**As filed with the Securities and Exchange Commission on June 27, 2007**

**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

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**Form 20-F**

**ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

**Forthe fiscal year ended December 31, 2006**

**Commissionfile number 1-14720**

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**MAGYARTELEKOM TÁVKÖZLÉSI NYILVÁNOSAN M**ŰKÖDŐRÉSZVÉNYTÁRSASÁG

(ExactName of Registrant as Specified in Its Charter)

**MAGYARTELEKOM TELECOMMUNICATIONS PUBLIC LIMITED COMPANY**

(Translationof Registrant’s Name Into English)

**Hungary**

(Jurisdictionof Incorporation or Organization)

**Budapest,1013, Krisztina krt. 55, Hungary**

(Addressof Principal Executive Offices)

Securitiesregistered or to be registered pursuant to Section 12(b) of the Act

| Title of each class                     | *** *** | **Name of each exchange  on which registered** |
|-----------------------------------------|--------------|------------------------------------------------|
| American  Depositary Shares,            |         | New York Stock  Exchange                       |
| each representing five  Ordinary Shares |         |                                           |
| Ordinary Shares                         |         | New York Stock  Exchange*                      |
|                                    |         | Budapest Stock  Exchange                       |

 

Securities registered or tobe registered pursuant to Section 12(g) of the Act: **N/A**

Securities for which thereis a reporting obligation pursuant to Section 15(d) of the Act: **N/A**

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Indicate the number ofoutstanding shares of each of the issuer’s classes of capital or common stockas of the close of the period covered by the annual report:

**Ordinary Shares......1,042,768,215nominal value HUF 100 per share**

(as of December 31,2006)

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

|  |   |   |   | YES               x |   | NO                 o |
|--|--------|--------|--------|-------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------|

 

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

|  |   |   |   | YES               o |   | NO                 x |
|--|--------|--------|--------|-------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------|

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15 (d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

|  |   |   |   | YES               x |   | NO                 o |
|--|--------|--------|--------|-------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------|

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct.

| Large accelerated  filer     x |   | Accelerated  filer     o |   | Non-accelerated  filer     o |
|---------------------------------------------------------|--------|---------------------------------------------------|--------|-------------------------------------------------------|

 

Indicateby check mark which financial statement item the registrant has elected tofollow.

|  |   |   |   | Item 17          x |   | Item 18          o |
|--|--------|--------|--------|-----------------------------------------------------------------|--------|-----------------------------------------------------------------|

 

Ifthis is an annual report, indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

|  |   |   |   | YES               o |   | NO                 x |
|--|--------|--------|--------|-------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------|

 

*                     Not for trading, but only in connection withthe registration of American Depositary Shares.

 

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**TABLEOF CONTENTS**

|            | ** ** | ** **                                                                         | ** ** | **Page**   |
|------------|------------|------------------------------------------------------------------------------------|------------|------------|
|       |       | Certain Defined Terms and  Conventions                                             |       | iv         |
|       |       | Forward-looking Statements                                                         |       | iv         |
|       | ** ** | **PART I**                                                                    | ** ** | ** ** |
| Item  1    |       | Identity of Directors,  Senior Management and Advisers                             |       | 1          |
| Item  2    |       | Offer Statistics and  Expected Timetable                                           |       | 1          |
| Item 3     |       | Key Information.                                                                   |       | 1          |
| ** ** |       | Selected Financial Data                                                            |       | 1          |
| ** ** |       | Exchange Rate Information                                                          |       | 3          |
| ** ** |       | Risk Factors                                                                       |       | 4          |
| Item  4    |       | Information on the Company                                                         |       | 10         |
| ** ** |       | Organization                                                                       |       | 10         |
| ** ** |       | History and Development                                                            |       | 10         |
| ** ** |       | Description of Business and  its Segments                                          |       | 12         |
| ** ** |       | Strategy                                                                           |       | 13         |
| ** ** |       | Overview of Magyar Telekom’s  Revenues and Principal Activities               |       | 17         |
| ** ** |       | Fixed Line  Telecommunications Services Segment                                    |       | 17         |
| ** ** |       | Hungarian Fixed Line Operations                                                    |       | 18         |
| ** ** |       | Domestic Services                                                                  |       | 18         |
| ** ** |       | International Telephone  Services                                                  |       | 20         |
| ** ** |       | Internet Services                                                                  |       | 21         |
| ** ** |       | Data Transmission and  Related Services                                            |       | 23         |
| ** ** |       | System Integration and  Information Technology                                     |       | 24         |
| ** ** |       | Multimedia                                                                         |       | 26         |
| ** ** |       | Fixed Line  Telecommunications Equipment Sales                                     |       | 27         |
| ** ** |       | Other Revenues                                                                     |       | 27         |
| ** ** |       | International Fixed Line  Operations                                               |       | 27         |
| ** ** |       | Mobile Telecommunications  Services Segment                                        |       | 29         |
| ** ** |       | Hungarian Mobile Operations                                                        |       | 30         |
| ** ** |       | International Mobile Operations                                                    |       | 33         |
| ** ** |       | Marketing and Distribution                                                         |       | 34         |
| ** ** |       | Hungarian Fixed Line Operations                                                    |       | 34         |
| ** ** |       | International Fixed Line  Operations                                               |       | 35         |
| ** ** |       | Hungarian Mobile Operations                                                        |       | 36         |
| ** ** |       | International Mobile Operations                                                    |       | 38         |
| ** ** |       | Competition                                                                        |       | 39         |
| ** ** |       | Hungarian Fixed Line Operations                                                    |       | 39         |
| ** ** |       | International Fixed Line  Operations                                               |       | 40         |
| ** ** |       | Hungarian Mobile Operations                                                        |       | 41         |
| ** ** |       | International Mobile Operations                                                    |       | 41         |
| ** ** |       | Regulation                                                                         |       | 42         |
| ** ** |       | Development of the  Telecommunications Regulatory Regime in Hungary                |       | 42         |
| ** ** |       | The Electronic  Communications Act and the Contract on Universal Service Provision |       | 43         |
| ** ** |       | Mobile Concession Contracts                                                        |       | 46         |
| ** ** |       | Competition Law Restrictions                                                       |       | 47         |
| ** ** |       | Hungary and the European Union                                                     |       | 48         |

i

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|            |   | Broadcasting and Transmission                                          |   | 49  |
|------------|--------|------------------------------------------------------------------------|--------|-----|
| ** ** |   | Development of the  Telecommunications Regulatory Regime in Macedonia  |   | 50  |
| ** ** |   | Macedonia and the European Union                                       |   | 51  |
| ** ** |   | Development of the  Telecommunications Regulatory Regime in Montenegro |   | 51  |
| ** ** |   | Montenegro and the European  Union                                     |   | 52  |
| ** ** |   | Pricing.                                                               |   | 52  |
| ** ** |   | Hungarian Fixed Line Operations                                        |   | 52  |
| ** ** |   | Hungarian Mobile Operations                                            |   | 55  |
| ** ** |   | Macedonian Fixed Line and  Mobile Operations                           |   | 55  |
|       |   | Organizational Structure                                               |   | 56  |
|       |   | Property, Plants and Equipment.                                        |   | 56  |
| ** ** |   | Infrastructure and Technology                                          |   | 56  |
| ** ** |   | Hungarian Fixed Line Operations                                        |   | 56  |
| ** ** |   | Hungarian Mobile Operations                                            |   | 58  |
| ** ** |   | Macedonian Fixed Line Operations                                       |   | 59  |
| ** ** |   | Macedonian Mobile Operations                                           |   | 60  |
| ** ** |   | Environment Protection                                                 |   | 60  |
| Item  4A   |   | Unresolved Staff Comments                                              |   | 60  |
| Item  5    |   | Operating and Financial  Review and Prospects                          |   | 61  |
|       |   | Operating results.                                                     |   | 61  |
| ** ** |   | Results of Operations—Total                                       |   | 61  |
| ** ** |   | Results of Operations—By Segment                                  |   | 66  |
|       |   | Critical Accounting Policies                                           |   | 84  |
|       |   | Liquidity and Capital Resources                                        |   | 84  |
| ** ** |   | Capital Expenditures                                                   |   | 89  |
| ** ** |   | Reconciliation to U.S. GAAP                                            |   | 89  |
|       |   | Research and Development                                               |   | 90  |
| ** ** |   | Hungarian Fixed Line Operations                                        |   | 90  |
| ** ** |   | Macedonian Fixed Line Operations                                       |   | 91  |
| ** ** |   | Hungarian Mobile Operations                                            |   | 92  |
| ** ** |   | Macedonian Mobile Operations                                           |   | 92  |
|       |   | Risk Management Policies                                               |   | 93  |
| Item  6    |   | Directors, Senior Management  and Employees                            |   | 95  |
| ** ** |   | Board of Directors.                                                    |   | 95  |
| ** ** |   | Management Committee                                                   |   | 99  |
| ** ** |   | Supervisory Board                                                      |   | 100 |
| ** ** |   | Indemnification of the Board  of Directors and the Supervisory Board   |   | 104 |
| ** ** |   | Statement of the Board of  Directors                                   |   | 105 |
|       |   | Compensation of Directors  and Officers                                |   | 105 |
|       |   | Board Practices                                                        |   | 105 |
|       |   | Employees.                                                             |   | 106 |
|       |   | Share Ownership of Management                                          |   | 108 |
| Item  7    |   | Major Shareholders and  Related Party Transactions.                    |   | 108 |
|       |   | Major Shareholders.                                                    |   | 108 |
|       |   | Related Party Transactions                                             |   | 109 |
| Item 8     |   | Financial Information                                                  |   | 110 |
| ** ** |   | Consolidated Financial  Statements                                     |   | 110 |
|       |   | Other Financial Information                                            |   | 110 |
|       |   | Legal proceedings                                                      |   | 110 |
|       |   | Dividend Policy                                                        |   | 119 |

ii

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|            |       | Significant Changes                                                                                                                                   |       | 119        |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| Item 9     |       | The Offer and Listing                                                                                                                                 |       | 120        |
| Item  10   |       | Additional Information                                                                                                                                |       | 121        |
|       |       | Share Capital                                                                                                                                         |       | 121        |
|       |       | Option to Purchase  Securities from Registrant or Subsidiaries                                                                                        |       | 121        |
|       |       | Memorandum and Articles of  Association                                                                                                               |       | 122        |
|       |       | Corporate Governance                                                                                                                                  |       | 122        |
|       |       | Significant Differences in  Corporate Governance Practices for Purposes of Section 303A.11 of the  New York Stock Exchange Listed Company Manual |       | 126        |
|       |       | Material Contracts                                                                                                                                    |       | 129        |
|       |       | Exchange Control                                                                                                                                      |       | 130        |
|       |       | Taxation                                                                                                                                              |       | 131        |
|       |       | Documents on Display                                                                                                                                  |       | 133        |
| Item  11   |       | Quantitative and Qualitative  Disclosures About Market Risk                                                                                           |       | 133        |
| Item  12   |       | Description of Securities  Other than Equity Securities                                                                                               |       | 133        |
|       | ** ** | **PART II**                                                                                                                                      | ** ** | ** ** |
| Item  13   |       | Defaults, Dividend  Arrearages and Delinquencies                                                                                                      |       | 134        |
| Item  14   |       | Material Modifications to  the Rights of Security Holders and Use of Proceeds                                                                         |       | 134        |
| Item  15   |       | Controls and Procedures                                                                                                                               |       | 134        |
| Item  16A  |       | Audit Committee Financial  Expert                                                                                                                     |       | 137        |
| Item 16B   |       | Code of Ethics                                                                                                                                        |       | 137        |
| Item  16C  |       | Principal Accountant Fees  and Services                                                                                                               |       | 138        |
| Item  16D  |       | Exemptions from the Listing  Standards for Audit Committees                                                                                           |       | 138        |
| Item  16E  |       | Purchases of Equity  Securities by the Issuer and Affiliated Purchasers                                                                               |       | 138        |
| ** ** | ** ** | **PART III**                                                                                                                                     | ** ** | ** ** |
| Item 17    |       | Financial Statements                                                                                                                                  |       | 139        |
| Item 18    |       | Financial Statements                                                                                                                                  |       | 139        |
| Item 19    |       | Exhibits                                                                                                                                              |       | 139        |

 

iii

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**Certain DefinedTerms and Conventions**

In this annual report the terms “Magyar Telekom”, the “Group”,the “Company”, “we”, “us” and “our” refer to Magyar Telekom Plc. and, ifapplicable, its direct and indirect subsidiaries as a group; the term “MagyarTelekom Plc.” refers to Magyar Telekom Plc. without its subsidiaries; the term “DT”refers to Deutsche Telekom AG. The term “TMH” refers to the mobile line ofbusiness of Magyar Telekom. T-Mobile Magyarország Távközlési Rt., ourfully owned subsidiary, merged with Magyar Telekom Plc. on February 28,2006. From March 1, 2006, Magyar Telekom is the legal successor of TMH.

In this annual report, the term “Minister” refers tothe Minister heading the Ministry of Economy and Transport.

Totals in tables may beaffected by rounding. Segment revenue and operating expense figures included inthis annual report do not give effect to intersegment eliminations.

**Forward-lookingStatements**

The Company may from time to time make written or oralforward-looking statements. Written forward-looking statements appear indocuments the Company files with the Securities and Exchange Commission,including this annual report, reports to shareholders and other communications.The U.S. Private Securities Litigation Reform Act of 1995 contains a safeharbor for forward-looking statements. Actual results may differ materiallyfrom a forward-looking statement made by Magyar Telekom or on its behalf.Readers should also consider the information contained in Item 3, “KeyInformation—Risk Factors” and Item 5, “Operating and Financial Review andProspects”, as well as the information contained in the Company’s periodicfilings with the Securities and Exchange Commission for further discussion ofthe risks and uncertainties that may cause such differences to occur. TheCompany’s forward-looking statements speak only as of the date they are made,and the Company does not have an obligation to update or revise them, whetheras a result of new information, future events or otherwise.

iv

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**PART I**

**ITEM 1—IDENTITY OFDIRECTORS, SENIOR MANAGEMENT AND ADVISERS**

Not applicable.

**ITEM 2—OFFERSTATISTICS AND EXPECTED TIMETABLE**

Not applicable.

**ITEM 3—KEY INFORMATION**

**SELECTED FINANCIAL DATA**

This selected consolidatedfinancial and statistical information should be read together with theconsolidated financial statements, including the accompanying notes, includedin this annual report. We derived these financial data from our consolidatedfinancial statements as of and for the years ended December 31, 2002,2003, 2004, 2005 and 2006 and the accompanying notes, which have been auditedby PricewaterhouseCoopers Könyvvizsgáló és Gazdasági Tanácsadó Kft. (“PwC”).These consolidated financial data are qualified by reference to ourconsolidated financial statements and accompanying notes, which we haveprepared in accordance with International Financial Reporting Standards (“IFRS”).IFRS differs from U.S. Generally Accepted Accounting Principles (“GAAP”). For adiscussion of the principal differences between IFRS and U.S. GAAP as theyrelate to us, see Note 37 to the consolidated financial statements.

| ** **                                   | ** ** | **Year ended December 31,**                           | ** ** |
|----------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **2002**                                                             | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2006** | ** ** |
| ** **                                   | ** ** | **HUF**                                                              | ** ** | **HUF** | ** ** | **HUF** | ** ** | **HUF** | ** ** | **HUF** | ** ** | **U.S.$**(1) | ** ** |
| ** **                                   | ** ** | **(in millions, except per share amounts)** | ** ** |
| **Consolidated Income Statement  Data:**     | ** ** | ** **                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Amounts in accordance  with IFRS             |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   | ** ** |   |
| Revenues(2)                                  |       | 590,585                                                              |       | 607,252 |   | 596,792 |   | 615,054 |   | 671,196 |   |   | 3,503 | ** ** |   |
| Operating profit(3)                          |       | 122,240                                                              |       | 122,064 |   | 93,719 |   | 141,754 |   | 136,391 |   |   | 712 | ** ** |   |
| Net income                                   |       | 68,128                                                               |       | 57,475 |   | 34,641 |   | 78,415 |   | 75,453 |   |   | 394 | ** ** |   |
| Operating profit per share(3)                |       | 117.76                                                               |       | 117.60 |   | 90.30 |   | 136.46 |   | 131.10 |   |   | 0.68 | ** ** |   |
| Basic earnings per share(4)                  |       | 65.66                                                                |       | 55.38 |   | 33.38 |   | 75.49 |   | 72.53 |   |   | 0.38 | ** ** |   |
| Diluted earnings per share(4)                |       | 65.66                                                                |       | 55.37 |   | 33.37 |   | 75.46 |   | 72.51 |   |   | 0.38 | ** ** |   |
| Amounts in accordance  with U.S. GAAP        |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   | ** ** |   |
| Revenues(2)                                  |       | 592,294                                                              |       | 610,946 |   | 602,953 |   | 620,208 |   | 675,564 |   |   | 3,526 | ** ** |   |
| Operating profit(3)                          |       | 132,585                                                              |       | 132,715 |   | 100,294 |   | 131,018 |   | 132,431 |   |   | 691 | ** ** |   |
| Net income                                   |       | 78,619                                                               |       | 66,404 |   | 39,684 |   | 69,260 |   | 71,481 |   |   | 373 | ** ** |   |
| Operating profit per share(3)                |       | 127.73                                                               |       | 127.86 |   | 96.63 |   | 126.12 |   | 127.30 |   |   | 0.66 | ** ** |   |
| Basic earnings per share(4)                  |       | 75.77                                                                |       | 63.98 |   | 38.23 |   | 66.67 |   | 68.71 |   |   | 0.36 | ** ** |   |
| Diluted earnings per share(4)                |       | 75.77                                                                |       | 63.97 |   | 38.22 |   | 66.65 |   | 68.69 |   |   | 0.36 | ** ** |   |
| **Consolidated Balance Sheet  Data:**        | ** ** | ** **                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Amounts in accordance  with IFRS             | ** ** | ** **                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Total assets                                 |       | 1,077,451                                                            |       | 1,058,837 |   | 1,029,568 |   | 1,082,948 |   | 1,131,595 |   |   | 5,905 | ** ** |   |
| Net assets as reported                       |       | 575,580                                                              |       | 630,384 |   | 576,664 |   | 597,694 |   | 593,167 |   |   | 3,095 | ** ** |   |
| Common stock                                 |       | 104,281                                                              |       | 104,281 |   | 104,281 |   | 104,281 |   | 104,277 |   |   | 544 | ** ** |   |
| Total shareholders’ equity as  reported |       | 516,144                                                              |       | 560,110 |   | 516,567 |   | 527,567 |   | 526,039 |   |   | 2,745 | ** ** |   |
| Amounts in accordance  with U.S. GAAP        |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   | ** ** |   |
| Total assets                                 |       | 1,099,634                                                            |       | 1,090,308 |   | 1,070,601 |   | 1,115,991 |   | 1,160,629 |   |   | 6,057 | ** ** |   |
| Net assets                                   |       | 570,541                                                              |       | 633,783 |   | 592,872 |   | 610,035 |   | 604,400 |   |   | 3,154 | ** ** |   |
| Total  shareholders’ equity             |       | 514,664                                                              |       | 567,452 |   | 534,907 |   | 542,098 |   | 538,190 |   |   | 2,809 | ** ** |   |

 

1

----

 

| ** **                        | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|
| ** **                        | ** ** | **2002**                                   | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                        | ** ** | **(in millions)**                     | ** ** |
| **Other  data:**                  |       |                                       |       |   |   |   |   |   |   |   |   |
| Weighted average number of shares |       |                                       |       |   |   |   |   |   |   |   |   |
| Basic                             |       | 1,038                                      |       | 1,038 |   | 1,038 |   | 1,039 |   | 1,040 |   |
| Diluted                           |       | 1,038                                      |       | 1,038 |   | 1,038 |   | 1,039 |   | 1,041 |   |

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(1)                 Translated intoU.S. dollars at the official exchange rate of the National Bank of Hungary on December 31,2006 of U.S. dollar 1.00 = HUF 191.62. These translations are unaudited andpresented for convenience purposes only.

(2)                 In 2006, wereassessed our status in the provision of a number of value added services,where so far we accounted for revenue on a gross basis implying a principalstatus rather than an agent status in the provision of the service. A grossbasis means that revenues included the full amount of fees collected fromcustomers, and outpayments to related service providers were included inoperating expenses. After analyzing the relationships with our subcontractorsone by one, we have changed our judgment of the situation in some cases, andnow we assess that in these cases we are more the selling agent of theseproducts than the principal provider of the service, from an IFRS accountingpoint of view. This had a decreasing impact on the fixed line “Value added,cable voice and other services” revenues and the mobile “Enhanced services”revenues as well as on subcontractor payments in “Other operating expenses -net”. The change only meant netting between revenues and expenses; it had noimpact on either operating profit or net income. We also restated 2004 and 2005figures accordingly.

(3)                 In 2006, wechanged our accounting policy to disclose Hungarian local business tax andinnovation fee as income taxes since we have determined that these taxes havethe characteristics of income taxes rather than operating expenses. In previousyears, these taxes were included among operating expenses. This change in thedisclosure of these taxes decreased our operating expenses and resulted in anequivalent increase in income taxes. The change had no impact on net income orequity. We also restated 2004 and 2005 figures accordingly.

(4)                 Basicearnings per share under IFRS and basic earnings per share under U.S. GAAP arecalculated by dividing net income by the weighted average number of sharesoutstanding during each period.

**Dividends**

Thefollowing table sets forth the dividend per Magyar Telekom ordinary share forthe years 2002, 2003, 2004, 2005 and 2006. The table shows the dividend amountsin Hungarian forints, together with U.S. dollar equivalents, for each of theyears indicated.

| ** ** | ** ** | **Dividend Paid  Per Ordinary Share** | ** ** |
|------------|------------|------------------------------------------------------|------------|
| ** ** | ** ** | **HUF**                                              | ** ** | **U.S.$**(1) | ** ** |
| **Year**   | ** ** |                                                 | ** ** | ** ** |   | ** ** | ** ** |
| 2002       |       |                                                 | 18         | ** ** |   | 0.0799 |   |
| 2003       |       |                                                 | 70         | ** ** |   | 0.3367 |   |
| 2004       |       |                                                 | 70         | ** ** |   | 0.3883 |   |
| 2005       |       |                                                 | 73         | ** ** |   | 0.3418 |   |
| 2006       |       |                                                 | 70         | ** ** |   | 0.3653 |   |

----

(1)                 Translated intoU.S. dollars at the official exchange rate of the National Bank of Hungary on December 31,2006 of U.S. dollar 1.00 = 191.62; December 31, 2005 of U.S. dollar 1.00 =HUF 213.58; December 31, 2004 of U.S. dollar 1.00 = HUF 180.29; December 31,2003 of U.S. dollar 1.00 = HUF 207.92 and on December 31, 2002 of U.S.dollar 1.00 = HUF 225.16.

2

----

**EXCHANGE RATEINFORMATION**

As used in this document, “Hungarian forint” or “HUF”mean the lawful currency of Hungary. “EUR”, “euro” or “€”mean the single unified currency of the European Union. “U.S. dollar,” “USD” or“$” mean the lawful currency of the United States.

The National Bank of Hungary (“NBH”) quotes andpublishes official exchange rates of the Hungarian forint for all majorcurrencies based on prevailing market rates. Unless otherwise stated,conversion of Hungarian forint into U.S. dollars have been made at the rate ofUSD 1.00 to HUF 191.62, which was the official rate quoted and published on December 31,2006.

The NBH as a policy intervenes in the foreign exchangemarket to stabilize the exchange rate of the Hungarian forint for the euro. Onany given day, the market exchange rate of the Hungarian forint against euromay vary from the official rate of the NBH. Prior to May 4, 2001, the NBHhad a policy of intervening in the foreign exchange market, if the market ratedeviated more than 2.25 percent above or below the official rate. On May 4,2001, the NBH announced that it had widened this intervention band to 15percent above and below the official rate. The central parity is set at 282.36HUF/EUR rate. This decision was taken as a step toward convergence with theEuropean Union exchange rate regime and as a measure against inflation.

Thefollowing tables set forth, for the periods and dates indicated, theperiod-end, average, high and low official rates quoted and published by theNBH for Hungarian forint per U.S.$1.00 and EUR1.00.

| ** ** | ** ** | **Exchange Rates**              | ** ** |
|------------|------------|--------------------------------------|------------|
| ** ** | ** ** | **Period-End**                       | ** ** | **Average**(1) | ** ** | **High** | ** ** | **Low** | ** ** |
| ** ** | ** ** | **(amounts in HUF/U.S.$)** | ** ** |
| **Year**   | ** ** |                                 | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |
| 2002       |       |                                 | 225.16     | ** ** |   |   | 258.00 | ** ** |   | 283.98 |   | 225.16 |   |
| 2003       |       |                                 | 207.92     | ** ** |   |   | 224.44 | ** ** |   | 237.63 |   | 206.61 |   |
| 2004       |       |                                 | 180.29     | ** ** |   |   | 202.63 | ** ** |   | 217.24 |   | 180.19 |   |
| 2005       |       |                                 | 213.58     | ** ** |   |   | 199.66 | ** ** |   | 217.54 |   | 180.58 |   |
| 2006       |       |                                 | 191.62     | ** ** |   |   | 210.51 | ** ** |   | 225.01 |   | 191.02 |   |
| 2006       |       |                                 |       | ** ** |   |   |   | ** ** |   |   |   |   |   |
| December   |       |                                 | 191.62     | ** ** |   |   | 192.26 | ** ** |   | 194.21 |   | 191.02 |   |
| 2007       |       |                                 |       | ** ** |   |   |   | ** ** |   |   |   |   |   |
| January    |       |                                 | 199.52     | ** ** |   |   | 195.22 | ** ** |   | 199.52 |   | 189.25 |   |
| February   |       |                                 | 193.21     | ** ** |   |   | 193.87 | ** ** |   | 196.88 |   | 191.34 |   |
| March      |       |                                 | 186.13     | ** ** |   |   | 188.74 | ** ** |   | 194.91 |   | 184.08 |   |
| April      |       |                                 | 181.03     | ** ** |   |   | 182.13 | ** ** |   | 185.02 |   | 180.10 |   |
| May        |       |                                 | 186.23     | ** ** |   |   | 183.84 | ** ** |   | 186.79 |   | 181.04 |   |

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(1)                 Theaverage of the exchange rates on each business day during the relevant period.

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| ** ** | ** ** | **Exchange Rates**            | ** ** |
|------------|------------|------------------------------------|------------|
| ** ** | ** ** | **Period-End**                     | ** ** | **Average**(1) | ** ** | **High** | ** ** | **Low** | ** ** |
| ** ** | ** ** | **(amounts in HUF/EUR)** | ** ** |
| **Year**   | ** ** |                               | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |
| 2002       |       |                               | 235.90     | ** ** |   |   | 242.97 | ** ** |   | 252.38 |   | 235.17 |   |
| 2003       |       |                               | 262.23     | ** ** |   |   | 253.51 | ** ** |   | 272.03 |   | 234.69 |   |
| 2004       |       |                               | 245.93     | ** ** |   |   | 251.68 | ** ** |   | 270.00 |   | 243.42 |   |
| 2005       |       |                               | 252.73     | ** ** |   |   | 248.05 | ** ** |   | 255.93 |   | 241.42 |   |
| 2006       |       |                               | 252.30     | ** ** |   |   | 264.27 | ** ** |   | 282.69 |   | 249.55 |   |
| 2006       |       |                               |       | ** ** |   |   |   | ** ** |   |   |   |   |   |
| December   |       |                               | 252.30     | ** ** |   |   | 254.08 | ** ** |   | 256.90 |   | 252.30 |   |
| 2007       |       |                               |       | ** ** |   |   |   | ** ** |   |   |   |   |   |
| January    |       |                               | 258.04     | ** ** |   |   | 253.83 | ** ** |   | 258.46 |   | 251.15 |   |
| February   |       |                               | 254.79     | ** ** |   |   | 253.40 | ** ** |   | 255.70 |   | 251.65 |   |
| March      |       |                               | 247.83     | ** ** |   |   | 249.81 | ** ** |   | 256.05 |   | 245.67 |   |
| April      |       |                               | 246.42     | ** ** |   |   | 245.96 | ** ** |   | 247.35 |   | 244.96 |   |
| May        |       |                               | 250.35     | ** ** |   |   | 248.47 | ** ** |   | 251.05 |   | 245.78 |   |

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(1)                 The average ofthe exchange rates on each business day during the relevant period.

We will pay any cashdividends in Hungarian forints, and if you are a holder of American DepositoryShares (“ADSs”) exchange rate fluctuations will affect the U.S. dollar amountsyou will receive upon conversion of cash dividends on the shares represented byADSs. Fluctuations in the exchange rate between the Hungarian forint and theU.S. dollar will also affect the prices of shares and ADSs.

**RISK FACTORS**

Prior to making anyinvestment decision, you should carefully consider the risks set forth below inaddition to other information contained in this annual report. The risks described below are not the onlyrisks we face. Additional risks not currently known to us or risks that wecurrently regard as immaterial also could have a material adverse effect on ourfinancial condition or results of operations or the trading prices of oursecurities.

**Our operations are subjectto substantial government regulation, which can result in adverse consequencesfor our business and results of operations.**

The Electronic Communications Act of 2003 (“ElectronicCommunications Act”), which came into force in January 2004, was enactedby the Parliament to achieve harmonization of the telecommunications regulatoryregime in Hungary with the New Regulatory Framework (“NRF”) of the EuropeanUnion (“EU”) for electronic communications adopted in 2002, and to encouragefurther competition in the market. The NRF is currently under review in the EU;however, according to our expectations, the amended regulation will not affectbusiness activities earlier than 2010.

Under the Electronic Communications Act, the NationalCommunications Authority (“NCA”) was established to regulate thetelecommunications industry. The primary responsibility of the NCA is toperform market analysis procedures, under which it defines “relevant markets,”or markets subject to the regulatory framework. The NCA analyzes such marketsfor the level of competition and, if it finds a lack of sufficient competitionin such markets, identifies service providers with significant market power (“SMP”),and imposes appropriate regulatory obligations on such providers to encouragecompetition.

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The NCA initiated the market analysis procedure on 17out of 18 relevant markets identified in an applicable decree in 2004 and hasreached its final findings on 16 of these markets. Under these findings, MagyarTelekom was found to have SMP on 12 of the 16 markets (i.e., markets 1-9and 11-13) and TMH was found to have SMP on one market (i.e., market 16).As a result, the NCA imposed various obligations on Magyar Telekom and TMH withrespect to these markets. See “Item 4—Regulation and Pricing”.

The Recommendation of the European Commission onrelevant product and service markets within the electronic communicationssector susceptible to *ex ante*regulationin accordance with Directive 2002/21/EC of the European Parliament and of theCouncil on a common regulatory framework for electronic communication networksand services (2003/311/EC) (“Recommendation”), the regulation on which themarket analysis procedure of the NCA is based, is also under review by the EU.The new recommendation is expected to enter into force in 2007.

The new Communications Act which is affecting ourBulgarian subsidiary’s, Orbitel’s core business is on the agenda of theBulgarian Parliament. The majority of changes proposed by Orbitel have beenaccepted by the relevant committee of the Parliament, but the changes are stillto be approved by the Parliament. Any further changes proposed in theCommunications Act by the members of the Parliament and any delay in the bylawsmay negatively influence the business results of Orbitel.

In addition, our businesses in Macedonia andMontenegro are also subject to various regulatory developments.

We cannot fully anticipatethe combined impact of these regulatory developments on our business andresults of operations. Our business and results of operations may be adverselyaffected by these changes.

**Recent EU initiative onroaming charges in the mobile telecommunications sector could adversely affectour results of operation.**

On July 12, 2006 theEuropean Commission proposed an EU regulation to reduce international roamingcharges within the EU. The proposal for a regulation of the European Parliamentand of the Council is dealing with the roaming on public mobile networks withinthe EU. The objective of this proposal is to amend the existing regulatoryframework for electronic communications to provide the necessary legal basisfor effective and timely action to bring about substantial reductions in thelevel of mobile roaming charges across the EU in a harmonized manner. The EUroaming regulation, as approved on May 23, 2007 by the EuropeanParliament, will set a limit on the international wholesale mobile roamingcharges among mobile operators and on international mobile roaming retailcharges (Eurotariff). The maximum inter-operator tariff shall not exceed EUR0.30 per minute, which will be further reduced in 2008 and 2009 to EUR 0.28 andEUR 0.26. The maximum retail charges of the Eurotariff, which a home providermay levy from its roaming customers, for calls made abroad shall not exceed EUR0.49 per minute (to be further reduced to EUR 0.46 and EUR 0.43 in 2008 and2009) and for calls received abroad shall not exceed EUR 0.24 per minute (to befurther reduced to EUR 0.22 and EUR 0.19 in 2008 and 2009). The Council of theEU telecommunications ministers endorsed the EU roaming regulation on June 7,2007. The EU roaming regulation will then become directly applicable in EUmember states (and therefore not require further transposition into nationallaw) following its publication, expected in June 2007. The EU roamingregulation will have significant consequences for TMH’s revenues.

**Weare subject to more intense competition due to the liberalization of thetelecommunications sector.**

The Electronic Communications Act was enacted tofacilitate further competition and encourage new entrants to the market.Although identities of such entrants are already known to some degrees, thescope of competition and any adverse effect on our results will depend on avariety of factors that we currently cannot assess with precision and are forthe most part not within our control. Among such factors are businessstrategies and capabilities of new competitors, prevailing market conditions,as well as the 

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effectiveness of ourefforts to prepare for new market conditions. Specific risks include loss ofcustomers as a result of unbundled access to the local loop, loss of fixed linecustomers as a result of introducing “naked” ADSL and migration to lower pricedInternet price plans as a result of speed upgrades.

In the mobile communications business, we already faceintense competition. As all telecommunications markets have become increasinglysaturated, the focus of competition is starting to shift from customeracquisition to retention. Significant customer defections could have an adverseeffect on results of operations, and customer acquisition and retentionexpenses are substantial. Due to the increased level of competition, prices formobile telephone services have been declining over the past several years andmay continue to decline. An eventual entry of Mobile Virtual Network Operators(“MVNOs”) into the mobile telecommunications market would intensify thecompetition in Hungary. MVNOs are mobile operators that do not own their ownspectrum or often network infrastructure, buy the use of the spectrum andnetwork infrastructure from traditional mobile operators and provide mobiletelecommunications services to consumers based on such purchased capacity.MVNOs will likely target the lower segment of the market and such developmentwill likely increase price-based competition.

We also face intense competition in the market forInternet services, as well as in the data communications markets from other fixedline, mobile and cable television service providers.

In Macedonia, the exclusive rights of MakedonskiTelekommunikacii AD (“Maktel”) to provide fixed line telecommunicationsservices expired at the end of 2004 as a result of the market liberalization.Competition posed by new entrants may result in a downward pressure on Maktel’spricing, sales volume and profitability, which would have an adverse effect onour financial condition and results of operations. The Macedoniantelecommunications regulator issued a third mobile license to Austrian Mobilkomin the first quarter of 2007, which is expected to intensify the competition inthe Macedonian mobile market.

In Montenegro, the de facto exclusivity of CrnogorskiTelekom in international voice traffic has come to an end as Promonte, theMontenegrin market leader in mobile telephony has acquired a license forinternational voice traffic valid from January 1, 2007. There are severalpublic tenders ongoing in Montenegro that will have a significant long term effecton the telecommunications market. The Montenegrin Telecommunications Agency hasannounced a public tender for cable television services, and new cabletelevision service providers may enter traditional telecommunications marketsin 2007. The Montenegrin Telecommunications Agency has also announced a publictender for providing telecommunications services using World Interoperabilityfor Microwave Access (“WiMAX”) technology. The outcome of this tender mightfurther increase competition in Montenegro. Furthermore, in November 2006,the Montenegrin telecommunications regulator has issued a tender for two ThirdGeneration (“3G”) licenses as well as a tender for a mixed 2G-3G licensefor a third mobile operator. In the first quarter of 2007, T-Mobile Crna Goraand Promonte were awarded with one 3G licenses each and Telekom Serbia won thecombined 2G-3G license. It is most likely, that the mobile operation ofCrnogorski Telekom could face a significant decrease in its market share overthe medium term.

Competition posed bypotential new entrants may result in a downward pressure on Crnogorski Telekom’sand T-Mobile Crna Gora’s pricing, sales volume and profitability, which wouldhave an adverse effect on our financial condition and results of operations.

**Our ability to sustainrevenue growth will depend in part on our ability to increase traffic and offervalue added and data services to our customers.**

We expect the number ofour fixed access lines and rates for fixed and mobile telephone services todecrease as competition increases. Our ability to sustain revenue growth willtherefore depend on our ability to increase the amount of traffic over existingfixed lines and to increase revenues from value added and data services. Wealso plan to grow our mobile subscriber base and our related lines of business,such as Internet and cable television, and expand our coverage area. We may notbe able to sustain revenue 

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growth,if we are not able to offer attractive and affordable value added services inthe future or if our customers do not purchase our services.

**We may be unable toadapt to technological changes in the telecommunications market.**

The telecommunications industry is characterized byrapidly changing technology with related changes in customer demands for newproducts and services at competitive prices. Technological developments arealso shortening product life cycles and facilitating convergence of varioussegments of the increasingly global industry. Our future success will largelydepend on our ability to anticipate, invest in and implement new technologieswith the levels of service and prices that customers demand. Technologicaladvances may also affect our level of earnings and financial condition byshortening the useful life of some of our assets.

The operation of our businesses depends in part uponthe successful deployment of continually evolving mobile communicationstechnologies, which requires significant capital expenditures. There can be noassurance that such technologies will be developed according to anticipatedschedules, that they will perform according to expectations, or that they willachieve commercial acceptance. We may be required to make more capitalexpenditures than we currently expect if suppliers fail to meet anticipated schedules,performance of such technologies fall short of expectations, or commercialsuccess is not achieved.

The effects of technological changes on our businessescannot be predicted. In addition, it is impossible to predict with anycertainty whether the technology selected by us will be the most economic,efficient or capable of attracting customer usage. There can be no assurancethat we will be able to develop new products and services that will enable usto compete effectively.

TMH launched 3G-based servicesin Hungary in 2005 before any of its competitors. TMH is currently upgradingthe network infrastructure to better provide the new generation of services.However, new alternative technologies and standards, e.g., Wireless Fidelity (“WiFi”),WiMAX, or Voice over Internet Protocol (“VoIP”), may keep consumers fromchoosing 3G-based services. We are not able to predict at the moment which ofthese competing technologies will be the most widely accepted platform, howeverwe think that High Speed Downlink Packet Access (“HSDPA”) and High Speed UplinkPacket Access (“HSUPA”) enabled 3G network is the most likely candidate.

**Developments in thetechnology and telecommunications sectors have resulted and may result inimpairments in the carrying value of certain of our assets.**

Developments in thetechnology and telecommunications sectors, including significant declines instock prices, market capitalization and credit ratings of market participantsmay result in impairments of our tangible, intangible and financial assets.Future changes in these areas could lead to further impairments at any time.Recognition of impairment of tangible, intangible and financial assets couldadversely affect our financial condition and results of operations and mightlead to a drop in the trading price of our shares. We review on a regular basisthe value of each of our subsidiaries and their assets. The value of goodwillis reviewed annually. In addition to our regular valuations, whenever weidentify any indication (due to changes in the economic, regulatory, businessor political environments) that goodwill, intangible assets or fixed assets mayhave been impaired, we consider the necessity of performing certain valuationtests which may result in an impairment charge.

**We depend on alimited number of suppliers for equipment and maintenance services.**

In each of our operatingdivisions, there are a limited number of suppliers for necessary equipment andmaintenance services. The failure of these suppliers to meet our equipment andmaintenance needs in a timely manner could have a significant effect on ourrevenues and market position. The construction and operation of our networksand the provision of our services and network infrastructure, especially mobiletelecommunications services, are dependent on our ability to obtain adequatesupplies of a number of key 

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items ona timely and cost-efficient basis. These include handsets and transmission,switching and other network equipment. Significant delays in obtaining suchequipment and maintenance services could have a material adverse effect on ourbusiness and results of operations.

**Our business may beadversely affected by actual or perceived health risks associated with mobilecommunications technologies.**

Media reports havesuggested that radio frequency emissions from mobile telephones are linked tomedical conditions such as cancer. In addition, a number of consumer interestgroups has requested investigations into claims that digital transmissions fromhandsets used in connection with digital mobile technologies pose health risksand cause interference with hearing aids and other medical devices. There canbe no assurance that the findings of such studies will not have a materialeffect on our mobile business or will not lead to additional governmentregulations. Our ability to install new mobile telecommunications base stationsand other infrastructure may also be adversely affected, and related costs mayincrease, due to regulations or consumer action in response to concerns over healthrisks and adverse effect on the value of properties adjacent to suchfacilities. The actual or perceived health risks of mobile communicationsdevices could adversely affect mobile communications service providers,including us, through increased barriers to network development, reducedsubscriber growth, reduced network usage per subscriber, threat of productliability lawsuits or reduced availability of external financing to the mobilecommunications industry.

**System failurescould result in reduced user traffic and revenue and could harm our reputation.**

Our technologyinfrastructure (including our network infrastructure for fixed network servicesand mobile telecommunications services) is vulnerable to damage andinterruption from information technology failures, power loss, floods,windstorms, fires, intentional wrongdoing and similar events. Unanticipatedproblems at our facilities, system failures, hardware or software failures orcomputer viruses could affect the quality of our services and cause serviceinterruptions. Any of these occurrences could result in reduced user trafficand revenue and could harm our reputation.

**Loss of keypersonnel could weaken our business.**

Our operations are managedby a small number of directors and key executive officers. The loss ofdirectors or key executive officers could significantly impede our financial,marketing and other plans. We believe that the growth and future success of ourbusiness will depend in large part on our continuing ability to attract and retainhighly skilled and qualified personnel at all levels; however, the competitionfor qualified personnel in the telecommunications industry is intense. We cangive no assurances that we will be able to hire or retain necessary personnel.

**Our independent registeredpublic accounting firm identified two contracts for which it was unable toidentify a proper business purpose. A subsequent independent investigation intothese and other contracts revealed weaknesses in our internal controls, and wemay not be able to remedy these weaknesses or prevent future weaknesses.**

In connection with their audit of our consolidatedfinancial statements for the year ended December 31, 2005, PwC, ourindependent auditor, identified two consulting contracts entered into by two ofour subsidiaries for which it was unable to identify a proper business purpose.A subsequent independent investigation, carried out by the law firm of White &Case under the supervision of our Audit Committee, and which is still ongoing,concluded that four consulting contracts were entered into by us and oursubsidiaries without there being adequate documentation of a proper businesspurpose for them. The investigation was also impeded by the destruction bycertain employees of documents relevant to these four contracts.

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The independent investigators’ Initial Report ofInvestigation further identified several contracts at our Macedonian subsidiarythat could warrant further review. In February 2007, our Board ofDirectors determined that those contracts should be reviewed and expanded thescope of the independent investigation to cover these additional contracts andrelated transactions.

The independent investigation revealed certainweaknesses in our internal controls and procedures. Management has failed tosufficiently communicate the importance of integrity and ethical values. Therewere deficiencies in controls related to the validity and authorization oftransactions in the mergers and acquisitions process and deficiencies in thedesign and effectiveness of controls related to the validity and authorizationof expenditures in procurement process. Specifically, senior level managersentered into expenditures by circumventing existing controls and theindependent investigation has been unable to determine definitely the purposeof the contracts, and it is possible that they may have been improper.

The investigation delayed the finalization of our 2005financial statements and Maktel has still not filed its 2005 annual report. Wehave to date been fined HUF 13 million as a consequence of these delays andadditional fines could be imposed in the future. At this juncture, the Companyis unable to estimate either the amount of such additional fines or the costs,in general, it could incur in relation to the investigation. For furtherdiscussion of the independent legal investigation, its conclusions and thesteps that we are taking to remedy our control deficiencies, see “Item 15—Controlsand Procedures.”

Notwithstanding the stepswe are taking to address these issues, we may not be successful in remedyingthese weaknesses or preventing future weaknesses. If we are unable to remedythese weaknesses, there is a risk that we may not be able to prevent or detectimproper third-party contracts that could cause a material misstatement of ourannual or interim consolidated financial statements. In addition any failure toimplement new or improved internal controls, or resolve difficultiesencountered with their implementation, could harm our operating results or causeus to fail to meet our reporting obligations and consequently subject us toregulatory fines. Inferior internal controls could also cause investors to loseconfidence in our reported financial information, which could have a negativeeffect on the trading price of our shares and ADSs.

**Our share price may bevolatile, and your ability to sell our shares may be adversely affected due tothe relatively illiquid market for our shares and ADSs.**

The Hungarian equitymarket is relatively small and illiquid compared to major global markets. As aresult of the limitations of the Hungarian equity market and the volatility ofthe telecommunications sector in general, the price of our shares and ADSs maybe relatively volatile and you may have difficulty selling your shares in theevent of unfavorable market conditions.

**The value of ourinvestments, results of operations and financial condition could be adverselyaffected by economic developments in Hungary and other countries.**

Our business depends on general economic conditions inHungary and abroad. There are many factors, which are outside of our controlthat influence global and regional economies. A cautious or negative businessoutlook may cause our customers to delay or cancel investment in informationtechnology and telecommunications systems and services, which would adverselyaffect our revenues directly and, in turn, slow the development of new servicesand applications that could become future revenue sources.

Due to the substantialstate budget deficit, the Hungarian government passed a stabilization packagein June 2006. The stabilization program provides for significant tax hikesfor both corporations and individuals, including the introduction of anadditional income tax on high-income individuals, increases in corporate taxesand Value-Added Tax (“VAT”), and a new tax on healthcare contributions andother benefits. The stabilization program also introduces material energy priceincreases. We expect this 

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stabilizationprogram could have the effect of increasing the Consumer Price Index (“CPI”)and decreasing GDP in 2007 and 2008 from the levels that might otherwise beattained without it. As an effect of any relative CPI increase and/or GDPdecrease, disposable income may decrease accordingly in both the corporate andthe residential segments. Any such decrease in disposable income couldnegatively affect spending on telecommunications, which could result indecreased revenues for Magyar Telekom. In addition, the measures introduced andto be introduced by the government negatively affect our employees’remuneration and may cause difficulties in the negotiations conducted with thetrade unions. In order to meet our efficiency improvement targets, we will notbe in the position to fully compensate the negative effects of the governmentmeasures suffered by our employees.

**Fluctuations in thecurrency exchange rate could have an adverse effect on our results ofoperations.**

We are subject to currencytranslation risks, mainly relating to the results of our Macedonian andMontenegrin operations. Devaluation of the Macedonian denar or appreciation ofthe Hungarian forint may exert a negative influence on Maktel’s results thatare converted into HUF. The conversion of Crnogorski Telekom’s results into HUFdepends on the value of the HUF against the EUR. This is mainly a reportingrisk, but through the dividend payments it has direct financial (cashflow)effects on us as well.

**ITEM 4—INFORMATIONON THE COMPANY**

**ORGANIZATION**

Until May 6, 2005, the legal name of the Companywas Magyar Távközlési Rt. and it operated under its commercial name, “Matáv”.On May 6, 2005, Magyar Távközlési Rt. was rebranded as Magyar TelekomTávközlési Rt. (Magyar Telekom Telecommunications Co. Ltd.) and its commercialname became Magyar Telekom Ltd. On March 1, 2006, Magyar Telekom changedits name to Magyar Telekom Távközlési Nyilvánosan Működő Rt. (Magyar TelekomTelecommunications Plc.).

Magyar Telekom is alimited liability stock corporation incorporated and operating under the lawsof Hungary. Our shares are listed on the Budapest Stock Exchange, and our ADSsare listed on the New York Stock Exchange. Our headquarters are located at55 Krisztina krt., 1013 Budapest, Hungary. Our telephone numbers are +36-1-458-0000and +36-1-458-7000. Our agent for service of process in theUnited States is CT Corporation, 111 Eighth Avenue, New York, New York 10011,USA.

**HISTORY ANDDEVELOPMENT**

Prior to 1990, the Hungarian national postal,telephone and telegraph authority, Magyar Posta, provided all public telephoneservices in Hungary. On January 1, 1990, the Hungarian government splitMagyar Posta into three distinct entities based on the nature of theiroperations: postal services, telecommunications and broadcasting. The Hungariangovernment made Magyar Távközlési Vállalat, the predecessor to Matáv,responsible for telecommunications operations. This entity was transformed onDecember 31, 1991 into a stock corporation, Magyar Távközlési Rt., orMatáv, then wholly owned by the predecessor of Állami Privatizációs ésVagyonkezelőRt. (“State Privatization and Holding Company” or “ÁPV”).

MagyarComGmbH (“MagyarCom”), a holding company in which Deutsche Telekom and AmeritechCorporation (“Ameritech”) each held a 50 percent interest, was selected by theMinister in an international tender and subsequently purchased a 30.1 percentstake in Matáv for approximately U.S.$ 875 million on December 22,1993. ÁPV contributed U.S.$ 400 million of the purchase price paid by MagyarComto Matáv to provide it with capital to expand the telephone network.

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MagyarCom entered into a concession agreement with theHungarian government on December 19, 1993. MagyarCom then assigned certainof its rights under the concession agreement to Matáv. On December 22,1993, Matáv entered into a concession contract (the “Concession Contract”) withthe Hungarian government, which gave us the exclusive right to provide domesticlong distance and international public telephone services throughout Hungaryand local public fixed line voice telephone services in 31 of 54 Local PrimaryAreas for a term of eight years ending on December 22, 2001. On May 24,1994, we obtained the right to provide telephone services in an additional fiveLocal Primary Areas for a term of eight years ending in May 2002.

On December 22, 1995, MagyarCom acquired from ÁPVan additional 37.2 percent interest for approximately U.S.$ 852 million,raising its stake to 67.3 percent.

In connection with the Company’s initial publicoffering in November 1997, both MagyarCom and ÁPV collectively sold272,861,367 shares or 26.31 percent of then outstanding shares. In June 1999,ÁPV sold its remaining 5.75 percent stake in Matáv in a secondary offering.

On October 8, 1999, SBC Communications Inc. (“SBC”)completed its acquisition of Ameritech and thus gained control over Ameritech’s50 percent interest in MagyarCom.

On July 3, 2000, SBC sold its 50 percentownership in MagyarCom to Deutsche Telekom, making Deutsche Telekom a 100percent owner of MagyarCom.

On December 20, 2005, Magyar Telekom’sExtraordinary General Meeting approved the decision on the merger of MagyarTelekom Plc. and TMH. The court registration of the merger took place on February 28,2006. From March 1, 2006, Magyar Telekom is the legal successor of TMH.TMH continues its operations within Magyar Telekom under an independent brandand as an independent line of business.

On March 1, 2006, Magyar Telekom changed its nameto Magyar Telekom Távközlési Nyilvánosan Működő Rt. (Magyar TelekomTelecommunications Public Limited Company) and its abbreviated namebecame Magyar Telekom Plc.

For the details on our principal acquisitions duringthe last three years, see “Item 10—Material contracts”.

In line with the Group’s strategy of increasing itsfocus on service quality and operational efficiency, and taking into accountthe positive results from the merger of Magyar Telekom Plc. and T-MobileHungary, the Board of Directors proposed further integration steps within the Hungarianoperations of the T-Com segment on May 25, 2007.

Emitel is a fully owned subsidiary of Magyar Telekom,offering telecommunication services in three regional service areas ofSouth-Hungary. The company operated 72,000 lines at the end of March 2007.The increasing competition generates the need for further efficiencyimprovements which can be ensured through integrating the legal entity intoMagyar Telekom. Following the integration, we aim to achieve increasedefficiency through joint marketing, communication activities and customerrelationship management, as well as simplifying the operating structure througheliminating overlaps in activities.

The activities of T-Online Hungary, also a fully ownedsubsidiary of Magyar Telekom, will be divided between the access business areaand the content and portal area. The access business area includes internetaccess products such as ADSL, dial-up, cable Internet, as well as IPTV and VoIPservices. Driven by the need to increase the focus on broadband services andthe spread of integrated services, the Board of Directors proposed to integratethe Internet access area into the T-Com segment. The merger will allow servicequality to be improved and facilitate broadband development thanks to theintegrated customer service and customer relationship management, as well asensuring increased organizational efficiency. The remaining business entity ofT-Online will focus on media, content and other new business areas.

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The Board proposal is subject to approval by the ExtraordinaryGeneral Meeting of Magyar Telekom to be held on June 29, 2007, and theconsent of the supreme bodies of the two subsidiaries. The merger process willbe completed with registration by the Court of Registry. Following that, MagyarTelekom will be the legal successor of Emitel and the merged area of T-Online.As both companies are fully owned subsidiaries of Magyar Telekom, the plannedsteps do not require approval from the Hungarian Competition Authority.

Following the expansion ofthe T-Systems segment’s service portfolio, particularly through the recentacquisitions of KFKI Group and T-Systems Hungary, the Company has reviewed theorganizational structure of the segment. Since January 1, 2007 theT-Systems segment has consisted of three divisions—Infocom, IT Infrastructureand IT Applications. The latter two encompass the activities of the current sixsubsidiaries, divided according to their profiles and competencies. In order toincrease the segment’s transparency and improve sales efficiency, the number ofsubsidiaries will be reduced via legal integration into the two respectivedivisions, thus forming two individual legal entities. The legal procedures areexpected to be completed by January 1, 2008. This move will enable us tofocus more efficiently on strengthening our market leadership in theinfo-communications service market as well as repositioning our corporatemarket approach as a true IT/TC provider. Operational efficiency will also beimproved through the elimination of overlapping activities.

**DESCRIPTION OFBUSINESS AND ITS SEGMENTS**

We are the principal provider of fixed linetelecommunications services in Hungary, with approximately 2.6 million fixedaccess lines as of December 31, 2006. We are also Hungary’s largest mobiletelecommunications services provider, with more than 4.4 million mobilesubscribers (including users of prepaid cards) as of December 31, 2006. Wehold a 100 percent interest in Stonebridge Communications AD, which controlsMaktel, the sole fixed line telecommunications services provider and, throughits subsidiary T-Mobile Macedonia, the leading mobile telecommunicationsoperator in Macedonia. We also hold a 76.53 percent ownership in CrnogorskiTelekom, the principal fixed line telecommunications services provider and,through its subsidiary T-Mobile Crna Gora, the second largest mobiletelecommunications operator in Montenegro.

Our consolidated revenues were HUF 671,196 million(U.S.$ 3,503 million), and our consolidated net income was HUF 75,453 million(U.S.$ 394 million) in 2006.

We are a full-service telecommunications provideroperating in two business segments:

*FixedLine Telecommunications Services.*   Our fixed linetelecommunications services consist of local, long distance and internationaltelephone as well as other telecommunications services, including leased line,data transmission, cable television and Internet services. We also providecorporate network services, system integration (“SI”) and informationtechnology (“IT”) services, sell telecommunications equipment and offer networkconstruction and maintenance services. We are the market leader for most ofthese services in Hungary.

The fixed line telecommunications service segment alsoincludes three Macedonian companies. Stonebridge is a holding company throughwhich Magyar Telekom controls Maktel. Telemacedonia is a management companythrough which Magyar Telekom provides management and consulting services toMaktel, T-Mobile Macedonia and Stonebridge. Maktel is Macedonia’s leading fixedline telecommunications company. In addition, the fixed line telecommunicationsservice segment also includes our Montenegrin subsidiary, Crnogorski Telekom. CrnogorskiTelekom is the principal fixed line telecommunications service provider inMontenegro.

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*MobileTelecommunications Services.**  *Ourmobile telecommunications business, TMH, is a leading provider of mobiletelecommunications services in Hungary. TMH is one of three digital mobileservices providers in Hungary. Since December 7, 2004, TMH also has rightsto operate 3G, or Universal Mobile Telecommunications System (“UMTS”), mobiletelecommunications services. Mobile telecommunications services havecontributed significantly to our revenues.

The mobiletelecommunications service segment also includes T-Mobile Macedonia, a leadingmobile telecommunications services provider in Macedonia. T-Mobile Macedonia isa fully owned subsidiary of Maktel. In addition, the segment also includesT-Mobile Crna Gora, the second largest mobile telecommunications servicesprovider in Montenegro, a fully owned subsidiary of Crnogorski Telekom.

**STRATEGY**

Since becoming a listed company in 1997, we havemaintained our leading positions in the domestic fixed line, mobile, Internetand data businesses. We have successfully expanded into international operationsthrough selective acquisitions, and continuously produced solid results.

The telecommunications industry is undergoing a majorchange globally. We have observed several long-term trends which are changingthe structure of the Hungarian telecommunications market. Key drivers of thelong-term trends include changes in technology (i.e., IP-based broadbandproducts and solutions, emerging wireless broadband technologies), customerrequirements (i.e., mobility and ease of use, triple-play solutions), competitionand regulation (i.e., low entry barriers, new business models).

To adapt to these changes in the market, we are nowmoving from the traditional traffic-based revenue structure to an access-basedrevenue structure, which will allow us to substitute declining traffic revenueswith content, entertainment and bundled access revenues. In addition, we areseeking new revenue sources by entering into non-traditional convergedtelecommunications markets.

Accordingly, we have redefined the focus areas of ourcorporate strategies to better exploit our position as the only integratedtelecommunications operator with a full range of services in Hungary and theregion, as well as to ensure our long-term competitiveness. Our strategies aredesigned to enable us to exploit and develop our extended customer base,significantly improve efficiency and capture growth opportunities.

To ensure our continuing success, we have beenoperating under our Value Creation Program since mid-2004. We believethat the successful implementation of this Program is critical to capturing newgrowth opportunities as the telecommunications market rapidly develops in newdirections.

In order tocontinue our transformation to become a cost-efficient integrated servicecompany in an extended market of telecommunications and converged industries wehave set our strategic priorities as follows:

1.                Excellence

·        *Service excellence*—Provide best-in-class customer care,service delivery and provisioning to our customers in order to maintain ourleadership on the market

·        *Broadbandpush*—Aggressively expand broadband relations, exploit multi-accesscost-efficient broadband rollout and content service

2.                Efficiency

·        *Operational efficiency—*Exploit efficiency improvementpotential in current operations and processes to improve our competitiveness

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·        *Integratedoperations—*Capture maximum revenue and cost potential in integratedoperations and leverage economies of scale and synergies in a converging market

3.                Expansion &Acquisition

·        *Content and media—*Move towards content and media businessesto support traditional access services and build new revenue streams/exploitnew revenue sources

·        *System integration—*Focus on complex service offering viamanaged services, system integration and outsourcing through consultancy-basedsales to corporate customers

·        *New services expansion—*Capture potential growthopportunities on new converged market areas by extending our service portfolio

·        *International acquisitions—*Seek value-creating coreacquisition targets in the South-East European region with appropriate scaleand leverage our regional presence

We have developed acomprehensive market-oriented program designed to improve operationalperformance on Group-level and in every division. Our primary focus is on thefollowing areas of business operations:

1.                Excellence

·        *Service Excellence—*As a service company operating on acompetitive market, one of our major strategic focuses has been to maximizecustomer satisfaction in all areas of operation. In order to achieve further improvementin customer service, we are now developing a Group-level customer value-basedCustomer Relationships Management (“CRM”) system. Throughout the past years ofservicing our mobile division, TMH has used a state-of-the-art customer valuemanagement system to track and monitor the value of each customer. We are nowin the process of extending this system to Group level. This will enable us toretain and target customer segments and sub-segments even more accurately. Inaddition, we aim to radically improve service delivery/provisioningcapabilities as it is a vital component in increasing our competitiveness.

·        *BroadbandPush—*In 2004, we nearly doubled Hungary’s Asymmetrical DigitalSubscriber Line (“ADSL”) access base to 200,000. In 2005 and 2006, we extendedour ADSL customer base further to over 500,000. As the leading broadbandprovider in Hungary, we are committed to accelerating growth in country-widebroadband penetration. Ongoing promotions, a new differentiated product rangeand innovative broadband-specific content services are being developed togenerate a strong increase in demand, while strategic pricing should allowoptimal subscriber and profit growth. In November 2006, we launchedInternet Protocol-based TV (“IPTV”) services; in early 2007, we doubledbandwidths on our network by utilizing ADSL2 technology and to further boostmarket development by introducing naked DSL services. Also, we believedifferent wireless broadband technologies will play an increasingly importantrole in the coming years. Applying the so-called “multi-access” (i.e., optimalcombination of different wired and wireless broadband access technologies)approach provides the most cost-efficient means to expand broadband access basecountrywide. Accordingly, leveraging first mover advantage on our newly builtHSDPA capacities is one of TMH’s primary strategic focuses on the fast growingwireless broadband market.

2.                Efficiency

·        *Operational Efficiency—*We plan to improve our internalefficiency by prolonging the aggressive internal cost reduction program, whichhas been underway for several years. A set of specific operational efficiencytargets has been set in place. Our initial 2006 goal to improve the 

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efficiency of ourworkforce by increasing the fixed lines (B-channel equivalent) per employeeratio to over 500 (a ratio that corresponds to the best practice in WesternEurope) was already reached by the end of February 2006. We are committedto further simplification and improvement of processes and connected systems,accelerating decision making and therefore speeding up time-to-market. Inaddition to organizational measures and process improvement, we seek costsavings by leveraging our group-wide synergies in procurement.

·        *Integrated Operations—*Fixed-mobile convergence is fastdeveloping in the telecommunications industry, particularly with respect totechnology, customer needs, products/services and organizational structures.Telecommunications companies are heading towards further integration of fixedand mobile businesses driven primarily by the technological developments andthe increasing customer demand for integrated services. We are expectingsignificant value generation through the gradual implementation of theintegration by seizing additional revenues and optimizing operating and capitalexpenses. To ensure our competitiveness and our ability to create shareholdervalue in the long run, we decided to merge our mobile and fixed divisionseffective March 2006.

The integration of ourfixed and mobile businesses will particularly enhance our competitiveness inthe following areas:

·       Customer care and customerservice (e.g., common chain of retail stores, one-stop shopping for corporatecustomers and marketing); unified T-Shop retail network was successfully set upin 2006;

·       Back-office and supportingsystems (e.g., common use of functional services, procurement synergies,unified supporting systems);

·       Network infrastructure(e.g., unified IP-based backbone network, joint platform planning anddevelopment); and

·       Products and valuepropositions (e.g., fixed-mobile bundled products, value added services basedon broadband access and content).

Customersdirectly experience and benefit from the expansion of the service portfolio,easier access to products, and more competitive value propositions.Exploitation of the operational synergies, streamlined organizationalstructures and simplified processes will improve our corporate efficiency.

3.                Expansion &Acquisition

Traditionaltelecommunications markets of our core operations imply limited top line growthpotential, whereas surrounding convergent market areas—such as mass media,transactional services, commerce and info-communications (“ICT”) services—implystable growth over long term. Leveraging our relationship advantage, extendeddistribution network and strong brand awareness, we are in a strong position toenter these new markets and increase our market share in the extendedmarketplace. We also see significant growth potential in expanding our coreoperations further in the South-East European region, where we have gainedhands-on experience with a good track record.

·        *Content and Media—*content and innovative broadband-basedservices play a crucial role in further enhancing broadband market development.We aim to further advance and extend our presence in this market segment.Accordingly, in April 2006, we gained control of iWiW Kft., the leadingHungarian online social network currently registering over 2.1 million users.In May 2006, we acquired Adnetwork Kft., the leading domestic onlineadvertisement network, to leverage the online advertisement potential ofT-Online and partner web pages*.*

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·        *Systems Integration—*the growth potential of traditionaltelecommunications services in the Hungarian corporate market is limited. ITservices such as systems integration, managed network services, customapplication development, IT outsourcing and consultancy services are becomingthe new growth drivers in the corporate market. In line with changing customerdemands we believe IT services will become the new “gateway” to sell integratedtelecommunications services, and the winning telecommunications firms in thefuture Hungarian corporate market will be those that establish theircredentials as trusted IT/telecommunications service partners. Therefore, tomaintain sustainable competitiveness in the corporate sector, we have committedto further developing our IT competencies. Acquisitions are an important partof this program, as they offer the fastest means to build our position andimprove our competency mix in the corporate IT/telecommunications market. As amajor provider of SI/IT services in Hungary, the acquisition of KFKI Group in June 2006was a major step towards this initiative. In April 2006, we acquiredDataplex, a major provider of ICT infrastructure outsourcing. Also, byacquiring additional two percent of T-Systems Hungary in January 2007, weare now the majority stakeholders of the company.

·        *New Services Expansion—*to further leverage our core assetswe are continuously exploring emerging business possibilities on new convergingmarkets through expanding our service portfolio. We are considering enteringnew market segments such as transactional services and commerce to generate newrevenue streams in case a potential business opportunity is arising*.*

·        *InternationalAcquisitions—*We acquired a 51.12 percent stake in Crnogorski Telekomfrom the government of Montenegro in March 2005. At the same time, weacquired an additional 21.92 percent of Crnogorski Telekom’s shares fromminority shareholders. As a result of a public offer, we acquired an additional3.49 percent stake in Crnogorski Telekom, increasing our stake to 76.53 percentby May 24, 2005. In February 2006, we acquired a 100 percent stake ina Bulgarian alternative fixed line telecommunications and Internet servicesprovider, Orbitel. Leveraging our hands-on experience and good track record inthe region, we are committed to further strengthen and leverage our presence inthe South-East European region. Accordingly, we are continuously seekingfurther value-creating acquisition and investment targets with even largerscale.

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**OVERVIEW OF MAGYARTELEKOM’S REVENUES AND PRINCIPAL ACTIVITIES**

Forthe years ended December 31, 2004, 2005 and 2006, our total revenues bybusiness segments were as follows:

| ** **                                  | ** ** | **Year ended December 31,** | ** ** | **Year ended  December 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------|------------|----------------------------------------|------------|
| ** **                                  | ** ** | **2004**                                   | ** ** | **2005**                               | ** ** | **2006** | ** ** | **2006/2005** | ** ** |
| ** **                                  | ** ** | **(in HUF millions)**            | ** ** | **(% change)**                    | ** ** |
| **Revenues**                                | ** ** | ** **                                 | ** ** | ** **                             | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Fixed line—Hungary                     |       | 298,707                                    |       | 284,985                                |       | 292,193 |   |   | 2.5 |   |   |
| Fixed line—Foreign operations          |       | 45,693                                     |       | 57,983                                 |       | 68,953 |   |   | 18.9 |   |   |
| Total                                       |       | 344,400                                    |       | 342,968                                |       | 361,146 |   |   | 5.3 |   |   |
| Less:  intra-segment revenue                |       | (1,271                                     | )          | (2,284                                 | )          | (3,569 | ) |   | 56.3 |   |   |
| Total revenue of  Fixed line segment        |       | 343,129                                    |       | 340,684                                |       | 357,577 |   |   | 5.0 |   |   |
| Less: revenue from Mobile segment           |       | (11,146                                    | )          | (11,478                                | )          | (13,711 | ) |   | 19.5 |   |   |
| Fixed line  revenue from external customers |       | 331,983                                    |       | 329,206                                |       | 343,866 |   |   | 4.5 |   |   |
| Mobile—Hungary                         |       | 260,568                                    |       | 266,217                                |       | 297,209 |   |   | 11.6 |   |   |
| Mobile—Foreign operations              |       | 33,734                                     |       | 42,693                                 |       | 52,399 |   |   | 22.7 |   |   |
| Total                                       |       | 294,302                                    |       | 308,910                                |       | 349,608 |   |   | 13.2 |   |   |
| Less:  intra-segment revenue                |       | (58                                        | )          | (27                                    | )          | (42 | ) |   | 55.6 |   |   |
| Total revenue of  Mobile segment            |       | 294,244                                    |       | 308,883                                |       | 349,566 |   |   | 13.2 |   |   |
| Less: revenue from Fixed line segment       |       | (29,435                                    | )          | (23,035                                | )          | (22,236 | ) |   | (3.5 | ) |   |
| Mobile revenue  from external customers     |       | 264,809                                    |       | 285,848                                |       | 327,330 |   |   | 14.5 |   |   |
| Total revenue of  the Group                 |       | 596,792                                    |       | 615,054                                |       | 671,196 |   |   | 9.1 |   |   |

 

Most of our revenues in 2004, 2005 and 2006 werederived from services provided within Hungary, except for the internationalfixed line and international mobile revenues, which were mainly derived fromservices provided in Macedonia in 2004, and in Macedonia and Montenegro in 2005and 2006.

Our business is notmaterially affected by seasonal variations.

**FIXED LINETELECOMMUNICATIONS SERVICES SEGMENT**

In 2006, our fixed line telecommunications servicesgenerated revenues of HUF 357,577 million before inter-segment eliminations.Fixed line telecommunications services consist of domestic and internationalservices, Internet services, data transmission, SI/IT services, cabletelevision, multimedia and telecommunications equipment sales, as well asconstruction, maintenance and other services.

The Hungarian fixed lineoperations include activities of Magyar Telekom in Hungary and South-EasternEurope. Magyar Telekom provides international network and carrier services inSouth-Eastern Europe through Points of Presence (“PoPs”). Magyar Telekomentered the Romanian market in July 2004, the Bulgarian market in September 2004,and the Ukrainian market in August 2005 to offer various wholesaleservices. Capitalizing on our experience in these markets, we have entered intothe retail market segment in Romania with a full service portfolio and intendto do so in Bulgaria and Ukraine as soon as the regulatory environment becomesfavorable.

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**Hungarian FixedLine Operations**

***Domestic Services***

Revenues fromdomestic fixed line telephone services consist of:

·       subscriptions,connections and other charges;

·       outgoingdomestic traffic revenues; and

·       incoming domestic trafficrevenues.

*Products and Services*

*Localand Long Distance Telephone Services.*   We providelocal, domestic and international long distance telephone services to our fixedline subscribers and to fixed line subscribers in other LocalTelecommunications Operator (“LTO”) areas.

*PublicSwitched Telephone Network (“PSTN”).**  *Due to the fierce competition and mobilesubstitution, the number of our PSTN lines decreased from 2,252,943 as of December 31,2005 to 2,158,547 as of December 31, 2006.

*IntegratedServices Digital Network (“ISDN”).**  *ISDNallows a single access line to be used simultaneously for a number of purposes,including voice, data, facsimile and video transmission. We offer both basicISDN access lines with two channels and multiplex ISDN access lines with 30channels. As of December 31, 2006, we had installed 171,995 ISDN access lineswith two channels and 4,710 ISDN access lines with 30 channels, for a total of485,290 ISDN channels. We intend to extend the life cycle of the ISDN productin the business segment by offering various discounts to our customers.

*DigifonServices.**  *At theend of 2005, our network was 100 percent digitalized, which enable us toprovide value added services in our entire service area. We provide a number ofvalue added services, such as call forwarding, call waiting, call conferenceand caller number identity to a significant number of our fixed linesubscribers. These services help increase fixed line usage as they make busysignals and unanswered calls less common. We also offer bundled packages ofdigifon services, including Digifon Home, Digifon Business, Összhang andVisszhang. The most popular of these packages is the Összhang, which containsfive services at a discount price. Összhang package had approximately 265,000customers by the end of 2006.

*SharedCost/Toll Free Numbers.*   The reverse chargednumbers (“blue” and “green”) are primarily used by business customersleveraging the service benefits in the course of their business operations. Thecustomer base and the usage volume of this service are stable. In line withinternational regulations, we ensure the international availability of reversecharged numbers both from fixed line and mobile networks.

*Voice-mail.**  *We offer a voice-mail service including call returnand call capture. We also offer voice-mail Short Message Service (“SMS”), whichprovides an SMS alert to the mobile handset of the customer each time he or shereceives a voice-mail message. These services allow better usage of thenetwork, provide convenience to our customers and decrease the ratio ofuncompleted calls.

*FixedSMS.**  *From afixed line terminal, short text messages can be sent with an SMS-capabletelephone and SMS termination is available for every subscriber. If theaddressee does not have an SMS-capable telephone, the text message is convertedand sent as a voice message. In December 2005, we launched a new platformfor the fixed SMS service, resulting in higher service quality. From 2006, ourclients are able to send fixed SMS to all domestic fixed and mobile operators’network. In addition, the increasing number of SMS-capable telephone sets alsocontributed to our revenue growth in 2006.

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*PrivateBranch Exchange (“PBX”) Services.*   We offer PBXservices through one of our subsidiaries, BCN Rendszerház Kft. (“BCN Kft.”).The vast majority of the leased equipment is digital and meets the demands ofdeveloping technologies such as ISDN and digitally enhanced cordlesstelecommunications.

*Directory Assistance.**  *We offer directory inquiry services. The domesticdirectory assistance database includes all fixed line and postpaid mobilesubscribers’ data in Hungary. We offer a call completion option to subscribers,whereby calls may be connected automatically. We also offer increasinglypopular Directory Assistance-Plus (“DA-Plus”) service. DA-Plus offers a widerange of information including Yellow Pages, residential classifiedadvertisements, encyclopedia- and dictionary-based information, recipes, poems,as well as telephone numbers, postal, e-mail and website addresses without anyquantity restrictions. The requestedinformation may be provided verbally, by SMS, by e-mail or by fax. Thefees for the service are based on per minute usage. We also offer a callcompletion option to the subscribers of DA-Plus.

*Subscribers*

Thefollowing table sets forth information regarding total fixed access lines andpenetration rates in the service areas of Magyar Telekom Plc. and Emitel:

| ** **                                                                           | ** ** | **At December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                           | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2006** | ** ** |
| Number of fixed lines                                                                |       |                          |       |   |   |   |   |
| Residential lines                                                                    |       | 2,080,408                     |       | 1,981,876 |   | 1,902,011 |   |
| Business lines                                                                       |       | 263,889                       |       | 248,955 |   | 236,019 |   |
| Public payphones                                                                     |       | 27,818                        |       | 22,112 |   | 20,517 |   |
| Total                                                                                |       | 2,372,115                     |       | 2,252,943 |   | 2,158,547 |   |
| ISDN channels                                                                        |       | 530,250                       |       | 500,696 |   | 485,290 |   |
| Total                                                                                |       | 2,902,365                     |       | 2,753,639 |   | 2,643,837 |   |
| Lines installed per 100 residents in the service  areas of Magyar Telekom Plc.       |       | 37.5                          |       | 35.6 |   | 34.2 |   |
| Digital exchange  capacity as% of Magyar Telekom Plc.’s total exchange capacity |       | 92.9                          |       | 100 |   | 100 |   |

 

Our domestic fixed line subscribers can be classifiedinto two categories: residential customers and business customers, whichinclude our customers in the public sector. As of December 31, 2006, 74percent of our access lines was utilized by our residential customers and 25percent by our business customers. The remaining one percent of access lineswas used for public payphones.

The Hungarian government,through its various institutions and departments, constitutes our largestcustomer group. We develop separate service packages for each of theseinstitutions and departments, as each of them generally has its own annualbudget, particular telecommunications needs and responsibilities. From astrategic perspective, however, we consider the Hungarian government a singlecustomer. We offer most of our largest customers, including the government,discounts for services we provide.

*Fees and Charges*

We charge fixed line subscribers a one-time connectionfee, monthly subscription charges and call charges based on usage. A callcharge contains two elements: a call set-up charge and a traffic chargemeasured in seconds based on the call’s duration. In accordance with the ActLXXXVII of 1990 on Pricing (the “Pricing Act”), as modified by the ElectronicCommunications Act, the Minister, together with the Minister of Finance, isresponsible for establishing the maximum rates for universal services. We may,however, offer services at prices lower than those established by the Minister.

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Our one-time connection fee and monthly subscriptioncharges are different for residential and business customers. We do not,however, charge our business and residential customers different trafficcharges if they use the same price plan.

In 2006, we increased the number of price plans toallow customers in different market segments to choose plans that best suittheir calling patterns. These price plans also serve as a tool to maintain ourcustomer base in the fully liberalized market as those customers who select usas the operator for every traffic direction (local, long distance andinternational) receive the highest discounts. In 2005, we introduced flat rateprice plans that offer free unlimited calls to customers during a certainperiod of the day for an additional monthly fee.

As a result of the VAT reduction in January 2006,the consumer prices decreased. At the same time, we decreased the minute feesof the Felezőprice plan, thus we managed to create an even more attractive product. In May 2006,within the framework of our flat rate program, we introduced offers containingno time limitation on usage. During 2006, the fixed-mobile bundled offersproved to be successful customer retention tools. In November 2006, wedeveloped a price plan with a monthly fee that can be fully offset by callcharges. This product (Total price plan) proved to be very successful andgenerated more than 80,000 subscribers by December 31, 2006. By the end of2006, Favorit and Felezőprice plans attracted the highest customer base, with 550,000 and 539,000subscribers, respectively.

We target business customers attacked by the mobilesubstitution (especially “fleet” offers) with our business flat rate priceplans, which are transparent and easy to budget. It is designed to retain fixedline traffic, to stop the increasing erosion, and to provide an opportunity forthe reacquisition of traffic that we lost due to pre-selection. Customers offlat rate price plans can use our network for local, domestic, and longdistance calls for a fixed monthly fee. We also offer flat rate price planswith options for mobile, international or LTO calls.

We introduced two productsin our new business flat rate portfolio (Grátisz 100, Grátisz 500) as well asoptional supplementary price plans for mobile and international flat ratecalls. These plans proved to be successful tools for traffic retention in thebusiness segment. At the end of 2006, we had 25,000 subscribers for the Grátisz500 and 12,000 subscribers for the Grátisz 100 price plans.

*Public Telephones*

Asof December 31, 2006, Magyar Telekom operated 20,517 public payphones. Thecall charges for calls from public payphones are at a premium to those chargedto fixed line subscribers.

***InternationalTelephone Services***

International telephoneservices consist of outgoing and incoming international calls, including voiceand switched transit traffic through Hungary.

*Products and Services*

We provide international calling access to our fixedline subscribers and to subscribers of other local telephone operators andmobile service providers. Our Hungary Direct and Country Direct services permitcustomers to charge calls made from 50 foreign countries to their home phonenumbers in Hungary.

International toll free service was launched in 1998.This service enables the caller to make international calls free of charge toand from 38 countries, while the subscriber of the toll free number is billedfor these calls. Universal internationaltoll free service was launched in 2003. This service enables the subscriber tobe called free of charge from 22 foreign countries with the same telephonenumber.

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In June 2000, weintroduced the international prepaid calling card, “Barangoló”, which allowscustomers to make phone calls, including IP-based calls, in 40 countries. Thisservice enables customers to make international calls from touch-tone payphonesin Hungary and abroad.

*Fees and Charges*

The call charge for an international call consists oftwo elements: a call set-up charge and a traffic charge measured in secondsbased on the call’s duration. Although the published prices of ourinternational rates did not change in 2006, the average per minute ratesdecreased as a result of discounts given in various optional price plans.

*Settlement Arrangements.**  *Under bilateral settlement arrangements, we pay othercarriers for the use of their networks for outgoing international calls andreceive payments from other carriers for the use of our network for incominginternational calls. In Europe, such settlement arrangements fall under thegeneral auspices of the International Telecommunications Union. Settlementpayments are generally denominated in Special Drawing Rights (“SDR”), based ona currency basket in which U.S. dollars have the greatest weight. Due to thelarge exchange rate fluctuations of the SDR caused by the recent volatility ofthe U.S. dollars, we started to shift our accounting rate agreements toeuro-based arrangements. Most new international carrier partners prefer to usethe euro as a settlement currency.

*International Telecommunications Hub*

We believe that Hungary is geographically wellpositioned to serve as a telecommunications gateway between Eastern and WesternEurope. We have two state-of-the-art international gateways as well as fiberoptic cable connections serving 25 border crossings. These fiber optic cableconnections use synchronous digital hierarchy transmission facilities and wehave launched our own Dense Wavelength-Division Multiplexing (“DWDM”) backbonenetwork. To increase the utilization of our transmission network, we offerattractive price schedules for dedicated transit services through Hungary. Weare DT’s partner in Delivery of Advanced Network Technology to Europe (“DANTE”),which provides transmission paths interconnecting Bucharest (2x622 Mbit/s) andSofia (2x155 Mbit/s) to the European research and educational network, GEANTthrough their Budapest node.

We have X.25 links, which are used for packet switcheddata transmission with 83 international networks. We also have ISDN connectionswith 50 international networks.

To seize the opportunitiespresented by the liberalization of the telecommunications market in Romania, weestablished interconnection arrangements with major Romanian alternativeservice operators and network service providers to offer transit services toWestern Europe. In addition, we use our own point of presence in Austria, whichenables us to engage in telephone and Internet business with alternativetelecommunications carriers located in Vienna. We provide Internet transitservice to several Romanian and Bulgarian ISPs on our two IP PoPs in Romaniaand high-capacity international Internet transit service on our IP PoPs inHungary to ISPs in Ukraine and Macedonia.

***Internet Services***

T-Online Hungary, our fully-owned ISP subsidiary,offers Internet services based on dial-up, ADSL technology as well as accessthrough cable television, Wireless Local Area Network (“WLAN”) and leased linesto provide residential and business customers with narrowband or broadbandInternet services at affordable prices.

In 2006, T-Online Hungary increased its subscriberbase by 30 percent to 427,000. T-Online Hungary is the largest Internet serviceprovider in Hungary with an estimated 39 percent market share based on thenumber of dial-up subscribers. The number of T-Online Hungary’s broadband(ADSL, cable television, 

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WLAN and leased line)customers reached 395,599 as of December 31, 2006 compared to 247,597 ayear earlier.

In 2006, the number of Internet users increasedsignificantly. By the end of 2006, approximately 23 percent of Hungarianhouseholds were connected to the Internet compared to 19 percent at the end of2005. T-Online Hungary is committed to accelerating Internet penetration growthand has invested a significant amount of resources to develop attractive andinnovative content, such as T-Home TV.

In 2006, T-Online Hungary and Magyar Telekom Plc.introduced an IPTV service. IPTV allows broadcasts to be seen on a televisionset with a set-top-box over ADSL connection. The new product line offersvarious interactive contents, such as time-shift function, program-magazine onscreen, recording onto the hard disc built in the set-top-box, video libraryand picture in picture. T-Home TV is available in six large cities in Hungary.

The joint product of T-Com (the residential Line ofBusiness of Magyar Telekom) and T-Online Hungary, Klip offers VoIP services viabroadband access. Users of Klip can initiate and receive calls for free via theInternet, to both fixed line and mobile networks. Klip users can also be calledfrom T-Com’s fixed network. The product, launched at the end of 2005, alreadyhad more than 58,000 registered users at the end of 2006.

*MagyarTelekom ADSL.**  *ADSL isa continuous, high-speed Internet access service based on the Asymmetric DSLtechnology. The service offers cost-efficient broadband Internet accesstogether with telephone service over existing copper wires. We sell theseservices mainly on a wholesale basis to ISPs, which in turn resell the servicesto residential and small business customers. At the end of 2006, we hadcontractual relationships with 22 ISPs. In 2006, this service saw a significantgrowth with the number of ADSL connections reaching 512,810 by December 31,2006 from 329,314 at December 31, 2005.

In 2006, we implemented an infrastructure expansionproject. A large amount of investment was used for the roll-out of broadbandInternet. As a result of these steps, over 150 additional settlements wereconnected to the service in 2006, exceeding 1,000 connected settlements by December 31,2006.

*T-ComADSL (“T-DSL”).**  *We offervoice and Internet bundles (T-DSL) for both residential and business costumers.Residential T-DSL price plans contain telephone line with flat voice and a flatInternet access. Our objective is to expand the broadband Internet marketaggressively. To support this goal, we launched a free service trial period(Try&Buy ADSL campaign) in 2006. After the free trial period, 49 percentof the customers subscribed for commercial ADSL.

*ADSL2+.*   OnJune 1, 2006, we introduced a number of new commercial products based onADSL2+ technology, providing two broadband packages to the ISP partners with amaximum download bit rate of 12 Mbit/s and 18 Mbit/s, a bit rate much higherthan before. ADSL2+ packages were available in 791 settlements by December 31,2006.

*T-ComHotSpot.**  *T-ComHotSpot is a wireless broadband Internet solution, based on the WiFi technologyfor public sites (i.e., hotels, conference centers and restaurants). TheHotSpot payment methods include T-Com HotSpot prepaid card and subscriptionpackages (HotSpot 180). The T-Com HotSpot service is also available forT-Online Hungary’s Internet access subscribers, for whom the usage fee is paidthrough T-Online Hungary’s Internet access monthly bill. Customers with a validT-Mobile HotSpot access identification may also use the T-Com HotSpot service.The HotSpot service is also available online by bank card payment. At the endof 2006, there were 354 public HotSpot sites in operation (113 hotels, 17T-Ponts and 224 others).

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*T-ComOpen Internet.**  *T-ComOpen Internet is our dial-up Internet service. To use the service, customers donot need to sign a contract or register and no monthly fees need to be paid.The minute fee of the usage is paid on the telephone bill. The low fees, theease of use and setup make this service an optimal choice for inexperiencedInternet users. This dial-up service also provides for us a potential base forbroadband migration. At the end of 2006, there were more than 60,000 customersusing Open Internet.

***Data Transmissionand Related Services***

We are the principal provider of leased lines inHungary.

Leased line service establishes a permanent connectionfor transmission of voice and data traffic between two geographically separatepoints (point-to-point connection) or between a point and several other points(point-to-multipoint connection). These points can be either all within Hungaryor some in Hungary and others abroad.

We lease lines to other local telephone operators andmobile service providers, who use such lines as part of their networks. We alsolease lines to providers of data services. In addition, we lease lines tomulti-site business customers who use leased lines to transmit internal voiceand data traffic.

We offer a broad variety of standard analog and digitallines for lease, including two-wire and four-wire analog lines and digitallines with capacities from 64 Kbit/s to 155 Mbit/s. We also offer high capacitycustomized digital lines to other telecommunications providers.

*Flex-Com.**  *We offer Flex-Com, domestic and international digitalleased lines with managed back-up systems that are dedicated to datatransmission. The number of Flex-Com connections decreased from 10,289 as of December 31,2005 to 9,165 lines as of December 31, 2006. However, during the sameperiod the aggregate sum of the bandwidths of the connections has increased by11.3 percent from 3.46 Gbit/s to 3.85 Gbit/s, which led to higher revenues.

*HighSpeed Leased Line (“HSLL”).*   The HSLL serviceprovides permanent, digital, transparent, point-to-point leased line servicebetween service access points (“SAPs”). The connections are established by aservice provider according to the needs of its customers. Transmission ratesprovided by the HSLL service are 2, 34, 45, 140 and 155 Mbit/s. We increasedour HSLL connections from 1,355 at December 31, 2005 to 2,493 by December 31,2006.

As an addition to the HSLL portfolio, we offer a WDMtechnology-based premium service, Gigalink, which provides leased line serviceat a higher speed (622 Mbit/s) to business customers and to other serviceproviders. For the Campus backbone network (a link between universities andacademic institutions) we offer Gigalink service up to 10 Gbit/s speed.

*Datex-P.**  *We offer Datex-P, a packet-switched data transmissionservice based on the X.25 protocol. The service provides low to medium speeddomestic switched data communications services with international connectivityto business customers. As a result of the proliferation of new technologies,growth in the number of subscribers has stopped. Between 2003 and 2005, ourmajor objectives were to extend the lifecycle of the product, maintainprofitability, optimize the network and reduce costs. In 2005, we assessed andcommenced migration of customers to other data transmission services. In 2006,we introduced a flat rate price plan and widened the access option by Ethernetinterface.

Our leased line customers pay a one-time connectionfee based on the type of line leased. Monthly subscription charges vary withthe type and length of lines leased and, in some cases, with the term of thelease. With the exception of leased lines required for connection with othernetworks, leased line charges are not subject to regulation. As part of theoverall rebalancing of our rates, we have reduced our leased line charges inreal terms over the last few years in response to competition, which partlyoffset the revenue increase generated by volume and bandwidth increases of the leasedline services.

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Data transmission and related services consistprimarily of data transmission and network services for business customers,such as financial institutions and insurance companies, and, to a lesserextent, residential customers. The market for data transmission and relatedservices in Hungary is highly competitive. We are the leading supplier of datatransmission and related services in Hungary.

Our revenues from data transmission have grownsignificantly as a result of both the development of the Hungarian economy andour increasingly sophisticated services. We expect the market for theseservices to grow with the proliferation of personal computers and increasingconsumer demand. We believe that the ability to offer new data products and serviceswill be critical to competing effectively in the future, particularly withrespect to business customers.

*MagyarTelekom DataLink.*   In 2004, we launched a newdata transmission product that offers technology independent data transmissionbetween business customers’ locations. The customer only needs to define threemain parameters, bandwidth, Service Level Agreement (“SLA”) and interface. Thisservice provides data connection below 2 Mbit/s, with X.21 or Ethernetinterfaces. With the introduction of this service, we can better utilize ourspare data transmission capacity.

*IPConnect.**  *IPConnect service, a complete solution for ISPs providing transport and accessfacilities to IP traffic, includes the provision of ports in the service area,required for the subscribers of ISPs to dial-in from analog or ISDN lines. Theservice also enables leased line access, and ensures that traffic will beforwarded to both domestic and international switches as well as to thedomestic switch of a particular ISP. The domestic switch of the ISP isconnected to our IP network via a leased line. To maintain our market share andcompetitive position, a new product offering, called Symmetrical Internet wasintroduced in 2003, which includes access and IP/Internet service. After theintroduction of this new service, many of our customers switched from IPConnect to Symmetrical Internet.

*IPComplex Plus.*   IP Complex Plus is an IP-basedVirtual Private Network (“IP-VPN”) service.**IP ComplexPlus service is offered to retail and wholesale customers having multipleremote sites. This service enables them to establish secure data trafficbetween sites without the need of setting up “point-to-point” connectionsbetween two sites. The development of supplementary services, such as ISDNback-up, integrated voice/data, ADSL/Single-Pair High-Speed Digital SubscriberLine (“SHDSL”) access and dial-up access to IP-VPNs make this product moreattractive to a growing number of business customers. In addition to thecurrent function of integrated voice/data service, we provide numberportability for our IP Complex Plus customers. Using this new service,customers can use their existing phone numbers within their private network aswell. In 2007, we intend to extend our portfolio with new access technologies,which enable our customers to connect to the IP network with a speed up to 1Gbit/s.

*International dataproducts.*   We provide signaling links for mobileoperators to facilitate international roaming. We also sell internationalleased lines, including international managed leased lines, international ISDN,X.400, X.25 and telegraph services. The sales of international leased lines aresteadily growing, partly due to the introduction of one-stop-shoppingagreements, whereby customers can order from and pay for the service at oneend-point of the connection, which eliminate the need to deal with multipleservice providers. International Internet connectivity was enhanced in 2004 toprovide services for Internet service providers. By the end of 2004, thecapacity of international Internet connections reached 3 Gbit/s.

***System Integrationand Information Technology***

In June 2006, we acquired one of the leadingHungarian IT companies, KFKI Group with the aim of becoming the leading systemintegrator in Hungary and we increased our share in T-Systems Hungary to 51percent on January 1, 2007. As a result of these acquisitions, IT equipmentand IT services revenues will represent a significant part of our revenues inthe coming years.

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We were able to achieve significant increase in thesales of complex ICT solutions, outsourcing and managed services. Incooperation with business partners, we also sell the products and services ofour subsidiaries (e.g., BCN, Integris, KFKI) and external market partners(e.g., Cisco) to our customers.

The most successful product was our OutsourcingBusiness Model. In 2006, we concluded several contracts to provide outsourcingservices to our strategic customers (e.g., Budapest Bank, Inter-Európa Bank,Allianz, E.ON). In addition, we experienced high customer demand in the salesof IP telephony, complex solutions, flat rate price plans and bandwidth expansion.The set-up of low current systems and the sales of IT solutions also showed asignificant increase. The most important project in this field related to theElectronic Government Backbone Network (“EKG”).

*E-Learning.**  *We provide e-learning solutions for employees orprivate individuals via Internet and private networks (LAN, Intranet, etc.).This service proved to be a cost efficient solution for both the trainingorganization and the user.

*E-Municipality.**  *Our aim is to establish electronic governments thatsupport information access, provide Internet-based public administration,create an open and transparent public sphere and support competitivenessthrough efficient village marketing. This solution includes both IT hardwareand software elements as well as ICT applications combined with projectmanagement.

*“Távszámla”(Electronic Bill Presentment and Payment).**  *This service replaces the use of paper-basedinvoices, as it connects the invoice issuer and the invoice payer via Internet.The system includes the presentment and the payment solution for invoices. Forall these functions, the users need only a PC with Internet access. After asuccessful registration, the invoices can be viewed and paid immediately. Inaddition to telephone, Internet, mobile and cable TV invoices issued by MagyarTelekom, “Távszámla” became available for E.ON customers in 2006.

*PublicAdministration e-Signature.**  *ThePublic Administration Procedure Act, which came into effect on November 1,2005, provides the facility to use e-Signature (tax return submission, passportrequests, etc.) and stipulates extra demand for the authentication services. In2006, we improved our certified e-Signature service and introduced it tothe government authority. NHH audited and assessed us as a certifiedauthentication service provider from March 20, 2007.

*rEDInet.**  *This service allows editing of business documentselectronically, quickly, accurately, remotely and with full security. Thetechnology behind the Electronic Data Interchange (“EDI”) service is usedworldwide. We also provide professional training and consultation services tothe users of our rEDInet service. The rEDInet offers EDI service for theHungarian Fast Moving Consumer Goods (“FMCG”) sector and for suppliers ofEuropean car factories. In recent years, the growth of the traditional EDImarket has slowed down in terms of new participants, but the number and type oftransferred messages are growing. Further growth will be realized with theintroduction of e-invoice solutions and Internet-based services with lowercosts. E-invoicing is supported by the approved regulation of EDI-basedinvoices. The Internet-based solution allows customers of the Small Office/HomeOffice (“SOHO”) and Small and Medium size Enterprises (“SME”) segment withoutIT background to become a member of the electronic trading community. For ourcustomers and other service providers we introduced Virtual Private Network (“VPN”)access via Internet.

*Managed Services.*   In2006, we introduced the Managed Services portfolio with three pillars.Depending on the success of the current portfolio, we intend to develop theManaged Desktop as the fourth pillar.

·       ManagedVoice.   The Managed Voice service provides a solution for turn-key VPNdevelopment and operation as well as voice traffic based on the datainfrastructure of our partners. The service is based on the operation of a fullinfrastructure specifically created for this purpose, including integrated dataand voice transmission via MultiProtocolLabel Switching (“MPLS”) network to 

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forward IP-packetinformation and connections with public networks. In addition to using theManaged LAN service, this solution enables the comprehensive management of allnetwork elements.

·       ManagedLAN.   The Managed LAN service is a provisioning and support solution thatmanages data lines and the connected local networks. Within the framework ofthe solution we also provide local network infrastructure development andoperation as well as continuous supervision with national coverage andproactive fault repair in order to help our customers in their networkmanagement related tasks.

·       Managed Security.   TheManaged Security service includes the development and operation of theprotection of IT infrastructure through local or centralized supervision. Thisservice covers the Internet access and the related local networks’comprehensive protection systems. It is able to guarantee continuous andundisturbed data communication, uninterrupted and authorized access and theenforcement of the corporate security policy and rules of operation.

***Multimedia***

Our cable television (“CATV”) group consists of twoentities providing various cable television services in Hungary. The largerentity is T-Kábel Hungary, which began providing cable television services on January 1,1999.

Through network development and acquisitions, our CATVgroup significantly increased its number of cable television customers duringthe past years. We are the second largest cable television provider in Hungarywith a market share of about 19 percent. The growth of subscribers has sloweddown in the past two years. The CATV group had approximately 414,000subscribers as of December 31, 2006 compared to approximately 404,000 ayear earlier.

T-Kábel Hungary offers 45 analog television channelsin three program packages and 17 radio stations in most of its networks.Premium digital television services are available in the product portfoliosince December 2005. As of December 31, 2006 more than 13,000 packageswere subscribed to from the 31 digital channels offered in 11 mini programpackages. At the end of 2006, T-Kábel Hungary also launched digital simulcastof television channels of two of its three analog program packages in Budapestand in its vicinity.

Our CATV firms—in cooperation with ISPs—offerbroadband Internet services. Partly due to the enlargement of the area withbidirectional data transmission network capability, the number of broadbandInternet subscribers through our cable television networks substantiallyincreased to approximately 63,000 on December 31, 2006 compared to 29,000a year earlier. During 2006, T-Kábel Hungary more than doubled the number ofits VoIP service (Kábeltel) customers to over 28,000 subscribers as of December 31,2006.

T-Kábel Hungary’s cabletelevision activities benefit from our long-term relationship with thecustomers, our thorough market knowledge as well as our strong brand name, andfurther synergies have been mutually utilized. Our main goals in this area are toincrease market share through acquisitions, to connect new customers in theexisting service areas, to broaden the product portfolio, to improve thequality of and further extend the enhanced technical capabilities of thenetworks, to enlarge the coverage of triple-play offering capabilities and toincrease Average Revenue per User (“ARPU”).

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***Fixed LineTelecommunications Equipment Sales***

We distribute an extensive range of telecommunicationsequipment, from individual telephone sets to facsimile terminals, PBXs andcomplete network systems, through a network of customer service centers. Inaddition to stand-alone telephone-set sales, we offer various packagescombining telephone sets with telephone lines and price plans.

We do not manufacture telecommunications equipment butresell and lease equipment manufactured by other companies.

The telecommunicationsequipment sector is highly competitive and characterized by rapid technologicalinnovation. We believe that the supply and service of telecommunicationsequipment are integral element of a full service telecommunications providerand are necessary for the expansion of our customer base. In addition, theseactivities allow to ensure that technologically advanced equipment required fornew services is available in Hungary.

***Other Revenues***

Other revenues include construction, maintenance,rental, wholesale infrastructure services and other miscellaneous revenues.

We construct fixed line telecommunications networksand offer network maintenance services to other telecommunications operators inHungary. These construction and maintenance services are ancillary to theconstruction and maintenance of our networks.

Magyar RTL Televízió ZRt. (“M-RTL”) is a Hungariantelevision broadcast company, in which Magyar Telekom has a 25 percenteffective share through a holding company, IKO-Telekom Média Holding ZRt. M-RTLis entitled to provide commercial television programs but not to engage inbroadcast diffusion or distribution activities. M-RTL has a concession for aperiod of ten years with an option for a five-year extension. The ProgramProvision Agreement was signed on July 9, 1997, being the starting date ofthe license. On July 20, 2005, M-RTL has extended the license for anadditional five years which will be effective from July 10, 2007. M-RTLoperates a channel under a brand name, RTL KLUB.

Since its launch in 1997, RTL KLUB has rapidlyestablished a strong position in Hungary’s television market, being the marketleader for the last six years. Market share among the targeted age 18-49audience remained stable, 29 percent in 2006 compared to 31 percent in 2005 forthe whole day and 34 percent in 2006 compared to 37 percent in 2005 for theprime-time (between 7 and 11 p.m.). M-RTL has successfully converted itsleading audience result into television advertising market share.

RTL KLUB seeks to maintainand increase audience share through investing in local productions, as well assuccessful internationally licensed programs, and through its continuedlong-term relationships with major film distributors, including WarnerBrothers, Fox, Buena Vista and Columbia. M-RTL is strategically concentratingon sport events, such as Formula One races, Paris-Dakar rally and boxing.

**International FixedLine Operations**

***Macedonian FixedLine Operations***

We fully own a Macedonian holding company,Stonebridge, which owns a 51 percent interest in Maktel. Magyar Telekom hascommenced a liquidation procedure of Stonebridge in accordance with therelevant Macedonian laws. Once the process is complete, Magyar Telekom willdirectly own its shares in Maktel, thus simplifying the ownership structure.

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Maktel is the primaryfixed line service provider in Macedonia. Its exclusive rights in fixed linetelecommunications services expired in December 2004. These exclusiverights included local, national and international long distance public telephoneservices, VoIP services, leased line services and building and operating publictelephone network services.

*Subscribers*

Thefollowing table sets forth information regarding the total fixed access linesand penetration rates of Maktel:

| ** **                                                              | ** ** | **At December 31,** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                              | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2006** | ** ** |
| Number of fixed lines                                                   |       |                          |       |   |   |   |   |
| Residential lines                                                       |       | 524,722                       |       | 467,559 |   | 430,082 |   |
| Business lines                                                          |       | 56,329                        |       | 48,252 |   | 42,780 |   |
| Public payphones                                                        |       | 2,725                         |       | 2,063 |   | 2,087 |   |
| Total                                                                   |       | 583,776                       |       | 517,874 |   | 474,979 |   |
| ISDN channels                                                           |       | 42,082                        |       | 41,262 |   | 42,200 |   |
| Total                                                                   |       | 625,858                       |       | 559,136 |   | 517,149 |   |
| Lines installed per 100 residents in the service  areas of Maktel       |       | 29.0                          |       | 26.0 |   | 23.9 |   |
| Digital exchange  capacity as% of Maktel’s total exchange capacity |       | 100                           |       | 100 |   | 100 |   |

 

Maktel has a 94 percent market share in the MacedonianInternet market. The number of Internet subscribers is gradually increasing.Maktel provides Internet access via the public switched telephone network,leased lines and ADSL. By the end of 2006, Maktel had 125,699 Internetcustomers, including 16,462 ADSL connections compared to 91,865 Internetcustomers, including 7,798 ADSL connections at the end of 2005.

Historically Maktel, likegovernment-owned operators in other countries, maintained relatively lowdomestic charges and high rates for international calls. Since November 1999,however, Maktel has been gradually rebalancing its rates. International ratesare expected to decrease further, bringing them in line with the EU standards.Local rates and basic access charges are expected to increase.

***Montenegrin FixedLine Operations***

Following a successful privatization tender, between March andMay 2005, Magyar Telekom obtained a 76.53 percent interest in CrnogorskiTelekom.

For details on the Crnogorski Telekom acquisition, see“Item 10—Material contracts”.

Crnogorski Telekom is the principal fixed line serviceprovider in Montenegro. Its exclusive rights in fixed line telecommunicationsservices expired in December 2003. Crnogorski Telekom provides local,national and international services, in addition to a wide range oftelecommunications services involving leased line circuits, data networks,telex and telegraph services.

For the past three years, Crnogorski Telekom’s majoroperational goals were to digitalize the fixed line network and to increase thenumber of subscribers and access to broadband services. The digitalization ratereached nearly 100 percent by the end of 2006.

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On June 26, 2006 theShareholders Assembly of Telekom Montenegro approved the proposal of the Boardof Directors to adopt the “T” brand in the Montenegrin market. On September 26,2006, the fixed line operations became T-Com Crna Gora (“T-Com CG”) and themobile business changed its name to T-Mobile Crna Gora (“T-Mobile CG”),while the fixed line parent company and the group was renamed to CrnogorskiTelekom.

*Subscribers*

Thefollowing table summarizes key operational information of Crnogorski Telekom:

| ** **                                                                          | ** ** | **At December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                          | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2006** | ** ** |
| Number of fixed lines                                                               |       |                          |       |   |   |   |   |   |   |
| Analog lines                                                                        |       |                          | n.a.       |   |   | 175,122 |   | 173,248 |   |
| ISDN channels                                                                       |       |                          | n.a.       |   |   | 18,750 |   | 21,288 |   |
| Total                                                                               |       |                          | n.a.       |   |   | 193,872 |   | 194,536 |   |
| Lines installed per 100 residents in the service  areas of Crnogorski Telekom       |       |                          | n.a.       |   |   | 31.2 |   | 31.4 |   |
| Digital exchange  capacity as% of Crnogorski Telekom’s total exchange capacity |       |                          | n.a.       |   |   | 99.9 |   | 99.9 |   |

 

Through its wholly-owned subsidiary, Internet CrnaGora, Crnogorski Telekom has a 98 percent market share in the MontenegrinInternet market. Internet Crna Gora, in cooperation with Crnogorski Telekom, isthe sole provider of ADSL in Montenegro. The time spent on dial-up Internetshows erosion, due to ADSL substitution and increase in dial-up tariffs in January 2006,while the number of active customers is stable. Internet access is provided viathe public switched telephone network, leased lines and ADSL. CrnogorskiTelekom group had 25,669 active dial-up Internet customers by the end of 2006.Crnogorski Telekom increased the number of ADSL customers from 1,085 at the endof 2005 to 6,639 at the end of 2006.

Similarly to other fixed line service providers beforeprivatization, Crnogorski Telekom maintained relatively low domestic chargesand high charges for international calls. In December 2004, CrnogorskiTelekom made the first rebalancing step according to the rebalancing roadmapadopted by the Montenegrin Agency of Telecommunications. International chargesare expected to decrease further while local charges and basic access chargesare expected to increase.

In order to improveefficiency, in June 2005, Crnogorski Telekom offered severance packagesfor employees leaving voluntarily with the goal of reducing Crnogorski Telekomwork force by approximately 250. This program was successfully completed by theyear-end significantly reducing Crnogorski Telekom’s labor costs. By the end of2006, Crnogorski Telekom set up a “technological surplus” program whichidentified approximately further 270 employees to be made redundant in 2007.The program was agreed upon with the trade unions of Crnogorski Telekom.

**MOBILETELECOMMUNICATIONS SERVICES SEGMENT**

Our mobiletelecommunications services generated revenues of HUF 349,566 million in 2006before inter-segment eliminations.

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**Hungarian Mobile Operations**

We provided mobiletelecommunications services in Hungary through our wholly-owned subsidiary, TMH(previously: Westel Mobil Távközlési Rt., “Westel”) prior to the merger ofMagyar Telekom and TMH, which is described below.

As of December 31, 2006, TMH accounted for anestimated 44.5 percent of the total Hungarian mobile market in terms ofsubscribers based on the number of active Subscriber Identity Module (“SIM”)cards. The penetration rate of mobile telephone services in Hungary increasedfrom 86.4 percent at December 31, 2004 to 99.0 percent at December 31,2006.

On October 6, 2005, in line with Magyar Telekom’smedium-term strategy announced in 2004, Magyar Telekom’s Board of Directorsmade a proposal for the merger of Magyar Telekom and TMH. On December 20,2005, Magyar Telekom’s Extraordinary General Meeting approved the decision onthe merger of the two companies.

The court registration of the merger took place on February 28,2006. From March 1, 2006, Magyar Telekom is the legal successor of TMH.TMH continues its operations within Magyar Telekom under an independent brandand as an independent business segment.

In 2006, TMH was the first mobile operator in Hungaryto launch HSDPA service. TMH also launched new data products, like web’n’walkand mobile Internet-based on HSDPA. TMH reached 30.3 percent HSDPA coveragebased on population, which is a quite significant achievement in this shortperiod.

In October 2005, the Hungarian governmentselected the consortium of Magyar Telekom Plc. and TMH to build and operate thenation-wide EDR (Hungarian abbreviation for Unified Digital Radio Network)system in Hungary. For this purpose, Magyar Telekom established a newsubsidiary, Professzionális Mobilrádió Zrt. (“Pro-M Zrt.”) in December 2005.

EDR is a 380-400 MHz band nation-wideProfessional Mobile Radio (“PMR”) network used by public safety and securityagencies in Hungary. The main users of EDR are police and fire departments andambulance agencies. The high-quality EDR network replaces the analog radioscurrently used by these agencies.

The consortium was able to offer favorable termsmainly due to its existing radio and fixed line infrastructure, on which theEDR network is based. The EDR service utilizes the Terrestrial Trunked Radio (“TETRA”)technology, which is a global standard for Public Safety and Security mobileradio communication, defined and approved by the European TelecommunicationsStandards Institute (“ETSI”) as the official European Standard for digitalProfessional Mobile Radio.

The roll-out of EDR has started in 2006. Under theterms of the agreement the government will pay us annual payments of HUF 9.3billion starting in 2007 for nine years.

In 2006, TMHcontinued to enhance its non-voice service portfolio, introduced several newproducts, increased the penetration and usage of the existing products andextended the access of some of its domestic products abroad:

·       Internationalroaming service was available for TMH subscribers on 373 networks in 173countries as of December 31, 2006, of which 164 networks in 89 countrieswere available for prepaid customers. At the end of 2006, customers could use161 General Packet Radio Service (“GPRS”) networks in 86 countries.

·       Inline with the increase in the number of MMS-capable handsets in the market, TMHexperienced a boost in MMS penetration and traffic. The number ofmobile-originated MMSs in 2006 was 20.2 percent higher than in 2005.

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·       TMHstarted to sell laptops with data cards in the second half of 2006, whichboosted data revenue and traffic. TMH reached 20.8 percent of its postpaidcustomer base with data service and expects further increase in datapenetration and traffic. Packet switched traffic was four times larger than in2005.

·       In2006, TMH launched WLAN service (Internet Fix) in 120 small settlements wherethere’s no or not sufficient broadband coverage. The international WLAN roamingservice became available in seven European countries and additionally inT-Mobile US’ mobile network for TMH’s subscribers in 2006.

·       TMHwidened its digital contents on t-zones WAP, web and 3G portal. TMH’s t-zonesWAP portal offers news, chat and downloadable content (e.g., logos, ring-tones,Java games). The popularity of this portal grew continuously during 2006 andthe daily average number of visitors reached 45,000 to 50,000. TMH’s specialt-zones portal for 3G customers contains mainly multimedia contents, such ason-line streaming, music and traffic monitors. News, sports, weather and othercontents are available via InfoSMS and InfoMMS as well.

·       Premium-rateSMS and premium voice traffic were substantial in 2006. TMH is able to providepremium-rate services—voice and SMS—on the same number, which is a competitiveadvantage in this field.

·       Theweb’n’walk service ensures the access to the Internet on mobile phones for TMHpostpaid customers from June 1, 2006. In addition to Internet browsing,customers have the opportunity to download wide range of contents, such as Javagames, ring tones, videos and to enjoy Mobile TV service.

·       In2006, TMH significantly widened the range of products that can be purchased byWAP or SMS. Using mobile purchase service, customers can buy various productsand services offered by TMH and third-party vendors. We experienced a stronggrowth in sales of products such as parking tickets, lottery and highway fees.We believe that mobile purchasing has a great potential for further growth.

·       Forcorporate customers TMH offers a full range of telecommunications solutions. In2006, the total corporate non-voice revenue was 25 percent higher than in 2005.The most successful services are Corporate LAN Access and Bulk SMS in the corporatesegment.

·       Electronictop-up services are available at many Automatic Teller Machines (“ATMs”),petrol stations, Internet-banks, Telebanks and Mobilbank. In 2006, the numberof electronic top-up outlets increased significantly. The share of electronictop-up increased, reaching 60 percent by the end of 2006.

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*Subscribers.**  *The number of TMH subscribers has been growing overthe past three years. The table below sets forth information concerning thenumber of TMH subscribers at the dates indicated:

| ** **                                                       | ** ** | **At December 31,** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                       | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2006** | ** ** |
| Number of subscribers                                            |       |                          |       |   |   |   |   |
| Postpaid subscribers                                             |       | 1,163,483                     |       | 1,323,814 |   | 1,545,115 |   |
| Prepaid subscribers                                              |       | 2,868,562                     |       | 2,870,041 |   | 2,886,021 |   |
| Total subscribers                                                |       | 4,032,045                     |       | 4,193,855 |   | 4,431,136 |   |
| Average monthly Minutes of Use (“MOU”) per  subscriber |       | 115                           |       | 127 |   | 142 |   |
| Churn ratio (%)                                                  |       |                          |       |   |   |   |   |
| Postpaid subscribers                                             |       | 11.9                          |       | 10.4 |   | 9.9 |   |
| Prepaid subscribers                                              |       | 17.4                          |       | 22.0 |   | 21.9 |   |
| Total subscribers                                                |       | 15.9                          |       | 18.5 |   | 17.9 |   |
| Average monthly  Revenue per User in HUF                         |       |                          |       |   |   |   |   |
| Postpaid subscribers                                             |       | 11,712                        |       | 10,838 |   | 9,849 |   |
| Prepaid subscribers                                              |       | 2,352                         |       | 2,239 |   | 2,300 |   |
| Total subscribers                                                |       | 4,892                         |       | 4,832 |   | 4,800 |   |
| Mobile penetration in Hungary (%)                                |       | 86.4                          |       | 92.4 |   | 99.0 |   |
| TMH’s market  share (%)                                     |       | 46.2                          |       | 45.0 |   | 44.5 |   |

 

The increase in the number of TMH subscribers since December 31,2004 is attributable to a number of factors, including the expansion of mobilebroadband services. Though the market is slowly reaching a saturation level, in2006 total growth rate exceeded previous year’s results due to significantgrowth in the postpaid segment.

According to NCA, as of December 31, 2006, TMHhad a 44.5 percent market share of the mobile services market in Hungary interms of subscriber base.

*Traffic.*   TMH’saverage traffic per subscriber is comparable to other European countries andwas at a blended level of 142 minutes in 2006. Average traffic per subscriberhas increased over 2005 as a result of successful tariff plans targeting bothpostpaid and prepaid segment.

*Rates.*   SinceJanuary 1998, mobile subscriber rates have been deregulated, and carriershave had the freedom to set the level of fee components (i.e., connection fee,subscription charge and traffic charges).

TMH charges subscribers a one-time connection fee,monthly subscription charges, event charges and time-based traffic charges.Customers using prepaid cards do not pay monthly subscription charges (but incase of some price plans monthly recurring fees do exist). TMH does not chargesubscribers for incoming calls, other than calls received while roaming. TMHreceives payments from other telecommunications service providers forterminating calls on its network. TMH maintained the widest range of priceplans and successfully introduced additional plans in 2006 to acquire newsubscribers and develop loyalty.

TMH faced intense price-based competition in 2006.Competitors waged various campaigns, including introduction of new price plansand products, to win over TMH’s subscribers. TMH responded to the competitorswith its own new tariff initiatives across all of the subscriber segments.

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**InternationalMobile Operations**

***Macedonian Mobile Operations***

On February 28, 2006 theShareholders Assembly of Mobimak approved the rebranding of Mobimak to T-MobileMacedonia AD Skopje. The rebranding was completed in September 2006.

Our Macedonian mobile services provider, T-MobileMacedonia, experienced significant growth in 2006.

T-Mobile Macedonia is the leading mobile operator inMacedonia, dedicated to providing up-to-date technologies and advanced serviceofferings, commensurate to the highest technological and service standard ofthe T-Mobile group.

By the end of 2006, T-Mobile Macedonia had expandedits customer base from 877,142 at the end of 2005 to 944,530, despite thecompetitive market environment. The principal activities of T-Mobile Macedonia’soperations are digital mobile telephone services based on the GSM technologyand non-voice services such as SMS, MMS and GPRS. T-Mobile Macedonia alsoprovides GSM phase2+ data and facsimile transmission services, mobile Internetand a number of other content services. The Macedonian market is very pricesensitive. We offer various promotions and incentives to encourage use of ourservices.

The number of T-Mobile Macedonia customers has grown significantly over the pastthree years. The table below sets forth information concerning the number of T-MobileMacedonia subscribers at the datesindicated:

| ** **                                    | ** ** | **At December 31,** | ** ** |
|-----------------------------------------------|------------|-------------------------------|------------|
| ** **                                    | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2006** | ** ** |
| Number of  subscribers                        |       |                          |       |   |   |   |   |
| Postpaid subscribers                          |       | 118,862                       |       | 139,367 |   | 177,311 |   |
| Prepaid subscribers                           |       | 633,600                       |       | 737,775 |   | 767,219 |   |
| Total subscribers                             |       | 752,462                       |       | 877,142 |   | 944,530 |   |
| Average monthly Minutes of Use per subscriber |       | 66                            |       | 63 |   | 72 |   |
| Average monthly Revenue per User in HUF       |       | 3,804                         |       | 3,065 |   | 3,206 |   |
| Mobile penetration in Macedonia (%)           |       | 48.1                          |       | 61.3 |   | 68.2 |   |
| T-Mobile Macedonia’s  market share (%)   |       | 76.3                          |       | 69.2 |   | 66.7 |   |

 

The increase in the number of T-MobileMacedonia subscribers in the lastthree years is attributable to a number of factors, including reductions inhandset prices and call charges in real terms, successful marketing campaignsand the introduction of installment purchase plans.

As of December 31, 2006, T-MobileMacedonia had a 66.7 percent marketshare in the Macedonian mobile telecommunications market in terms ofsubscribers. The mobile penetration rate is still growing, though at a smallerextent than in 2005.

T-Mobile Macedonia’s business is affected by seasonal factors, witha general increase in roaming revenues during the third calendar quarter ofeach year due to the summer holidays and increased sales of products andservices during the fourth quarter due to Christmas purchases.

***Montenegrin Mobile Operations***

Following the shareholders’ decision on introducingthe “T-brands” in Montenegro, on September 26, 2006, Monet changed itsname to T-Mobile Crna Gora and markets its services under the brand “T-Mobile”.

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Our Montenegrin mobile services provider, T-MobileCrna Gora, experienced significant growth in 2006.

T-Mobile Crna Gora is the second largest mobileoperator in Montenegro in terms of number of subscribers. Since its inceptionin 2000, it has dedicated itself to offering innovative and advanced servicesto the Montenegrin market and has been experiencing dynamic growth.

The main activities of T-Mobile Crna Gora’s operationsare digital mobile telephone services based on the GSM technology and non-voiceservices, such as SMS, MMS and GPRS. T-Mobile Crna Gora actively employsvarious promotions and incentives to encourage use of its services. In 2006, T-Mobile Crna Gora made significant investments in its network andcore systems to ensure sufficient capacity, maintain competitive service level,as well as to extend its service portfolio. In addition to a variety of servicepackages, T-Mobile Crna Gora offersWAP, MMS, content SMS and premium-rate SMS services. After the commercial introduction of GPRS in 2004,T-Mobile Crna Gora continued theexpansion of its services by launching EDGE in 2005.

Thetable below summarizes the key operational statistical figures of T-Mobile CrnaGora:

| ** **                                    | ** ** | **At December 31,** | ** ** |
|-----------------------------------------------|------------|-------------------------------|------------|
| ** **                                    | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2006** | ** ** |
| Number of  subscribers                        |       |                          |       |   |   |   |   |   |   |
| Postpaid subscribers                          |       |                          | n.a.       |   |   | 31,212 |   | 48,252 |   |
| Prepaid subscribers                           |       |                          | n.a.       |   |   | 176,882 |   | 283,364 |   |
| Total subscribers                             |       |                          | n.a.       |   |   | 208,094 |   | 331,616 |   |
| Average monthly Minutes of Use per subscriber |       |                          | n.a.       |   |   | 127 |   | 127 |   |
| Average monthly Revenue per User in HUF       |       |                          | n.a.       |   |   | 3,745 |   | 3,858 |   |
| Mobile penetration in Montenegro (%)          |       |                          | n.a.       |   |   | 78.6 |   | 129.8 |   |
| T-Mobile Crna  Gora’s market share (%)   |       |                          | n.a.       |   |   | 42.7 |   | 41.2 |   |

 

T-Mobile Crna Gora’s operations, customer base and revenues aresignificantly affected by seasonal factors. In summer, there is a significantsubscriber and revenue growth attributable to tourists who visit theMontenegrin seaside. In 2006, the penetration level in the summer seasonreached almost 110 percent, as many tourists purchased prepaid cards, and theseseasonal subscribers churned out in the fourth quarter. In 2006, this drop incustomer base in the last quarter was mitigated by the change of prepaid offerby T-Mobile Crna Gora in October 2006. In order to meet the competitor’soffer, prepaid voucher lifecycles (i.e. access to the service) were extendedfrom the earlier three months to 11 months.

In November 2006, theAgency of Telecommunications launched a 3G tender for the Montenegrin mobilemarket for service licenses to be distributed in the first quarter of 2007.T-Mobile Crna Gora won one of the licenses.

**MARKETING ANDDISTRIBUTION**

**Hungarian FixedLine Operations**

One year after the rebranding, our main strategicobjectives focused on the development of customer relationship, the enhancementof the customer experience, the revenue maximization, the expansion of thenumber of broadband accesses as well as the start of mobile integration.

In the Hungarian fixed line segment competition becamefiercer and the range of services became significantly wider in 2006. The CATVproviders expanded their operations, for example by introducing triple-playservices. In addition, fixed line competitors offered local loop unbundling andnumber porting 

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services. Due to thesefactors and mobile substitution, the number of Magyar Telekom’s fixed accesslines decreased by 4.0 percent by December 31, 2006, compared to a yearearlier.

We consider the retention of the fixed line user baseand the decrease of the customer churn to be one of our key objectives. Weintend to prevent line churn with active and preventive measures, includingfavorable offers and targeted customer contact. In addition, we furtherintensify our access line sales activities. In 2006, we significantly increasedour broadband customer base.

In 2006, the MOU of our residential customersincreased by 15.6 percent, driven primarily by our price plans offeringunlimited calls for a fixed monthly fee. The number of our flat rate customersgrew significantly in 2006 and reached 630,000 by the end of the year.

In 2006, we continued to expand the selection of priceplans available with pre-selection on the service areas of other fixed lineservice providers. In line with our strategic objectives, the portfolio of ourpre-selection price plans was broadened and customers were gradually migratedfrom the call-by-call price plans to pre-selection schemes. As a result of thenew offers and our intensive sales activity, almost 134,000 users on theservice area of our competitors registered to use our services by the end of2006.

In 2006, we continuously worked on integrating ourservices with TMH products to make them available from one place, in onepackage and at the lowest possible rates.

In 2006, our retail stores were gradually convertedinto integrated T-Ponts, where both fixed line and mobile services areavailable. The development of a unified T-Pont shop network started in January 2006and was finished at the end of 2006.

TOP 3600 key accounts are served by qualified personalaccount managers. In 2006, we implemented joint account management with TMH andfrom 2007 we plan to assign single contact customer relationship managers withKFKI and T-Systems Hungary as well.

In the area of improvingcustomer satisfaction one of the key programs of 2006 was the “Quality for ourcustomers!” initiative. This is a comprehensive, service quality assuranceprogram that aims at the improvement of the customer relations, the continuousdevelopment of our services and the maintenance of our competitiveness. As partof the program, public commitments and customer service standards wereformulated by the subsidiaries of Magyar Telekom. As a result of these efforts,customer satisfaction significantly improved in 2006.

**International FixedLine Operations**

***Macedonian Fixed Line Operations***

After the market liberalization in 2006, the new fixedline service providers (26 in total) started their operation by offeringinternational outgoing calls via prepaid cards. Maktel responded with feeadjustments for international calls, special price plans (“Partner Country”, “FavoriteCountry”) and launched co-branded prepaid cards. As a result, Maktel lost onlya small market share in the international outgoing voice traffic.

Several sales campaigns launched in 2006 increased thenumber of ADSL connections. Maktel also launched several new ADSL products tocover different customer segments and to compete with low priced CATV offers.In addition, in the last quarter of 2006, the “PC+ADSL” campaign was launchedto extend PC penetration and broadband Internet usage in Macedonia.

Aggressive marketing and sales approach combined withwide territory coverage, fast provisioning time and high service reliability,supported by strong image campaign, allowed Maktel to retain the dominantposition on the Internet market and strengthen the position of ADSL as premiumquality service 

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for broadband access toInternet. In 2006, Maktel doubled the number of broadband ADSL users comparedto the end of 2005.

In 2006, Maktel continuedto develop business solutions for the corporate market including videosurveillance and bundled equipment and services offers.

***Montenegrin Fixed Line Operations***

In 2006, the main focus of our marketing activities inour Montenegrin fixed line operations was to increase ADSL sales. In order toprofit from the market dominance of Crnogorski Telekom and to stimulate growthof non-voice revenues, several promotions have been implemented. The ADSLsubscriber base has grown more than sixfold. Substantial growth could be stillachieved in the dial-up Internet segment by adapting the tariff portfolio andintroducing postpaid dial-up Internet access.

On September 26, 2006 the old brand “Telekom CrnaGora” has been replaced by “T-Com”. This gives a new appeal to the fixed lineoperations of being more modern, international, quality-focused andcustomer-oriented. The first product introductions under the new brand havebeen a new ADSL entry-level price plan and a voice weekend price plan, thelatter with the goal of improving price perception and stimulating fixed voiceusage. To prevent erosion of fixed line connections, the weekend price planoffers segment specific conditions for second home owners.

Montenegrin fixed voicetariffs are still “unbalanced” by international standards, i.e. access andlocal call fees are relatively low, whereas international call rates are ratherhigh, opening the door for alternative providers like international VoIPcarriers. For historical reasons, business customers are paying higher feesthan residential customers. There is a general rebalancing roadmap agreed uponwith the regulatory agency.

**Hungarian MobileOperations**

In 2006, the Hungarian mobilemarket reached a 99.0 percent penetration rate, which is comparable to theaverage level in Western European countries. The growth in mobile marketincreased as compared to previous years. The Hungarian mobile market is highlycompetitive and dominated by three mobile network operators: TMH, Pannon andVodafone. Due to the very high penetration level, our focus has moved fromacquisition to retention. In case of our new service, EDR, we are alreadyworking on introducing new services for the EDR users (e.g. Automatic VehicleLocation).

At T-Mobile International Group, focus areas and corresponding keyperformance indicators have been defined for the key pillars of our strategy:

·       Customer centricity;

·       Superior network experience; and

·       Operational excellence.

This provides the strategicframework for the local organizations. Each local company has translated thesefocus areas into concrete “BIG X” programs which outline the direction anddefine the strategic goals for 2006, taking local priorities into account.

At TMH the “Big7” program consisted of the following items:

·       Build T-Mobile brand and be an advocate for it;

·       Launch fixed-mobile products and stabilize mobile market share;

·       “Best-in-class” service culture;

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·       Grow service revenue focusing on high value customers;

·       Exploit mobile data/Internet;

·       Network leadership; and

·       Number one in HSDPA going commercial.

2006was a very successful year for TMH in all of our strategic areas:

*Build T-Mobile brand and be an advocate for it*

Wework continuously to strengthen our brand and build our brand values—reliability,simplicity, inspiration; adding “value for money” in Hungary. Our efforts havemaintained the aided brand awareness at nearly 100 percent, whereas thespontaneous brand awareness was higher than 80 percent during the whole year.

*Launch fixed-mobile products and stabilize mobile market share*

Afterthe announcement of the merger, TMH has developed fixed-mobile bundled offersas one of the first tangible benefits of the integration. The first offer,Vica-Versa price plan was re-launched at the end of 2006 offering free callsbetween maximum four mobile and a fixed number for a monthly fee of HUF 890 persubscription. In addition to this offer, other trial bundled products were alsooffered. These and the mobile-only services and price plans helped TMH tostabilize its market share. Domino Aktív, Kameleon and the Relax price planswere especially successful.

*“Best-in-class” service culture*

Accordingto measurement developed by T-Mobile International Group, TMH has succeeded inreaching a higher than market average promoter score.

*Grow service revenue focusing on high value customers*

The active customer portfolio management facilitated the increase in valueof our customer base. Our main targets were the followings:

·       Develop services based on value and needs of customers;

·       Differentiate service levels based on the value of customers; and

·       Enhanceeffectiveness of communication via CRM and campaign management tools.

*Exploit mobile data/Internet*

Non-voiceand content services are playing an increasingly important role in the mobile market.All providers strengthened their non-voice services in 2006. TMH is the firstmobile operator in Hungary to launch HSDPA. By the end of 2006, TMH subscribersequipped with the latest net-card could already use the Internet with adownload speed of 3.6 Mbit/s in 23 cities. In 2007, this speed is expected toincrease up to 7.2 Mbit/s in Budapest.

*Network leadership*

Notonly the objective Key Performance Indicators showed excellence in regards tothe network, but our customers judged TMH’s network to be of very high qualityduring the whole year.

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*Number one in HSDPA going commercial*

In 2006, TMH launched its fast commercial mobile Internetservice, HSDPA, in the internal districts of Budapest. The networkallows 3.6 Mbit/s downlink speed, however most of the currently availablemobile phonesets support only 1.8 Mbit/s. HSDPA may contribute to the fast diffusionof broadband mobile Internet access.

*Distribution*

As a consequence of the merger of Magyar Telekom andTMH, the direct shop networks of T-Mobile and T-Com have been integrated during2006. As a result of the functional and organizational integration, by September 2006,Magyar Telekom had a shop network offering the entire product and serviceportfolio (T-Com, T-Mobile, T-Online and T-Kábel products and services). Themain objective of the integrated T-Pont network is to leverage grouplevel potentials for cross-selling, retention, and customer satisfaction.

Before the integration, TMH’s strong directdistribution network consisted of 36 stores, whereas T-Com had 18 directshops (T-Ponts). The integration process resulted in an optimized direct shopnetwork consisting of 47 integrated T-Pont shops by the end of 2006. All 47shops provide full-scale sales and customer service in case of all related linesof business. Full-scale mobile handset repair service is provided in 27 shops.12 T-Ponts are located in Budapest and the other 35 in regional centers. During2006, 20 shops have been fully and 13 have been partially refurbished accordingto the T-Pont design. The full refurbishments of the remaining shops continuein 2007.

TMH also has a department dedicated to major accounts.This department consists of 86 sales representatives and serves major accountson the segment basis. Our customers can also purchase TMH products on ouron-line shop.

TMH also distributes its products and services throughindirect sales partners. At the end of 2006, TMH had 211 full-scale T-Mobileindirect shops nationwide that provide the full product portfolio for thecustomers. From January 1, 2006 all T-Mobile Partners (211 full-scaleshops) have access to the CRM system. 91 of the T-Mobile shops also providecustomer care with access to the central customer database.

From April 1, 2006within the frames of the shop integration project, TMH took over the managementcontrol of the T-Com partner shop network as well. At the end of 2006, thisnetwork consisted of 77 T-Com partners, of which 49 are T-Mobile partners, too.There are three contracted partners selling mobile data products. TMH alsosells its prepaid products (e.g., prepaid SIM packages, plastic top-up cards,on-line top-up) through major Hungarian retail channels. Prepaid products areavailable in 10,542 sales points nationwide (including 7,967 shops whereon-line top-up is available).

**InternationalMobile Operations**

***Macedonian Mobile Operations***

In September 2006, Mobimakchanged its name to T-Mobile Macedonia and became a member of the T-Mobilefamily. To sustain its primary position in the country, T-Mobile Macedonia hasdeveloped a wide range of services and price plans for prepaid, postpaid andbusiness customers. With the rebranding, T-Mobile Macedonia introduced new tariff models forall segments, launched a prepaid loyalty program and carried out a number ofinnovative promotions.

Marketingbased on customer data is widely used to build strong customer relationships.Loyalty schemes and handset upgrade programs are also used to improve customersatisfaction and reduce customer churn rate.

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***Montenegrin Mobile Operations***

In Montenegro, the brands of Monet and later T-MobileCrna Gora are generally perceived as customer-oriented, with strong sense ofcustomers’ communications needs. Under the new T-Mobile brand, the brand valuesinclude higher international competence and higher quality standards.

In order to have a successful brand introduction andto increase market share, new offers have been quickly introduced to themarket. At first, a whole portfolio of new postpaid price plans (“Smart”) targetedat the residential segment has been introduced in October 2006,accompanied by a strong handset campaign. Minimum contract durations andhandset subsidies differentiated by contract value have been introduced.Secondly, a strong promotion followed in November 2006 for the prepaidsegment.

In line with theintroduction of the new brand, nine shops (“T-Centars”) have been opened inmajor towns, setting a new benchmark in shop design for Montenegro. These areaccompanied by a network of 16 exclusive Partner Shops which use a similardesign to the own shops. Both types of outlets provide a permanent portfolio ofhandsets and the full range of services for new and existing customers. Inaddition, there are 1,600 contracted Points of Sale for prepaid vouchers andSIM cards.

**COMPETITION**

**Hungarian FixedLine Operations**

In 2006, despite the increased competition, we managedto retain our leading position in the voice services market with 80 percentmarket share at the end of the year. Similarly to the prior years, mobilecarriers still remain our largest competitors. In addition to the fiercecompetition triggered by mobile carriers, new market entrants provide publicfixed voice telephony services by unbundling local loops. Competitors includemobile telecommunications providers, other LTOs, alternative service providers(e.g., Tele2, PanTel) and cable television service providers.

Mobile penetration reached 99.0 percent by the end of2006, which not only led to intense competition on the mobile telecommunicationsmarket, but also affected the fixed line telephone market. This near-saturationlevel has led mobile carriers to offer residential and business customers moreand more competitive packages and lower prices in an effort to win fixed linecustomers. In 2006, the main reason for fixed line churn was mobilesubstitution.

New alternative service providers were able to enterthe voice and broadband services market in 2006 due to the unbundling of localloops. As the obstacles imposed by technology disappeared, every majorcompetitor (alternative service provider, ISP, CATV) is able to become atriple-play provider. This trend is expected to largely influence thetelecommunications trends and competition on the Hungarian market in thefollowing years.

In our service areas, a number of carriers (Tele2, GTSDatanet, eTel, Invitel, PanTel, British Telecom and Monortel) offerpre-selection and call-by-call services and were able to attract some of ourcustomers. Our competitors’ voice minute tariffs are decreasing, and they alsoprovide significant discounts from the monthly fee of their services. We alsooffer similar price plans and are successful in attracting new customers fromLTO areas. In the government and public administration sector, we couldsuccessfully attack our competitors’ low prices with the discounts we providedue to the high volume of the EKG frame contracts.

In 2006, Tele2 expanded its service portfolio (flatrate price plans and dial-up Internet access), and introduced variouspromotions. Tele2 mainly focuses on the residential market. It competes on thebasis of simple and low pricing structure, aggressive marketing and innovativesales channels. However, we responded to the challenge posed by Tele2 withattractive price plans, and we believe that we have successfully limited Tele2’sexpansion.

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In 2004, cable television providers also entered thevoice market with triple-play offers, consisting of voice telephone services,Internet access and cable television. The main advantages of the triple-playoffers are free calls within the network, low monthly fee and one-stopshopping. Our largest cable television competitor is UPC. In 2006, triple-playoffers had significant impact on the fixed line telephone competition.

On the Internet market, we could keep our leadingposition with the continuous, intense increase of the number of ADSL lines.

We have severalcompetitors in the IT market as well, including Siemens, Synergon andHumansoft. Smaller, but very efficient and flexible service providers also provedto be strong competitors in system and network integration market. In 2007,together with KFKI Group and T-Systems Hungary, we expect to be able to reactmore efficiently to the challenge posed by our competitors.

**International FixedLine Operations**

***Macedonian Fixed Line Operations***

On January 1, 2005, Maktel’s exclusive rights toprovide fixed line telephone services expired, but as a result of the delay inimplementation of the new regulatory framework, competition from other fixedline service providers started only in February 2007. Maktel, however,faced indirect competition earlier from mobile service providers and, to alimited extent, from VoIP providers.

Starting from the second quarter of 2006, Maktelopened its network for alternative VoIP service providers of internationaloutgoing calls. By the end of 2006, Maktel has concluded 26 ISDN-basedcommercial Network Access Agreements with alternative VoIP service providers.

On November 15, 2006, Maktel signed its firstReference Interconnection Offer (“RIO”)-based interconnection agreement withOnNet, an alternative fixed line network operator. OnNet launched its longdistance, fix to mobile and international services in February 2007. Thesecond interconnection agreement was concluded with Akton in December 2006.In March 2007, Akton started to provide international terminationservices. As a result, Maktel will face direct competition in its fixed linebusiness from the first quarter of 2007. OnNet has already requested Local LoopUnbundling services from Maktel based on the approved unbundling referenceoffer (“MATERUO”). OnNet has requested only fully unbundled access to the localloop.

Maktel is the leading provider of leased line servicesand data transmission services. CATV and other wireless operators have builttheir own networks and are also capable to offer data transmission services,transmission capacity and various broadband services.

In the Internet market,there are three major ISPs in addition to Maktel: OnNet, MOL and UNet. Maktelis the market leader based on the number of Internet dial-up minutes. On thebroadband market, Maktel has approximately 50 percent market share and it facescompetition mainly from OnNet’s wireless broadband and CATV operators’ cablebroadband Internet, offered to the CATV customers through their own networks.

***Montenegrin Fixed Line Operations***

Crnogorski Telekom is the sole provider of fixed linetelecommunications in Montenegro. However, it faces fixed-mobile servicesubstitution, which is expected to become increasingly significant. The highmobile penetration and the introduction of a third mobile operator in 2007 willintensify this trend. Crnogorski Telekom, however, owns a 100 percent interestin T-Mobile Crna Gora, the second largest mobile service provider inMontenegro.

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Several MultichannelMultipoint Distribution Service (“MMDS”) and CATV licenses were awarded at thebeginning of 2007. Some of the cable operators have declared their intention toprovide Internet and telephony services, too. Three fixed wireless accesslicenses have also been awarded, to Telekom Serbia (the third mobile operator),to Broadband Montenegro (an MMDS operator with nationwide coverage) and toT-Mobile Crna Gora.

**Hungarian MobileOperations**

In 2006, the Hungarian mobile telecommunicationsmarket was characterized by intense competition, driven by new services, lowerprices and aggressive marketing. The mobile penetration rate further increasedto 99.0 percent by the end of 2006. At TMH, the focus on acquisition wasclearly replaced by the focus on retention. Despite the intense competition,TMH retained its market leading position with a 44.5 percent market sharebased on the number of active SIM cards.

The direct competitors of TMH are Pannon and Vodafone.Vodafone, the smallest mobile service provider in terms of the number ofsubscribers in Hungary, continued its intensive and aggressive marketingcampaigns and captured a 21.4 percent market share by the end of 2006. Pannonhas refreshed its brand, started to build a new image in line with the globalrenewal of the Telenor companies. Pannon has reached a market share of 34.1percent by the end of 2006.

Non-voice and content services are playing anincreasingly important role in the mobile market. All providers strengthenedtheir non-voice services in 2006. TMH was the first mobile operator in Hungaryto launch HSDPA and provide high-speed mobile Internet services and new dataservices, like web’n’walk.

To draw attention andboost the number of active users, notebooks with HSPDA enabled data cards aresold in the T-Pont network and at selected dealers from September 2006.Several 3G handsets and data cards were offered as a promotion.

**InternationalMobile Operations**

***Macedonian Mobile Operations***

There are at present two mobile operators operating inthe Macedonian mobile market. Competition is generally intense and conducted onthe basis of price, subscription options, subsidized handsets, range ofservices offered, innovation and quality of service. The second largest mobiletelecommunications services provider in the country, Cosmofon, began commercialoperation in June 2003. Its marketing and advertising efforts areaggressive with low and competitive handset pricing, attractive price plans,broad array of advertising and indirect channels of sales. In June 2005,Cosmofon launched 2.5G services (MMS, GPRS). The Macedonian telecommunicationsregulator issued a third mobile license to Austrian Mobilkom in the firstquarter of 2007, which is expected to intensify the competition in theMacedonian mobile market.

In 2006, the competition between the two mobileoperators has become stronger especially during the large rebranding campaignlaunched by T-Mobile Macedonia. Both T-Mobile Macedonia and Cosmofon launchedseveral price plans during this period. Special price plans (closed usergroups, special business offers) combined with additional services (SMS, MMS,GPRS) and large advertising campaigns were introduced to capture various partsof the telecommunications market and to provide higher value compared to fixedline offerings.

According to T-Mobile Macedonia’s estimates, Cosmofonhad approximately 33.3 percent market share at the end of 2006. Cosmofon’ssubscriber base is mainly prepaid. Cosmofon has been increasingly targetingT-Mobile Macedonia’s residential and business postpaid (contract) customers.

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In this intensivecompetitive environment, T-Mobile Macedonia plans to maintain its market sharethrough improved productivity, efficiency measures and maintenance of existingcustomer relations to avoid the escalation of price-based competition.

***Montenegrin Mobile Operations***

T-Mobile Crna Gora started its commercial operation as a secondmobile telecommunications services provider in Montenegro in 2000, four yearsafter the first mobile provider, Promonte, started its operations. According toT-Mobile Crna Gora’s estimate, T-MobileCrna Gora had 41.2 percent market share interms of number of subscribers at the end of 2006.

As in other countries, competition in mobile servicesis intense and driven by pricing, subscription options, subsidized handsets,coverage, as well as quality and portfolio of services offered.****Ourcompetitor’s marketing and advertising activities are aggressive.

T-Mobile Crna Gora’s goal is to increase its marketshare by introducing segment-oriented price plans, continuously offering newattractive handsets, exploiting synergies of the DT group, and maintainingexisting customer relations and community involvement as a sponsor of importantsocial, cultural, sports and educational events.

In November 2006, theMontenegrin telecommunications regulator has issued a tender for two 3G licensesas well as a tender for a mixed 2G-3G license for a third mobileoperator. In the first quarter of 2007, T-Mobile Crna Gora and Promonte wereawarded with one 3G licenses each and Telekom Serbia won the combined 2G-3Glicense. It is most likely, that the mobile operation of Crnogorski Telekomcould face a significant decrease in its market share over the medium term.

**DEPENDENCE ON PATENTS,LICENSES, CUSTOMERS, INDUSTRIAL, COMMERCIAL AND FINANCIAL CONTRACTS**

We do not believe that weare dependent on any patent or other intellectual property right, on anyindividual third party customer or on any industrial, commercial or financialcontract. Similar to other fixed line and mobile operators, we requiretelecommunications licenses from the governments of Hungary, Macedonia,Montenegro, Romania and Bulgaria, the countries in which we providetelecommunications services.

**REGULATION**

**Development of theTelecommunications Regulatory Regime in Hungary**

Prior to 2001, Act LXXII of 1992 onTelecommunications, as amended (the “Telecommunications Act”), provided thegeneral regulatory framework for the telecommunications industry in Hungary.The telecommunications industry has been also governed by other generallegislation, including, among others, Act XVI of 1991 on Concessions, asamended (the “Concessions Act”), the Pricing Act and Act LVII of 1996 on theProhibition of Unfair and Restrictive Market Practice (the “Competition Act”).

The regulatory framework of the telecommunicationsindustry was fundamentally altered in December 2001, when theCommunications Act came into effect. The Communications Act provided the mainregulatory framework for the liberalized market until the end of 2003.

The limited level ofcompetition that resulted from the Communications Act and harmonization of theHungarian law to EU standards required by the accession of Hungary to EU led tothe further modification of the regulatory regime. Act C of 2003 on ElectronicCommunications came into effect on January 1, 2004 and the CommunicationsAct was superseded at that time.

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**The ElectronicCommunications Act and the Contract on Universal Service Provision**

The Electronic Communications Act was approved by theParliament on November 24, 2003 and came into effect on January 1,2004. Under the Act, the NCA, the supreme supervisory body, and Permanent Courtof Arbitration for Communications (“CAC”) were established.

Set forth below is a brief summary of certainprovisions of the Electronic Communications Act.

*UniversalService.**  *The Electronic Communications Actprovides that universal services are basic communications services that shouldbe available to all at an affordable price. Universal services include accessto fixed line voice telephone services of certain quality enabling access toInternet services, a regulated density of public payphones, a public directoryof telephone users, national domestic inquiry service as well as freecall-blocks and emergency calls. Access to voice services at an affordableprice is effected by designation of universal service providers (the Ministershall appoint the most efficient service provider) and state subsidies todisabled or low-income users.

We were designated a universal service provider andentered into a universal service contract with the Minister. The currentcontract is valid until December 31, 2008 and can be extended for anadditional four years.

*SubscriberContracts.**  *Service providers must establishgeneral terms and conditions of subscriber contracts. The ElectronicCommunications Act provides general rules of agreements betweensubscribers and telecommunications services providers for telecommunicationsservices. The ministerial Decree 16/2003 (XII.27.) on “TelecommunicationsSubscriber Contract” contains other important rules relating to subscribercontracts. In subscriber contracts, parties can modify the provisions of theElectronic Communications Act only if they are more favorable to thesubscribers.

The general terms and conditions of subscribercontracts must contain, among other things, the procedure for terminating andamending subscriber contracts, the quality of the telecommunications service,conditions for restriction of the service, the fault-repair service and themethod for handling subscriber complaints. The individual subscriber contractmust contain personal data of the subscriber.

*SignificantMarket Power Regulation.**  *OnFebruary 11, 2003, the European Commission identified in itsrecommendation (2003/311/EC) the following 18 relevant product and service markets within the electronic communicationssector susceptible to ex ante regulation in accordance with Directive 2002/21/ECon a common regulatory framework for electronic communication networks andservices:

Retail level:

1.                Accessto the public telephone network at a fixed location for residential customers.

2.                Accessto the public telephone network at a fixed location for non-residentialcustomers.

3.                Publicly available local and/or nationaltelephone services provided at a fixed location for residential customers.

4.                Publicly available international telephoneservices provided at a fixed location for residential customers.

5.                Publicly available local and/or nationaltelephone services provided at a fixed location for non-residential customers.

6.                Publicly available international telephoneservices provided at a fixed location for non-residential customers.

7.                The minimum set of leased lines.

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Wholesale level:

8.                Call origination on the public telephone networkprovided at a fixed location.

9.                Call termination on individual public telephonenetworks provided at a fixed location.

10.         Transit services in the fixed public telephone network.

11.         Wholesale unbundled access (including shared access) to metallic loopsand sub-loops for the purpose of providing broadband and voice services.

12.         Wholesale broadband access.

13.         Wholesale terminating segments of leased lines.

14.         Wholesale trunk segments of leased lines.

15.         Access and call origination on public mobile telephone networks.

16.         Voice call termination on individual mobile networks.

17.         The wholesale national market for international roaming on public mobilenetworks.

18.         Broadcasting transmission services, to deliver broadcast content to endusers.

In 2004, analysis of 17 out of 18 markets wasinitiated by the NCA. Analysis on 16 of these markets has been completed sofar. The results of the analysis on fixed line retail markets have identifiedMagyar Telekom as having SMP and imposed a price cap on retail access marketservices (market 1 and 2) for residential and non-residential customers. Inaddition, it required Magyar Telekom to allow fixed line residential and non-residentialcustomers to select other service providers for local and/or national andinternational calls (markets 3-6) and obliged Magyar Telekom to providethe minimum set of leased lines (market 7). On the wholesale markets, the NCAimposed the obligations of transparency (markets 8-9, 11-13),accounting separation (markets 8-9, 11-13), access andinterconnection obligations (markets 8-9, 11-13), variousobligations regarding cost-based prices and price control (markets 8-9, 11-13)and non-discrimination (markets 12-13). The market analysis procedurealso identified TMH as having SMP in the mobile termination market (market 16)and imposed the obligations of transparency, accounting separation,access/interconnection and cost-based prices and price control.

The aforementioned list of relevant markets taken intoaccount in the market analysis of the NCA is currently under review in the EU.The amended Recommendation of the EU that contains the relevant markets isexpected to enter into force in 2007. As a result, retail call markets and theminimum set of leased lines are expected to be deregulated. Consultation papersof the review raised the possibility that SMS termination could become part ofmarket 16, which would mean the extension of regulation to SMS termination inaddition to mobile voice call termination.

The new round of analysis of the 18 relevant productand service markets started in the second half of 2006. The new resolution onmarket 16 was published on October 2,2006. The rest of the resolutions areexpected to be published in 2007.

*LocalLoop and Bit-stream Unbundling.**  *Accordingto the Electronic Communications Act and Government Decree 277/2003, (XII.24.)on “The detailed rules of procedures related to the reference offers andnetworking contracts”, operators with SMP providing unbundled access orbroadband access are obliged to unbundle local loops and prepare referenceoffers for unbundled local loops (whether fully or partially unbundled) andbit-stream access and to provide these services when there is a request forthem by other telecommunications service providers.

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Providers with SMPmay refuse the request for unbundling only if:

·       thereare technical barriers; and

·       providingaccess to the local loop or bit-stream access would endanger the unity of theprovider’s network.

*Interconnection.**  *According to the Electronic Communications Act andGovernment Decree 277/2003 (XII. 24.), providers with SMP are obliged toprepare reference offers for interconnection and to provide these services uponthe reference offer when there is a request for them by othertelecommunications service providers.

According to the Government Decree 277/2003 (XII.24.), providers with SMP are obliged to enter into agreements for access totheir networks when requested by another service provider. If the provider isobliged to prepare a reference interconnection offer, this offer must be inline with the legal regulations about the reference offer. The NCA hasauthority to arbitrate in disputed cases and may establish provisionalarrangements. The reference offer of the providers with SMP must be approved bythe NCA.

*CarrierSelection.**  *Accordingto the Electronic Communications Act, voice telephone customers have the rightto select different service providers for each call directions. Theimplementing regulation was released in Government Decree 73/2004 (IV.15.) in April 2004.

*NumberPortability.**  *Fixedline telecommunications service providers are required to provide numberportability on their networks, and to allow subscribers to change serviceproviders without changing their telephone numbers in the same geographiclocation. In May 2004, non-geographic and mobile number portability werealso implemented.

*Licensingand Allocation of Frequencies.*   With theexception of a program receiver device, radio equipment, radio stations andradio communication networks may be operated with a radio license. A radiolicense may be issued exclusively on the basis of a valid frequency assignmentlicense, with certain exceptions. Radio equipment, radio stations, radionetworks and radio communications systems may be installed with a frequencyassignment license, with certain exceptions. Payment of fees is required forreservation and authorized use of frequencies assigned for civil purposes,reservation of identifiers and use of the assigned identifiers.

Magyar Telekom Plc. pays a frequency license fee onthe basis of Decree 6/1997 (IV.22.) KHVM on “Frequency Reservation and UsageFee” and Government Decree 120/1998 (VI.17.) on “Rules of Payment ofFrequency Reservation and Usage Fee”. Additional rules related tofrequency usage include Government Decree 346/2004 (XII. 22.) on “Specificationof the National Frequency Allocation Table” and Government Decree 78/2006 (IV.4.) on “Rules of the Auction and Tender to Obtain the Frequency UsageRight”.

Magyar Telekom Plc. pays a number usage fee for callnumbers used by the Company, according to Decree 11/2005 (IX. 28.) IHM on “Feesof Engaging the Identification Numbers Necessary for the Provision of PublicTelephone Services”.

Frequency assignments must conform to the NationalFrequency Range Distribution Chart, which lays out the entire spectrum and thepurpose and availability of frequency bands. Our frequencies are generallyvalid for periods of one to five years.

*Rightsof Way.*   According to the ElectronicCommunications Act, communications service providers are entitled with priornotice to enter private property where communications facilities (equipment,cables, antennas) are located for maintenance and repair. The publictelecommunications service provider must enter into a contract with theproperty owner setting forth conditions for the common use of the property. Theproperty owners are also obliged to remove obstructions to public telecommunicationsnetworks.

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**Mobile ConcessionContracts**

Hungary was the first country in Central and EasternEurope to introduce public mobile telecommunications services. Westel 0660began providing analog mobile radiotelephone service in October 1990 withan exclusive license. In 1993, the Minister awarded two concessions to providenationwide mobile telephone services using the digital GSM 900 standard: one toTMH and the other to Pannon.

Under the Concession Contract, dated November 4,1993, as amended (the “900 Concession Contract”), between the Minister and TMH,TMH was granted the right to provide public GSM mobile telephone services for15 years. The parties may agree to extend the TMH concession for an additionalperiod of seven and half years for an additional fee. In May 2007, thegovernment indicated that it would require a HUF 10 billion concession fee toextend the 900 Concession Contract.

On February 25, 1999, the Ministry issued aninvitation to tender for concessions for the DCS 1800 services in Hungary, amobile telecommunications service in the 1800 MHz frequency band. The tenderwas closed on May 7, 1999. On October 7, 1999, an amended 900Concession Contract was signed, allowing TMH and its competitor, Pannon, tostart commercial service in the 1800 MHz band for 15 years beginning November 26,2000. At that time, the Minister also signed a concession contract withV.R.A.M. Rt., which operates the Vodafone brand name.

TMH, simultaneously with Pannon, started commercialoperation of the 1800 MHz band on November 16, 2000. Upon the request ofVodafone, the national roaming agreement between TMH and Vodafone wasterminated effective November 30, 2000, whereby TMH was released from theobligation to provide Vodafone with domestic roaming services on a nationwidebasis. Effective December 6, 2002 Pannon terminated its national roamingagreement with Vodafone. As Vodafone had no remedy available for such aunilateral decision, it was forced to speed up its network roll-out to closethe coverage gap vis-à-vis its competitors.

By virtue of the amendment to the Concession Contractin 1999, by the end of 2003, the three digital mobile telecommunicationsservice providers had the same spectrum resources allocated to them both on the900 and the 1800 MHz bands.

TMH was required to pay a HUF 11 billion concessionfee, adjusted for changes in the HUF/USD exchange rate. The first installmentof the concession fee, HUF 2,750 million was paid eight days after themodification of the 900 Concession Contract in November 1999. The secondinstallment of HUF 2,750 million, adjusted for changes in the HUF/USD exchangerate, was paid eight days after the commencement of 1800 MHz service in November 2000.The third installment of HUF 1,830 million, adjusted for changes in the HUF/USDexchange rate, was paid in November 2002. The last installment of HUF3,670 million, adjusted for changes in the HUF/USD exchange rate, was paid on December 2003.TMH also pays an annual concession fee of USD 1 million.

*FrequencyFees.**  *TMH hadfrequency fee payment obligations for channels allocated in the 1800 MHz band.In 2006, TMH paid HUF 3,530 million for frequency usage in the 900 MHz band,and paid HUF 150 million for the right to use the 15 MHz frequency band, andHUF 271 million for the actual use of channels within 1800 MHz band.

TMH also paid frequency fees for the IMT-2000/UMTSband. In 2006, TMH paid HUF 151 million for the right to use the 2x15 MHzfrequency band and HUF 487 million for the actual use of channels within theband. In addition, TMH paid HUF 871 million in 2006 for the right to usemicrowave frequencies.

*Feesand Charges.**  *TMH’ssubscriber charges are not subject to regulation under the Pricing Act or anyministerial decree.

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*RoamingAgreements.**  *TMH maysign roaming agreements with other public mobile telecommunications serviceoperators outside of Hungary in accordance with the rules of the GSMAssociation, an association of GSM operators and associated members.

*MarketAssessment, SMP Designation Process and Interconnection.*   See“Item 4—Pricing”.

*Termination.*   TMHmet all of its concession obligations in 2006. If an event of default occursunder the 900 Concession Contract, the NCA may issue a cure notice to TMH. TMHwould then have 90 days to agree with the NCA on a plan of action for curingthe default. If TMH does not reach an agreement with the NCA or if TMH does notcure any such default within an agreed period of between three to six months,the NCA may issue a notice terminating the 900 Concession Contract. Upontermination of the 900 Concession Contract, TMH would be dissolved under theConcessions Act.

*UMTS.**  *On December 7, 2004, the NCAawarded TMH the exclusive right to use the frequency blocks of 1920-1935/ 2110-2125 MHz Frequency Division Duplex (“FDD”) and 1915-1920 MHzTime Division Duplex (“TDD”) for deployment and operation of InternationalMobile Telecommunications (“IMT”) 2000/UMTS mobile telecommunications system(3G system). The duration of the frequency usage right is 15 years (until 2019)with an option to extend for another seven and a half years.

The right was awarded after a tender process thatstarted on September 1, 2004 and concluded on December 7, 2004. TMHapplied for all three frequency blocks (“A”, “B” and “C”) separately and wonthe usage right of frequency block “A”. The right to use the frequencies vestedupon payment of the first installment of the license fee on December 27,2004.

TMH was obliged by the term of the license decree tostart commercial IMT-2000/UMTS service in the inner city of Budapestwithin 12 months of the grant of the license. This obligation was met. It isalso obliged to expand the coverage to 30 percent of the Hungarian populationwithin 36 months of the license.

The license fee for IMT-2000/UMTS was HUF 17,000million plus reclaimable VAT, payable by the end of 2005. In addition to thelicense fee, TMH capitalized expenses incurred in connection with theacquisition process of the license. The total amount capitalized was HUF 17,073million. The IMT-2000/UMTS license right is amortized on a straight-linebasis over 15 years from the time of the commencement of the commercial serviceon August 26, 2005 to the end of the initial license period.

Mobileradiotelephone license’s terms are extendable; however, they expire in thefollowing years:

·       GSM900:                 2008

·       DCS1800:                2014

·       IMT-2000/UMTS:   2019

**Competition LawRestrictions**

The Electronic Communications Act and the Contract onUniversal Service Provision in line with the Competition Act prohibit us fromthe abuse of our dominant position in the public voice telephone servicesmarket.

Under the Competition Act, a market participant isconsidered to be in a dominant position if, among other things, it is able topursue economic activities substantially independent of other marketparticipants, i.e., without the need to consider the market behavior of itscompetitors, suppliers, customers and other business partners.

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Under the Electronic Communications Act and theCompetition Act, service providers with SMP are required to provide services toother telecommunications service providers on the same commercial terms, andthese terms may not be less favorable than those offered to other serviceproviders controlled by it or controlling it.

According to the Contracton Universal Service Provision, we are obliged to treat similar subscribers ina reasonably similar manner and to refrain from effecting discrimination and/orunjustified advantage with respect to conditions and fees of universal serviceprovision.

**Hungary and theEuropean Union**

Hungary joined the European Union on May 1, 2004and became a member state without transitional provisions.

In connection withthe accession, Hungarian regulations relating to electronic communications wereharmonized with the EU NRF, which required all member states of the EuropeanUnion to adopt it through national legislation. The NRF consists of variousdirectives relating to the following:

·       accessto and interconnection of electronic communications networks;

·       mandatoryminimum service standards for all users (“universal service”) and users’rights;

·       authorizationand licensing regimes;

·       dataprotection and privacy; and

·       decisionon a regulatory framework for radio spectrum policy in the EU.

The NRF, inparticular:

·       setsout the rights, responsibilities, decision-making powers and proceduresof the National Regulatory Authorities (“NRAs”) and the European Commission.This includes the NRAs’ obligation to submit to the Commission and the NRAs ofother EU member states the draft regulatory measures that they intend toimplement with respect to market definition and SMP and the European Commission’spower to require NRAs to withdraw such drafts, if the European Commissionconsiders that such measures may create a barrier to the single European marketor are incompatible with EU law;

·       identifiesspecific policy objectives that NRAs must achieve in carrying out theirresponsibilities (namely, to promote an open and competitive European marketfor communications services, to promote the interests of European citizens andto consolidate the EU’s internal market in a converging technologicalenvironment); and

·       providesthat operators with SMP in relevant communications markets will be subject toobligations set out in the directives on universal service and access.

The European Commission started to carry out a reviewof the NRF in November 2005 and the review is currently ongoing(consultations, publication of Commission communications, etc.). Proposals forthe European Parliament and the Council directives modifying the NRF can beexpected in the first half of 2007, which will be followed by the communitylegislation procedure. The amended regulation is expected to be implemented in2010.

The European Commission issued a Recommendation onrelevant product and services markets in February 2003. The Recommendationidentifies markets with certain characteristics that may justify imposition ofex ante regulatory obligations. See “Regulation—Significant Market PowerRegulation”.

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The European Commission will regularly carry out areview of the Recommendation on relevant markets. The first review of thisRecommendation started in line with the NRF review in November 2005 andthe amended new recommendation is expected to enter into force in 2007.

On July 12, 2006 the European Commission proposedan EU regulation to reduce international roaming charges within the EU. Theproposal for a regulation of the European Parliament and of the Council isdealing with the roaming on public mobile networks within the EU. The objectiveof this proposal is to amend the existing regulatory framework for electroniccommunications to provide the necessary legal basis for effective and timelyaction to bring about substantial reductions in the level of mobile roamingcharges across the EU in a harmonized manner. The EU roaming regulation, as approvedon May 23, 2007 by the European Parliament, will set a limit on theinternational wholesale mobile roaming charges among mobile operators and oninternational mobile roaming retail charges (Eurotariff). The maximuminter-operator tariff shall not exceed EUR 0.30 per minute, which will befurther reduced in 2008 and 2009 to EUR 0.28 and EUR 0.26. The maximum retailcharges of the Eurotariff, which a home provider may levy from its roamingcustomers, for calls made abroad shall not exceed EUR 0.49 per minute (to befurther reduced to EUR 0.46 and EUR 0.43 in 2008 and 2009) and for callsreceived abroad shall not exceed EUR 0.24 per minute (to be further reduced toEUR 0.22 and EUR 0.19 in 2008 and 2009). The Council of the EUtelecommunications ministers endorsed the EU roaming regulation on June 7,2007. The EU roaming regulation will then become directly applicable in EUmember states (and therefore not require further transposition into nationallaw) following its publication, expected in June 2007. The EU roamingregulation will have significant consequences for TMH’s revenues.

Implementation of NRF in the member states is overseenby the European Commission and the European Regulators Group (“ERG”), whichissues reports and common statements. The ERG is a body composed ofrepresentatives of NRAs and the European Commission, which plays an importantrole in advising and assisting the Commission in consolidating the internalmarket for electronic communication networks and services.

Hungary fully implementedthe NRF with the enactment of the Electronic Communications Act and fullyimplemented decrees in 2004.

**Broadcasting andTransmission**

Broadcasting and transmission in Hungary are governedby Act I of 1996 on Radio and Television Broadcasting (“Media Act”), Act LXIIof 1993 on Frequency Management (“Frequency Act”), the ElectronicCommunications Act and the Concessions Act. Under the Media Act, the NationalRadio and Television Board (“NRTB”) has the primary authority for issuingtenders for broadcasting contracts and registering broadcasters andtransmitters.

National and regional television and radiobroadcasting or broadcast “distribution” to local operators generally requireconcessions under the Electronic Communications Act and may be carried out onthe basis of a program distribution contract in accordance with the Media Actbetween the NRTB and the distributor. Frequencies are assigned under the termsof the Frequency Act. Entities registered as program distributors are permittedto transmit broadcasts of third parties to subscribers through a cabletransmission network.

The restriction under theMedia Act on our further expansion in the program distribution sector waslifted on January 1, 2004. Accordingly, we are now free to increase ourownership interest in any program distributor, including cable televisioncompanies, despite our existing controlling interest in one cable televisioncompany.

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**Development of theTelecommunications Regulatory Regime in Macedonia**

A new Macedonian law concerning electroniccommunications (“Law on Electronic Communications, “ECL”), which was enacted onMarch 5, 2005, brings the country’s telecommunications regulations closerto the EU regulatory framework, with some transitional provisions. It alsoprovides a number of strict obligations for the existing operators.

Since the parliamentaryelections in July 2006, the Government of the Republic of Macedonia hasenacted a number of bylaws and rulebooks regulating different communicationareas. As a result of the intensified implementation, there is a possibilitythat certain ECL provisions and bylaws will be soon amended.

*Regulation of FixedLine Business*

On December 31, 2004, Maktel’s monopoly rights inthe Macedonian telecommunications market expired, thus making it possible forother network and service providers to enter the Macedonian telecommunicationsmarkets, upon the submission of notification to the Macedoniantelecommunications regulator (and the registration thereof). By December 2006,the Macedonian telecommunications regulator had registered 45 network operatorsand 55 providers of public fixed telephony services. Maktel published NetworkAccess Agreement for the VoIP service providers for international calls. In February 2007,the Government of the Republic of Macedonia determined that the concessioncontracts of three telecommunications operators (Maktel, T-Mobile Macedonia andCosmofon) do not exist any more according to the ECL, and that these companiesshould therefore continue their operations according to the provisions of theECL. After several meetings held between the representatives of thetelecommunications operators with valid concession contracts and the Macedoniangovernment, the parties agreed that the current concession contracts should beharmonized with the provisions of the ECL.

In July 2005, the Macedonian telecommunicationsregulator issued regulations governing the conditions of interconnection. Rules foraccess to, and the use of, specific network facilities were issued in August 2005,and regulations governing the opening of the local loop to competitors, andcarrier selection, were adopted in December 2005.

On August 8, 2005, Maktel submitted its first RIOto the Macedonian telecommunications regulator. The interconnection pricescontained in this offer were approved on January 23, 2006. In November 2006,the first interconnection contract was signed according to the conditionsdetermined in the RIO. Maktel’s first Reference Offer for the Unbundling of theLocal Loop (“RUO”) was submitted to the Macedonian telecommunications regulatoron September 5, 2005 and approved on July 19, 2006.

To prepare for competition in its fixed line business,Maktel carried out several changes to its retail pricing structure. Forexample, Maktel continued to align the prices it charged for network accessproducts and calling services with the underlying costs, and changed itspulse-based charging system to a more customer-oriented time-based chargingsystem with shorter time units. In addition, on the basis of the ECL, theMacedonian telecommunications regulator imposed obligation for cost-basedprices for wholesale services of Maktel. Because Maktel’s monthly fees fornetwork access and the prices it charges for local calls amount toapproximately half of the respective EU averages and are below Maktel’sapproved cost-based wholesale prices, further cost-based realignment of retailprices might become necessary. To the extent that any of its subscriber lineprices do not yet fully reflect the cost of service, a negative impact onMaktel’s competitiveness in the wholesale and retail markets can be expected.

According to the obligations imposed by the ECL, a newnumber portability bylaw has been published by the Agency for ElectronicCommunications on December 27, 2006. Maktel and T-Mobile Macedonia, asoperators of publicly available telephone services, must enable theirsubscribers to retain their geographic and non-geographic numbers when changingtelecommunications operators. The number 

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portability is scheduled tobe fully implemented by July 1, 2007. Due to the short notice, theimplementation of number portability will be technically hardly feasible withinthe given timeframe, therefore Maktel will use the appropriate legal steps torespond to this.

Since the end of 2004, when Maktel’s obligation forproviding universal services according to its concession contract expired,there has been no operator dedicated as universal service provider. In May 2006,the Government of the Republic of Macedonia enacted a decision forimplementation of temporary strategy for universal services, which set thebasic strategic decisions. The relevant bylaws regulating the technicalparameters, quality requirements and pricing of providing universal services inMacedonia were enacted in the second half of 2006.

The Agency for ElectronicCommunications announced its willingness to implement a public tender procedurefor granting authorizations for radio frequency utilization in the 3.4-3.6GHz band for realization of a fixed wireless access, WiMAX. The tender will beimplemented due to efficient and effective utilization of the scarce radiofrequency resources.

*Regulation ofMobile Business*

The services provided by the mobile network operatorsin Macedonia are currently not subject to price regulation. However, theMacedonian telecommunications regulator is collecting market data on thefixed-to-mobile market. It is expected that this market analysis will becompleted by the end of the first half of 2007 and a probable outcome is that T-MobileMacedonia will be designated with SMP status. Depending on the outcome andfindings of this market analysis, regulatory obligations, including thoserelating to wholesale pricing, carrier selection and pre-selection and nationalroaming cannot be excluded.

A public tender for a third mobile operator licensewas published on October 30, 2006. The tender envisages granting of anauthorization for radio frequencies utilization to a third mobile operator onthe entire territory of the Republic of Macedonia in the GSM 900 and DCS 1800radio frequency bands. The authorization will be granted for an initial periodof 10 years, with a possibility of subsequent extension of another 10 years.The public opening of the bid was held on January 31, 2007. The Commissiongranted the license to the only bidder, Austrian Mobilkom.

The Agency for ElectronicCommunications announced a call for expressions of interest for a fourth mobileoperator on April 2, 2007.

**Macedonia and theEuropean Union**

The Republic of Macedonia signed the Stabilization andAssociation Agreement with the European Union and its Member States on April 9,2001. The Macedonian Parliament ratified the Agreement on April 12, 2001,reaffirming the strategic interest and the political commitment for integrationwith the European Union. The Stabilization and Association Agreement has beenratified and in force since April 1, 2004.

On December 17, 2005,the EU decided to grant Macedonia EU candidate status. Following candidatestatus, the EU must set a date to begin the negotiations about full accessencompassing all aspects of EU membership, including trade, environment,competition and health. Macedonia, as candidate country, should harmonize itslegislation with the EU.

**Development of theTelecommunications Regulatory Regime in Montenegro**

Following the privatization of Crnogorski Telekom, thegradual liberalization of the telecommunications markets in Montenegro can beexpected in the coming years. The 2000 Montenegrin telecommunications law (the “2000Law”) conferred broad authority upon the Montenegrin telecommunicationsregulator. The 2000 Law established a licensing regime whereby all 

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telecommunicationsactivity must be licensed by the Montenegrin telecommunications regulator. Inaddition, a new competition law came into force on January 1, 2006.However, no Montenegrin competition agency has yet been set up, and to datethere is no consumer protection law or agency in Montenegro.

We expect that the 2000 Law will be significantlyamended in the third quarter of 2007. The major goal of these amendments willbe to bring the legislation closer to EU directives, to stimulate competition,to stimulate Internet usage and to encourage investment in thetelecommunications sector. We also expect that the current licensing-basedregulatory regime will be replaced with an authorization-based regime.Furthermore, the introduction of cost-based pricing and accounting separationobligations, and of the provision of binding reference interconnection offersby operators with significant market power, can also be expected. All of theseobligations would significantly lower the market entry barriers for newproviders in the telecommunications markets, thus leading to market sharelosses for Crnogorski Telekom in the medium and long term.

Furthermore, in November 2006, the Montenegrintelecommunications regulator has issued a tender for two 3G licenses as well asa tender for a mixed 2G-3G license for a third mobile operator. In thefirst quarter of 2007, T-Mobile Crna Gora and Promonte were awarded with one 3Glicenses each and Telekom Serbia won the combined 2G-3G license. It ismost likely, that the mobile operation of Crnogorski Telekom could face asignificant decrease in its market share over the medium term.

Local governments inMontenegro have the authority to levy municipal taxes on telecommunicationsequipment placed on municipal land and under roads, resulting in a high degreeof uncertainty for Crnogorski Telekom with respect to the overall taxliabilities. The parliament adopted legislation that established a cap on taxesthat can be charged by local governments for objects above the ground andabolishes this tax from January 1, 2008. The local governments still havethe freedom to levy any tax on cables placed under the ground.

**Montenegro and theEuropean Union**

Montenegro became anindependent state in 2006 and is in the process of conducting negotiationsabout a Stabilization and Association Agreement with the European Union.

**PRICING**

**Hungarian FixedLine Operations**

*Connection Fees*

Decree 3/2002 (I.21.)MeHVM on “Charges for Voice Telephone Services Provided by Companies withSignificant Market Power and Price Plans Related to Universal Services” (“the2002 Fixed Line Tariff Decree”) gives service providers the right to collect anadditional fee of up to 50 percent of the costs incurred for providingconnections in rural areas, if the connection fee does not cover the directcosts of the service provider. Connection fees and subscription charges, butnot usage charges, are different for our business and residential customers. Wemay apply discounts to the published charges but are not allowed to exceed anypublished charge.

*Subscription Feesand Usage Charges*

Under the Pricing Act, as modified by the ElectronicCommunications Act, the Minister is responsible for establishing the maximumrates for universal services. Tariff regulation in Hungary is currently basedon a price cap method for universal services. Since February 1, 2002,fixed line rates and connection fees have been regulated by the 2002 Fixed LineTariff Decree. This decree has been modified to limit its scope of priceregulation to universal services. The 2002 Fixed Line Tariff Decree establishedthe price cap 

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formula, under which ourannual price increase cap was set as the forward-looking CPI less a threepercent productivity factor.

According to the SMP resolutions concerningresidential and business access markets, a price cap should apply tosubscription fees of various price plans. These SMP resolutions were onlyeffective for 2005, although a resolution with similar price cap regulation isexpected for 2007 as well. The SMP resolutions concerning residential andbusiness access markets extend the applicability of price caps to allsubscription fees. The resolutions provide that the maximum aggregate price increaseof the subscription fees—business and residential separately—cannot be higherthan the actual CPI for the current year.

This implies that a price check can only be carriedout after the year the price cap relates to has ended.

On January 1, 2005, we set new prices for ourservices. We increased most of our residential subscription fees, resulting inan average subscription fee increase of approximately 3.5 percent forresidential PSTN lines. Subscription fees for business PSTN lines changed to avery small extent. In 2005, our traffic charges did not change significantly.

In 2006, we increased the subscription fee of ourresidential PSTN lines by 2.7 percent, while the prices of the business PSTNlines were raised by slightly more than one percent. Traffic fees were onlychanged in case of the popular “Felező” price plan: thesewere reduced by an average of 7.7 percent. There were no SMP resolutions for2006.

On January 1, 2007 we increased our subscriptionfees for the residential market. As a result, the PSTN residential subscriptionfees rose by 2.8 percent on average. Business subscription fees for analoglines were raised from March 1, 2007 by 2.8 percent. Traffic fees are notexpected to be changed in 2007.

In 2006, the NCA initiateda controlling process on price cap compliance in all three areas (universalservices, residential and business access). We submitted the data required bythe enquiry. We were not certain about the calculation method used by the NCA.As a result, there was a briefing onour request on December 15, 2006, at which the NCA informed us about themethod to be used. According to the calculation of the NCA, we have breachedthe price cap by 5.9 percentage points, however, we have not received anofficial resolution yet. We dispute the correctness of the method set forth bythe NCA. There was another consultation on February 15, 2007, at which therepresentatives of the NCA seemed to accept two of our propositions, but thesewere not yet officially accepted by the NCA’s committee. The sanctions caninclude a fine (approximately HUF 250 million) and/or the obligation to reduceour residential subscription fees (a two percent reduction would mean a revenueloss of about HUF 1 billion).

*Rates for PSTNAccess to the Internet*

Since January 1,2004, retail rates for PSTN access to the Internet are no longer regulated.Since 2002, however, a part of the charge billed to the customer—30 percent inpeak time and 10 percent in off-peak time—must be transferred to ISPs. In thecase of flat rate Internet access, 13 percent of the fee must be shared withISPs. This type of revenue sharing remains in operation under the ElectronicCommunications Act. Since January 1, 2004, Internet call origination andFlat Rate Internet Access Call Origination (“FRIACO”) services are part of theRIO and the prices of these services are also regulated within the scope of theRIO (rates approved by the NCA).

*Leased Line Fees*

After our concession ended in the area of leased linesrequired for interconnection, the leased lines market became unregulated in2002. In 2005, we were identified as an operator with SMP on the retail marketof a minimum set of leased lines and on the wholesale market of terminating segmentsof leased lines. In both cases we have been identified as the only operatorwith SMP in Hungary.

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For the leased linetermination market, the SMP resolution has adopted the “retail minus” pricingrule, requiring us to provide all wholesale leased line access services atprices approximately 33 percent lower than the listed retail prices. We arealso required to provide all services identified in the resolution nationwide.On October 11, 2006, the court abolished this resolution of the NCA, andobliged it to carry out a new process for determining SMP obligations for us onthe wholesale leased line market. The court’s decision is not binding.

*Regulated WholesalePrices*

Since December 23, 2001, the interconnectionrates are no longer regulated on an itemized basis but as part of the RIO.Since January 1, 2004, local bit-stream access must be offered as part ofthe RUO, which also regulates pricing for the local bit-stream access. The costmethodologies used in the reference offers are provided in the MinisterialDecree 18/2003 (XII.27.) IHM on cost calculation of electronictelecommunications services. The cost-based unbundling and interconnectionrates must be approved by the NCA. The reference offers must contain approvedrates.

The NCA has published its SMP resolution with respectto the wholesale broadband market, and identified Magyar Telekom Plc., as wellas all other LTOs, as operators with SMP. The SMP resolution adopted a “retail-minus”pricing rule for the wholesale broadband market. According to theresolution, the NCA intends to transform the local bit-stream access servicecurrently provided by us into a nationwide bit-stream access service. Pricingfor the local bit-stream access service is currently regulated on a cost-based rule underthe RUO.

We have been identified asan operator with SMP in the voice termination and origination market and thewholesale market on unbundling of copper loops, along with all other LTOs.These SMP resolutions included obligations to submit RIO and RUO to the NCA.The NCA also adopted cost-based pricing rules, based on Long Run IncrementalCosts (“LRIC”) for the RIO and Fully Distributed Costs (“FDC”) for the RUO. Wesubmitted our first draft RIO in June 2005 and first draft RUO in October 2005.After several rejections and repeated submissions the NCA accepted our RIO on May 3,2006 and our RUO on September 11, 2006. The RIO took effect from September 15,2005 retrospectively and the RUO from January 20, 2006 alsoretrospectively. On December 12, 2006 the court abolished the NCA’sdecision that the RIO fees would take effect retrospectively from September 15,2005. The court’s decision is not binding.

*Other WholesalePrices*

The ElectronicCommunications Act provides that network access fees be set based on a numberof objective criteria, with transparency and without discrimination. The costof wholesale access services are now required to be calculated based on LRICand the pricing for these services must be approved by the NCA, even if theservice provider is not obliged to make a reference offer for these services.

*Network Access andInterconnection Agreements between Magyar Telekom and ISPs*

We enter into networkaccess agreements with ISPs to secure access to services provided by ISPs forour subscribers. In addition to the network access agreements, we may enterinto interconnection agreements with ISPs. The terms and conditions for thenetwork access agreements must be in line with the terms and conditions of theexisting subscriber contracts.

*Reverse ChargingAgreements between Magyar Telekom and ISPs*

We have entered intoreverse charging agreements with a number of ISPs. Under these agreements,customers remit payment for Internet services to the ISPs rather than directlyto us. This scheme allows ISPs to offer various price plans based on theircustomers’ needs.

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*“Price Squeeze”(Predatory Pricing) Issues*

Under the Electronic Communications Act, serviceproviders with SMP are prohibited from pricing retail network services belowtheir wholesale prices. When service providers reduce their end user prices andit causes a “price squeeze”, they are obliged to proportionally reduce theirprices in their reference offers. This provision only applies if the pricereduction affects more than 10 percent of subscribers for the service, or theimpact of the price reduction exceeds five percent of net sales of the service.

If the regulatoryauthority identifies a price squeeze, the NCA examines whether the price of thenetwork service is in line with the incurred costs. If the network prices arecost-based, the NCA refers the case to the Competition Authority. If thenetwork prices are not cost-based, the NCA determines the minimum mandatorymargin between the price of the network service and the end user service and/ororders the service provider to modify the reference offer.

**Hungarian MobileOperations**

*Market Assessment,SMP Designation Process and Interconnection*

Upon request for interconnection (to provide eithernetwork access or network interconnection) from another telecommunicationsoperator, TMH is required under the Electronic Communications Act and a relateddecree to provide such services, if such request is reasonable on bothtechnical and economic grounds and provision of such services is not impossibledue to the limitation of resources.

See “Item 8—Legalproceedings” for developments on TMH’s SMP designation process andinterconnection rates.

**Macedonian FixedLine and Mobile Operations**

Pricing for most of the retail services provided byMaktel is regulated by Maktel’s Concession Contract. Pricing and maximum changein prices for these services are based on the price cap method.

In addition, according to the ECL, based on marketanalysis the Agency for Electronic Communications may impose retail priceregulations and price controls on operators with SMP in a relevant market. TheSMP operator is obliged to keep separate accounting records for its wholesaleand retail activities.

Pricing for dial-up and ADSL access to the Internet,however, is currently unregulated.

*RegulatedWholesale Prices.**  *During 2006, the Agency forElectronic Communications approved Maktel’s interconnection and unbundling fees(“MATERIO and MATERUO”) based on the fully distributed cost accounting method. However, thecurrent interconnection fees between Maktel and two mobile operators, andbetween the two mobile operators themselves, are still established based onformer interconnection agreements and not yet harmonized with MATERIO.According to the relevant bylaw, Maktel is obliged to implement long runincremental costing methodology for interconnection and unbundling prices by July 2007.

On December 21, 2006, the Agency for ElectronicCommunications decided to change the interconnection fees. The level of the newfees was determined according to benchmarks and was mainly based on Maktel’sretail fees without taking into account the costing model prepared by Maktel asprescribed by the relevant law. On February 14, 2007, the Agency forElectronic Communications decided to change the unbundling fees based onbenchmarks.

The level of wholesale regulated prices directlydepends on the finalization of the price adjustment of Maktel’s retailregulated prices. In case Maktel does not increase its retail prices, that canlead to significant decrease of wholesale regulated prices.

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Pricing for mobiletelecommunications services is currently unregulated. Under the Law on Electronic Communications,however, the NationalRegulatoryAgency isempowered to regulate the pricing of the retail mobile services, in caseconcern over competition arises.

**ORGANIZATIONALSTRUCTURE**

MagyarCom, which is fully owned by Deutsche Telekom,owns 59.21 percent of outstanding ordinary shares of Magyar Telekom.

For a list of principaloperating subsidiaries and associates of the Company as of December 31, 2006,see Note 2.2 (b) to the consolidated financial statements.

**PROPERTY,PLANTS AND EQUIPMENT**

We have one of the largestreal estate holdings in Hungary. We use substantially all of these propertiesfor telecommunications installations, computer installations, research centers,service outlets and offices. Our equipment and machinery primarily consist ofswitches, communication towers and other telecommunications equipment.

Due to the consolidationof various operations, the conversion to digital switches and ongoing staffreductions, we anticipate that a substantial portion of our owned and leasedproperties will not be necessary for our core business in the future. We intendto sell or rent our surplus properties.

We intend to rely fully onoutside providers of facility and real estate management services in themedium-term. We are accordingly developing a new service-based contractstructure and intend to terminate all our remaining in-house real estatemanagement functions. Our aim is to secure reliable facility and real estateservices at the needed quality level and at prices that allow flexiblemanagement of our changing real estate portfolio and reduction of real estatemanagement expenses.

Since February 2005,Magyar Telekom Plc.’s real estate development, investment, operations andmanagement activities have been outsourced to DeTe Immobilien-Hungary Zrt. The Company’s real estate department,however, continues to handle strategic management and control of its realestate holdings.

Maktel outsourced its realestate management operations to a third party starting from April 1, 2006.

The number of sites usedby Magyar Telekom is approximately 7,800, out of which approximately 2,800sites are owned by the Company and approximately 5,000 sites are leased. Thetotal area of properties used by Magyar Telekom as of December 31, 2006was approximately 1,200,000 m2.

The majority of sites usedin our operations are smaller than 100 m2. Approximately 55 percent of the totalarea is used to house telecommunications equipment and other technical devices.The largest site is our headquarters building located at Krisztina krt. 55 inBudapest, with floor space of 35,000 m2.

**INFRASTRUCTURE AND TECHNOLOGY**

**Hungarian Fixed Line Operations**

The following tableprovides information on the length of the copper and fiber optic cablescontained in Magyar Telekom Plc.’s access, backbone and rural area networks inHungary at December 31, 2006, and each of the two prior years inkilometers:

| ** **        | ** ** | **At December 31,** | ** ** |
|-------------------|------------|-------------------------------|------------|
| ** **        | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **        | ** ** | **(in kilometers)**      | ** ** |
| Copper cable      |       | 159,504                       |       | 158,112 |   | 159,951 |   |
| Fiber optic cable |       | 13,580                        |       | 14,376 |   | 15,026 |   |

 

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*Expansionof Access Networks.**  *At theend of 2000, we began to offer broadband Internet access services, based on theADSL and Asynchronous Transfer Mode (“ATM”) technologies. We selectedEthernet-based Digital Subscriber Line Access Multiplexers (“DSLAMs”) toprovide a more cost effective ADSL solution together with the ATM technologyalready in use. The ADSL transmission system provides high-speed digital accessto any data network over existing copper wires without interruption of PlainOld Telephone Service (“POTS”) and ISDN2 services with the data speed of 512Kbit/s and 1, 2, 3 and 6 Mbit/s. In 2006, we continued the roll-out of theADSL technology nationwide. At the end of 2006, approximately 500,000 customerswere using ADSL lines for connection to the Internet. By the end of 2006, ourinfrastructure allowed up to 2.1 million of our analog and ISDN2 subscribers tohave access to the ADSL service. This represents coverage of over 1,000 townsand cities and approximately 87 percent of the population in our service area.In 2007, we plan to introduce the VDSL2 technology to provide high-speed dataaccess with data speed of 25 and 50 Mbit/s.

We used fiber optic cables for our fixed line localloop networks for approximately 120,000 customers at the end of 2006. Weinstalled a substantial amount of local network fiber optic cable in Budapest,where segments of the old cable network were in poor condition and where webelieve the demand for high capacity and high quality transmission will be thegreatest (e.g., shopping malls, industrial parks). We plan to extend our localfiber optic network both inside and outside Budapest to cover new businessdemands in existing areas, mainly to provide broadband services through opticalaccess as well.

*WirelessSolutions.*   In 2003, we introduced the WLANtechnology in the access network for hot spot applications. By the end of 2006,440 hot spot sites were in operation. With this technology, we can provideInternet access service in public areas to customers requiring temporaryInternet access (e.g., conference centers, exhibitions, airports, hotels).Since the end of 2004, WLAN users of TMH and Magyar Telekom Plc. can use hotspot sites operated by either entity.

We have been selectively applying radio technology inour local loops since 1996. At the end of 2006, approximately 71,444 subscriberlines were based on the radio technology.

*BackboneNetwork.**  *We havea digital fiber optic national long distance network that connects localprimary area networks. We have implemented the DWDM technology and SynchronousDigital Hierarchy (“SDH”) systems in both the national long distance andBudapest networks. The countrywide DWDM backbone network, installed in 2006,provides high capacity (maximum 64 times 10 Gbit/s) in the most important nodesof Hungary, as well as in international directions. In 2006, we carried on anextension of the DWDM network. In addition to cost advantages, SDH systemsprovide a flexible transmission infrastructure with automatic transmissionpaths. We introduced a new generation of the SDH system that, besidesincreasing network availability and transmission capacity, enables new services,such as data transmission (e.g., Ethernet). In 2006, the increase in thecapacity of the backbone network served the growing demand of IP core networkand HSLL. The HSLL is mainly provided for mobile operators. Since we currentlyhave a robust optical backbone network, we have no immediate plan forexpansion.

*IP/MPLS.*   Since2000, we have provided Internet access and IP-VPN services on the same IP/MPLSplatform. The network is built-up of STM-16, Gigabit Ethernet and 10GEconnections. The network has several access options (dial-up, leased line,broadband DSL, CATV) with PoPs in each primary area in Hungary. Availableservices include IP-VPN (scalable interconnection for corporate sites withIntegrated Voice and Data option), IPSec and xDSL to Virtual Private Networks,Virtual Private Dial-up Network and wholesale Internet services for ISPs. Theconnectivity network that concentrates xDSL traffic towards the IP core isbased on ATM and Ethernet technology. In 2006, we started to developcarrier-grade IP core network to be able to ensure high availability, demandedquality of service, scalability and security for triple-play, VoIP andbroadband data communication services, and also for the common T-Com and T-MobileIP platform. In 2006, significant capacity, quality and functional upgradeshave been performed, including the development of the countrywide 10 Gbit/score network, installation of new Gigabit Ethernet 

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(“GE”) and 10 GEconnections, duplications of devices to increase redundancies, change of olddevices etc. Further Quality of Service (“QoS”) and high-availability featuresare planned in the next three years in order to increase network capacityaccording to traffic demand, to install new network functions and to developconnectivity and integrity with different communication networks to become anappropriate transport platform for Next Generation Network (“NGN”) andtriple-play services.

We are making preparations for interconnection andconvergence of voice and data networks, which are currently separate. The NGNconcept has been espoused as a long-term project. We do not plan to develop ourtraditional (such as PSTN/ISDN) network further except for maintenance andlegal compliance purposes. The key focus instead will be on development oftechnologies and networks compatible with or forming a part of NGN, such as VoIP.In 2005, Voice-over CATV, Integrated Voice and Data service (IP Complex Plus)and Voice-over Internet (KLIP) have been introduced. In 2006, we continued todeploy a carrier-grade multi-service NGN. We also launched the commercial IPTVservice at the end of 2006 together with T-Online. An IP Multimedia Subsystemwas installed in 2006, which is considered to be the base for feature-rich,IP-based, Publicly Available Telephone Service (“PATS”). In 2007, we continueto deploy a carrier-grade multi-service NGN and launch new services, such as IPCentrex.

*InformationTechnology.**  *We havededicated a significant amount of resources to improve our informationtechnology systems. We believe that the continuing development of these systemsis essential to improving customer service and the efficiency and productivityof our employees.

Our nationwideoperational support system integrates the following elements:

·       CRM;

·       Billing,e-billing;

·       automatedcall collection;

·       networktraffic management;

·       workforceand workflow management;

·       element,network and service management (configuration, alarm management, SLAmanagement); and

·       processcontrolled technical inventories.

This operational supportsystem environment permits us to focus on our customers’ needs, to offer morepersonalized services, itemized billing, to bundle products and services inprice plans and to generate a single bill for customers with multiplelocations. In 2006, a project has been established to develop and implement theNext Generation Support System (“NGOSS”) concept to support the new triple-playand NGN platform based services.

**Hungarian MobileOperations**

*GSMNetwork.**  *TMHoperates a nationwide GSM public digital mobile network in the 900 MHzband with 8 MHz duplex spectrum since 1994, in the 1800 MHz band with6 MHz duplex spectrum since 1999 and in the 1800 MHz band with a total of15 MHz duplex spectrum since January 2004. To guarantee the bestpossible service quality for our customers, we are dedicated to the continuingnetwork roll-out to meet traffic and coverage demands.

*Coverage.**  *By the end of 2004, coverage of villages withpopulation between 1,000 and 10,000 was 97 percent. This level was furtherincreased up to 99 percent by December 31, 2006. The deep indoor coveragewas 97 percent in Budapest and 96 percent in cities over 100,000inhabitants by the end of 2004. 

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The deep indoor coveragein cities over 100,000 inhabitants, including Budapest, was increased up to97 percent as of December 31, 2006.

*EDGE PacketSwitched Data Service.**  *Atthe end of 2003, commercial EDGE service was launched in approximately 23percent of Budapest area. By the end of 2004, EDGE coverage reached 91 percentof Budapest. In 2005 and 2006, the EDGE development project was continued,resulting in 59 and 74 percent population coverage by the end of the year,respectively. The peak data rate was increased to around 200 Kbit/s in2005.

*UniversalMobile Telecommunications System.**  *The3G network enables—besides rapid data transmission and video-telephone—morecomprehensive and interesting contents than before, including, in addition toimage and text, fast transmission of high quality multimedia materials. In December 2004,TMH was awarded a 3G service license and was granted the use of 15 MHzduplex and 5 MHz unpaired 3G spectrums until 2019. In August 2005,TMH launched commercial UMTS service, first in Hungary. By the end of 2005,UMTS coverage increased to 43.6 percent of Budapest. On May 17, 2006, TMHlaunched commercial HSDPA service in the internal districts of Budapest, firstin Hungary. From the last quarter of 2006, each 3G cell is capable of HSDPA,therefore the UMTS/HSDPA population coverage reached 30.3 percent by the end of2006. The network allows 3.6 Mbit/s downlink speed, however most of the currentlyavailable mobile phonesets support only 1.8 Mbit/s.

*WLANproject.**  *In theframe of the WLAN program “Small settlements”, 110 access points have beenrolled out during 2006 making “Internet Fix” service available in 120settlements.

*SpecialProject TETRA.**  *TMH tookpart in the exclusive mobile tender of the Hungarian Government. A new entity,Pro-M, was established for providing TETRA services for governmentalorganizations. The network uses the 380-400 MHz spectrum, applying TETRAtechnology. By December 2006, TMH completed the development of 225 sitesand four switches according to the roll-out program.

*InformationTechnology.**  *TMH’soperations are supported extensively by IT solutions. A great number of closelyintegrated application systems are used in sales, customer service, collection,service provisioning, call data processing (mediation) and charging, fraudmanagement, billing, handset logistics, interconnect billing, general ledgerreporting and electronic document archiving.

TMH operates proprietaryData Warehouse (“DWH”), which provides management and endorsers with businessreports and marketing and finance analysts with detailed subscriber, trafficand business information for on-line interactive analysis. DWH is playing amajor role in customer segmentation and customer life-cycle value calculation.

**Macedonian FixedLine Operations**

Maktel endeavors to maintain its network at a hightechnological level to offer and provide a wide range of products and servicesthat will satisfy customers’ demands.

The PSTN/ISDN network in the Republic of Macedonia hasbeen fully digitalized since the end of 2003. The liberalization of thetelecommunications market required Maktel to perform a substantial upgrade ofthe PSTN/ISDN platform. With the upgrade, switching systems are now able tosupport carrier selection and pre-selection functions.

Maktel’s primary area networks are connected to thefiber optic national long distance network. The SDH technology has beenimplemented in the backbone network, in the transmission networks in Skopje andother cities in the country. For connection of Remote Subscriber Units,Plesiochronous Digital Hierarchy (“PDH”) equipment is used as well.

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The existing copper-wire network is a good basis forintroduction of broadband services based on the DSL technologies. At the end of2003, Maktel introduced broadband Internet access services based on the ADSL technology.Optical cables in the access network are used for connection of key businesscustomers.

The core of the IP backbone network is built on theGigabit Switch Routers (“GSR”) platform. The core is connected to the globalInternet network through two main internet gateways. Available services includeIP-VPN, ADSL, dial-up Internet access, wholesale Internet services for ISPs,web services, content oriented services and video streaming. In 2006, Maktelhas installed Intrusion Detection and Prevention System in order to protect itsusers from Denial of Service (“DOS”).

In 2006, Airspan-based VoIP platform was installed inthe network for the purposes of terminating and originating international VoIPcalls as well as for providing business VoIP services.

In 2006, Maktel installeda Service Selection Gateway platform. It is based on Cisco Systems solution andprovides bandwidth on demand, walled garden, anti-virus and anti-spam servicesto its Internet subscribers. The migration from frame relay to IP-VPN solutionswas also finalized in 2006.

**Macedonian MobileOperations**

T-Mobile Macedonia hasbuilt a high quality and high capacity network that meets the requirements andneeds of its growing subscriber base. Our rating and billing platforms provideenhanced services for the entire prepaid and postpaid customer base as well asfor the interconnection partners. Our comprehensive solutions for promotions,discounts and incentives provide extensive flexibility for tailored offeringsand customer satisfaction.

**ENVIRONMENTPROTECTION**

The management committee of Magyar Telekom adopted theSustainability Strategy of the Company in January 2005 to strengthen ourcommitment to sustainable development.

As a part of ourcommitment to sustainability, we developed a sustainability section for MagyarTelekom’s website. This section includes our reports and news relating tosustainability and discusses our philosophy and approach to sustainability.

**ITEM 4A—UNRESOLVEDSTAFF COMMENTS**

Not applicable.

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**ITEM 5—OPERATINGAND FINANCIAL REVIEW AND PROSPECTS**

The following discussionshould be read together with the consolidated financial statements, includingthe accompanying notes, included in this annual report. The consolidatedfinancial statements, the accompanying notes as well as the discussion ofresults presented below have been prepared in accordance with IFRS. IFRSdiffers in certain respects from U.S. GAAP. For a discussion of the principaldifferences between IFRS and U.S. GAAP as they relate to us, see Note 37 to theconsolidated financial statements. Revenues and operating expenses discussedunder “—Results of Operations—By Segment” do not reflect intrasegment andintersegment eliminations.

**OPERATING RESULTS**

***Results of Operations—Total***

***Basis of presentation***

We determine segments primarily based on products andservices that are subject to risks and returns different from those of otherbusinesses. In 2004, we changed our segment disclosure as a result of thechange in our management and reporting structure. The primary segments arebased on the business lines (fixed line and mobile operations), which includeboth Hungarian and international activities. Reported segments are consistentwith information used by management for internal reporting and monitoringpurposes. In addition, our secondary format for reporting segment informationis geographical segments.

In 2005, Magyar Telekom acquired a 76.53 percentinterest in Crnogorski Telekom. Crnogorski Telekom’s balance sheet wasconsolidated in our accounts as of March 31, 2005, and the results ofCrnogorski Telekom are included in our consolidated income statement from thesecond quarter of 2005.

Magyar Telekom has reassessed its status in theprovision of a number of value added services, where revenue was accounted foron a gross basis implying a principal status rather than an agent status in theprovision of the service. A gross basis means that revenues included the fullamount of fees collected from customers, and payments to related service providerswere included in operating expenses. After analyzing the relationships with oursubcontractors one by one, we have changed our judgment of the situation insome cases and determined that in these cases the Group is more the sellingagent of these products than the principal provider of the service.

This change had a decreasing impact on the Fixed lineVoice—retail revenues and the Mobile Non voice revenues, with equivalentcorresponding effects in operating expenses. The change resulted in nettingrevenues with expenses, and has no impact on operating profit, net income orequity. Prior year’s reported numbers have been restated accordingly. See Note2.1.7 to the consolidated financial statements.

The Group has changed its accounting policy todisclose the Hungarian local business tax and innovation fee as income taxes aswe have established that these taxes have the characteristics of income taxesrather than operating expenses. In previous years, these taxes were disclosedamong operating expenses.

This change in thedisclosure of these taxes had a decreasing impact on operating expenses and anequivalent increase in income taxes. The change resulted in no impact on netincome or equity. Prior year’s reported numbers have been restated accordingly.See Note 2.1.7 to the consolidated financial statements.

***Total Revenues***

Our total revenues grew by9.1 percent from HUF 615,054 million in 2005 to HUF 671,196 million in 2006.The increase in revenues was mainly due to higher revenues from mobiletelecommunications services, which grew by 14.5 percent from 2005 to 2006,**driven mainly by Pro-M’s EDR activities in the Hungarianmobile operations. The higher system integration and IT revenues as well ashigher broadband 

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Internetrevenues also contributed to the growth, and were only partly offset by lowerrevenues from outgoing domestic and international traffic in the fixed linetelecommunications services. The longer consolidation period (12 months in 2006compared to nine months in 2005) of Crnogorski Telekom also contributed to therevenue growth.

***Total Operating Expenses***

Our total operating expenses increased by 11.9 percentfrom 2005 to 2006. Operating expenses amounted to HUF 481,309 million in 2005and HUF 538,380 million in 2006. Our total operating expenses as a percentageof total revenues increased from 78.3 percent in 2005 to 80.2 percent in 2006.

Depreciation and amortization and employee-relatedexpenses are our most significant operating expenses.

Depreciation and amortization increased by 6.6 percentfrom HUF 114,686 million in 2005 to HUF 122,249 million in 2006 mainly as aresult of the consolidation of Crnogorski Telekom and the impairment of theMonet, TCG and Internet CG brandnames in connection with the rebranding inMontenegro in September 2006. In addition, depreciation increased at TMHdue to the capitalized UMTS concession and also due to their higher gross assetbase of telecommunications and IT equipment. As a result of the continuousrevision of the useful life of our assets, the lives of certain assets werechanged as of January 1, 2006. These assets mainly included IT equipmentsand software, and the change in life resulted in HUF 58 million higherdepreciation expense in 2006.

Employee-related expenses increased by 2.7 percent in2006 as compared to 2005 because of the inclusion of new subsidiaries (such asPro-M, Dataplex and KFKI). Higher expenses resulted also from the severanceprovision recognized in connection with the headcount reduction program atCrnogorski Telekom and from higher severance expenses of Magyar Telekom Plc. in2006. The total payment made in relation to employee termination in 2006amounted to HUF 6,099 million, of which HUF 2,639 million was charged againstthe provision for liabilities and charges as at December 31, 2005, whilethe rest was recognized as employee-related expense in 2006.

Other operating expenses include materials,maintenance, marketing, service fees, fees and levies, outsourcing expenses,energy and consultancy. Other operating expenses increased by 13.5 percent in2006 compared to 2005 primarily due to higher fees for outsourcing services(e.g., real estate management, transportation, customer service andinformatics) as well as higher expenses in connection with various projects.The significant increase in materials and maintenance fees was driven by theconsolidation of new subsidiaries such as Dataplex and KFKI. In 2006, higherconcession fees were due to the UMTS fee paid by TMH and to increased frequencyfees at T-Mobile Macedonia. Non-rebranding related marketing expenses increasedsignificantly as well at Magyar Telekom Plc., due to more intensive advertisingactivity in 2006.

In the course of conducting their audit of our 2005financial statements, PwC identified certain contracts the nature and businesspurposes of which were not readily apparent. PwC notified the Audit Committeeand advised them to retain independent counsel to conduct an investigation intothese contracts. Our Audit Committee retained White & Case, as itsindependent legal counsel, to conduct the investigation. See “Item 3—RiskFactors” and “Item 15—Controls and Procedures.”

In 2006, Magyar Telekom incurred HUF 4.1 billionexpenses relating to the investigation, which are included in other operatingexpenses in the Hungarian fixed line operations. This amount includes HUF 3.3billion legal fees, HUF 0.3 billion audit-related fees and HUF 0.5 billion feespaid for legal counsel representing our current and former employees.

In 2005, other expensesinclude HUF 2,059 million paid under four consulting contracts entered into byMagyar Telekom Plc. and two of its subsidiaries as to which it has not beenable to obtain sufficient 

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evidencethat it or its subsidiaries received adequate value. This amount also includesthe tax implications of the payments as well.

***Total Operating Profit***

Our total operating profitdecreased by 3.8 percent from HUF 141,754 million in 2005 to HUF 136,391million in 2006 due to the fact that the increase in expenses was higher thanthe growth in revenues.

***Outlook***

The telecommunications industry is undergoing a majorchange globally. We have observed several long-term trends which are changingthe structure of the Hungarian telecommunications market. Key drivers of thelong-term trends include changes in technology (i.e., IP-based broadbandproducts and solutions, emerging wireless broadband technologies), customerrequirements (i.e., mobility and ease of use, triple-play solutions),competition and regulation (i.e., low entry barriers, new business models).

To adapt to these changes in the market, we are nowmoving from the traditional traffic-based revenue structure to an access-basedrevenue structure, which will allow us to substitute declining traffic revenueswith content, entertainment and bundled access revenues. In addition, we areseeking new revenue sources by entering into new non-traditional convergedtelecommunications markets.

We should emphasize that each segment is affected byits unique business environment, and we are subject to circumstances and eventsthat are yet unforeseen or beyond our control. We have identified several riskfactors which may affect our business in the future including changes in theregulatory environment, changes in competition, the unforeseeable effects ofthe announced stabilization package of the Hungarian government and changes inthe foreign exchange rates just to mention the most important ones. See thedetailed description of these and other risk factors in “Item 3—Risk Factors”.

Magyar Telekom’s current plans and outlook are basedon our current best knowledge and expected circumstances. Nevertheless thebehavior of our competitors can hardly be completely predicted. Therefore astronger than assumed impact of alternative operators, new market entrants andnew solutions in any country where Magyar Telekom is present could influenceour business performance negatively.

We expect that our corebusiness units will be able to continue to generate strong free cash flow.However, there are some significant elements that can have negative effects onthe free cash flow, for example, the roll-out of EDR infrastructure andpotential acquisitions. Despite these effects we expect to generate solidpositive free cash flow in 2007 as well.

**Revenues**

The following reflects ourcurrent expectations with respect to our segmental plans and initiatives:

***Fixed line segment***

In the fixed line segment, we expect continued gradualdecline in fixed line voice revenues due to continued line reduction and fixedline unit price erosion driven by mobile substitution and the increasedcompetition in the fixed line market, including competition from PSTN resellersand VoIP or VoCATV providers. As indicated in our strategy, to mitigate thedecrease in fixed line voice revenues we are now moving from the traditionaltraffic-based revenue structure to an access-based revenue structure, whichwill allow us to substitute declining traffic revenues with content,entertainment and bundled access revenues.

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As the leading broadbandprovider in Hungary, we are committed to accelerating growth in country-widebroadband penetration by applying a multi-access cost-efficient approach. In November 2006,we launched IPTV services; in early 2007 we doubled bandwidths on our networkby utilizing ADSL2 technology and sought to further boost market development byintroducing naked DSL services.

We aim to move towardscontent and media businesses to support traditional access services and buildnew revenue streams and exploit new revenue sources. Accordingly, in April 2006,we gained control of iWiW Kft., the leading Hungarian online social network,which has currently more than two million users registered. In May 2006,we acquired Adnetwork, the leading domestic online advertisement networks toleverage the online advertisement potential of T-Online and partner web pages.

To maintain sustainablecompetitiveness in the corporate sector, we have committed to furtherdeveloping our IT competencies by focusing on complex service offering viamanaged services, system integration and outsourcing through consultancy-basedselling to corporate customers. This strategic initiation is promoted by theacquisition of KFKI Group in June 2006 and Dataplex in April 2006.Expanding our business operation to these new areas with lower EBITDA marginsresults in a dilutive effect in the EBITDA margin both on fixed segment andMagyar Telekom Group level.

In addition, we areseeking new revenue sources by entering new non-traditional telecommunicationmarkets such as transactional services and commerce to generate new revenuestreams in case a potential business opportunity arises to capture potentialgrowth opportunities on new converged market areas.

We also had highercontributions from Crnogorski Telekom in 2006 since the consolidation commencedin April 2005. International PoP and alternative operations are expectedto contribute increased revenues as well. Especially in the case of ourBulgarian subsidiary (Orbitel) are we expecting a changing trend because sinceits EU membership commenced in January 2007, Bulgaria has to apply the EUregulation in the telecommunication sector as well.

In Montenegro, the defacto exclusivity of Crnogorski Telekom in international voice traffic has cometo an end as Promonte, the Montenegrin market leader in mobile telephony hasacquired a license for international voice traffic valid from January 1,2007. There are several public tenders ongoing in Montenegro having asignificant long term effect on the telecommunication market. The MontenegrinTelecommunication Agency has announced a public tender for cable televisionservices, in which 10 companies got licenses. As a result, new cable televisionservice providers may enter traditional telecommunications markets in 2007. TheMontenegrin Telecommunication Agency has also announced public tenders forproviding telecommunication services using WiMAX technology. These tenders willinfluence the level of competition in Montenegro.

***Mobile segment***

In the mobile segment weexpect continuing growth in net revenues at TMH, T-Mobile Macedonia andT-Mobile Crna Gora as well. Market penetration in Hungary is now almostsaturated, and we expect lower growth rates due to a smaller number ofpotential new subscribers. This trend is partly offset by the migration ofprepaid customers to postpaid packages and the future growth potential ofhigher-value services, which is supported by the launch of UMTS and HSDPAservices. Accordingly, leveraging first mover advantage on our newly builtHSDPA capacities is one of T-Mobile Hungary’s primary strategic priorities onthe fast growing wireless broadband market.

We won the EDR tender of the Hungarian government andwill provide TETRA services for 10 years. Significant revenue contribution wasrealized from this project already in 2006. The EDR system implementationresulted in significant increase in revenues and also in the cost of equipmentsale in 2006. Looking forward to 2007, this significant one-off revenue andcost of telecommunications equipment sale will be eliminated resulting in lowerrevenues and accordingly also lower cost of equipment sale on this field ofoperation.

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In the Macedonian and Montenegrin market, subscribergrowth continued in 2006 and drove the net revenue growth. For 2007, we expecta slowdown of subscriber growth in both countries.

The government of Macedonia has approved AustrianMobilkom’s bid to become the country’s third mobile operator at the beginningof 2007. The Austrian firm was the sole company to submit a bid on the tenderfor the third license. Under the license rules, the new operator must launchservices within six months of being granted the license. Therefore thesuccessful bidder is expected to launch its operation by July 2007.

The MontenegrinTelecommunication Agency has announced public tenders for providing 3rdGeneration mobile services and a combined new license to provide 2G/3G mobiletelephony services in Montenegro. The outcome of this tender will definitelyinfluence the market development in Montenegro.

**Expenses**

In line with our strategy, we plan to improve ourinternal operational efficiency in all segments. Our initial 2006 goal toimprove the efficiency of our workforce by increasing the fixed lines(B-channel equivalent) per employee ratio to over 500 (a ratio that correspondsto the best practice in Western Europe) was already reached by the end of February 2006.We are targeting further headcount reductions in our Macedonian and Montenegrinfixed line service providers. We are determined to bring their performance inline with industry best practice and our management is committed to furthersimplification and improvement of processes and connected systems. In additionto organizational measures and process improvement, we seek cost savings byleveraging our group-wide synergies in procurement.

The merger of MagyarTelekom Plc. and TMH enables us to further improve efficiency. We are expectingsignificant value generation through the gradual implementation of theintegration by seizing additional revenues and optimizing operating and capitalexpenses. In 2006, the first impacts from the fixed-mobile integration in termsof sales and customer retention began to be seen. These were, however, offsetby related costs. In the next three years we expect to see a significantpositive impact, with net present value of these benefits currently estimatedto be around HUF 60 billion in the period of 2007-2009. The integrationof our fixed and mobile businesses will particularly enhance ourcompetitiveness in the areas of customer care and customer service, productsand value propositions, back-office and supporting systems and joint networkinfrastructure management.

**Gross additions totangible and intangible assets**

We aimed to reduce the gross additions to tangible andintangible assets to sales ratio to below 15 percent in 2006 and succeeded inmeeting this target. We are targeting this ratio to fall below 14 percent in2007 excluding potential acquisitions. We expect an increasing proportion ofgross additions to relate to high-growth areas in the fixed line segment, suchas Internet, broadband and data transmissions, while our mobile segment willcontinue the roll-out of the UMTS and HSDPA infrastructure.

According to our strategicdirections we are committed to further strengthening and leveraging ourpresence in the South-East European region. Therefore, we are continuouslyseeking for further value-creating acquisition and investment targets with evenlarger scale.

**Revenue and EBITDAtargets**

Based on our former outlook and market and regulatoryconditions, we expected to achieve compounded average revenue growth rate of atleast three percent for the period of 2006-2007. In terms of EBITDA, wetargeted to maintain the 2005 reported EBITDA level in 2006. At the end of2006, we were fully on track to meet both of these targets. Looking forward to2007, we are targeting stable revenue and EBITDA in forint terms over 2006reported figures.

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**Results ofOperations—By Segment**

Thefollowing table sets forth revenues, operating expenses and operating profit bysegment:

| ** **                                               | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                               | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                               | ** ** | **(in HUF millions)**            | ** ** |
| Revenues                                                 |       |                                       |       |   |   |   |   |
| Hungarian Fixed  line                                    |       | 298,707                                    |       | 284,985 |   | 292,193 |   |
| International  Fixed line                                |       | 45,693                                     |       | 57,983 |   | 68,953 |   |
| Total                                                    |       | 344,400                                    |       | 342,968 |   | 361,146 |   |
| Less:  intra-segment revenues                            |       | (1,271                                     | )          | (2,284 | ) | (3,569 | ) |
| Total revenue of  Fixed line segment                     |       | 343,129                                    |       | 340,684 |   | 357,577 |   |
| Less:  inter-segment revenues(1)                         |       | (11,146                                    | )          | (11,478 | ) | (13,711 | ) |
| Fixed line  revenue from external customers              |       | 331,983                                    |       | 329,206 |   | 343,866 |   |
| Hungarian Mobile                                         |       | 260,568                                    |       | 266,217 |   | 297,209 |   |
| International  Mobile                                    |       | 33,734                                     |       | 42,693 |   | 52,399 |   |
| Total                                                    |       | 294,302                                    |       | 308,910 |   | 349,608 |   |
| Less:  Intra-segment revenues                            |       | (58                                        | )          | (27 | ) | (42 | ) |
| Total revenue of  Mobile segment                         |       | 294,244                                    |       | 308,883 |   | 349,566 |   |
| Less:  inter-segment revenues(1)                         |       | (29,435                                    | )          | (23,035 | ) | (22,236 | ) |
| Mobile revenue  from external customers                  |       | 264,809                                    |       | 285,848 |   | 327,330 |   |
| Total revenue of the Group                               |       | 596,792                                    |       | 615,054 |   | 671,196 |   |
| Operating  expenses—net                             |       |                                       |       |   |   |   |   |
| Hungarian Fixed  line                                    |       | 280,766                                    |       | 239,716 |   | 260,065 |   |
| International  Fixed Line                                |       | 38,669                                     |       | 49,022 |   | 57,461 |   |
| Total                                                    |       | 319,435                                    |       | 288,738 |   | 317,526 |   |
| Less:  intra-segment expenses                            |       | (1,271                                     | )          | (2,284 | ) | (3,569 | ) |
| Total operating  expenses—net of Fixed line segment |       | 318,164                                    |       | 286,454 |   | 313,957 |   |
| Hungarian Mobile                                         |       | 200,861                                    |       | 190,998 |   | 221,532 |   |
| International  Mobile                                    |       | 24,687                                     |       | 30,388 |   | 35,304 |   |
| Total                                                    |       | 225,548                                    |       | 221,386 |   | 256,836 |   |
| Less:  intra-segment expenses                            |       | (58                                        | )          | (27 | ) | (42 | ) |
| Total operating  expenses—net of Mobile segment     |       | 225,490                                    |       | 221,359 |   | 256,794 |   |
| Less: inter-segment expenses(1)                          |       | (40,581                                    | )          | (34,513 | ) | (35,946 | ) |
| Total operating  expenses—net of the Group          |       | 503,073                                    |       | 473,300 |   | 534,805 |   |

----

(1)                 Inter-segmenteliminations include primarily interconnection fees between the fixed line andmobile networks.

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| ** **                                       | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                       | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                       | ** ** | **(in HUF millions)**            | ** ** |
| **Segment results (Operating  profit)**          |       |                                       |       |   |   |   |   |
| Fixed line—Hungary                          |       | 17,941                                     |       | 45,269 |   | 32,128 |   |
| Share of associates’ profits—(Hungary) |       | 1,896                                      |       | 330 |   | 703 |   |
| Fixed line—Foreign operations               |       | 7,024                                      |       | 8,961 |   | 11,492 |   |
| Fixed line  segment                              |       | 26,861                                     |       | 54,560 |   | 44,323 |   |
| Mobile—Hungary                              |       | 59,707                                     |       | 75,219 |   | 75,677 |   |
| Mobile—Foreign operations                   |       | 9,047                                      |       | 12,305 |   | 17,095 |   |
| Mobile segment                                   |       | 68,754                                     |       | 87,524 |   | 92,772 |   |
| Less: Share of associates’ profits          |       | (1,896                                     | )          | (330 | ) | (703 | ) |
| Total operating  profit of the Group             |       | 93,719                                     |       | 141,754 |   | 136,391 |   |

----

(1)                 Inter-segmenteliminations include primarily interconnection fees between the fixed line andmobile networks.

***Fixed LineTelecommunications Segment***

The fixed line segmentincludes Magyar Telekom Plc. and its consolidated subsidiaries, other than T-MobileMacedonia, T-Mobile Crna Gora, TMH and Pro-M.

***Revenues***

Our fixed linetelecommunications segment includes local, domestic and international longdistance telephone services as well as value added digifon services such ascall waiting, itemized billing and telephone and private branch exchangeequipment rental. This segment also consists of revenues from related services,such as leased lines, data transmission, Internet, SI/IT, equipment sales andcable television.

**Hungarian FixedLine Operations**

Hungarian fixed line operations include Magyar TelekomPlc. and its consolidated subsidiaries, other than TMH, Pro-M and our foreignsubsidiaries.

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Thefollowing table sets forth information regarding Hungarian fixed line revenues:

| ** **                                  | ** ** | **Year ended December 31,** | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                  | ** ** | **2004**                                   | ** ** | **2005**                                   | ** ** | **2006** | ** ** | **2005/2004** | ** ** | **2006/2005** | ** ** |
| ** **                                  | ** ** | **(in HUF millions)**            | ** ** | **(% change)**                        | ** ** |
| Subscriptions                               |       | 79,577                                     |       | 80,261                                     |       | 81,897 |   |   | 0.9 |   |   |   | 2.0 |   |   |
| Domestic outgoing traffic revenues          |       | 91,452                                     |       | 67,717                                     |       | 49,034 |   |   | (26.0 | ) |   |   | (27.6 | ) |   |
| International outgoing traffic revenues     |       | 8,528                                      |       | 6,835                                      |       | 5,524 |   |   | (19.9 | ) |   |   | (19.2 | ) |   |
| Value added, cable voice and other services |       | 8,780                                      |       | 7,342                                      |       | 6,895 |   |   | (16.4 | ) |   |   | (6.1 | ) |   |
| Voice-retail revenues                       |       | 188,337                                    |       | 162,155                                    |       | 143,350 |   |   | (13.9 | ) |   |   | (11.6 | ) |   |
| Domestic incoming traffic revenues          |       | 8,120                                      |       | 9,429                                      |       | 8,256 |   |   | 16.1 |   |   |   | (12.4 | ) |   |
| International incoming traffic revenues     |       | 9,969                                      |       | 9,050                                      |       | 9,905 |   |   | (9.2 | ) |   |   | 9.4 |   |   |
| Voice-wholesale revenues                    |       | 18,089                                     |       | 18,479                                     |       | 18,161 |   |   | 2.2 |   |   |   | (1.7 | ) |   |
| Voice revenues  total                       |       | 206,426                                    |       | 180,634                                    |       | 161,511 |   |   | (12.5 | ) |   |   | (10.6 | ) |   |
| Internet broadband                          |       | 17,441                                     |       | 28,295                                     |       | 39,548 |   |   | 62.2 |   |   |   | 39.8 |   |   |
| Internet narrowband, content and other      |       | 11,192                                     |       | 8,939                                      |       | 6,253 |   |   | (20.1 | ) |   |   | (30.0 | ) |   |
| Internet revenues  total                    |       | 28,633                                     |       | 37,234                                     |       | 45,801 |   |   | 30.0 |   |   |   | 23.0 |   |   |
| Data                                        |       | 27,642                                     |       | 27,508                                     |       | 27,087 |   |   | (0.5 | ) |   |   | (1.5 | ) |   |
| System  integration/Information technology  |       | 9,154                                      |       | 8,790                                      |       | 24,359 |   |   | (4.0 | ) |   |   | 177.1 |   |   |
| Multimedia                                  |       | 13,364                                     |       | 15,017                                     |       | 17,481 |   |   | 12.4 |   |   |   | 16.4 |   |   |
| Equipment sales                             |       | 5,104                                      |       | 5,530                                      |       | 4,444 |   |   | 8.3 |   |   |   | (19.6 | ) |   |
| Other revenues                              |       | 8,384                                      |       | 10,272                                     |       | 11,510 |   |   | 22.5 |   |   |   | 12.1 |   |   |
| Total fixed segment  revenues               |       | 298,707                                    |       | 284,985                                    |       | 292,193 |   |   | (4.6 | ) |   |   | 2.5 |   |   |

* *

*Subscriptions.**  *Revenues from subscriptions consist of revenues frommonthly subscription fees for price plans. Revenues from subscriptions areprincipally a function of the number and mix of residential, business and ISDNaccess lines and corresponding charges.

Revenues from subscription fees slightly increasedboth in 2005 and 2006 due to higher revenues from customized and supplementaryprice plans at Magyar Telekom Plc. resulting from increased number of customerschoosing these plans. This increase was partly offset by decreased ISDNsubscription fee revenues at Magyar Telekom Plc. as a result of the lowernumber of average ISDN connections and lower tariffs.

Thetable below sets forth information regarding average access lines in ourservice areas:

| ** **                                                                   | ** ** | **Year ended December 31,** | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                   | ** ** | **2004**                                   | ** ** | **2005**                                   | ** ** | **2006** | ** ** | **2005/2004** | ** ** | **2006/2005** | ** ** |
| ** **                                                                   | ** ** | ** **                                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | **(% change)** | ** ** |
| Average access lines in  the service areas of Magyar Telekom Plc. and Emitel |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Residential                                                                  |       | 2,078,089                                  |       | 2,033,397                                  |       | 1,942,260 |   |   | (2.2 | ) |   |   | (4.5 | ) |   |
| Business                                                                     |       | 264,858                                    |       | 255,207                                    |       | 242,192 |   |   | (3.6 | ) |   |   | (5.1 | ) |   |
| Public payphones                                                             |       | 28,966                                     |       | 23,822                                     |       | 21,706 |   |   | (17.8 | ) |   |   | (8.9 | ) |   |
| Total                                                                        |       | 2,371,913                                  |       | 2,312,426                                  |       | 2,206,158 |   |   | (2.5 | ) |   |   | (4.6 | ) |   |
| ISDN channels                                                                |       | 530,622                                    |       | 515,900                                    |       | 493,766 |   |   | (2.8 | ) |   |   | (4.3 | ) |   |
| Total                                                                        |       | 2,902,535                                  |       | 2,828,326                                  |       | 2,699,924 |   |   | (2.6 | ) |   |   | (4.5 | ) |   |

 

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The number of lines decreased both in 2005 and 2006,as a result of migration of customers to mobile services and due to increasedcompetition in the fixed line market.

*Domesticoutgoing traffic revenues.**  *Domesticoutgoing traffic revenues consist of traffic charges for local and domesticlong distance calls placed by our subscribers. Domestic outgoing trafficrevenues are a function of rates, the total number of telephone calls, thedistribution of call duration, the time of day and the mix between more costlydomestic long distance calls and less expensive local calls.

Thefollowing table sets forth the total minutes of domestic telephone traffic thatour Hungarian fixed line subscribers generated, including calls from the fixedline network to mobile subscribers:

| ** **                                                | ** ** | **Year ended December 31,**   | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------------|------------|-----------------------|------------|
| ** **                                                | ** ** | **2004**                                     | ** ** | **2005**              | ** ** | **2006** | ** ** | **2005/2004** | ** ** | **2006/2005** | ** ** |
| ** **                                                | ** ** | **(in thousands of minutes)** | ** ** | **(% change)**   | ** ** |
| Domestic voice  traffic at Magyar Telekom Plc. and Emitel |       | 5,859,967                                    |       | 5,126,455             |       | 5,037,235 |   |   | (12.5 | ) |   |   | (1.7 | ) |   |
|                                                           |            |                                              |            |                       |            |  |  |  |  |  |  |  |  |  |  |

 

Domestic outgoing traffic revenues decreased in 2005as compared to 2004 mainly as a result of decreased fixed line usage due tomobile substitution as well as intensive competition from other fixed lineoperators. The proportion of calls changed unfavorably as well, as the higherpriced long distance and fixed-to-mobile traffic decreased to a greater extentthan local traffic. The decrease in revenue is higher than the decrease intraffic, due to lower average per minute fees. In line with the decision of theNational Regulatory Authority to reduce fixed-to-mobile termination rates, werecorded a reduction in the fixed-to-mobile revenues. The pricediscounts included in different price plans also contributed to lower outgoingdomestic traffic revenues. At the end of December 2005, approximately 66percent of Magyar Telekom Plc.’s customers had chosen customized price plans,the most popular of which were the Felező plan with over 530,000subscribers and the Favorit plan with approximately 325,000 customers.

Domestic outgoing traffic revenues decreased in 2006as compared to 2005 mainly as a result of lower average per minute fees andloss of fixed line customers mainly owing to competition from other fixed lineservice providers and mobile substitution. Both Magyar Telekom Plc. and Emiteloffered several price discounts to customers choosing different price plans.Customized price plans represented 83.4% of the lines at Magyar Telekom Plc. atDecember 31, 2006. The most popular of these plans were the Favorit planswith almost 550,000 subscribers, but our Felező plan also gained approximately539,000 subscribers by the end of 2006.

*Internationaloutgoing traffic revenues.*   Internationaloutgoing traffic revenues are a function of rates and the number, duration andmix of calls to destinations outside Hungary placed by our fixed linesubscribers.

Thefollowing table sets forth information concerning outgoing internationaltraffic:

| ** **                                                           | ** ** | **Year ended December 31,**   | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                           | ** ** | **2004**                                     | ** ** | **2005**                                   | ** ** | **2006** | ** ** | **2005/2004** | ** ** | **2006/2005** | ** ** |
| ** **                                                           | ** ** | **(in thousands of minutes)** | ** ** | **(% change)**                        | ** ** |
| International  outgoing traffic at Magyar Telekom Plc. and Emitel(1) |       | 133,773                                      |       | 113,315                                    |       | 98,723 |   |   | (15.3 | ) |   |   | (12.9 | ) |   |
|                                                                      |            |                                              |            |                                            |            |  |  |  |  |  |  |  |  |  |  |

----

(1)                 Excludes minutesfrom calls placed by subscribers of other local telephone operators and mobileservice providers. Our revenues relating to these calls are included inrevenues from domestic incoming traffic.

In 2005 and 2006, international outgoing trafficrevenues decreased primarily as a result of lower usage due to the relativelyhigh number of international calls placed by mobile subscribers and the rapidgrowth of private leased lines. The decrease also resulted from rate decreasesdue to various discounts provided to subscribers of optional price plans.

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*Valueadded, cable voice and other services.**  *Revenues from value added, cable voice and otherservices consist of revenues from connection fees, fees for digifon services,rental charges for telephones and private branch exchanges as well as cable TVvoice subscription fees.

Value added, cable voice and other services revenuesshowed a decrease both in 2005 and 2006 principally due to lower amortizationof deferred revenues as amortization of connection fees collected ten years agostarted to run out. In 2005, lower value-added services relating to Sulinettogether with decreased PBX revenues at BCN Rendszerház Kft. also reducedrevenues from other services.

These decreases were partly compensated by higherrevenues from cable TV voice subscription fees reflecting strong increase inthe number of VoCATV subscribers in 2006 as compared to 2005.

*Domesticincoming traffic revenues.**  *Domesticincoming traffic revenues include amounts related to domestic and internationallong distance services that we provide to other LTO or mobile customers. Incomingdomestic traffic revenues increased in 2005 as compared to 2004 primarily as aresult of higher LTO call origination and call termination traffic in line withthe increased customer base of other fixed line service providers, partlyoffset by lower LRIC-based interconnection rates introduced on June 15,2004. These increases were partly offset by decreased incoming domestic trafficrevenues from mobile operators at Magyar Telekom Plc. resulting from lowertraffic as well as lower interconnection rates mainly in mobile tointernational calls.

Domestic incoming traffic revenues decreased in 2006as compared to 2005 due to lower traffic revenues from LTOs at Magyar TelekomPlc. due to the application of the new RIO prices based on NCA decision from June 2006and applied retrospectively since September 2005. Revenues from callorigination and call termination also declined as a result of lower RIO fees,partly offset by higher volume of traffic.

*Internationalincoming traffic revenues.**  *Internationalincoming traffic revenues consist of amounts paid by foreign carriers for theuse of our network to carry calls placed by their customers.

Thefollowing table sets forth information concerning international incomingtraffic:

| ** **                         | ** ** | **Year ended December 31,**   | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                         | ** ** | **2004**                                     | ** ** | **2005**                                   | ** ** | **2006** | ** ** | **2005/2004** | ** ** | **2006/2005** | ** ** |
| ** **                         | ** ** | **(in thousands of minutes)** | ** ** | **(% change)**                        | ** ** |
| International  incoming traffic(1) |       | 288,564                                      |       | 295,405                                    |       | 316,183 |   |   | 2.4 |   |   |   | 7.0 |   |   |
|                                    |            |                                              |            |                                            |            |  |  |  |  |  |  |  |  |  |  |

----

(1)                 Includes minutesfrom calls transited by Magyar Telekom Plc. and terminating with subscribers ofMagyar Telekom Plc, other local telephone operators and mobile serviceproviders. Does not include transit traffic and other international servicesvia Hungary.

International incoming traffic revenues decreased in2005 as compared to 2004 principally driven by the lower HUF/SDR averageexchange rates. The volume of incoming international traffic somewhat increasedas higher traffic terminated in Magyar Telekom Plc. and LTO areas was onlypartly offset by lower mobile terminated international traffic transited byMagyar Telekom Plc. (due to the migration of international calls to mobilenetworks).

International incoming traffic revenues increased in2006 as compared to 2005 due to higher revenues at Magyar Telekom Plc.resulting from the increased volume of international incoming traffic andhigher HUF/EUR average exchange rate, partly offset by lower average EURsettlement rates.

*Internetbroadband.*   Revenues from Internet broadbandservices increased in both 2005 and 2006 as a result of significant growth inthe number of Internet subscribers, ADSL and cable TV customers. The proportionof higher revenue generating broadband Internet customers significantly grewwithin the customer base, which also contributed to the revenue growth. By theend of 2006, the total number of our broadband connections exceeded 572,000 in the Hungarian fixed lineoperations.

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*Internet narrowband.*   Revenuesfrom Internet narrowband services decreased in both 2005 and 2006 reflectingthe decrease in the volume of Internet dial-up traffic and lower number ofInternet dial-up subscribers.

| ** **                      | ** ** | **Year ended December 31,** | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                      | ** ** | **2004**                                   | ** ** | **2005**                                   | ** ** | **2006** | ** ** | **2005/2004** | ** ** | **2006/2005** | ** ** |
| ** **                      | ** ** | ** **                                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | **(% change)** | ** ** |
| ADSL connections                |       | 205,886                                    |       | 329,314                                    |       | 512,810 |   |   | 59.9 |   |   |   | 55.7 |   |   |
| Number of  Internet subscribers |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Dial-up                         |       | 111,638                                    |       | 80,938                                     |       | 31,401 |   |   | (27.5 | ) |   |   | (61.2 | ) |   |
| Leased line                     |       | 907                                        |       | 751                                        |       | 656 |   |   | (17.2 | ) |   |   | (12.6 | ) |   |
| DSL                             |       | 137,910                                    |       | 218,954                                    |       | 336,181 |   |   | 58.8 |   |   |   | 53.5 |   |   |
| W-LAN                           |       | 1,153                                      |       | 1,467                                      |       | 1,175 |   |   | 27.2 |   |   |   | (19.9 | ) |   |
| CATV                            |       | 14,412                                     |       | 26,425                                     |       | 57,587 |   |   | 83.4 |   |   |   | 117.9 |   |   |
| Total                           |       | 266,020                                    |       | 328,535                                    |       | 427,000 |   |   | 23.5 |   |   |   | 30.0 |   |   |

 

*Data.**  *Revenues from data transmission services slightlydecreased both in 2005 and 2006 mainly driven by lower narrowband retailrevenues, partly offset by higher broadband data retail revenues (mainly HSLL)and higher broadband IP revenue at Magyar Telekom Plc.

*Systemintegration/Information technology.*   Systemintegration (“SI”) and Information technology (“IT”) revenues decreased in 2005as compared to 2004 primarily driven by lower revenues at X-Byte. In 2006, thestrong increase in SI and IT revenues resulted mainly from the consolidation ofKFKI and Dataplex revenues since their acquisitions in 2006. The increasednumber of SI/IT service projects at Magyar Telekom Plc. and BCN also hadpositive effects on revenues. The most significant projects were the outsourcingservices provided to E.ON and Erste Bank, set-up of low current systems as wellas SI and IT solutions provided to the Hungarian government (E-Közmű).

*Multimedia.**  *Multimedia revenues increased both in 2005 and 2006mainly due to the growth in cable TV revenues resulting from the increase inthe average number of cable TV subscribers and price increases.

| ** **                  | ** ** | **Year ended December 31,** | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                  | ** ** | **2004**                                   | ** ** | **2005**                                   | ** ** | **2006** | ** ** | **2005/2004** | ** ** | **2006/2005** | ** ** |
| ** **                  | ** ** | ** **                                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | **(% change)** | ** ** |
| Cable television  customers |       | 383,904                                    |       | 403,631                                    |       | 414,286 |   |   | 5.1 |   |   |   | 2.6 |   |   |
|                             |            |                                            |            |                                            |            |  |  |  |  |  |  |  |  |  |  |

 

*Equipmentsales.**  *Revenuesfrom telecommunications equipment sales increased in 2005 as compared to 2004due to the higher amount of equipment sold at Magyar Telekom Plc. duringmarketing campaigns and also due to increased sales of BCN Rendszerház Kft. In2006, equipment sales revenue showed a decrease due to lower rental fees oftelecommunications equipment and decreased PBX charges at Magyar Telekom Plc.

*Otherrevenues.**  *Otherrevenues include construction, maintenance, rental, wholesale infrastructureservice and miscellaneous revenues.

Other revenues increasedin both 2005 and 2006 mainly as a result higher amount of fees paid for realestate rental and IT services by DeTeImmobilien to Magyar Telekom Plc.

71

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**International FixedLine Operations**

The results of the international fixed line operationsinclude our foreign subsidiaries, other than T-Mobile Macedonia andT-Mobile Crna Gora.

The following table setsforth information regarding international fixed line revenues:

| ** **                                  | ** ** | **Year ended December 31,** | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                  | ** ** | **2004**                                   | ** ** | **2005**                                   | ** ** | **2006** | ** ** | **2005/2004** | ** ** | **2006/2005** | ** ** |
| ** **                                  | ** ** | ** **                                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | **(% change)** | ** ** |
| Subscriptions                               |       | 9,359                                      |       | 10,317                                     |       | 11,611 |   |   | 10.2 |   |   |   | 12.5 |   |   |
| Domestic outgoing traffic revenues          |       | 16,076                                     |       | 19,794                                     |       | 20,696 |   |   | 23.1 |   |   |   | 4.6 |   |   |
| International outgoing traffic revenues     |       | 3,768                                      |       | 4,322                                      |       | 4,744 |   |   | 14.7 |   |   |   | 9.8 |   |   |
| Value added, cable voice and other services |       | 1,464                                      |       | 1,489                                      |       | 1,782 |   |   | 1.7 |   |   |   | 19.7 |   |   |
| Voice-retail revenues                       |       | 30,667                                     |       | 35,922                                     |       | 38,833 |   |   | 17.1 |   |   |   | 8.1 |   |   |
| Domestic incoming traffic revenues          |       | 2,042                                      |       | 4,414                                      |       | 5,749 |   |   | 116.2 |   |   |   | 30.2 |   |   |
| International incoming traffic revenues     |       | 6,437                                      |       | 7,885                                      |       | 11,335 |   |   | 22.5 |   |   |   | 43.8 |   |   |
| Voice-wholesale revenues                    |       | 8,479                                      |       | 12,299                                     |       | 17,084 |   |   | 45.1 |   |   |   | 38.9 |   |   |
| Voice revenues  total                       |       | 39,146                                     |       | 48,221                                     |       | 55,917 |   |   | 23.2 |   |   |   | 16.0 |   |   |
| Internet broadband                          |       | 730                                        |       | 1,536                                      |       | 2,529 |   |   | 110.4 |   |   |   | 64.6 |   |   |
| Internet narrowband, content and other      |       | 1,001                                      |       | 1,167                                      |       | 1,516 |   |   | 16.6 |   |   |   | 29.9 |   |   |
| Internet revenues  total                    |       | 1,731                                      |       | 2,703                                      |       | 4,045 |   |   | 56.2 |   |   |   | 49.6 |   |   |
| Data                                        |       | 3,046                                      |       | 5,224                                      |       | 6,633 |   |   | 71.5 |   |   |   | 27.0 |   |   |
| System  integration/Information technology  |       | 296                                        |       | 257                                        |       | 385 |   |   | (13.2 | ) |   |   | 49.8 |   |   |
| Multimedia                                  |       | 0                                          |       | 20                                         |       | 52 |   |   | n.a. |   |   |   | 160.0 |   |   |
| Equipment sales                             |       | 181                                        |       | 178                                        |       | 349 |   |   | (1.7 | ) |   |   | 96.1 |   |   |
| Other revenues                              |       | 1,293                                      |       | 1,380                                      |       | 1,572 |   |   | 6.7 |   |   |   | 13.9 |   |   |
| Total fixed segment  revenues               |       | 45,693                                     |       | 57,983                                     |       | 68,953 |   |   | 26.9 |   |   |   | 18.9 |   |   |

 

Total revenues of the international fixed lineoperations were strongly affected by the inclusion of T-Com Crna Gora’srevenues from the second quarter of 2005. In 2005, total revenues frominternational fixed line operations decreased by 2.6 percent without theconsolidation of T-Com Crna Gora. In 2006, the depreciation of HUF against MKDand EUR had significant effect on the revenue increase of Maktel and T-Com CrnaGora.

*Subscriptions.**  *Revenues from subscriptions increased both in 2005and 2006, mainly as a result of the additional revenues due to theconsolidation of T-Com Crna Gora. In 2005, this increase was partly offset bylower PSTN subscription fees at Maktel, reflecting the lower average number ofcustomers and higher number of disconnected lines. In 2006, higher subscriptionrevenues at Maktel resulted from increased tariffs as rates rebalancingoccurred in August 2005, partly compensated by lower average number ofcustomers.

*Domesticoutgoing traffic revenues.*   Domestic outgoingtraffic revenues showed an increase both in 2005 and 2006 due to theconsolidation of T-Com Crna Gora’s revenues. The increase was partly offset bylower revenues at Maktel as a result of decreased usage, partly compensated byprice increases in August 2005.

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*Internationaloutgoing traffic revenues.**  *Internationaloutgoing traffic revenue increased in 2005 and 2006 due to the inclusion ofT-Com Crna Gora’s revenues, partly offset by lower revenues at Maktel,reflecting decreased volume of traffic and lower prices.

*Valueadded, cable voice and other services.**  *Value added, cable voice and other services revenuesshowed an increase both in 2005 and 2006. In 2006, the strong increase was dueto higher premium rate revenues relating to TV quiz shows at T-Com Crna Gora.

*Domesticincoming traffic revenues.**  *Domesticincoming traffic revenue increased significantly both in 2005 and 2006 mainlydue to the consolidation of T-Com Crna Gora’s revenues. In 2005, this increasewas partly compensated by decreased domestic incoming traffic revenue at Maktelas a result of lower traffic from T-Mobile Macedonia and lower interconnectionfees. In 2006, lower domestic incoming revenue at Maktel was principally due tolower interconnection fees of international calls, partly compensated byincreased traffic from Cosmofon in line with its increased subscriber base.

*Internationalincoming traffic revenues.**  *Internationalincoming traffic revenue increased in 2005 as compared to 2004 reflecting theconsolidation of T-Com Crna Gora’s revenues. This increase was mitigated bydecreased incoming international revenues at Maktel as a result of loweraverage settlement rates and stronger MKD against the SDR. Higher internationalincoming traffic revenue in 2006 was primarily attributable to increased amountof international incoming minutes resulting from the restricted illegal VoIPtraffic at Maktel. The revenue increase was also due to the inclusion of T-ComCrna Gora’s full year revenues.

*Internet.**  *Revenues from Internet services increased in both2005 and 2006 because of significantly higher number of ADSL subscribers aswell as increased average number of Internet customers at Maktel. In 2006, theincrease in Internet revenues was also helped by the strong increase in thenumber of ADSL subscribers at T-Com Crna Gora.

| ** **                      | ** ** | **Year ended December 31,** | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                      | ** ** | **2004**                                   | ** ** | **2005**                                   | ** ** | **2006** | ** ** | **2005/2004** | ** ** | **2006/2005** | ** ** |
| ** **                      | ** ** | ** **                                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | **(% change)** | ** ** |
| ADSL connections                |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Maktel                          |       | 2,447                                      |       | 7,798                                      |       | 16,462 |   |   | 218.7 |   |   |   | 111.1 |   |   |
| T-Com Crna Gora                 |       | n.a.                                       |       | 1,085                                      |       | 6,639 |   |   | n.a. |   |   |   | 511.9 |   |   |
| Number of  Internet subscribers |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Maktel                          |       | 67,391                                     |       | 91,865                                     |       | 125,699 |   |   | 36.3 |   |   |   | 36.8 |   |   |
| T-Com Crna Gora                 |       | n.a.                                       |       | 26,796                                     |       | 32,429 |   |   | n.a. |   |   |   | 21.0 |   |   |

 

*Data.*   Datatransmission revenues grew both in 2005 and in 2006 primarily resulting fromthe consolidation of T-Com Crna Gora’s revenues.

*Equipmentsales.**  *Revenuesfrom telecommunications equipment sales decreased in 2005 due to fewerphonesets sold and the lower average price of phonesets at Maktel. In 2006,higher equipment sales revenues resulted from the higher amount of equipmentsold at Maktel during marketing campaigns.

*Other revenues.**  *Other revenues increased in both 2005 and 2006 mainlyas a result of the inclusion of T-Com Crna Gora’s revenues.

73

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***Operating Expenses***

**Hungarian FixedLine Operations**

The following table setsforth information regarding operating expenses of Hungarian fixed lineoperations:

| ** **                          | ** ** | **Year ended December 31,** | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **2004**                                   | ** ** | **2005**                                   | ** ** | **2006** | ** ** | **2005/2004** | ** ** | **2006/2005** | ** ** |
| ** **                          | ** ** | **(in HUF millions)**            | ** ** | **(% change)**                        | ** ** |
| Operating expenses:                 |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Employee-related expenses           |       | 78,744                                     |       | 58,108                                     |       | 59,801 |   |   | (26.2 | ) |   |   | 2.9 |   |   |
| Depreciation and amortization       |       | 72,547                                     |       | 61,290                                     |       | 62,397 |   |   | (15.5 | ) |   |   | 1.8 |   |   |
| Payments to other network operators |       | 50,375                                     |       | 38,185                                     |       | 32,276 |   |   | (24.2 | ) |   |   | (15.5 | ) |   |
| Cost of telecomm. equipment         |       | 3,723                                      |       | 3,990                                      |       | 6,332 |   |   | 7.2 |   |   |   | 58.7 |   |   |
| Other operating expenses—net   |       | 75,377                                     |       | 78,143                                     |       | 99,259 |   |   | 3.7 |   |   |   | 27.0 |   |   |
| Total                               |       | 280,766                                    |       | 239,716                                    |       | 260,065 |   |   | (14.6 | ) |   |   | 8.5 |   |   |

 

*Employee-relatedexpenses.**  *Employee-relatedexpenses consist of wages and salaries, social security and other expenses.Employee-related expenses decreased in 2005 as a result of significantly lowerseverance provisions and expenses at Magyar Telekom Plc. as well as a decreasein average headcount. This decrease was partly offset by a 5.6 percent averagewage increase for employees of Magyar Telekom Plc. in April 2005.

In 2006, employee-related expenses increased mainlydue to the inclusion of new subsidiaries (e.g., Dataplex, KFKI). Higherseverance expenses of Magyar Telekom Plc. also contributed to the increase.

*Depreciationand amortization.**  *Depreciationand amortization decreased in 2005 as compared to 2004 due to the HUF 5,355million impairment losses recorded on our tangible fixed assets and scrappingof certain fixed assets in the Hungarian fixed line operations. In 2006, thesmall increase in depreciation and amortization expenses was driven by theinclusion of newly acquired subsidiaries (e.g., Dataplex, KFKI) and higherdepreciation of intangible assets due to the capitalization of service rightsrelating to the Electronic Governmental Backbone Network at Magyar Telekom Plc.

*Paymentsto other network operators.*   Payments to othernetwork operators include amounts paid to mobile operators, other local fixedline telephone operators and to foreign telephone operators for callsterminated on their network. In 2005 and 2006, payments to domestic networkoperators decreased because of lower traffic transited through Magyar TelekomPlc. and lower fixed-to-mobile termination rates. In 2005, interconnectiontraffic between Magyar Telekom Plc. and the LTOs increased significantly, butthe traffic increase was offset by lower LRIC-based rates. In 2006, MagyarTelekom Plc.’s outpayments to LTOs decreased driven by lower RIO fees based onNCA decision from June 2006 and applied retrospectively since September 2005,partly compensated by higher interconnection traffic. Payments to foreignnetwork operators decreased in 2005 mainly due to lower international traffic.Payments to foreign network operators increased in 2006 primarily due to higherHUF/EUR exchange rates, partly offset by lower international settlement ratesand decreased international traffic.

*Costof telecommunications equipment.**  *Costof telecommunications equipment increased both in 2005 and 2006. In 2005, thegrowth mainly resulted from the increased sales of phonesets as part of theFavorit campaigns at Magyar Telekom Plc. In 2006, the significantly higher costof equipment resulted from various network construction and system integrationtenders at Magyar Telekom Plc. Higher sales at BCN Rendszerház Kft. as well asthe inclusion of KFKI also contributed to the increase.

*Otheroperating expenses—net.**  *In2005, other net operating expenses increased due to higher subcontractor’s feesat Magyar Telekom Plc. as a result of increased commissions related to priceplans 

74

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sold both in LTOs’ andMagyar Telekom Plc.’s service areas. In 2005, other expenses included HUF 1,344million paid under two consulting contracts entered into by Magyar TelekomPlc., as to which it had not been able to obtain sufficient evidence that it orits subsidiaries received adequate value. This amount also included the taximplications of the payments as well. See “Item 15—Controls and Procedures”.

In 2006, the significantgrowth in other net operating expenses was due to higher fees for outsourcingservices (e.g., real estate management, transportation, customer service andinformatics) as well as higher expenses in connection with various projects.The increase in materials and maintenance fees was driven by the consolidationof new subsidiaries such as Dataplex and KFKI. Non-rebranding related marketingexpenses increased significantly as well at Magyar Telekom Plc., due to moreintensive advertising activity in 2006. Other operating expenses—net included aHUF 4.1 billion one-off item, which included the expenses Magyar Telekomincurred relating to the ongoing investigation.

**International FixedLine Operations**

Thefollowing table sets forth information regarding operating expenses ofinternational fixed line operations:

| ** **                          | ** ** | **Year ended December 31,** | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **2004**                                   | ** ** | **2005**                                   | ** ** | **2006** | ** ** | **2005/2004** | ** ** | **2006/2005** | ** ** |
| ** **                          | ** ** | **(in HUF millions)**            | ** ** | **(% change)**                        | ** ** |
| Operating expenses:                 |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Employee-related expenses           |       | 10,502                                     |       | 11,657                                     |       | 13,239 |   |   | 11.0 |   |   |   | 13.6 |   |   |
| Depreciation and amortization       |       | 9,114                                      |       | 10,604                                     |       | 12,677 |   |   | 16.3 |   |   |   | 19.5 |   |   |
| Payments to other network operators |       | 10,628                                     |       | 13,932                                     |       | 17,943 |   |   | 31.1 |   |   |   | 28.8 |   |   |
| Cost of telecomm. equipment         |       | 344                                        |       | 377                                        |       | 621 |   |   | 9.6 |   |   |   | 64.7 |   |   |
| Other operating expenses—net   |       | 8,081                                      |       | 12,452                                     |       | 12,981 |   |   | 54.1 |   |   |   | 4.2 |   |   |
| Total                               |       | 38,669                                     |       | 49,022                                     |       | 57,461 |   |   | 26.8 |   |   |   | 17.2 |   |   |

 

In 2005, total operating expenses from internationalfixed line operations decreased by 6.9 percent without the consolidation ofT-Com Crna Gora. In 2006, the weaker HUF against MKD and EUR had significanteffect on the expenses of Maktel and T-Com Crna Gora.

*Employee-relatedexpenses.**  *Employee-relatedexpenses increased both in 2005 and in 2006, mainly as a result of theconsolidation of T-Com Crna Gora’s expenses. The increase was partly offset bydecreased severance provisions and expenses at Maktel relating to the headcountrationalization. In 2006, higher employee-related expenses at T-Com Crna Goraresulted primarily from the severance provision recognized in connection withthe headcount reduction program.

*Depreciationand amortization.**  *Depreciationand amortization expense increased both in 2005 and 2006 reflecting theconsolidation of T-Com Crna Gora’s expenses. In 2005, this increase was partlycompensated by lower expenses at Maktel because of the cessation of goodwillamortization from January 1, 2005. In 2006, the impairment of TCG andInternet CG brandnames in connection with the rebranding in Montenegro in September 2006also contributed to higher expenses, partly offset by the decrease at Maktel inline with lower gross additions to tangible and intangible assets and highernumber of fully amortized assets.

*Paymentsto other network operators.**  *Paymentsto other network operators increased in 2005 as compared to 2004 due to theinclusion of T-Com Crna Gora’s expenses. This increase was partly offset bydecreased payments at Maktel to T-Mobile Macedonia due to lower volume oftraffic, which was partly compensated by increased outpayments to the secondmobile telecommunications service provider, Cosmofon, as a result of itsincreased mobile subscriber base. Lower international outpayments at Maktelwere due to decreased traffic and the stronger MKD against the SDR.

75

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Payments to other network operators increased in 2006as compared to 2005 primarily due to the inclusion of Orbitel’s expenses andhigher outpayments by Combridge. The longer consolidation period of T-Com CrnaGora (12 months in 2006 as opposed to nine months in 2005) also increased theoutpayments. The increase was also attributable to Maktel’s increased mobileoutpayments to Cosmofon, partly offset by lower international outpayments dueto decreased outgoing minutes, lower international average settlement rates aswell as the lower MKD/SDR exchange rate.

*Costof telecommunications equipment.**  *Costof telecommunications equipment increased both in 2005 and 2006. In 2005, thegrowth mainly resulted from the consolidation of T-Com Crna Gora, while in2006, the significantly higher cost of equipment was due to the inclusion ofOrbitel.

*Otheroperating expenses—net.**  *Otheroperating expenses showed a considerable increase in 2005 due to theconsolidation of T-Com Crna Gora’s expenses. In 2005, other expenses includeHUF 144 million paid under a consulting contract entered into by T-Com CrnaGora, as to which the Company has not been able to obtain sufficient evidencethat it or its subsidiaries received adequate value. This amount also includesthe tax implications of the payments as well. See “Item 15—Controls andProcedures”.

In 2006, higher other netoperating expenses resulted from increased expenses at Combridge and Novatel aswell as the inclusion of Orbitel.

***Operating Profit***

**Hungarian FixedLine Operations**

Thefollowing table sets forth information concerning operating profit andoperating margin for the Hungarian fixed line operations:

| ** **                          | ** ** | **Year ended December 31,** | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **2004**                                   | ** ** | **2005**                                   | ** ** | **2006** | ** ** | **2005/2004** | ** ** | **2006/2005** | ** ** |
| ** **                          | ** ** | ** **                                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | **(% change)** | ** ** |
| Operating profit  (in HUF millions) |       | 17,941                                     |       | 45,269                                     |       | 32,128 |   |   | 152.3 |   |   |   | (29.0 | ) |   |
| Operating margin (%)(1)             |       | 6.0                                        |       | 15.9                                       |       | 11.0 |   |   | n.a. |   |   |   | n.a. |   |   |

----

(1)                 Operating marginis the ratio of operating profit to revenue, expressed as a percentage.

In 2005, operating profitsignificantly increased by 152.3 percent mainly as a result of decreasedseverance provisions and expenses, lower payments to other network operators,lower amount of depreciation and amortization and higher Internet revenues.These favorable movements were partly offset by lower traffic revenues andincreased other net operating expenses. In 2006, operating profit declined by 29.0percent, mainly as a result of significantly higher other net operatingexpenses, higher cost of equipment and decrease in traffic revenues. Thesenegative effects on operating profit were partly compensated by the strongincrease in SI and IT revenues as well as higher Internet revenues.

**International FixedLine Operations**

Thefollowing table sets forth information concerning operating profit andoperating margin for the International fixed line operations:

| ** **                          | ** ** | **Year ended December 31,** | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **2004**                                   | ** ** | **2005**                                   | ** ** | **2006** | ** ** | ** 2005/2004 ** | ** ** | ** 2006/2005 ** | ** ** |
| ** **                          | ** ** | ** **                                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | **(% change)** | ** ** |
| Operating profit  (in HUF millions) |       | 7,024                                      |       | 8,961                                      |       | 11,492 |   |   | 27.6 |   |   |   | 28.2 |   |   |
| Operating margin (%)(1)             |       | 15.4                                       |       | 15.5                                       |       | 16.7 |   |   | n.a. |   |   |   | n.a. |   |   |

----

(1)                 Operating marginis the ratio of operating profit to revenue, expressed as a percentage.

76

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Operating profit increasedby 27.6 percent in 2005 as the increase in total revenues was higher than theincrease in total operating expenses. Total revenues mainly increased due tohigher domestic incoming revenues and higher Internet and data revenues. Operatingprofit increased by 28.2 percent in 2006 due to higher increase in revenuescompared to the increase in total operating expenses. Total revenues mainlyincreased due to higher international incoming traffic revenues and higherinternet and data revenues.

***MobileTelecommunications Segment***

Mobile telecommunicationssegment includes TMH, Pro-M, T-Mobile Macedonia and T-Mobile Crna Gora.

***Revenues***

Revenues from the mobiletelecommunications segment consist of one-time connection fees, monthlysubscription fees (only payable by postpaid customers), traffic charges,including fees for enhanced services, and equipment sales.

**Hungarian MobileOperations**

The results of the Hungarian mobile operations includeTMH and Pro-M.

Thefollowing table sets forth information regarding revenues from Hungarian mobileoperations:

| ** **                | ** ** | **Year ended December 31,** | ** ** | **Year ended December 31,** | ** ** |
|---------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                | ** ** | **2004**                                   | ** ** | **2005**                                   | ** ** | **2006** | ** ** | ** 2005/2004 ** | ** ** | ** 2006/2005 ** | ** ** |
| ** **                | ** ** | **(in HUF millions)**            | ** ** | **(% change)**                        | ** ** |
| Network usage and  access |       | 208,361                                    |       | 211,360                                    |       | 216,658 |   |   | 1.4 |   |   |   | 2.5 |   |   |
| Enhanced services         |       | 26,779                                     |       | 31,876                                     |       | 35,110 |   |   | 19.0 |   |   |   | 10.1 |   |   |
| Equipment sales           |       | 22,965                                     |       | 21,021                                     |       | 22,286 |   |   | (8.5 | ) |   |   | 6.0 |   |   |
| Activation fees           |       | 676                                        |       | 697                                        |       | 741 |   |   | 3.1 |   |   |   | 6.3 |   |   |
| Other revenues            |       | 1,787                                      |       | 1,263                                      |       | 22,414 |   |   | (29.3 | ) |   |   | 1,674.7 |   |   |
| Total                     |       | 260,568                                    |       | 266,217                                    |       | 297,209 |   |   | 2.2 |   |   |   | 11.6 |   |   |

 

Thefollowing table provides information concerning subscribers of mobiletelecommunications services and monthly usage of the network at TMH:

| ** **                                                                 | ** ** | **Year ended December 31,** | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                 | ** ** | **2004**                                   | ** ** | **2005**                                   | ** ** | **2006** | ** ** | ** 2005/2004 ** | ** ** | ** 2006/2005 ** | ** ** |
| ** **                                                                 | ** ** | ** **                                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | **(% change)** | ** ** |
| Average number of  subscribers                                             |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| TMH                                                                        |       | 3,906,319                                  |       | 4,077,521                                  |       | 4,270,324 |   |   | 4.4 |   |   |   | 4.7 |   |   |
| Average monthly  usage per                                                 |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| TMH subscriber (minutes).                                                  |       | 115                                        |       | 127                                        |       | 142 |   |   | 10.4 |   |   |   | 11.8 |   |   |
| ARPU in HUF                                                                |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| TMH subscriber                                                             |       | 4,892                                      |       | 4,832                                      |       | 4,800 |   |   | (1.2 | ) |   |   | (0.7 | ) |   |
| Postpaid TMH subscriber                                                    |       | 11,712                                     |       | 10,838                                     |       | 9,849 |   |   | (7.5 | ) |   |   | (9.1 | ) |   |
| Prepaid TMH subscriber                                                     |       | 2,352                                      |       | 2,239                                      |       | 2,300 |   |   | (4.8 | ) |   |   | 2.7 |   |   |
| Enhanced services within ARPU in HUF                                       |       | 559                                        |       | 621                                        |       | 667 |   |   | 11.1 |   |   |   | 7.4 |   |   |
| Average  subscriber acquisition cost (“SAC”) per customer in HUF |       | 10,275                                     |       | 7,062                                      |       | 6,234 |   |   | (31.3 | ) |   |   | (11.7 | ) |   |

 

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*Networkusage and access.*   Revenues from network usageand access increased both in 2005 and 2006 principally as a result of thegrowth in the average monthly usage per subscriber, and, to a lesser extent,due to the higher number of subscribers. The average number of TMH subscribersgrew by 4.4 percent in 2005 and 4.7 percent in 2006. TMH continuously monitorsits churn rates and proactively offers tailor-made discounts to retainvaluable customers. While the penetration growth of mobile customers has sloweddown in Hungary, TMH maintained its leading position with a 44.5 percent marketshare at December 31, 2006.

Prepaid customers represented 65.1 percent of totalTMH customers at December 31, 2006 as compared to 68.4 percent at the endof 2005. The proportion of prepaid customers decreased as many of them migratedto more favorable, for example flat rate, postpaid price plans.

TMH’s average usage per customer per month measured inMOU increased by 11.8 percent from 127 minutes in 2005 to 142 minutes in2006. The ARPU slightly decreased from HUF 4,832 in 2005 to HUF 4,800 in 2006as the proportion of calls within the TMH network with lower per minute feesincreased.

The increase in revenue was partly offset by thedecrease in fixed-to-mobile termination fees. Pursuant to the relevantprovisions of Decree 9/2003 and Decree 10/2003, issued by the Ministry ofInformatics and Communications at the end of June 2003 and also inaccordance with the decision of the Telecommunications Arbitration Councilpublished on July 8, 2003 with regards to the regulation of interconnectcharges applicable by TMH for fixed-to-mobile calls terminating on its network,the relevant interconnect charges were required to be reduced by 10 percentfrom September 1, 2003. In May 2004, the NCA ordered TMH to furtherreduce its interconnection fees by an average of 8.8 percent from June 15,2004. In August 2005, a further NCA decree was released, which resulted inadditional decrease in fixed-to-mobile termination rates with aretroactive effect from May 25, 2005.

*Enhancedservices.**  *Withinthe mobile telecommunications services, enhanced services show 19 percentgrowth in 2005 and 10.1 percent growth in 2006 at TMH. Enhanced servicesrepresented approximately 12 percent of TMH’s total revenues in 2006. Thisrevenue is primarily from fees charged for short message services andmultimedia messaging services. The strong revenue growth in 2005 is due to theincreasing proportion of content messages with higher rates, and also due tohigher access (data, Internet, GPRS, etc.) revenues. In 2006, higher enhancedservices revenue resulted partly from the increased number of SMS and MMS andpartly from higher access revenues.

*Equipmentsales.**  *Equipmentsales decreased in 2005 in the Hungarian mobile operations due to lower averageprice of phonesets, which was partly compensated by higher gross additions tocustomers as well as a higher number of phoneset upgrades. In 2006, theincrease in equipment sales revenue reflects higher average handset prices andhigher gross additions.

Average acquisition cost per customer fell by 11.7percent to HUF 6,234 in 2006 from HUF 7,062 a year earlier at TMH. Whencalculating subscriber acquisition cost, TMH includes the connection margin(activation fee less the SIM card cost), the sales related equipment subsidyand agent fee.

*Other revenues.**  *In 2006, the significant increase in other revenuesreflects Pro-M’s operations. Pro-M’s EDR activities contributed HUF 18.0billion to total Hungarian mobile revenues and a similar amount to cost ofequipment sales.

**InternationalMobile Operations**

The results of the international mobile operationsinclude T-Mobile Macedonia and T-Mobile Crna Gora.

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Thefollowing table sets forth information regarding international mobile revenues:

| ** **                | ** ** | **Year ended December 31,** | ** ** | **Year ended December 31,** | ** ** |
|---------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                | ** ** | **2004**                                   | ** ** | **2005**                                   | ** ** | **2006** | ** ** | ** 2005/2004 ** | ** ** | ** 2006/2005 ** | ** ** |
| ** **                | ** ** | **(in HUF millions)**            | ** ** | **(% change)**                        | ** ** |
| Network usage and  access |       | 27,421                                     |       | 35,548                                     |       | 43,871 |   |   | 29.6 |   |   |   | 23.4 |   |   |
| Enhanced services         |       | 3,309                                      |       | 4,736                                      |       | 5,882 |   |   | 43.1 |   |   |   | 24.2 |   |   |
| Equipment sales           |       | 2,062                                      |       | 1,843                                      |       | 2,131 |   |   | (10.6 | ) |   |   | 15.6 |   |   |
| Activation fees           |       | 200                                        |       | 149                                        |       | 63 |   |   | (25.5 | ) |   |   | (57.7 | ) |   |
| Other revenues            |       | 742                                        |       | 417                                        |       | 452 |   |   | (43.8 | ) |   |   | 8.4 |   |   |
| Total                     |       | 33,734                                     |       | 42,693                                     |       | 52,399 |   |   | 26.6 |   |   |   | 22.7 |   |   |

 

Thefollowing table provides information concerning subscribers of mobiletelecommunications services and monthly usage of the network at T-MobileMacedonia:

| ** **                                                               | ** ** | **Year ended December 31,** | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                               | ** ** | **2004**                                   | ** ** | **2005**                                   | ** ** | **2006** | ** ** | ** 2005/2004 ** | ** ** | ** 2006/2005 ** | ** ** |
| ** **                                                               | ** ** | ** **                                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | **(% change)** | ** ** |
| Average number of  subscribers                                           |       | 629,844                                    |       | 809,691                                    |       | 901,485 |   |   | 28.6 |   |   |   | 11.3 |   |   |
| Average monthly usage per T-Mobile Macedonia subscriber  (minutes). |       | 66                                         |       | 63                                         |       | 72 |   |   | (4.5 | ) |   |   | 14.3 |   |   |
| ARPU in HUF                                                              |       | 3,804                                      |       | 3,065                                      |       | 3,206 |   |   | (19.4 | ) |   |   | 4.6 |   |   |

 

In 2005, total revenues from international mobileoperations increased by 1.6 percent without the consolidation of T-Mobile CrnaGora, partly offset by a 1.0 percent decrease due to the HUF/MKD foreignexchange movements. In 2006, the depreciation of HUF against MKD and EURstrongly contributed to the revenue increase both in the Macedonian andMontenegrin mobile operations.

*Networkusage and access.*   Revenues of the internationalmobile operations increased both in 2005 and 2006. In 2005, the increase wasmainly as a result of the inclusion of T-Mobile Crna Gora’s revenue. In 2006,the strong increase at T-Mobile Macedonia was owing to the higher averagenumber of subscribers and higher MOU, partly offset by lower per minute rates.

Within T-Mobile Macedonia’s subscriber base, prepaidsubscribers represented 81.2 percent of total mobile customers at the end of2006. T-Mobile Macedonia’s MOU increased by 14.3 percent from 63 minutes in2005 to 72 minutes in 2006. The ARPU also increased from HUF 3,065 in 2005 toHUF 3,206 in 2006 as a result of the weakening of HUF against MKD.

T-Mobile Crna Gora had 331,616 subscribers and a 41.2percent market share in the Montenegrin mobile market at the end ofDecember 2006.

*Enhancedservices.**  *Enhancedservices increased over the period mainly due to the consolidation of T-MobileCrna Gora and in 2006, also as a result of increased number of SMSs at T-MobileMacedonia.

*Equipment sales.*   Equipmentsales revenue decreased in 2005 due to the lower average price of mobilehandsets, partly offset by higher gross additions in the Macedonian mobileoperations. In 2006, higher equipment sales revenue was owing to the longerconsolidation period and increased sales during campaigns at T-Mobile CrnaGora.

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***Operating Expenses***

**Hungarian MobileOperations**

Thefollowing table sets forth information regarding operating expenses for theHungarian mobile operations:

| ** **                          | ** ** | **Year ended December 31,** | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **2004**                                   | ** ** | **2005**                                   | ** ** | **2006** | ** ** | ** 2005/2004 ** | ** ** | ** 2006/2005 ** | ** ** |
| ** **                          | ** ** | **(in HUF millions)**            | ** ** | **(% change)**                        | ** ** |
| Operating  expenses:                |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Employee-related expenses           |       | 18,708                                     |       | 20,540                                     |       | 19,185 |   |   | 9.8 |   |   |   | (6.6 | ) |   |
| Depreciation and amortization       |       | 47,571                                     |       | 33,897                                     |       | 36,359 |   |   | (28.7 | ) |   |   | 7.3 |   |   |
| Payments to other network operators |       | 56,564                                     |       | 59,799                                     |       | 64,734 |   |   | 5.7 |   |   |   | 8.3 |   |   |
| Cost of telecomm. equipment         |       | 34,172                                     |       | 29,548                                     |       | 48,822 |   |   | (13.5 | ) |   |   | 65.2 |   |   |
| Other operating expenses—net   |       | 43,846                                     |       | 47,214                                     |       | 52,432 |   |   | 7.7 |   |   |   | 11.1 |   |   |
| Total                               |       | 200,861                                    |       | 190,998                                    |       | 221,532 |   |   | (4.9 | ) |   |   | 16.0 |   |   |

 

*Employee-relatedexpenses.**  *Employee-relatedexpenses increased in 2005 principally as a result of increased wages andwelfare expenses. In 2006, lower employee-related expenses were primarilyattributable to higher personnel expenses capitalized.

*Depreciationand amortization.**  *Depreciationand amortization expenses decreased in 2005 as in accordance with the IFRS 3standard, goodwill relating to acquisitions after March 31, 2004 was notamortized and the amortization of the existing goodwill was discontinued fromJanuary 1, 2005 which caused a HUF 9,540 million decrease in 2005. Thedecrease was also due to the impairment on the Westel brand name booked in2004.

Depreciation and amortization expenses increased in2006 at TMH mainly due to the capitalized UMTS concession and also due to theirhigher gross asset base of telecommunications and IT equipments.

*Paymentsto other network operators.**  *Paymentsto other network operators include amounts paid by TMH to other mobiletelephone operators and to the fixed line telephone operators as well as to theforeign mobile telephone operators for terminating their calls. Payments toother network operators increased in both 2005 and 2006 as a result of thehigher mobile penetration and increased traffic. The increase in 2005 waspartly offset by lower international roaming outpayments as a result offavorable agreements concluded with other mobile operators, mainly with otherT-Mobile companies.

*Costof telecommunications equipment.**  *Costof telecommunications equipment decreased in 2005 as a result of lower averagecost of phonesets at TMH, reflecting the development of a central procurementprocess within the DT Group. The significant growth in the cost of equipment in2006 was due to the EDR activities of Pro-M. Higher cost at TMH was driven by highergross additions and higher average cost of phonesets, partly compensated bylower equipment sales ratio.

*Other operating expenses—net.**  *Other net operating expenses increased both in 2005and 2006. In 2005, the increase mainly resulted from higher agency fees due tohigher commissions paid for new subscribers in line with higher gross additionsto subscribers. In 2006, higher other net operating expenses were mainly drivenby increased concession fees due to the UMTS fee paid by TMH.

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**InternationalMobile Operations**

Thefollowing table sets forth information regarding operating expenses for theinternational mobile operations:

| ** **                          | ** ** | **Year ended December 31,** | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **2004**                                   | ** ** | **2005**                                   | ** ** | **2006** | ** ** | **  2005/2004  ** | ** ** | **2006/2005** | ** ** |
| ** **                          | ** ** | **(in HUF millions)**            | ** ** | **(% change)**                        | ** ** |
| Operating  expenses:                |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Employee-related expenses.          |       | 1,657                                      |       | 2,582                                      |       | 3,138 |   |   | 55.8 |   |   |   | 21.5 |   |   |
| Depreciation and amortization       |       | 8,434                                      |       | 8,894                                      |       | 10,816 |   |   | 5.5 |   |   |   | 21.6 |   |   |
| Payments to other network operators |       | 3,403                                      |       | 5,029                                      |       | 7,852 |   |   | 47.8 |   |   |   | 56.1 |   |   |
| Cost of telecomm. equipment         |       | 3,227                                      |       | 3,522                                      |       | 3,985 |   |   | 9.1 |   |   |   | 13.1 |   |   |
| Other operating expenses—net   |       | 7,966                                      |       | 10,361                                     |       | 9,513 |   |   | 30.1 |   |   |   | (8.2 | ) |   |
| Total                               |       | 24,687                                     |       | 30,388                                     |       | 35,304 |   |   | 23.1 |   |   |   | 16.2 |   |   |

 

In 2005, total operating expenses from internationalmobile operations decreased by 6.5 percent without the consolidation ofT-Mobile Crna Gora, including 1.0 percent decrease due to foreign exchangemovements. In 2006, the weaker HUF against MKD and EUR had significant effecton the increase in the expenses of T-Mobile Macedonia and T-Mobile Crna Gora.

*Employee-relatedexpenses.*   Employee-related expenses increasedboth in 2005 and 2006 reflecting the impact of the inclusion of T-Mobile CrnaGora’s expenses.

*Depreciationand amortization.*   Depreciation and amortizationexpenses increased significantly both in 2005 and 2006 mainly as a result ofthe consolidation effect of T-Mobile Crna Gora’s expenses. In 2005, this growthwas largely compensated by lower depreciation and amortization expenses atT-Mobile Macedonia due to the cessation of goodwill amortization from January 1,2005. Higher expenses in 2006 also resulted from the impairment of the Monetbrandname in connection with the rebranding in Montenegro in September 2006.

*Paymentsto other network operators.*   Payments to othernetwork operators increased considerably both in 2005 and 2006. Higheroutpayments over the period primarily resulted from the consolidation of T-MobileCrna Gora’s expenses. The increase was also due to T-Mobile Macedonia’s higheroutpayments to Cosmofon in line with its larger subscriber base.

*Costof telecommunications equipment.**  *In2005 and in 2006, cost of telecommunications equipment increased as a result ofthe inclusion of T-Mobile Crna Gora’s expenses. In 2005, this increase waspartly offset by lower average cost of phonesets at T-Mobile Macedonia, whilein 2006, the growth was partly compensated by the lower equipment sales ratioat T-Mobile Macedonia despite higher gross additions and higher average cost ofphonesets.

*Otheroperating expense—net.*   Other net operatingexpenses increased in 2005 principally due to the consolidation of T-MobileCrna Gora’s expenses. In 2005, other expenses include HUF 571 million paidunder a consulting contract entered into by T-Mobile Crna Gora, as to which theCompany has not been able to obtain sufficient evidence that it or itssubsidiaries received adequate value. This amount also includes the taximplications of the payments as well. See “Item 15—Controls and Procedures”.

Other net operatingexpenses showed a decrease in 2006 as compared to 2005 resulting from thegeneral cost cutting at T-Mobile Macedonia.

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***Operating Profit***

**Hungarian Mobile Operations**

Thefollowing table sets forth information concerning operating profit andoperating margin for the Hungarian mobile operations:

| ** **                          | ** ** | **Year ended December 31,** | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **2004**                                   | ** ** | **2005**                                   | ** ** | **2006** | ** ** | **2005/2004** | ** ** | **2006/2005** | ** ** |
| ** **                          | ** ** | ** **                                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | **(% change)** | ** ** |
| Operating profit  (in HUF millions) |       |                                       | 59,707     |                                       |       | 75,219 |   | 75,677 |   |   | 26.0 |   |   |   | 0.6 |   |   |
| Operating margin (%)(1)             |       |                                       | 22.9       |                                       |       | 28.3 |   | 25.5 |   |   | n.a. |   |   |   | n.a |   |   |

----

(1)                 Operatingmargin is the ratio of operating profit to revenue, expressed as a percentage.

Operating profit increasedby 26.0 percent in 2005 mainly due to the significant decrease in depreciationcharges resulting from the discontinuation of the goodwill amortization (HUF9,540 million) and the impairment on the Westel brand name (HUF 4,426 million)in 2004. Cost of equipment also decreased in 2005 due to the centralprocurement process within Deutsche Telekom Group. In addition, revenues fromHungarian mobile operations increased by HUF 5,649 million in 2005. Operatingprofit remained broadly stable in 2006 as compared to 2005 as total revenuesincreased by HUF 30,992million, while operating expenses increased by HUF 30,534 million year over year. Operating expenses increased dueto the combined effect of significantly higher cost of equipment (primarily dueto Pro-M’s EDR services), increased payments to other mobile operators, higherdepreciation (resulting from higher gross asset base of telecommunications andinformatics equipment as well as capitalized UMTS concession), increased otheroperating expenses—net and lower employee-related expenses.

**International Mobile Operations**

Thefollowing table sets forth information concerning operating profit andoperating margin for the international mobile operations:

| ** **                          | ** ** | **Year ended December 31,** | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **2004**                                   | ** ** | **2005**                                   | ** ** | **2006** | ** ** | **2005/2004** | ** ** | **2006/2005** | ** ** |
| ** **                          | ** ** | ** **                                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | **(% change)** | ** ** |
| Operating profit  (in HUF millions) |       | 9,047                                      |       | 12,305                                     |       | 17,095 |   |   | 36.0 |   |   |   | 38.9 |   |   |
| Operating margin (%)(1)             |       | 26.8                                       |       | 28.8                                       |       | 32.6 |   |   | n.a. |   |   |   | n.a. |   |   |

----

(1)                 Operatingmargin is the ratio of operating profit to revenue, expressed as a percentage.

Operating profit increasedby 36 percent in 2005 and by 38.9 percent in 2006 because total revenuesincreased at a higher rate than total operating expenses. The main driver inthe increase of total revenues was the higher network usage and enhancedrevenues. The consolidation of T-Mobile Crna Gora also contributed to theincrease in operating profit over the period.

***Finance Expenses***

The following table setsforth information concerning finance expenses:

| ** **                  | ** ** | **Year ended December 31,** | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                  | ** ** | **2004**                                   | ** ** | **2005**                                   | ** ** | **2006** | ** ** | **2005/2004** | ** ** | **2006/2005** | ** ** |
| ** **                  | ** ** | **(in HUF millions)**            | ** ** | **(% change)**                        | ** ** |
| Interest expense            |       | 34,731                                     |       | 31,340                                     |       | 27,325 |   |   | (9.8 | ) |   |   | (12.8 | ) |   |
| Other finance expenses      |       | 3,183                                      |       | 3,157                                      |       | 2,831 |   |   | (0.8 | ) |   |   | (10.3 | ) |   |
| Less: Interest  capitalized |       | —                                     |       | —                                     |       | (54 | ) |   | n.a. |   |   |   | n.a. |   |   |
|                        |       | 37,914                                     |       | 34,497                                     |       | 30,102 |   |   | (9.0 | ) |   |   | (12.7 | ) |   |

 

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Finance expenses decreasedboth in 2005 and 2006 primarily as a result of the decrease in HUF interestexpenses due to lower average HUF interest rates. In 2006, Magyar Telekom didnot have to take loans for dividends, as no dividends were paid due to thedelayed acceptance of the 2005 financial statements. The proportion of loanportfolio with variable interest rates was higher than in 2005.

***Finance Income***

Thefollowing table sets forth information concerning finance income:

| ** **                                                                   | ** ** | **Year ended December 31,** | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                   | ** ** | **2004**                                   | ** ** | **2005**                                   | ** ** | **2006** | ** ** | **2005/2004** | ** ** | **2006/2005** | ** ** |
| ** **                                                                   | ** ** | **(in HUF millions)**            | ** ** | **(% change)**                        | ** ** |
| Gain on sale of  financial instruments                                       |       | —                                     |       | —                                     |       | 1,190 |   |   | n.a. |   |   |   | n.a. |   |   |
| Gain on sale of  subsidiary                                                  |       | 191                                        |       | —                                     |       | 121 |   |   | n.a. |   |   |   | n.a. |   |   |
| Gains / (losses)  on the valuation of derivative financial instruments) |       | 647                                        |       | —                                     |       | 377 |   |   | n.a. |   |   |   | n.a. |   |   |
| Net foreign  exchange gains /(losses)                                        |       | (523                                       | )          | 1,014                                      |       | (659 | ) |   | n.m. |   |   |   | n.m. |   |   |
| Finance lease  interest income                                               |       | —                                     |       | —                                     |       | 480 |   |   | n.a. |   |   |   | n.a. |   |   |
| Interest and  other financial income                                         |       | 1,453                                      |       | 1,982                                      |       | 3,183 |   |   | 36.4 |   |   |   | 60.6 |   |   |
|                                                                         |       | 1,768                                      |       | 2,996                                      |       | 4,692 |   |   | 69.5 |   |   |   | 56.6 |   |   |

 

Finance income showed a significant increase both in2005 and 2006. In 2005, higher income was driven by the higher foreign exchangegain at Maktel as a result of the weakening of the MKD against the USD, in whichthe majority of its foreign currency cash and receivables are denominated.Interest income increased at Maktel as it held higher amounts of cash anddeposits in banks at longer maturities.

In 2006, increase in finance income was attributableprimarily to Crnogorski Telekom as a result of the sale of CKB’s shares in December 2006.The increase in Magyar Telekom Plc.’s foreign exchange gains was due to thestrengthening of the HUF in 2006. These increases were somewhat offset byhigher foreign exchange losses at Maktel resulting from the unfavorablemovements of the MKD against the USD.

See Notes 3, 16 and 17 tothe consolidated financial statements for certain quantitative and qualitativeinformation about financial instruments.

***Income Tax—Total***

Thefollowing table sets forth information concerning our income tax expense:

| ** **             | ** ** | **Year ended December 31,** | ** ** | **Year ended December 31,** | ** ** |
|------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **             | ** ** | **2004**                                   | ** ** | **2005**                                   | ** ** | **2006** | ** ** | **2005/2004** | ** ** | **2006/2005** | ** ** |
| ** **             | ** ** | **(in HUF millions)**            | ** ** | **(% change)**                        | ** ** |
| Income tax  expense(1) |       | 16,142                                     |       | 21,858                                     |       | 24,220 |   |   | 35.4 |   |   |   | 10.8 |   |   |
|                        |            |                                            |            |                                            |            |  |  |  |  |  |  |  |  |  |  |

----

(1)                 Due to a changein IFRS rules, we report income tax without the taxation charge on the share ofassociate’s results from 2005 (the 2004 comparative figure was revisedaccordingly).

Deferred taxes have been recognized for temporarydifferences arising on the valuation of investments (mainly currencydifferences) in subsidiaries and associates in the parent companies’ books asrequired by IAS 12. For more details on the tax credits, see Note 9 to theconsolidated financial statements.

Income tax expense increased in 2005 as a result ofthe significantly higher profit before tax at almost all members of the Group.The lower effective tax rate in 2005 (19.8 percent compared to 27.1 percent in2004) was mostly due to the compounding of the tax credit carried forwardrelated to the Hungarian broadband investments, which resulted in tax creditswith no impact on profit before tax. In addition, the 

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higher amount of otherincome related to the rebranding, which is not taxable, also contributed to thelower effective tax rate.

Income tax expenseincreased in 2006 as compared to 2005, mainly because of the deferred taxrecognized in relation to withholding tax on future dividends based on theundistributed reserves of Maktel and Crnogorski Telekom. In addition, thehigher profit before tax at our Macedonian and Montenegrin subsidiaries alsoincreased income tax expenses. These increases were partly offset by lowerincome tax at Magyar Telekom Plc. in line with its lower pre-tax profit.

**CRITICAL ACCOUNTINGPOLICIES**

The discussion and analysis of our financial conditionand results of operations are based on our consolidated financial statements,which have been prepared in accordance with IFRS. Reported financial conditionsand results of our operations are sensitive to accounting methods, assumptionsand estimates that underlie the preparation of the financial statements. Webase our estimates on historical experience and on various other assumptions,the results of which form the basis for making judgments about the carryingvalues of assets and liabilities that are not readily apparent from othersources.

The selection of critical accounting policies, thejudgments and other uncertainties affecting application of those policies andthe sensitivity of reported results to changes in conditions and assumptionsare factors to be considered when reviewing our financial statements.

For a list of our criticalaccounting policies and assumptions, see Note 4 to the consolidated financialstatements. For a discussion about the differences between our IFRS and U.S.GAAP accounting policies, see Note 37 to the consolidated financial statements.

**LIQUIDITY ANDCAPITAL RESOURCES**

**Cash flow analysis**

Thefollowing table sets forth information concerning our cashflows:

| ** **                                                            | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                            | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                            | ** ** | **(in HUF millions)**            | ** ** |
| Net cashflows:                                                        |       |                                       |       |   |   |   |   |
| From operating activities                                             |       | 189,751                                    |       | 201,336 |   | 187,624 |   |
| From investing activities                                             |       | (100,787                                   | )          | (131,566 | ) | (122,259 | ) |
| From financing activities                                             |       | (72,095                                    | )          | (61,848 | ) | (35,154 | ) |
| Effect of foreign  exchange rate changes on cash and cash equivalents |       | (2,122                                     | )          | 1,259 |   | 1,569 |   |
| Change in cash  and cash equivalents                                  |       | 14,747                                     |       | 9,181 |   | 31,780 |   |
| Cash and cash  equivalents, beginning of year                         |       | 22,132                                     |       | 36,879 |   | 46,060 |   |
| Cash and cash  equivalents, end of year                               |       | 36,879                                     |       | 46,060 |   | 77,840 |   |

 

*NetCashflows from Operating Activities.**  *Our primary source of liquidity is cashflows fromoperating activities.

Net cashflows from operating activities increased byHUF 11,585 million in 2005 as compared to 2004. Income tax paid decreased byHUF 10,513 million, the amount of interest paid decreased by HUF 2,952 millionand cash generated from operations decreased by HUF 1,880 million.

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Net cashflows from operating activities decreased byHUF 13,712 million in 2006 as compared to 2005. The HUF 7,909 million increasein income tax paid and the HUF 7,005 million decrease in cash generated fromoperations was partly offset by HUF 1,202 million decrease in interest paid.

*NetCashflows from Investing Activities.*   Netcashflows from investing activities are primarily driven by capitalexpenditures and acquisitions of businesses. In 2005, cash spent on purchase ofsubsidiaries increased significantly as compared to 2004 due to the acquisitionof a 76.53 percent stake in Crnogorski Telekom. In 2006, the HUF 9,307 milliondecrease in cash outflow is predominantly due to the combined effect of thelower cash outflow for capital expenditures, the higher amounts of proceedsfrom disposal of real estate and from the sale of financial assets, partlyoffset by lower amount of dividends received. Purchase of tangible andintangible assets were HUF 91,748 million in 2004, HUF 103,587 million in 2005and HUF 96,790 million in 2006.

*NetCashflows from Financing Activities.*   Netcashflows from financing activities primarily relate to our borrowingactivities and dividend payment.

In 2005, we received net proceeds from loans in anamount of HUF 20,734 million. The increase in borrowings is mainly due tofinancing the acquisition of Crnogorski Telekom. In 2005, we paid dividends toshareholders in an amount of HUF 84,551 million. The increase in dividends paidas compared to 2004 is primarily due to the higher amount of dividends paid tominority shareholders of Maktel in 2005. In 2006, we had a net repayment ofloans of HUF 35,568 million as Magyar Telekom Plc. and Maktel did not paydividends in 2006. Maktel used part of its cash-flow to buy back shares fromthe minority shareholders in 2006.

We carry indebtedness at a level we considerappropriate based on a number of factors, including cash flow expectations(i.e., cash requirements for ongoing operation, investment plans), expectationsof investors, analysts, rating agencies and the overall cost of capital. Weannounced a definite dividend policy in 2003, according to which the net debtratio is to be kept between 30 to 40 percent. Under the new dividend policy,based on the results of 2004, we paid an amount of HUF 70 dividend per share in2005 and based on the results of 2005, we paid HUF 73 dividend per share in2007, by which we maintained the net debt ratio in the target range. Our netdebt ratio was 27.9 percent at December 31, 2006. Future dividend paymentwill be determined by the new dividend policy and will depend on our cashflowgeneration and potential acquisition opportunities.

For a discussion of our financial instruments, loansand other borrowings, see Notes 3, 16 and 17 to our consolidated financialstatements.

By the end of May 2007, long term indebtednessincreased by HUF 115 billion at Magyar Telekom Plc. from December 31,2006, mainly due to long term loans taken to finance the dividend payments for2005 and 2006 and to refinance some expiring short term loans.

In our Hungarian fixed line and mobile operations, ouroperating revenues and expenses are denominated almost entirely in Hungarianforints. Amounts payable to and receivable from other international carriers,which are denominated in a basket of currencies known as SDRs, are nettedagainst one another and settled primarily in U.S. dollars and euros. Capitalexpenditures are denominated partly in foreign currencies, principally U.S.dollars and euros.

In 2005, the HUF interest rates started to declinegradually from a very high basis, but from the second half of 2006 theyincreased again to approximately eight percent. At December 31, 2006, theloans were almost 100 percent denominated in HUF, thus the foreign exchangerisk of the loan portfolio is naturally hedged by the HUF-denominated revenues.

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At December 31, 2006, 61.1 percent of the loanportfolio bore fixed interest rates - these are mainly the medium and long-termelements of the portfolio - while 38.9 percent of the loan portfolio wassubject to variable interest rates. Short-term loans are partially taken tomanage liquidity peaks and their variable rates are based on Budapest InterbankOffered Rate (“BUBOR”). Taking into consideration HUF interest rate volatility,we follow the approach of balancing the fixed and variable interest rateelements in our loan portfolio.

We do not have any legal or economic restrictions onthe ability of our subsidiaries to transfer funds to the Company in forms ofcash dividends, loans or advances.

Our liquidity needs are primarily covered by our freecash flows. Liquidity peaks are financed from current account overdrafts andbilateral shelf facilities. The total available current account overdrafts atthe end of 2006 amounted HUF 10,549 million. The total committed shelffacilities from the Hungarian market amount to HUF 82,349 million, out of whichHUF 68,700 million was available at the end of 2006. We also have a EUR 50million shelf facility with Deutsche Telekom, which functions as a safety netfor potential liquidity peaks and has not been drawn since its signing on April 16,2004.

Wehave uncommitted lines at Hungarian banks in the amount of around HUF 15billion, which can be drawn for a maximum period of 90 days. Since these arenon-committed lines, we do not rely on them when managing liquidity, howeverthey are used when the liquidity need is only short-term. At the end of 2006,HUF 2 billion was drawn from these facilities.

| ** **                          | ** ** | **Amount of  the facility** | ** ** | **Drawn at  the end of  2006** | ** ** | **Available at  the end of  2006** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                          | ** ** | **(in HUF millions)**       | ** ** |
| Current account  overdrafts         |       |                                  | 14,608     |                                          |       |                                              | 4,059      |   |   |   | 10,549 |   |   |
| Bilateral loans                     |       |                                  | 82,349     |                                          |       |                                              | 13,649     |   |   |   | 68,700 |   |   |
| DT shelf facility                   |       |                                  | 12,615     |                                          |       |                                              | —     |   |   |   | 12,615 |   |   |
| Total credit  lines                 |       |                                  | 109,572    |                                          |       |                                              | 17,708     |   |   |   | 91,864 |   |   |
| Total uncommitted  lines            |       |                                  | 15,150     |                                          |       |                                              | 2,000      |   |   |   | 13,150 |   |   |
| Total lines for liquidity  purposes |       |                                  | 124,722    |                                          |       |                                              | 19,708     |   |   |   | 105,014 |   |   |

 

Thecurrent amount and structure of the shelf facilities described above issufficient, and for the purposes of liquidity management, we believe that thereis no need to establish new facilities.

| ** **                  | ** ** | **Maturity structure**     | ** ** |
|-----------------------------|------------|---------------------------------|------------|
| ** **                  | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2009** | ** ** |
| ** **                  | ** ** | **(in HUF millions)** | ** ** |
| Current account  overdrafts |       | 14,608                          |       | — |   | — |   |
| Bilateral loans             |       | 59,349                          |       | 2,000 |   | 21,000 |   |
| DT shelf facility           |       | 12,615                          |       | — |   | — |   |
| Total credit lines          |       | 86,572                          |       | 2,000 |   | 21,000 |   |

 

Deutsche Telekom is ready to finance our majorfinancing needs (such as refinancing or financing acquisitions) through theinternational capital markets and it passes the conditions of the loans on anarms length basis to Magyar Telekom. Should this financing source cease tobecome available in the future, we plan to raise funds from the Hungariansyndicated loan market and from the Hungarian capital markets. Our financialposition is quite strong in the Hungarian markets therefore we expect to beable to obtain financing at favourable terms from these markets. In addition,we have access to the international bank and capital markets.

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Our ordinary shares are listed on the Budapest StockExchange (“BSE”) and the American Depositary Shares, each representing five ofour ordinary shares, are listed on the New York Stock Exchange (“NYSE”). We had2,456,659 treasury shares at December 31, 2006. These shares aremaintained to hedge and finance exercises of share options under the managementshare option plan launched in 2002. No issuance is likely in the foreseeablefuture.

For additional informationabout market risk sensitive instruments, see Notes 3, 16 and 17 to theconsolidated financial statements.

**Credit rating**

In 2000, we requested both Moody’s Investors Services(“Moody’s”) and Standard & Poor’s Ratings Services (“S&P”) toinitiate rating coverage.

In 2004, Moody’s upgraded DT’s credit rating,therefore at the end of 2004, our ratings became same as that of DT: Baa1(Moody’s) and BBB+ (S&P).

In March 2005, S&P upgraded our rating fromBBB+ to A- with a stable outlook following a similar upgrade of DT and in June 2005,Moody’s upgraded DT’s credit rating by one notch to A3, while confirming ourBaa1 credit rating.

On September 11, 2006S&P revised our outlook from stable to negative, while affirming the A- rating.The move followed the outlook revision of DT. On August 31, 2006 Moody’splaced the Baa1 issuer rating in both local and foreign currencies of MagyarTelekom on review for possible downgrade, prompted by prolonged delay of thepublication of our 2005 audited financial statements. After the publication ofthese figures, Moody’s confirmed the Baa1 issuer rating on January 31,2007.

**Off-balance sheetarrangements**

We do not have anyoff-balance sheet arrangements (including contingent liabilities, guarantees,etc.) that have or are reasonably likely to have a material current or futureeffect on our financial condition, changes in financial condition, revenues orexpenses, results of operations, liquidity, capital expenditures or capital resources.We do not participate in, nor secure, financings for any unconsolidated,limited purpose entities.

**Tabular disclosureof contractual obligations**

Our contractual obligations, including commitments forfuture payments under non-cancelable lease arrangements and short- andlong-term debt arrangements, are summarized below and are disclosed in moredetails in Notes 16, 17 and 33 to our consolidated financial statements.Amounts disclosed as purchase obligations represent long-term commitments underoutsourcing contracts, commitments towards international telecommunicationscarriers and other purchase commitments. Commitments under outsourcedactivities include a long-term contract for IT services, where paymentobligations depend on a number of factors, such as the number of PCs, exchangerates and annual inflation rates, therefore the related amounts included in thetable below are estimates.

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Thistable excludes other obligations we may have, such as payroll and related humanresource services (including bonuses and payments under our mid-term incentiveplan). Payments under these contracts are based on the level of servicerequired and are excluded from this table due to the uncertainty of the amountsto be paid, if any, as well as the timing of such amounts.

| ** **                                                | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| ** **                                                | ** ** | **(in HUF millions)**           | ** ** |
| Loans and  borrowings including finance lease commitments |       | 309,734                                   |       |   | 103,605 |   |   | 122,873 |   |   | 23,575 |   |   |   | 59,681 |   |   |
| Interest on loans  and borrowings                         |       | 62,774                                    |       |   | 22,789 |   |   | 26,473 |   |   | 11,564 |   |   |   | 1,948 |   |   |
| Operating leases.                                         |       | 43,349                                    |       |   | 6,869 |   |   | 10,943 |   |   | 7,870 |   |   |   | 17,667 |   |   |
| Contractual  commitments for capital expenditures         |       | 6,022                                     |       |   | 3,878 |   |   | 2,144 |   |   | — |   |   |   | — |   |   |
| Purchase  obligations                                     |       | 70,172                                    |       |   | 22,580 |   |   | 31,522 |   |   | 13,278 |   |   |   | 2,792 |   |   |
| Trade and other  payables                                 |       | 200,589                                   |       |   | 200,589 |   |   | — |   |   | — |   |   |   | — |   |   |
| Total contractual cash  obligations                       |       | 692,640                                   |       |   | 360,310 |   |   | 193,955 |   |   | 56,287 |   |   |   | 82,088 |   |   |

 

In addition to the above, in October 2005, we wonthe government tender and signed a contract with the Prime Minister’s Office tobuild and operate the nationwide EDR system in Hungary. The rollout of EDR hasbegun in 2006 and the contract lasts until the end of 2015. Magyar Telekominvested HUF 18.0 billion in 2006 in the assets required to build out the EDRservice and expect to invest HUF 2.9 billion in 2007.

On November 29, 2005, we entered into anagreement to acquire a 100 percent stake in Orbitel for a considerationconsisting of EUR 7.35 million at the closing of the transaction, an additionalEUR 500 thousand to be paid in 2008 depending on whether the two top managersstay at the company until the end of 2007, an additional EUR one million to bepaid in 2008 if certain financial targets are met between 2005 and 2007. Theclosing of the transaction took place in February 2006.

In December 2006, Magyar Telekom agreed toacquire a 100 percent stake in MobilPress. The transaction was closed on January 25,2007. See Note 5.1.6 to the consolidated financial statements for more details.

As agreed in December 2006, the Company signed asale-purchase agreement to acquire an additional two percent ownership in TSHeffective from January 1, 2007 for a purchase price of HUF 60 million. TSHhas been an associate of the Group since September 2004.

According to the Share Purchase Agreement signed on June 16,2006, the previous owners of KFKI were entitled to an earn-out payment of HUF1.5 billion depending on the 2006 financial performance. As reported in thecompany’s full year 2006 consolidated financial statements, KFKI delivered HUF19.8 billion revenues and HUF 2.0 billion EBITDA, reaching the predefinedthresholds. As a result, on May 14, 2007, Magyar Telekom has paid the HUF1.5 billion earn-out payment to the previous owners of KFKI.

On March 28, 2007, the Agency ofTelecommunications and Postal Services of the Republic of Montenegro awarded a3G license to T-Mobile Crna Gora. In April 2007, T-Mobile Crna Gora paidEUR 2.4 million for the license.

In addition to the above,Magyar Telekom assumes the legal expenses of its current and former employeesinvolved in the internal investigation (see “Item 3—Risk Factors” and “Item 15—Controlsand Procedures”); in connection with this we incurred HUF 458 million expensesin 2006. We are not able to estimate the expenses we will incur in 2007 andfuture years for legal counsel advising these individuals.

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**CAPITALEXPENDITURES**

Our capital expenditures on tangible and intangibleassets totaled HUF 91,748 million in 2004, HUF 103,587 million in 2005 and HUF96,790 million in 2006, including in each year changes in the balance ofcapital expenditure trade creditors and the recognition of investment taxcredit. Capital expenditures include expenditures for (1) the fixed linenetwork, including network operations systems, (2) mobiletelecommunications and (3) new products, corporate infrastructure andother assets.

Purchases of tangible and intangible assets for thefixed line segment accounted for 40 percent in 2004, 53 percent in 2005 and 55percent in 2006. Purchases of tangible and intangible assets for the mobilesegment totaled 60 percent in 2004, 47 percent in 2005 and 45 percent in 2006.

We expect to be able tofinance capital expenditures over the next several years from net cashflowsfrom operations and from borrowings. Our actual future capital expenditureswill depend on a variety of factors, such as development of our business and ofthe Hungarian economy and whether we enter into any new line of business. As aresult, our actual future capital expenditures may be significantly different.

**RECONCILIATION TOU.S. GAAP**

Thefollowing table shows net income and shareholders’ equity under IFRS and U.S.GAAP for the periods indicated:

| ** **                                                              | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                              | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                              | ** ** | **(in HUF millions)**            | ** ** |
| Profit  attributable to the equity holders of the Company (Net income): |       |                                       |       |   |   |   |   |
| IFRS                                                                    |       | 34,641                                     |       | 78,415 |   | 75,453 |   |
| U.S. GAAP                                                               |       | 39,684                                     |       | 69,260 |   | 71,481 |   |
| Shareholders’ equity:                                              |       |                                       |       |   |   |   |   |
| IFRS as reported                                                        |       | 516,567                                    |       | 527,567 |   | 526,039 |   |
| U.S. GAAP                                                               |       | 534,907                                    |       | 542,098 |   | 538,190 |   |

 

The U.S. GAAPreconciliation adjustments (See Note 37 to the consolidated financialstatements) can be grouped in two major categories as below:

*1. Adjustmentsarising from differences that existed in the past and still amortizing orremaining in equity*

These include revenuerecognition differences originating from SAB 101, before the adoption of EITF 00-21related to connection and activation fees; recognition of intangible assetsacquired through business combinations and the corresponding impact on goodwilland the earlier discontinuation of goodwill amortization in U.S. GAAP than inIFRS.

*2. New adjustmentsarising*

These include the significantly higher amount ofinterest capitalization and the consequent impacts on tangible assetdepreciation; recognition and consequent amortization and accretion of assetretirement obligations; compensation received from the parent company for there-branding of the Group’s entities and products that is recognized as incomein IFRS, while it is recognized as capital contribution in U.S. GAAP; and therecognition of derivatives embedded in contracts denominated in othercurrencies than the functional currency of the contracting Group company.

Related to the above adjustments, we also have incometax and minority adjustments where applicable.

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The net impact of therecurring U.S. GAAP adjustments on the IFRS Net income is rather stable andinsignificant. The apparent fluctuation is caused by the non-recurringadjustments including the re-branding compensation in 2004, 2005 and 2006, andthe last year of goodwill amortization in IFRS in 2004.

**Recent AccountingPronouncements**

We have reviewed the newstandards, amendments and interpretations to existing standards that have beenpublished that are mandatory for our accounting periods after January 1,2007. For a list of recent IFRSs accounting pronouncements, see Note 2.1.3 tothe consolidated financial statements. For a list of recent U.S. GAAPaccounting pronouncements, see Note 37 to the consolidated financialstatements.

**RESEARCH ANDDEVELOPMENT**

**Hungarian FixedLine Operations**

Magyar Telekom Plc. has a department dedicated toperformance of research and development (“R&D”) projects to meet thedemands of the rapidly changing market, such as development of ourtelecommunications networks and service platforms. The R&D department worksin close cooperation with educational institutions (including the BudapestUniversity of Technical and Economic Sciences and the Technical College ofBudapest), strategic investors, suppliers and domestic and internationaldevelopment organizations. Following our accession to the European Union,several funds aimed encouraging research and development activities becameavailable to us as well; this encouraged us to deepen our involvement in nationaland international consortiums engaged in R&D.

The harmonization projects among DT Group members(Maktel, Slovak Telekom, Croatian Telekom and T-Systems International) play animportant role. The joint development themes enable us to utilize group-levelsynergies, pursue efficient financial and human resource management and use thesame third party contractors for our R&D projects.

In the last few years, to maintain or expand thecompetitive positions of Magyar Telekom we developed the technical platformthrough the R&D activities for the introduction of new VoIP andmultimedia-based services, based on the next generation (“NGN”)IP/Ethernet-based core and broadband fixed (ADSL, xDSL) and wireless (WLAN,WiFi) accesses.

Significant resources are devoted to the upgrading ofour digital backbone network. The DWDM technology was introduced to satisfy theadditional demands on the backbone network that arose in connection withbroadband services, such as fast Internet access and broadband IP-VPN.

We are continuously developing our data communicationsand IP network and services to meet demands for broadband services. Wedeveloped the concept of a national, high-speed IP network built on DWDM andGigabit Ethernet. Under this program, the components of our IPv6 protocol pilotnetwork were identified.

In the last few years, we rolled out a wide range ofbroadband access technologies (e.g., ADSL, cable television, optical accessnetwork and managed leased line technologies) to satisfy demands for higherbandwidth. To widen the choice of broadband services, we considered thepossibilities of implementing triple-play solutions. In 2006, multimediaservices, including IPTV development, were tested in the Ethernet and DSLAMenvironment. Based upon this work, by the end of 2006, we introduced IPTVservices. The possibility of introduction and application of IP High DefinitionTV (“HDTV”) and Three Dimension (“3D”) TV technologies are being investigated.

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In 2006, we studied the usability of WorldInteroperability for Microwave Access (“WiMAX”) technology. WiMAX can providewireless broadband access with effective radius of up to several kilometerswith up to 70 Mbit/s radio throughput. WiMAX is in a standardization phase. Wealso plan to implement the new generation of xDSL technologies (VDSL2, Gigabitcapable Passive Optic Network) in the access network to extend the broadbandaccess coverage and provide higher bit rate.

The Global Resource Information Database (“GRID”)mass-computing platform prototype has been further developed providing quotamanagement to enhance its security and to ensure resilience against dataflooding attacks.

In the last two years, we laid down the basis forproduct developments toward the convergence of fixed and mobile networks (“FMC”)together with TMH. A Bluetooth and WiFi-based intelligent solution has beentested in our laboratory. Our next step in this field will be a study on theFMC possibilities in IP Multimedia Subsystem (“IMS”) environment, and WiFi/UMTShandsets. A study has been launched on the potential interconnection of theNext Generation fixed and mobile networks, based on the ETSI Telecoms andInternet converged Services and Protocols for Advanced Networks (“TISPAN”) IMSarchitecture.

When we aim to provide voice service over IP networks,Name Addressing and Routing (“NAR”) issues essentially differ from those thatwe experienced in the PSTN network. Electronic Telephone Number Mapping (“ENUM”)is one of the most promising technologies to provide information for IP basedcall routing including information for number portability, freephone and othernumber or address translation capabilities, SMS and MMS. This routing isavailable both internally and for interconnection of networks (peering). In2006, we set up an experimental network and interconnected it with the ENUMtrial system of Deutsche Telekom to examine the possibilities of the ENUMinfrastructure. In 2007, we aim to build an ENUM network that will be used fordynamic call routing based on Bluetooth sensors.

We have developed a testsystem for hearing-impaired users, which transforms the speech signals intomoving images, so users can recognize the speech by lip-reading.

**Macedonian FixedLine Operations**

In the last three years, significant efforts have beenmade to upgrade the network to extend the range of services offered and improvetheir quality. This, together with the rationalization of network switchingarchitecture, resulted in improvement in the operational efficiency and networkconsolidation. New telephone services were introduced through the IN andVoice-mail Platforms and provision of broadband services became available withthe implementation of ADSL technology.

In the next phase, the main focus will be on extensionof ADSL capacities nationwide and development of new services. To expandbroadband offerings, Maktel will evaluate video services in terms of itstechnical feasibility, impact on access and transport network.

Maktel will continue to dedicate necessary resourcesfor implementation of new technologies to develop the capacity to offerbroadband services that will satisfy customers’ demands. For connection ofbusiness customers Metro Ethernet equipment will be used.

Maktel is making preparationsfor interconnection and convergence of separate voice and data networks. TheNGN concept has been seen as a long-term project. Maktel does not plansignificant development of traditional PSTN/ISDN network except for purposes ofmaintenance and compliance with the regulatory requirements. The key focus willbe on provisioning of broadband access, upgrade of transport network andnetwork migration towards NGN.

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**Hungarian MobileOperations**

TMH works in close cooperation on R&D projectswith educational institutions such as the Budapest University of Technical andEconomic Sciences, strategic investors and suppliers to meet the demand of therapidly changing market.

TMH has worked successfully on various R&Dprojects with universities since 1997 in five different areas: MobileTelecommunications Laboratory deployment, Inter-University Centre forTelecommunications and Informatics, Mobile Innovation Centre, research anddevelopment activities as well as joint mobile services development for TMH.Through these areas TMH continuously monitors the forthcoming new generationtechnologies, hardware-software solutions and mobile services. One of thelargest challenges of the new mobile and wireless systems is the integrationand interoperability of different technologies. TMH is committed to analyzingand adopting new solutions on a continual basis. University departmentsactively participate in R&D projects initiated by TMH.

“Digital Home” is a new field in home automation.These systems aim to make life at home easier. An already common tool in homeautomation is the remote controlling of lighting, heating, security, garagedoors and entertainment devices as TV, Hi-Fi, video, etc. The research focuseson the evolution and the present of digital home systems. Current systems areaimed at integration, the possibility to control multiple household andentertainment devices with non-dedicated controllers, such as a cellular phoneor multi-purpose displays scattered around the flat.

The Mobile Communicationsand Computing Laboratory (“MCL”) supported by TMH is located at theDepartment of Telecommunications of BME. Currently there are six staff members,17 PhD students and approximately 80 undergraduates working on variousprojects. MCL has strong and successful cooperation since its foundation withTMH. In 2006, the projects focused on 3G radio access planning, application ofmobile technology in interactive TV broadcasting and mobile security.

ENUM is an Internet Engineering Task Force (“IETF”)standard. ENUM allows telephone operators to map telephone numbers to variousInternet services. ENUM uses the standard domain name system (“DNS”) to storethe mapping information about different types of services and its mappings.ENUM facilitates the convergence of telecommunications technologies. There weretwo studies prepared for TMH which describe the technology, the relevantstandards and the recent developments in the standardization. Both studiesconcentrate on the implementation and the use of ENUM by TMH to introduce new servicesin the Hungarian market.

One of the newtechnologies in mobile communications is the Radio Frequency Identification (“RFID”).RFID offers a means of identification, where reader devices are capable ofsensing—and reading data from—RFID tags in their active radius without physicalcontact. The goal of the current project is to provide TMH with up-to-dateinformation, educational material, expert consultations, testing environmentand experimental pilot projects in the area of RFID technology. As a result ofthis project, TMH will be better prepared for developing and using commercialRFID applications once RFID enabled mobile phones become widely available.

**Macedonian Mobile Operations**

Research and development projects at T-MobileMacedonia are performed in close cooperation with suppliers and stateeducational institutions. The aim of these projects is to prepare T-MobileMacedonia to meet the needs of the rapidly developing market and to optimizethe maintenance of current activities.

The software developed for Optimization, Measurement,Analyses and Presentation with visualization (“OMAP”) represents a modular andflexible solution based on existing informatics infrastructure at T-MobileMacedonia, in accordance with international software engineering standards. Thesoftware 

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provides traffic analysesbased on information from switches in real time and monitoring of congestion ofeach traffic route.

The Base Station Alarm Monitoring Performance (“BAMP”)is a modular software application, which provides alarm monitoring of T-MobileMacedonia’s radio network and inventory management of base stations. Theapplication identifies and reports causes for malfunction of base stations andfacilitates prompt corrective actions.

Our R&D teams have developed an e-recharge gatewayfunction that is offered and used by T-Mobile Macedonia dealers for sales ofelectronic recharges of prepaid vouchers. The system is experiencing intensecapacity growth as more and more dealers are utilizing this cost effectiveprocess for voucher sales.

Mass market SMS, Interactive Voice Response (“IVR”),SMS2TV based games and quizzes are also developed to support our marketpresence and leadership.

In cooperation with other T-Mobile Internationalcompanies, we are in an early stage of developing a system for Automated DeviceManagement that should enable easier VAS service adoption on the local market.

T-Mobile Macedonia startedan IT infrastructure consolidation project aimed at transforming it to a betteroperating and more efficient system. Together with our suppliers, we arebuilding a component based, service oriented architecture that should enableleaner operation and faster time-to-market service development.

**RISK MANAGEMENTPOLICIES**

It is our policy that alldisclosures made by us to our security holders and the investment community beaccurate and complete, and fairly present our financial condition and resultsof operations in all material respects. Such disclosures should be made on atimely basis as required by applicable laws, rules and regulations,including by-laws of the Budapest Stock Exchange and rules adopted by theU.S. Securities and Exchange Commission (“SEC”). To achieve these objectives,we formed the Disclosure Committee and developed and have continuously enhancedour risk management policies.

*Risk Management Policies*

Our risk management includes identification,assessment and evaluation of risks, development of necessary action plans, andmonitoring of performance and results. For risk management to be effective, wemust ensure that management take business decisions with full understanding ofall relevant risks.

In 1999, we established a formal risk managementsystem. In 2000, we established a department to co-ordinate all risk managementtasks. This system was integrated into the risk management system of DT in2002.

All risks related to material internal and externaloperations, financial and legal compliance and certain other risks areevaluated and managed by a well-defined internal mechanism. A risk management handbookand a Chief Executive Officer (“CEO”) directive on risk management werepublished in 2003. A risk management course was developed for employeesresponsible for risk management in all organizational areas. Risk itemsaffecting our operations are reviewed quarterly throughout the Group. All ofour subsidiaries, business units, divisions and entities are obliged toidentify and report their operational risks on a quarterly basis. Afterevaluation of these risks, results are reported to our management, to the AuditCommittee and to DT.

Following the enactment of the Sarbanes-Oxley Act, wedecided to enhance our risk management procedures. As this new law requiresprompt disclosure of all risk items influencing investors’ decisions, wecomplemented our quarterly risk reporting system with a continuous reportingprocedure which requires 

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all of our departments andsubsidiaries to report on a real-time basis any new material fact, informationor risk that comes to their knowledge. Information thus submitted is monitoreddaily by the risk management department, and the Chief Financial Officer (“CFO”)is notified when a new material risk or information is identified.

A CEO directive has been issued to defineresponsibilities of each employee in risk monitoring and management. Inaddition, an e-learning course was created to train our employees onrequirements of the Sarbanes-Oxley Act, our enhanced reporting and corporategovernance obligations and the enhanced risk reporting procedures. Completionof this course has been made compulsory for all of our employees.

For further discussion ofthe steps that we are taking to remedy our control deficiencies, see “Item 15—Controlsand Procedures.”

*Disclosure Committee*

We established the Disclosure Committee on July 31,2003. The Disclosure Committee acts both in plenary meetings and through itsmembers acting individually. It supports CEO and CFO in fulfilling theirresponsibility to oversee processes designed to ensure accuracy and timelinessof our disclosures.

The DisclosureCommittee consists of individuals knowledgeable in significant and diverseaspects of our business, finances and risks. The members of the DisclosureCommittee are:

·       GroupCompliance Director;

·       Directorof Group Accounting Branch;

·       Directorof Group Legal Services Branch;

·       Directorof Group Human Resources Branch;

·       Headof Secretariat of the Chairman-CEO;

·       Headof External Reporting Department;

·       Headof the Business Development and Acquisitions Branch;

·       Headof Group Investor Relations Department; and

·       Headof Group Risk Management Department.

Director of Internal Audit Branch is a permanentinvitee.

Principalresponsibilities of the Disclosure Committee are as follows:

·       preparationof all SEC and Budapest Stock Exchange filings of the Company (e.g., Form 20-Fand Registration Statements) and local annual/interim reports that aresubsequently submitted on Form 6-K;

·       monitoringand recommendation of all disclosure controls and procedures;

·       determinationof the content of general rules and instructions issued to preparers ofall SEC filings of the Company; and

·       recommendationsas to materiality of information and procedures relating to the CEO and CFOcertifications required by the Sarbanes-Oxley Act.

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**ITEM 6—DIRECTORS,SENIOR MANAGEMENT AND EMPLOYEES**

**Board of Directors**

Under Hungarian laws, the Board of Directors isresponsible for the Company’s management and decides on matters other thanthose that must be determined by shareholders. The Board of Directors isrequired to report annually to the shareholders at the general meeting of theshareholders and quarterly to the Supervisory Board on our businessadministration, state of assets and business policy.

Pursuant to our Articles of Association, the Board ofDirectors consists of a minimum of six and a maximum of eleven members electedat the annual general meeting of the shareholders for a term of three years.One of the current directors was nominated by the holder of the Series “B”Share pursuant to the Articles of Association, seven of the current directorswere nominated by MagyarCom and two of the current directors are independent;MagyarCom therefore controls Magyar Telekom.

Meetings of the Board of Directors are held at leastfour times a year. Meetings of the Board of Directors require the presence ofsix members for a quorum. Each member has one vote. The Board of Directorspasses resolutions by a simple majority vote.

On December 31,2006, members of the Board of Directors, their principal occupations and theyears of their original election were as follows:

| **Name**                             | ** ** | ** ** | ** ** | **Age**                                                                                                     | ** ** | **Principal Occupation** | ** ** | **Member  since** |
|--------------------------------------|------------|------------|------------|-------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------|
| Christopher Mattheisen               |       | 45         |       | Chairman and Chief  Executive Officer of Magyar Telekom Plc.                                                |       | 2006                     |
| Dr. István Földesi(1) |       | 58         |       | International business  advisor                                                                             |       | 2003                     |
| Dr. Mihály Gálik      |       | 60         |       | Director of the  Marketing and Media Institute of the Corvinus University                                   |       | 2006                     |
| Michael Günther                 |       | 62         |       | Member of the Management  Board of T-Mobile International                                                   |       | 2002                     |
| Dr. Klaus Hartmann(2)           |       | 46         |       | Chairman and Chief Executive  Officer of Polska Telefonia Cyfrowa Sp. Z o.o                                 |       | 2000                     |
| Horst Hermann                        |       | 52         |       | Senior Executive Vice  President of DT, responsible for Affiliate Management in Central and Eastern  Europe |       | 2003                     |
| Thilo Kusch                          |       | 42         |       | Chief Financial Officer  of Magyar Telekom Plc.                                                             |       | 2006                     |
| Gerhard Mischke                      |       | 48         |       | Senior Executive Vice  President, Treasury and International Investment, DT                                 |       | 2005                     |
| Frank Odzuck                         |       | 47         |       | Chief Executive Officer  of Zwack Unicum Plc.                                                               |       | 2006                     |
| Dr. Ralph Rentschler            |       | 46         |       | Member of the Management Board of T-Com                                                                     |       | 2003                     |

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(1)                 Representative ofthe holder of the Series “B” Share

(2)                 Resignedfrom his position on June 19, 2007.

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**Other Principal Directorships of Members of the Boardof Directors**

| Name                              | ** ** | ** **                              | ** ** | **Position held**                             | ** ** | **Company** |
|-----------------------------------|------------|-----------------------------------------|------------|-----------------------------------------------|------------|-------------|
| Christopher Mattheisen            |       | None                                    |       |                                          |
| Dr. István Földesi |       | President                               |       | Inter-Access, Inc.  (US)                 |
|                              |       | Member of the Board of  Directors       |       | Sláger Rádió                   |
|                              |       | Managing Director                       |       | Hungarian Technology  Center                  |
| Dr. Mihály Gálik   |       | None                                    |       |                                          |
| Michael Günther              |       | Chairman of the Board of  Directors     |       | T-Mobile Slovensko a.s.,  Slovakia            |
|                              |       | Member of the Board of  Management      |       | T-Mobile Worldwide  Holding GmbH              |
|                              |       | Chairman of the  Supervisory Board      |       | T-Mobile Macedonia                            |
|                              |       | Chairman of the  Supervisory Board      |       | Polska Telefonia Cyfrowa  Sp. Z. o.o., Poland |
|                              |       | Member of the  Supervisory Board        |       | T-Hrvatski Telekom,  Croatia                  |
|                              |       | Vice-Chairman of the  Supervisory Board |       | T-Mobile Hrvatski  d.o.o., Croatia            |
| Dr. Klaus Hartmann           |       | Chairman of the  Management Board       |       | Polska Telefonia Cyfrowa                      |
| Horst Hermann                     |       | Member of the  Supervisory Board        |       | T-Hrvatski Telekom,  Croatia                  |
|                              |       | Member of the Board of  Directors       |       | Slovak Telecom                                |
| Thilo Kusch                       |       | None                                    |       |                                          |
| Gerhard Mischke                   |       | Member of the  Supervisory Board        |       | Deutsche  Telekom, Inc., New York        |
|                              |       | Member of the  Supervisory Board        |       | DeTe Asia Holding GmbH                        |
|                              |       | Chairman of the  Supervisory Board      |       | T-Hrvatski Telekom,  Croatia                  |
|                              |       | Member of the  Supervisory Board        |       | T-Systems International  GmbH                 |
| Frank Odzuck                      |       | Member of the Board of Directors        |       | Zwack Unicum Plc.                             |
| Dr. Ralph  Rentschler        |       | Member of the Board of  Directors       |       | Slovak Telecom                                |
|                              |       | Member of the  Supervisory Board        |       | T-Hrvatski Telekom,  Croatia                  |
|                              |       | Member of the  Supervisory Board        |       | CAP Customer Advantage  Program GmbH          |
|                              |       | Member of the Supervisory Board         |       | DeTe Fleet Services GmbH                      |

 

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***Biographies of Members of the Board of Directors***

*ChristopherMattheisen.**  *Mr. Mattheisenstudied economics and finance at Indiana University of Bloomington and atColumbia University. He first came to Hungary in 1990 to start a strategicplanning and business consulting company. In 1993, in his capacity as amarketing manager of U.S. West International, Mr. Mattheisen helped launchvarious Hungarian, Polish and Czech mobile service operators. He worked as amarketing and sales director of TMH between 1993 and 1996. Between 1997 and1999, he ran sales and marketing activities of MediaOne in London and laterworked in Britain as a business, sales and marketing director of BT’s Cellnet.In September 2002, Mr. Mattheisen became Chief Officer of ResidentialServices of Magyar Telekom and in January 2005 Chief Officer of theWireline Lines of Business (“T-Com”, including Residential Services, Internetand Network divisions). From December 6, 2006, Mr. Mattheisen is theChief Executive Officer of Magyar Telekom, from December 21, 2006 he isthe Chairman of the Company’s Board of Directors.

*Dr. IstvánFöldesi.**  *Dr. Földesi received a degree in economicsin 1972 and graduated with a Ph.D. in 1974. He spent twenty years as a diplomatin London, Madrid and Washington D.C. At the end of the 1980’s, he served as anadvisor to the Prime Minister and participated in round table negotiationsresulting in political and economic changes. In 1991, he became an advisor tothe OECD. He has been working as an international business advisor since 1992.From 1994 to 1999, Mr. Földesi was a member of the Board of Directors ofMagyar Telekom and until 1996 he acted as Chairman of the Board. In 2003, hewas reappointed as a member of the Board of Directors of Magyar Telekom.

*Dr. MihályGálik.**  *Dr. Gálikis a senior university lecturer with a Ph.D in economics. He spent nearly twodecades in the media, working for Hungarian Radio, where he held severalpositions involving high responsibility, including that of Managing Director.Afterwards, his professional career has been linked to the Budapest Universityof Economics (currently called Corvinus University), one of the mostprestigious institutions in Hungarian academic education. For three years, hewas a senior lecturer, while in the last seven years he headed severaldepartments at the university. He is a key figure of the university’s culturallife, author of some 70 scientific publications including four textbooks. He isalso a recipient of the Széchenyi Professor Scholarship. He is the Director ofthe Marketing and Media Institute of the Corvinus University and the Head ofthe Media, Marketing Communications and Telecommunications Department.

*MichaelGünther.*   Mr. Günther studied businessadministration at universities in Berlin and Hamburg. In 1971, he started hiscareer at Philips-Konzern where he was a financial executive. From 1987 to1993, Mr. Günther was a member of the Board of Directors of PhilipsKommunikations Industrie AG in Nuremberg and was responsible for controlling,finance and accounting, as well as information technology. In 1994, he joinedDeTeSystems, a DT subsidiary, as Financial Director. In 1996, Mr. Güntherjoined DT as Head of Financial and Controlling Division. From September 1997to August 2000, Mr. Günther served as Financial and ControllingDirector at T-Mobile International AG*.*In February 2000,Mr. Günther became Chief Financial Officer, then since June 2001, hehas served as Chief Executive Officer of the Joint Venture Management forT-Mobile International AG.

*Dr. KlausHartmann.**  *Dr. Hartmannreceived a Ph.D. in economics from the Institute for Company Management inGermany in 1987. He also holds an MBA from the University of Birmingham. Priorto his employment with DT, he worked for Arthur Andersen in Germany and as atreasurer and operational controller for a subsidiary of the BICC Group. Hejoined DT in 1995 as Manager of International Capital Markets and becameCorporate Treasurer of Global One, a joint venture of DT, France Telekom andSprint in 1997. He returned to DT’s Bonn headquarters as Senior Advisor to CFOin April 2000*.*He was appointed as CFO ofMagyar Telekom and Vice-Chairman of our Management Committee in November 2000.On September 15, 2006, he became CEO of Polska Telefonia Cyfrowa.

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*HorstHermann.*   After graduating with an engineeringdegree, Mr. Hermann joined DT as an operations manager in theTelecommunications Office in Bonn in 1978. In 1990, he began to work forCorporate Strategy and Regulatory Policy at the DT headquarters. From 1994until 1996, he was Assistant Managing Director in Business Development andFinance at DT’s regional headquarters in Singapore covering branch offices inHongkong and New Delhi. From 1996 until 1998, Mr. Hermann returned to DTheadquarters for a strategic planning position. In April 1998, he joinedMagyar Telekom to head Strategy, Business Development and M&A. On January 1,2002, he became Chief Strategy and International Officer and was also put incharge of our Business Portfolio, Maktel and our group policy for Media. In June 2003,Mr. Hermann became responsible for Affiliate Management for DT’s Centraland Eastern European telecommunications operations, such as Magyar Telekom,T-Hrvatski Telekom, Croatia and Slovak Telecom.

*ThiloKusch.*   Mr. Kusch studied communicationengineering and business administration at Technische Universität Berlin. From1989 to 1992 he successfully established his own company selling PCs and PCnetwork to residential and small business customers. From 1992 to 1998 heworked in a leading position in Arthur D. Little’s Telecoms, IT, media andentertainment practice as a management consultant and from 1998 to 2001 he wastelecommunications equity analyst with Dresdner Kleinwort Wasserstein. Hejoined Deutsche Telekom Group in 2001 as Senior Director in charge of IPOpreparations and investor relations for T-Mobile International. Since April 2002he was a Senior Executive Vice president of Deutsche Telekom, in charge ofinvestor relations. He was appointed Chief Financial Officer of Magyar Telekomin September 2006.

*GerhardMischke.**  *Mr. Mischkereceived a degree in business management at Justus-Liebig University in Gießenin 1984. Between 1985 and 1990, he worked at the Finance Department of FranzHaniel & Cie GmbH in Duisburg. From 1990 until 1991, he worked at theFinance Department of Scrivner Inc., Oklahoma City and concurrently studied asa correspondence student at Cornell University. From 1991 until 1998 he actedas Head of Finance and M&A at GEHE AG, Stuttgart, then he worked as GroupFinance Director of GEHE UK, Coventry until 2000. In September 2000, hewas appointed Senior Executive Vice President Finance and Treasurer of DeutscheTelekom AG. Since October 2004, he has served as Senior Executive VicePresident, Treasury and International Investment.

*FrankOdzuck.**  *Mr. Odzuckobtained an economist degree in 1983 in Budapest. He has been working inHungary for over 15 years. He was the managing director of the Hungarianoperations of Eduscho and Eduscho-Tchibo for 8 years and later the managingdirector of Nestlé-Schöller Hungary Ltd. Since 2003, he has been the CEO ofZwack Unicum Rt, listed on the Budapest Stock Exchange. The company, producingand marketing a genuine “Hungaricum”, is one of the best-known internationalcompanies in Hungary (Underberg, Diageo).

*Dr. Ralph Rentschler.*   Dr. Rentschlerhas been CFO of T-Com since 2001. After receiving a doctorate degree ineconomics, he worked for four years for Robert Bosch GmbH as an expert advisoron business principles and methods. His areas of responsibility includedinvestment analysis and cost accounting. Later he became Commercial Manager ofBrand Optics Division at Carl Zeiss, where he managed Accounting, Controlling,Data Processing and Purchasing. Mr. Rentschler was Head of GroupControlling and Planning and Reporting Departments at Carl Zeiss from 1992 to1997. His areas of responsibility included production and investmentcontrolling, controlling of affiliated companies, M&A and strategicplanning.

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**ManagementCommittee**

Pursuant to our amendedArticles of Association and the amended Rules of Procedure of the Board ofDirectors, the Board of Directors established a Management Committee in 2000,which is empowered to carry out the day-to-day operations in accordance withthe annual business plan. On December 31, 2006, the Management Committeeconsisted of six chief officers of Magyar Telekom. The members were as follows:

| **Name**                             | ** ** | ** ** | ** ** | **Age**                                                                                 | ** ** | **Position** | ** ** | **Member  since** |
|--------------------------------------|------------|------------|------------|-----------------------------------------------------------------------------------------|------------|--------------|------------|-------------------|
| Christopher Mattheisen               |       | 45         |       | Chairman and Chief  Executive Officer                                                   |       | 2006         |
| Thilo Kusch                          |       | 42         |       | Chief Financial Officer                                                                 |       | 2006         |
| Dr. Tamás Pásztory(1) |       | 55         |       | Chief Human Resources  and Legal Officer                                                |       | 2000         |
| György Simó                |       | 40         |       | Chief Operating Officer,  Wireline Services LoB and Chief Executive Officer of T-Online |       | 2006         |
| Zoltán Tankó.              |       | 49         |       | Chief Operating Officer,  Business Services LoB                                         |       | 2000         |
| János Winkler                   |       | 52         |       | Chief Operating Officer, Mobile Services LoB                                            |       | 2006         |

----

(1)                 Resignedfrom his position as of March 30, 2007. Effective April 1, 2007, ÉvaSomorjai was appointed as Chief Human Resources Officer. At the same time, aChief Information Officer position was established and István Maradi wasappointed to fill this position. Both new officers are members of theManagement Committee.

**OtherPrincipal Directorships of Members of Management Committee**

| Name                              | ** ** | ** **                         | ** ** | **Position held**                                       | ** ** | **Company** |
|-----------------------------------|------------|------------------------------------|------------|---------------------------------------------------------|------------|-------------|
| Christopher Mattheisen            |       | See above                          |       |                                                    |
| Thilo Kusch                       |       | See above                          |       |                                                    |
| Dr. Tamás Pásztory |       | Member of the Board of  Directors  |       | Investel Zrt.                                           |
|                                   |       | Member of the Board of  Directors  |       | T-Online Hungary Zrt.                                   |
| György Simó             |       | Member of the Board of  Directors  |       | T-Online Hungary Zrt.                                   |
|                              |       | Member of the Board of  Directors  |       | Maktel                                                  |
|                              |       | Trustee                            |       | Magyar Mozgókép  Közalapítvány |
|                              |       | Member of the Advisory  Board      |       | Dataplex Kft.                                           |
| Zoltán Tankó            |       | Chairman of the  Supervisory Board |       | Linum Foundation                                        |
| János Winkler                |       | None                               |       |                                                    |

 

***Biographies of Chief Officers***

*ChristopherMattheisen.**  *See “Biographiesof Members of the Board of Directors” above.

*ThiloKusch.**  *See “Biographiesof Members of the Board of Directors” above.

*Dr. TamásPásztory.**  *Dr. Pásztorygraduated with degrees in law and organization engineering. He was appointedDeputy Chief Officer of Magyar Telekom in July 1995 and Chief HumanResources and Legal Officer in February 1996. He joined our predecessor in1969 and has been in various positions in the human resources area since 1980. His professional expertise includes top-levelcorporate governance, change management, transformation of companies andcorporate groups, as well as business operations. He resigned from his positionas of March 30, 2007.

*GyörgySimó.**  *Mr. Simógraduated in 1997 at ELTE Sociology Department. During his studies received ascholarship to the Sociology Department of the New School for Social Research(New York). In 1991 he founded Tilos Radio, where he acted as host, later asChairman of the Board of Trustees. From 1996 to 1998 Vice-Chairman ofAMARC-EUROPE, the European Association of Community Radio Broadcasters. From1999 he was Program Director at MATÁVnet, then in 2000 one of the leaders ofthe 

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project elaborating MagyarTelekom’s Internet strategy. From April 1, 2000 Chief Officer andExecutive Director of MATÁVnet Kft., from September 1, 2000 Senior ChiefOfficer of the company (renamed on May 2, 2001 to Axelero Internet Rt.)responsible for media, strategy and communication, from July 2002 memberof Axelero Internet Rt.’s Board of Directors. From November 1, 2003 CEO ofAxelero Internet, from May 6, 2005 CEO of T-Online, Deputy to Head ofT-Com and Head of T-Com’s Internet Services Division. As of September 20,2006, György Simó was appointed Chief Operating Officer of the Wireline LoB ofMagyar Telekom. He also retains his position as CEO of T-Online Hungary.

*ZoltánTankó.**  *Mr. Tankógraduated from Budapest Technical University with a degree in electricalengineering. He started as an IT development engineer for Budapest RadioTechnology Enterprise in 1980 and for Kőbánya Pharmaceuticals in 1982. Hehad several positions at Műszertechnika (Instrument technology) startingin 1984, including Chief Telecommunications Officer starting in 1990. He becameDirector of our Business Communications Branch in February 1996, ChiefSales Officer in January 2000 and Chief Operating Officer of BusinessServices Lines of Business (T-Systems) in January 2002.

*János Winkler.**  *Mr. Winkler earned an economics degree at theBudapest University of Economic Sciences, and in 2000 an MBA degree at PurdueUniversity (USA). He started his career as trade manager with Nikex ForeignTrade Company, then from 1986 to 1991 he served in Beijing at the Commercial Section ofthe Republic of Hungary, first as commercial secretary, later deputy counselor.From 1992 he was National Sales Manager, later Deputy Director of Marketing atTMH and in 1994 he was appointed Deputy CEO. From February 1996 he hasbeen Chief Marketing and Sales Officer of TMH. As of January 20, 2006, hewas appointed TMH’s CEO and became member of the Management Committee of MagyarTelekom. From March 1, 2006 he has been Chief Operating Officer of MagyarTelekom’s Mobile Services LoB.

**Supervisory Board**

The Supervisory Board is responsible for supervisingour administration and control and for assuring our compliance with Hungarianlegal requirements and provisions set out in our governing instruments. TheSupervisory Board reviews every significant report delivered to the generalmeeting of the shareholders, proposals by the Board of Directors, financialstatements and proposals regarding profit distribution. The Supervisory Boardalso prepares a report on these subjects for the annual general meeting ofshareholders.

Pursuant to the Articles of Association, theSupervisory Board consists of a minimum of three and a maximum of fifteenmembers elected by the shareholders for a term of three years. The WorksCouncil nominates one third of the Supervisory Board members. The holder of theSeries “B” Share has the right to nominate one member of the SupervisoryBoard. Meetings of the Supervisory Board require a quorum of eight members.

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On December 31,2006, the members of the Supervisory Board, their principal occupation and theyears of their original election were as follows:

| **Name**                         | ** ** | ** ** | ** ** | **Age**                                                                                | ** ** | **Principal Occupation** | ** ** | **Member  since** |
|----------------------------------|------------|------------|------------|----------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------|
| Géza Böhm              |       | 54         |       | Chairman of Hungarian  Telecommunications Trade Union                                  |       | 2002                     |
| Attila Csizmadia(1)              |       | 57         |       | Ministry of Finance,  Chief Counsellor                                                 |       | 2003                     |
| Dr. Ádám Farkas   |       | 39         |       | CEO of Allianz Bank Zrt.                                                               |       | 2005                     |
| Dr. János Illéssy |       | 44         |       | Chief Financial Officer  of Borsodchem                                                 |       | 2006                     |
| Gellért Kadlót         |       | 58         |       | Member of the Workers’  Council of the sales field                                |       | 2002                     |
| Dr. Sándor Kerekes     |       | 58         |       | Director of Institute of  Environmental Sciences Corvinus University Budapest          |       | 2006                     |
| Dr. Thomas Knoll            |       | 40         |       | Senior Executive Vice  President, Corporate Audit                                      |       | 2005                     |
| Konrad Kreuzer                   |       | 58         |       | Chairman of the Board of  Directors of E.ON Hungária Zrt.                         |       | 2006                     |
| Dr. László Pap    |       | 63         |       | Budapest University of  Technology, Professor and Head of Telecommunication Department |       | 1998                     |
| György Varju                |       | 60         |       | Chairman of the Workers’  Council at Technical Services                           |       | 2005                     |
| Péter Vermes                |       | 60         |       | Chairman of Magyar Telekom’s Central Workers’  Council                       |       | 1995                     |

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(1)                 Representative ofthe holder of the Series “B” Share

On March 1, 2007, Dr. György Szapáry joinedthe Supervisory Board.

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**Other Principal Directorships of Members of theSupervisory Board**

| Name                             | ** ** | ** **                          | ** ** | **Position held**                                                                                     | ** ** | **Company** |
|----------------------------------|------------|-------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|-------------|
| Géza Böhm              |       | Member of the  Supervisory Board    |       | DIMENZIÓ Biztosító és  Önsegélyező  Egyesület                 |
| Attila Csizmadia                 |       | Member of the  Supervisory Board    |       | Postaautó Tisza ZRt.                                                                             |
|                             |       | Member of the  Supervisory Board    |       | Puskás Tivadar  Közalapítvány                                                     |
|                             |       | Member of the  Supervisory Board    |       | Neumann János Digitális  Könyvtár és Multimédiás Központ Kht. |
|                             |       | Member of the Board of  Directors   |       | MÁV Cargo ZRt.                                                                                   |
| Dr. Ádám Farkas   |       | Member of the Board of  Directors   |       | Thomson Financial  Services Ltd., Hungary                                                             |
|                                  |       | Member of the Board of  Directors   |       | Allianz Bank Zrt.                                                                                     |
|                                  |       | Member of the Board of  Directors   |       | Budapest Airport Ltd.                                                                                 |
|                                  |       | Member of the  Supervisory Board    |       | Central European Broker  Training Foundation                                                          |
| Dr. János Illéssy |       | Member of the  Supervisory Board    |       | Béres Gyógyszergyár Zrt.                                                               |
|                             |       | Member of the Board of  Directors   |       | Borsodchem Plc.                                                                                       |
| Gellért Kadlót         |       | None                                |       |                                                                                                  |
| Dr. Sándor Kerekes     |       | Member of the  Supervisory Board    |       | Tomori Pál Főiskola                                                                         |
|                             |       | Chairman of the Advisory  Board     |       | Zöld Iránytő Alapítvány                                                      |
|                             |       | Chairman of the Advisory  Board     |       | Partners Hungary  Alapítvány                                                                |
| Dr. Thomas Knoll            |       | None                                |       |                                                                                                  |
| Konrad Kreuzer                   |       | Chairman of the Board of  Directors |       | ZSE                                                                                                   |
|                             |       | Chairman of the Supervisory  Board  |       | E.ON Tiszántúli Zrt.                                                                        |
|                             |       | Chairman of the  Supervisory Board  |       | E.ON Észak-Dunántúli  Zrt.                                                             |
|                             |       | Chairman of the  Supervisory Board  |       | E.ON Dél-Dunántúli Zrt.                                                                |
|                             |       | Chairman of the  Supervisory Board  |       | KÖGÁZ Zrt.                                                                                  |
|                             |       | Chairman of the  Supervisory Board  |       | DDGÁZ Zrt.                                                                                       |
| Dr. László Pap    |       | None                                |       |                                                                                                  |
| György Varju                |       | None                                |       |                                                                                                  |
| Péter Vermes                |       | None                                |       |                                                                                                  |

 

**Biographies ofMembers of the Supervisory Board**

*GézaBöhm.*   Mr. Böhm has been working with MagyarTelekom and its predecessor since 1970. He has worked as a foreman, anadministrator in charge of transmission investment and an SDH project leader.He has been an officer of the Workers’ Council since 1993. Since March 2002,he has been Chairman of the Hungarian Telecommunications Trade Union.

*AttilaCsizmadia.*   Mr. Csizmadia holds anengineering degree in telecommunications. From 1968 to 1983, he worked at theBudapest Telephone Directorate as an engineer, then held various managementpositions. In 1983, he became a senior staff member at the General Directorateof Hungarian Post. From 1986 to 1990, he was a senior staff member and Head ofTelecommunications Department at the National Planning Office. From 1990, heworked as Head of Department and chief counsellor in the Ministry of Finance.He also took part in work of various inter-departmental committees andconsulting bodies dealing with IT and communications issues.

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*Dr. ÁdámFarkas.*   Dr. Farkas graduated from theBudapest University of Economics in 1990 and he obtained a Ph.D. from the sameinstitution in 1995. He studied and worked on various research projects atseveral universities outside Hungary. He started his career as a full-timelecturer at the university and as a finance advisor to EBRD (London). Atpresent, he is a lecturer at the Budapest University of Economics as well as atInternational Training Centre for Bankers. Between 1997 and 2001 he wasManaging Director of the National Bank of Hungary and member of its Board ofDirectors. From 1999 until 2001, he acted as Deputy Chairman of Keler Rt.’sBoard of Directors and was a member of the Stock Exchange Council. From 2001,he was Managing Director of CIB Central European International Bank, and thenhe was Chief Executive Officer between 2002 and 2005. He is a member ofexecutive committees of several Hungarian professional associations as well asof the Supervisory Board of the Central European Training Foundation for Brokers.In March 2006, he became CEO of Allianz Bank Zrt.

*Dr. JánosIlléssy.**  *Dr. Illéssyis an electrical engineer graduated from the Budapest Technical University andacquired MBA and PhD degrees at the Pittsburgh University. For over one and ahalf decades he worked for Pannonplast, a plastics manufacturer company listedat the Budapest Stock Exchange, in various positions of advisor, controller,Chief Financial Officer and Chief Executive Officer. From 2001 to 2003 he hasbeen the managing director of the Hungarian branch bank office of BNP Paribas.Since 2004 he has been the Chief Financial Officer and member of the Board ofDirectors of BorsodChem.

*GellértKadlót.*   Mr. Kadlót has been working withMagyar Telekom since 1970, initially in operations, and later in development.Currently, he coordinates cooperation between local telecommunicationsoperators and Magyar Telekom within the Domestic Carriers Division. From 1996to 2005, he was Chairman of the Workers’ Council of the Domestic CarriersDivision. Since 2005, he has been serving as Member of the Workers’ Council ofthe sales field.

*Dr. SándorKerekes.**  *ProfessorKerekes has a PhD in Chemistry and a Degree in Economics as well as an advancedManagement Program in Harvard Business School. He served as Chairman in variousBoards of mid sized companies in Hungary for 15 years. The last 8 years heserved as the Head of Business Administration Faculty of the Corvinus Universityof Budapest. He is the Director of the Institute of Environmental Sciences ofCorvinus University.

*Dr. ThomasKnoll.**  *Dr. Knollreceived a degree in economics in 1992 and a Ph.D. in 1999. During his studies,he acquired job experience at Hypo-Bank and Lufthansa Informationstechnik undSoftware GmbH where he started his career in 1992. Since December 1992, hehas been working at Deutsche Telekom AG in various executive positions. From1998 until 2000 he acted as Head of the Finance and Controlling Department ofDeutsche Telekom AG, Branch of the Network Division, Cologne. In 2000 he becameHead of the Board of Management Office and Chief of Staff at the Headquartersin Bonn. At present, he is Senior Executive Vice President, Corporate Audit.

*KonradKreuzer.**  *Mr. Kreuzeris a lawyer with a degree in Business Administration. After serving in variouspositions at the Universities of Munich and Konstanz and in the Ministry ofDomestic Affairs of the State of Bavaria, he joint Bayernwerke utilities as aHead of the Law and Property Department. Since 1997, he has been serving EON inHungary as the Chairman of the Board of Directors. His current responsibilitiesare Legal Affairs, Gas Business and International Affairs. He is also aChairman of the Board of Directors of Západoslovenska energetika, Slovakia.

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*Dr. LászlóPap.**  *Dr. Papgraduated from the Budapest Technical University with a degree intelecommunications. He received a Ph.D. in 1980 and Doctor of Sciences (thehighest degree awarded by the Hungarian Academy of Sciences) in 1992. He hasbeen a professor in the Electrical Engineering Department and Head of theDepartment of Telecommunications at Budapest Technical University since 1967.He has obtained numerous patents for his inventions. He is Vice President ofthe Scientific Society of Telecommunications, a member of the editorial boardof the periodical World of Nature, a member of the Hungarian Society ofInventors, and an expert of the Hungarian Space Research GovernmentalCommittee.

*GyörgyVarju.**  *Mr. Varjuhas been working with Magyar Telekom and its legal predecessor since 1977.Until 1998, he acted as an on-site construction manager. In 1993, he waselected to the Workers’ Council, and he is now Chairman of the Workers’ Councilat Technical Services and a member of the Central Workers’ Council. Between1999 and 2002, he was a member of Magyar Telekom’s Supervisory Board as arepresentative of the employees.

*PéterVermes.*   Mr. Vermes became a qualifiedengineer in 1972, graduated with a degree in telecommunications in 1975 andbecame a teacher of technical sciences in 1978. Between 1972 and 1986, heworked for the Budapest Regional Directorate and between 1986 and 1997 for theLong-Distance Telecommunications Directorate. He currently works for the Operationsand Maintenance Directorate. He has been Chairman of our Central Workers’Council since 1993. He was elected as the employees’ representative on theSupervisory Board in 1995 for the first time.

The mandate of the members of the Board, SupervisoryBoard and Audit Committee expired on April 26, 2007, on the date of theannual general meeting closing business year 2006. On the same day, the annualgeneral meeting elected the following people to these bodies:

Board of Directors: Dr. István Földesi, Dr. MihályGálik, Michael Günther, Dr. Klaus Hartmann, Horst Hermann, Rudolf Kemler,Thilo Kusch, Christopher Mattheisen, Frank Odzuck and Dr. Ralph Rentschler.

Supervisory Board: Jutta Burke, Attila Csizmadia, Dr. ÁdámFarkas, Dr. János Illéssy, Gellért Kadlót, Dr. Sándor Kerekes, IstvánKoszorú, Konrad Kreuzer, Dr. László Pap, Dr. György Szapáry, PéterVermes and György Varju.

Audit Committee: Dr. Ádám Farkas, Dr. JánosIlléssy, Dr. Sándor Kerekes, Dr. László Pap and Dr. GyörgySzapáry.

The mandate of the membersof the Board, Supervisory Board and Audit Committee lasts until the day of theAnnual General Meeting that closes fiscal year 2009, but no later than May 31,2010.

**Indemnification ofthe Board of Directors and the Supervisory Board**

Pursuant to our Articlesof Association, to the extent permitted by law, we are required to indemnifyeach current and former member of the Board of Directors and the SupervisoryBoard under certain circumstances. Generally, if such individual is liable forcertain costs or damages in connection with his or her board position and hasacted in good faith, we must indemnify him or her. We may maintain insurance onbehalf of any member of the Board of Directors or the Supervisory Board againstany liability asserted against him or her and incurred by him or her in anysuch capacity, whether or not we have the obligation to indemnify him or heragainst such liability.

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**Statement of theBoard of Directors**

“The role of the Board of Directors is to act onbehalf of the shareholders to ensure that Magyar Telekom operates in a mannerthat serves the interests of shareholders all over the world. As members ofMagyar Telekom’s governing body we will always act in accordance with ourfiduciary responsibilities and the following values:

·       accountabilityto our shareholders;

·       opennessto scrutiny;

·       transparencyof all decisions taken; and

·       deliberationthat will be fair and open but also efficient, timely and orderly.

By accepting to serve onMagyar Telekom’s Board, we have committed ourselves not to spare neither timenor effort to earn the trust of those who have invested in the future of thisCompany.”

**Compensation ofDirectors and Officers**

For the year ended December 31, 2006, theaggregate compensation of the members of the Board of Directors was HUF 8.5million.

For the year ended December 31, 2006, theaggregate compensation of the members of the Supervisory Board was HUF 17.5million.

For the year ended December 31, 2006, theaggregate compensation of the members of the Management Committee (“MC”) wasHUF 817.3 million.

Half of the MC members have an employment contract fora fixed duration. Pursuant to Hungarian legislation, if an employment contractis terminated before the end of its term, the average compensation received bythe employee prior to such termination is payable for the remaining period upto 12 months. In the case of an employment contract for a fixed duration thenotice period is normally six months, and severance is between 16 and 21months.

In addition to the above, the affected persons arebound by the non-compete clause, under which the employee is barred fromentering into employment with any Hungarian or international competitor ofMagyar Telekom Group and is required to refrain from provision of direct or indirectservices or activities of any kind to such companies for a definite period (notlonger than one year) upon termination of his/her employment. Furthermore, suchemployee is barred from any action aimed to recruit employees of Magyar TelekomGroup for any other company. This limitation entails certain compensation whichis proportional with the above obligation. If the employee is in breach of theagreement, he/she will reimburse the net amount of compensation to theemployer. In addition, the employee will be liable for a payment ofcompensation to the employer.

The MC members from foreign countries may be entitledto housing subsidies.

In line with the Company’sallowance scheme, the company contributes to the personal pension scheme andthe personal insurance scheme on behalf of the MC members. In addition, the MCmembers are entitled to the use of company cars.

**Board Practices**

Members of the Board of Directors and the SupervisoryBoard are elected for a term of three years. Members of the Management Committeeare elected for the duration of their employment in the respective chiefofficer position.

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Employment contracts with our management employeescontain special provisions providing for entitlements after termination ofemployment; therefore, the amount of severance is higher than the amountrequired by the applicable provisions of the Labor Code.

In compliance with the relevant provisions of the newCompany Act and the amendments to the Company’s Articles of Associationapproved on October 9, 2006 the EGM held on November 6, 2006 electedan Audit Committee from the independent members of the Supervisory Board. SinceNovember 6, 2006, the members of the Audit Committee of Magyar Telekom areDr. Ádám Farkas (Chairman), Dr. László Pap, Dr. János Illéssy, Dr. GyörgySzapáry and Dr. Sándor Kerekes. The mandate of Dr. György Szapáry hasbegun as of March 1, 2007.

The Audit Committee assists in appointment ofindependent auditors to be elected by the annual general meeting and reviewsthe scope of external audit services. It advises the Supervisory Board withrespect to approval of all audit and non-audit services to be performed by theexternal auditor. The Audit Committee also reviews our annual financialstatements, taking into account results of audits and reviews performed by theindependent auditors. The Audit Committee also reviews financial reportssubmitted to the stock exchanges, banks and regulatory bodies as well asreports prepared by our internal auditors. The Audit Committee meets at leastfour times a year.

The Remuneration Committeemakes proposals to the Board of Directors with respect to appointment anddismissal, as well as remuneration of chief officers, including establishmentand assessment of bonus targets. Members of the Remuneration Committee areMichael Günther, Frank Odzuck and Dr. Ralph Rentschler. The RemunerationCommittee meets at least three times a year.

**Employees**

We had12,341 employees as of December 31, 2006. The following table providesinformation concerning the number of full-time employees, including full-timeequivalents, of Magyar Telekom Plc. and its consolidated subsidiaries:

| ** **                                              | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Magyar Telekom  Plc.                                    |       | 7,740    |       | 5,478    |       | 6,980    |       |
| Magyar Telekom  Plc. and its consolidated subsidiaries: |       | 13,724   |       | 11,919   |       | 12,341   |       |

 

Thefollowing table provides information on the breakdown of Magyar Telekom’semployees by operations:

| ** **                           | ** ** | **Number of employees** | ** ** |
|--------------------------------------|------------|-----------------------------------|------------|
| ** **                           | ** ** | **2004**                          | ** ** | **2005** | ** ** | **2006** | ** ** |
| Hungarian fixed  line operations     |       | 9,141                             |       | 6,852 |   | 6,963 |   |
| International  fixed line operations |       | 2,386                             |       | 2,760 |   | 2,901 |   |
| Hungarian mobile  operations         |       | 1,780                             |       | 1,708 |   | 1,880 |   |
| International  mobile operations     |       | 417                               |       | 599 |   | 597 |   |
| Total                                |       | 13,724                            |       | 11,919 |   | 12,341 |   |

 

*WorkforceReduction and Redeployment.**  *Centralization,technological improvements and attrition have allowed us to reduce the size ofour workforce. While overall personnel levels are falling, the number of highlyskilled employees is increasing. We plan to further reduce the number of ouremployees.

In 2005 and 2006, we carried out a restructuringprogram, which included a significant headcount reduction. The objective of therestructuring program was to redefine the focus of our operation andconsumption patterns. We reallocated substantial human and financial resourcesto the mobile, data and Internet operations.

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*EmployeeRepresentation and Labor Relations.**  *Magyar Telekom Plc. has entered into a collectivebargaining agreement with the Hungarian telecommunications trade unions(Távközlési Szakszervezet, “TÁVSZAK” and Magyar Távközlési ÁgazatiSzakszevezet, “MATÁSZ”). The agreement, which can be terminated by either partywith three months’ notice, applies to all Magyar Telekom Plc. employees exceptthe Chief Executive Officer, regardless of their union membership status. Wageterms in the agreement must be renegotiated annually. Under the agreement,employees are generally entitled to prior notice before termination.Furthermore, employees are entitled to a specific amount of severance pay,which depends on the tenure of the employee. Employees are also entitled towelfare benefits as discussed below.

In addition to the collective bargaining agreement,employees of our Hungarian operations are generally covered by the HungarianLabor Code, Law XXII of 1992, as amended, which imposes various restrictions onthe involuntary termination of employment. The Hungarian Labor Code protectsemployee interests through two different labor organizations: the Trade Unionand the Workers Council.

The Trade Union, as the official representative ofemployee interests in negotiations relating the terms of employment, has theright to be informed of all corporate measures that may significantly affectthe interests of employees and to commence legal action against us foremployment-related conduct that infringes an employment rule. In addition, theWorkers Council directly represents employee interests in dealings withmanagement and decides jointly with management on matters involving employeewelfare funds and institutions. The Workers Council must be informedsemi-annually on issues affecting our economic performance and changes inwages, employment conditions and working hours. The Workers Council must alsobe consulted on corporate measures affecting employees.

Under the Hungarian Companies Act, employeerepresentatives on the Supervisory Board are nominated by the Workers Councilin cooperation with the Trade Union. The composition of the Supervisory Boardis approved by the annual general meeting. At least one third of the members ofthe Supervisory Board must be employee representatives. Currently, four membersof the Supervisory Board are employee representatives. These members are GézaBöhm, Gellért Kadlót, György Varju and Péter Vermes.

We believe that our relations with our employees aregood. We have not experienced any labor strikes or disruptions since ourformation.

*Pensions and BenefitPrograms.**  *Weprovide employees with discounted telephone services, subsidized meals,interest-free loans to purchase real estate, discount holiday facilities andother fringe benefits. In addition to our statutory contributions togovernmental health, retirement and unemployment schemes, we contribute to theemployees’ voluntary pension fund and supplementary benefits fund, whichprovide private pension and health insurance benefits supplementing governmentpension and health benefits. We do not, however, guarantee payment by thebenefits fund to its members. At the end of 2006, approximately 85 percent ofall employees participated in the pension plan, 78 percent in the self-helpplans and 71 percent in the health fund.

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**Share Ownership ofManagement**

Thefollowing table sets out information relating to holdings of ordinary shares byour directors and executive officers at December 31, 2006:

| **Name**                           | ** ** | ** **                                      | ** ** | **Position** | ** ** | **No. of Options  Owned** | ** ** | **No. of Shares  Owned** | ** ** |
|------------------------------------|------------|-------------------------------------------------|------------|--------------|------------|-------------------------------------|------------|------------------------------------|------------|
| Christopher  Mattheisen            |       | Chairman-CEO,  Board Member                     |       |         | —     |                                |       |                               | —     |   |   |
| Dr. Klaus  Hartmann           |       | Board  Member                                   |       |         | 103,600    |                                |       |                               | 8,000      |   |   |
| Dr. Mihály  Gálik   |       | Board  Member                                   |       |         | —     |                                |       |                               | 1,000      |   |   |
| Horst Hermann                      |       | Board  Member, Remuneration Committee Member    |       |         | —     |                                |       |                               | 400        |   |   |
| Attila Csizmadia                   |       | Supervisory  Board Member                       |       |         | —     |                                |       |                               | 6,272      |   |   |
| György Varju                  |       | Supervisory  Board Member                       |       |         | —     |                                |       |                               | 417        |   |   |
| Péter Vermes                  |       | Supervisory  Board Member                       |       |         | 3,600      |                                |       |                               | 8,800      |   |   |
| Dr. Tamás  Pásztory |       | Chief  Human Resources and Legal Officer        |       |         | 70,000     |                                |       |                               | —     |   |   |
| Zoltán Tankó             |       | Chief  Operating Officer, Business Services LoB |       |         | —     |                                |       |                               | 1,100      |   |   |
| Total                              |       |                                            |       |         | 177,200    |                                |       |                               | 25,989     |   |   |

 

For information aboutshare options, see Note 28 to the consolidated financial statements.

**ITEM 7—MAJORSHAREHOLDERS AND RELATED PARTY TRANSACTIONS**

**Major Shareholders**

The share capital of Magyar Telekom Plc. is HUF104,276,831,500, consisting of 1,042,768,215 Series “A” ordinary sharesand one Series “B” voting preference share. All Series “A” ordinaryshares have a nominal value of HUF 100 each and the Series “B” Share has anominal value of HUF 10,000. The holder of the Series “B” Share enjoyscertain preferential voting and other rights. See “Item 10—AdditionalInformation—Voting Rights and Voting—Series “B” Share” and “Transfer ofShares”.

Ordinary shares outstanding as of December 31,1999 amounted to 1,037,281,600 shares. In June 2000, 630,000 ordinaryshares of the Company were registered, which increased Magyar Telekom Plc.’snumber of registered ordinary shares to 1,037,911,600. Of the newly issuedshares, 77,270 ordinary shares were traded outside Magyar Telekom. Consequently,the number of shares outstanding increased to 1,037,358,870 shares.

In 2002, the remaining 552,730 shares from the June 2000transaction issue were traded outside Magyar Telekom. In addition, as a resultof the new management stock ownership program launched in 2002, we issued4,900,000 shares of common stock, which were repurchased immediately. As aresult, the number of registered shares increased to 1,042,811,600.

At the end of February 2006, TMH was merged intoMagyar Telekom Plc. According to the Hungarian Act on Business Associations itis not mandatory for the shareholders to remain shareholders of the mergedcompany and the company’s share capital should be reduced by the nominal valueof the shares held by departing shareholders. When departing shareholdersstated to leave the merged Company, MagyarCom, as controlling stakeholder, alsohad to divest some of the interest in Magyar Telekom to avoid a public offeringprocedure. As 43,385 shares were divested by departing shareholders, the numberof ordinary shares outstanding decreased to 1,042,768,215 as of February 28,2006, when the Court of Registry registered the merger.

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Informationconcerning our ownership structure as of December 31, 2006 is set out inthe following table:

| ** **                                     | ** ** | ** ** | ** **    | **Percentage of**         | ** ** |
|------------------------------------------------|------------|------------|---------------|--------------------------------|------------|
| **Shareholder**                                | ** ** | ** ** | ** **    | **Number of shares** | ** ** | **share capital** | ** ** |
| MagyarCom                                      |       |       | 617,452,081   |                           |       |   | 59.21 |   |   |
| Publicly traded(1)                             |       |       | 422,859,475   |                           |       |   | 40.55 |   |   |
| Treasury shares                                |       |       | 2,456,659     |                           |       |   | 0.24 |   |   |
|                                           |       |       | 1,042,768,215 |                           |       |   | 100.00 |   |   |
| Holder of  Series “B” Shares(2) |       |       | 1             |                           |       |   |   |   |   |
|                                                |            |            |               |                                |            |  |  |  |  |  |  |

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(1)                 Of our publiclytraded shares, JP Morgan Chase Bank had 12,229,840 ADRs, evidencing 61,149,200shares on its accounts as of December 31, 2006, for registered holders,such amount representing 5.9 percent of the total shares outstanding. We do notknow whether this percentage may be indicative of the percentage of ourordinary shares held by U.S. persons. Also, the members of the Board ofDirectors, Supervisory Board and the management own a total of 25,989 shares.

(2)                 Par value of Series “B”Share is HUF 10,000.

The number of treasury shares held by Magyar Telekomdeclined from 2,456,659 to 1,917,824, due to options exercised as part of thecompany’s management incentive program on December 29, 2006. The decreasedshare number was reflected in the company’s share register from January 2,2007, as the settlement date of the transactions was on the first working dayfollowing the trade date.

On May 15, 2007, the number of treasury sharesfurther declined to 1,789,575 due to options exercised as part of the company’smanagement incentive program.

One of the current directors was nominated by theholder of the Series “B” Share pursuant to the Articles of Association,seven of the current directors were nominated by MagyarCom and two of thecurrent directors are independent; MagyarCom therefore controls Magyar Telekom.

SBC and DT jointly managed and operated MagyarComuntil SBC’s 50 percent ownership in MagyarCom was transferred to DT in June 2000.DT now controls Magyar Telekom indirectly.

*The Government of Hungary.**  *The Hungarian government has significant influenceover our activities as the holder of the Series “B” Share and as theregulator of the Hungarian telecommunications sector. Ownership of the Series “B”Share gives the Hungarian government, through the Minister, certain specialrights in the election of one member of each of the Board of Directors and theSupervisory Board and the right to require the Ministry’s consent for certainother decisions taken at the general shareholders’ meeting. On April 16,2007, the Hungarian Parliament approved a bill transforming the “B” share intoordinary share and abolishing the special rights attached to it. Within 90 daysafter the new law comes into effect companies will have to modify theirinternal regulations accordingly. The Hungarian government, acting through theMinistry and various regulatory bodies under its supervision, will continue toexercise regulatory control over our telecommunications activities.

**Related partytransactions**

For a discussion of related party transactions, seeNotes 16 and 35 to the consolidated financial statements.

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**ITEM 8—FINANCIALINFORMATION**

**CONSOLIDATEDFINANCIAL STATEMENTS**

**See “Item 17—Financial Statements”.**

**OTHER FINANCIALINFORMATION**

**Legal proceedings**

***Legal proceedings pending before the competent courts,affecting Magyar Telekom in excess of HUF 500 million***

*UniversalTelecommunications Support Fund*

In January, 2002, the Prime Minister’s Office enteredinto an agreement with Magyar Telekom Plc. to revise and terminate theNationwide Concession Contract and Local Concession Contracts signed in 1994and to establish terms of universal telecommunications services to be providedby Magyar Telekom. According to the agreement, the Universal TelecommunicationsFund, established by the Communications Act, was obliged to pay certain fees touniversal service providers, as specified in the relevant laws. The UniversalTelecommunications Fund failed to make this payment when due. Magyar TelekomPlc. unsuccessfully tried to compel payment in an out-of-court procedure. In June 2004,Magyar Telekom Plc. requested a municipal court to compel the legal successorof the Universal Telecommunications Fund (the Universal ElectronicTelecommunications Fund) to pay HUF 194 million in interest for the latepayment plus legal costs. In July 2004, Magyar Telekom Plc. increased itsclaim by HUF 3,294 million, the unpaid sum for 2003. Accordingly, our totalclaim is now HUF 3,488 million. Currently there is also a public administrationprocedure under way in relation to the case the subject matter of which is themaking of a resolution defining the necessary contributions for 2004. Followingthe suspension of both procedures Magyar Telekom Plc. requested theircontinuation.

In the public administration procedure the BudapestMetropolitan Court in its ruling in November 2006 upheld Magyar TelekomPlc’s claim and regarded the second instance decision of the Chairman of theCouncil of National Communications Authority (“NCA”)—in which he confirmed thefirst instance decision of the NCA on the amounts due to Magyar Telekom inrespect of 2004—as unlawful, annulled the decision and ordered the NCA toinitiate new proceedings.

Furthermore, in January 2007 the BudapestMetropolitan Court upheld Magyar Telekom Plc’s claim and obliged the Fund topay to Magyar Telekom Plc. the late payment interest it is entitled to afterthe amount due to Magyar Telekom Plc. for 2002 in the amount of HUF 194million. Following the Fund’s appeal against this decision, the appellate courtin its decision in June 2007 amended the ruling of the Metropolitan Courtand refused Magyar Telekom Plc.’s claim for the HUF 194 million late paymentinterests. The ruling is final and binding. It is yet undecided whether MagyarTelekom Plc. wishes to initiate judicial review of the decision with theSupreme Court.

At the same time, the Budapest Metropolitan Court—applyingthe 2004 regulation with retroactive effect—ruled that the amount due to MagyarTelekom regarding 2003 can only be determined in a decision of the NCA. In thecourt appeal phase of this NCA procedure the Court also found Magyar TelekomPlc’s claim founded and obliged the NCA to initiate new proceedings. The sumdefined in the decision concluding this procedure will be Magyar Telekom’sentitlement for 2003. The NCA in its repeated procedure determined that theamount due is HUF 1,468 million, same as determined in its first procedure.

In its decision of December 1, 2004 the NCAordered TMH to pay HUF 1,131 million to the Universal ElectronicTelecommunications Fund. This decision was based on a regulation that was nolonger applicable after October 1, 2004 and thus after this date thedecision lacked legal grounds. TMH appealed the decision to the president ofthe Universal Electronic Telecommunications Fund who rejected 

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the appeal. TMH theninitiated a proceeding at the relevant court and requested the court to issue astay, which was granted. The relevant court in its decision of September 15,2005 annulled both decisions of the Universal Electronic TelecommunicationsFund in favor of TMH and awarded TMH HUF 1 million in legal expenses. TheUniversal Electronic Telecommunications Fund submitted a plea for judicialreview by the Supreme Court. On April 25, 2006 the Supreme Court ruledthat the original resolution of the NCA should stay in place and hence MagyarTelekom (as the legal successor of TMH) will have to pay the above sum 15 daysafter the judgment is received in writing.

Since Magyar Telekom Plc. was entitled to receive—basedon its statutory right as universal service provider—HUF 1,468 million from theUniversal Electronic Telecommunications Fund (out of which HUF 619 million wastransferred to Magyar Telekom Plc. earlier) and due to the fact that TMH mergedinto Magyar Telekom Plc., according to Magyar Telekom Plc’s interpretation ofthe relevant regulation, there was a legal possibility to net the claim ofMagyar Telekom Plc. against that of the Fund and consequently TMH executedpayment to the Universal Electronic Telecommunications Fund in the amount ofHUF 282 million.

The Fund requested the Hungarian Tax Authority toexecute prompt collection in the amountof HUF 849 million (HUF 1,131 million minus HUF 282 million) againstMagyar Telekom. Magyar Telekom Plc. initiated proceedings against the Fund,asking the court to declare that the company has no outstanding debt towardsthe Fund and to oblige the Fund to refund the HUF 891 million (with interestdue since November 21, 2006) collected from Magyar Telekom Plc.

Despite Magyar Telekom Plc.’s request delivered to theTax Authority to stop or suspend its procedure, and not to start the execution—theFund’s claim being unfounded in Magyar Telekom Plc.’s view—the Tax Authorityexecuted the collection of the amount with interest.

As the appropriate amountof receivables and payables were recognized in the consolidated financialstatements, no provision was considered necessary.

*Interconnectionfees*

In November 2002, the CAC designated TMH as aprovider with SMP in the national interconnection market. TMH, under statutoryobligations, filed its cost calculation methodology and relevant cost/ratesdata based on the mandatory LRIC model.

TMH withdrew the LRIC model, which it originally filedin December 2002, because the legal situation was unclear and no validregulation providing a guideline for the LRIC model existed. The lack of such aguideline meant that equal treatment of market participants could not beensured. The Chairman of CAC informed TMH that the CAC accepted the withdrawal,but it had to continue the procedure and ordered TMH to decrease itsfixed-to-mobile termination fees by about 10 percent, effective September 1,2003. This resulted in inconsistency with respect to call termination chargesas Pannon was not under the same legal obligation, due to the staying orderissued by the court of first instance on the execution of the SMP decision.However, Pannon later chose to follow TMH on its own initiative and lowered itsmobile termination charges by five percent, effective October 1, 2003. TMHchallenged the CAC’s decision in court on procedural grounds as the CAC had nolegal right to continue to consider the procedure binding.

The court of first instance in its decision on March 3,2005 found that the CAC’s decision was unlawful and ordered it to carry out anew procedure. The NCA did not appeal this decision, while TMH appealed thechoice of regulations ordered to be used in the new proceeding. The judgment onthe merits of the case is now final and binding. The second instance courtaccepted TMH’s arguments and ordered the NCA to apply the Electronic CommunicationsAct in the new procedure. The NCA carried out a repeated procedure and in itsdecision set the same fees (40.50 HUF/minute peak, 22.50 HUF/minute 

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off-peak) and notedthat these fees should be applied to the period from August 11, 2003 to June 15,2004. TMH filed suit against the decision at court.

In May 2004, the NCA ordered TMH to apply 37HUF/peak minute and 20.50 HUF/off-peak minute fixed-to-mobile termination rates(approximately an 8.7 percent decrease), effective June 15, 2004. TMHchallenged the decision in court and requested the court to suspend theexecution of the resolution until the case is resolved. The court of firstinstance decided in favor of TMH but did not suspend the resolution of the NCA.The NCA filed its appeal against the decision and TMH also appealed againstcertain parts of the reasoning, requesting again that the court suspend theexecution of the resolution. The second instance court decided that the NCA’sdecision was of a temporary nature and thus TMH did not have the right ofappeal and repealed the first instance court’s decision. The Supreme Courtupheld that the NCA’s decision was of a temporary nature and thus TMH did nothave a right of appeal. TMH is currently challenging this NCA decision in thecourt procedure relating to the NCA’s first market analysis decision of 2005which could be considered the “final decision” in this respect.

Pursuant to the Electronic Communications Act, the NCAlaunched in March 2004 a new market assessment and analysis procedure toidentify providers with SMP in certain relevant markets. The NCA completed theanalysis on January 17, 2005 and found all three GSM mobile operators inHungary as providers with SMP in their respective national voice calltermination markets subject to regulatory obligations. The NCA’s decisionperpetuated the asymmetry in the mobile operators’ termination fees, as itallows a 20 percent difference between the lowest and the highest terminationfee. Because of this asymmetry, TMH filed a suit to challenge this decision incourt. The first instance court repealed the 20 percent rule andcertain other provisions of the NCA’s decision. The second instance court inits binding decision on March 23, 2007 partly amended the first instancedecision and refused the claim of the plaintiffs in its entirety. TMH hasappealed the decision to the Supreme Court.

The NCA rejected the LRIC models and the proposed calltermination fees of all three mobile operators and applied benchmarking todetermine the termination fees. The NCA in its temporary decision of July 20,2005 set TMH’s average termination fee at HUF 27.17, Pannon’s at HUF 29.44 andVodafone’s at HUF 32.61. According to these decisions, these averagetermination fees were to be applied as of May 25, 2005. The decisions,among other things, do not define how to calculate the average, or whichservice’s termination the decisions apply to, or the unit to which the set HUFvalues apply, or how to apply the set fees with retroactive effect. Thedecisions are interpreted and applied in three different ways by the threemobile operators.

All three mobile operators filed suits against theirrespective decisions and requested the suspension of their application. Thecourt has rejected all requests for suspension, including TMH’s suit, as thedecision was temporary in nature. The NCA in its decision on September 13,2005 made all three temporary decisions final, without making any changes tothem. All three mobile operators filed suits against their respective decisionsand requested the suspension of their application. The court rejected allparties’ requests to suspend the decisions. The case is still ongoing.

On September 14, 2005 the NCA published anInformation Memorandum, which provided that the average termination fee set outin the 2005 termination fee decision is to be calculated based on weightedaverage, without specifying formulae to be used for the calculation. In itsdecision on November 22, 2005, the NCA found that TMH had chargedtermination fees at the level higher than specified by the termination feedecision, and ordered TMH to apply termination fees in compliance with theaverage termination fee prospectively and retrospectively. In addition, NCAimposed a fine of HUF 150 million. TMH challenged the decision in court andrequested that the decision be repealed. The court of first instance in itsdecision of June 2006 annulled the decision of the NCA and obliged it torepeat its procedure. The NCA appealed against the decision.

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The appellate court in its decision of May 2007annulled the first instance decision and ordered the Metropolitan Court toinitiate new proceedings.

In its decision of October 2, 2006 on the 2006market analysis of the mobile termination market, the NCA identified all threemobile service providers as SMPs and prescribed obligations regarding accessand interconnection, transparency, equal treatment, accounting separation andpricing, and also prescribed similar obligations in the modified 2005 decision.

On December 20, 2006 the NCA delivered itsdecisions on the mobile termination fees applicable from February 2, 2007.The rates are identical to those forecasted in the 2006 market analysisdecision: 23.17 HUF/min for TMH, 26.16 HUF/min for Vodafone and 24.44 HUF/minfor Pannon from February 2, 2007; 19.75 HUF/min for TMH, 20.99 HUF/min forVodafone and 20.29 HUF/min for Pannon from January 1, 2008 and HUF/min16.84 for all three operators from January 1, 2009. TMH filed suit againstall three decisions and the other mobile operators filed suits against theirrespective decisions.

As the relevant amounts ofreceivables and payables were recognized in the consolidated financialstatements, no provision was considered necessary.

*Base stationdisturbance*

TMH is currently a defendant in numerous lawsuits inwhich various parties are seeking damages for alleged disturbance caused bybase stations operated by TMH. The aggregate amount of such claims isapproximately HUF 500 million. TMH believes that these claims are ill founded,as base stations do not disturb owners of the neighbouring houses and fields inthe use of their properties. Under this reasoning, some of the Courts ofAppeals have remanded a number of unfavourable decisions rendered by the courtsof first instance. The majority of the lawsuits are pending before the courtsof first instance.

We consider risks of thesuits high, since the courts tend to rule in favour of the plaintiff insimilar cases. We made a provision in our financial statements for the fullamount of these claims.

*Alleged trade markviolation of T-Online*

OrigoApro.hu Kft. (“Origoapro.hu”) filed a lawsuit in May 2006against T-Online Hungary for damages, its claims potentially amounting to HUF19 billion. Origoapro.hu was established in 2004 and its claim is based on itstrademarks “origoingatlan”, “origoapro” and “origoauto” which it requested tobe registered in 2004 and eventually got registered in 2006.

Origoapro.hurequested the court:

·       toissue a preliminary injunction against the use of the trademark “origo” byT-Online Hungary’s portal;

·       declarea trademark violation;

·       orderT-Online Hungary to stop the violation and to restrain from similar conduct inthe future;

·       provethe exact amount of damages, i.e. revenues achieved by T-Online Hungary byusing the trademark—the plaintiff claimed this was an amount up to HUF 19billion.

Within the legaldeadline, T-Online Hungary submitted a complaint, in which it asked the courtto deny the request for an injunction and the plaintiff’s claim, stating that:

·       itstrademarks had been registered before the current lawsuit (in 2000, 2001 and2002) and provide sufficient protection in all product categories;

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·       T-OnlineHungary has been using these trademarks well before the establishment of theplaintiff (according to the relevant regulation on intellectual property,trademarks not registered but well-known in a country deserve protection);

·       theplaintiff’s conduct is not bona fide;

·       T-OnlineHungary asked the court to declare that the plea for a preliminary injunctionis unfounded and as potential negative financial effect the figure of HUF 15billion was submitted.

The plaintiff’s request for injunction was deniedagainst which the plaintiff has appealed.

Earlier in 2006, T-Online Hungary already initiatedthe deletion from the trademark registry Origoapro.hu’s trademarks in question.

T-Online Hungary requested the court suspend theproceeding while the deletion procedure is under way.

No exact amount for damages was defined by theplaintiff yet. Its claim is based on its own calculations of estimated revenuesof Origo deriving from advertising activities.

The court rejected the claim of OrigoApro.hu Kft. atfirst instance.

We believe the possibilityof any outflow in settlement to be remote, therefore no provision was recordedfor this purpose.

*Arbitrationprocedure initiated by fellow owner for non-approval of sale of shareholding*

The shares of M-RTL are owned by CLT-UFA S.A. (49percent), IKO-Telekom (31 percent) and Pearson (20 percent). Pearson intendedto sell its shares to KOS Beteiligungs Verwaltungsgesellschaft mbH („KOS”)which deal was not approved by the Extraordinary General Meeting of M-RTL.Pearson claims that this disapproval was unlawful and initiated proceedings atICC, Paris and is seeking the annulment of the resolution, registration of KOSas a shareholder of M-RTL and possible damages.

The arbitration procedure shall be carried out underGerman procedural law and Hungarian substantive law. The value of the claim fordamages is not known yet.

We believe the possibilityof any outflow in settlement to be remote, therefore no provision was recordedfor this purpose.

*Unauthorizedtapping and recording telephone conversations*

A group of private individuals in Macedonia hasclaimed that their personal rights were violated as a result of unauthorizedtapping and recording of their telephone conversations in the service area ofMaktel and is seeking EUR 3.3 million for damages. In January 2001, theleader of the opposition party (the current President of the Republic of Macedonia)published a report on widespread unauthorized tapping of telephone lines inMacedonia. This is the first case of its kind in Macedonia.

On June 15, 2007, the court obliged Maktel andthe Montenegrin Ministry of Internal Affairs jointly to pay 18 plaintiffs350,000 MKD each (approximately 26 million HUF in total). After receiving thewritten decision, the defendants intend to appeal.

We believe the possibilityof any outflow in settlement to be remote, therefore no provision was recordedfor this purpose.

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*Terminatedagreement for collection services for overdue accounts*

Newsphone DOO Skopje in Macedonia initiatedproceedings against T-Mobile Macedonia, alleging that T-Mobile Macedoniaunilaterally terminated an agreement for collection services for overdueaccounts of T-Mobile Macedonia’s subscribers, to seek damages for the futureprofit and the compensation for services already rendered. Newsphone is seekingMKD 978.7 million (approximately EUR 16.0 million) plus interest from April 18,2002, for the lost profit, and MKD 4.4 million (approximately EUR 0.1 million)plus interest from May 15, 2002, for services already rendered. T-MobileMacedonia believes that Newsphone breached several of its contractualobligations in the “trial period,” during which T-Mobile Macedonia may evaluatethe services of Newsphone, and if not satisfactory, terminate the agreement.The case is in its initial phase. T-Mobile Macedonia expects the resolution ofthis lawsuit to take a long time, due to complexities of the case and the largeamount of damages sought. The expertanalysis ordered by the court concluded mostly in favor of T-Mobile Macedonia.The plaintiff submitted an objection against the expert used. In general, theanalysis was accepted by the court, however, the expert was requested toprovide additional clarifications and information, which was received (positivefor T-Mobile Macedonia). The plaintiff has requested exclusion of the expert.

We believe the possibilityof any outflow in settlement to be remote, therefore no provision was recordedfor this purpose.

*Abuse of dominantposition by Maktel on wholesale ADSL market*

Macedonia On-Line (“MOL”) filed a lawsuit againstMaktel based on the Competition Authority’s (“CA”) 2003 decision, according towhich Maktel abused its dominant position because it did not offer wholesaleADSL to the other ISP in Macedonia while launching its own ADSL service andbecause it refused to offer third party billing to the other ISP with the sameconditions as it offered to its own Internet business.

MOL requests damages on the same grounds in the amountof EUR 3.5 million. MOL also requested the court to order Maktel—as an interimmeasure - to stop ADSL and dial-up sales until the final court decision. Thiswas refused by the court but appealed by MOL.

At the preliminary hearing held on September 4,2006, MOL withdrew its request for an interim measure enjoining future sales ofMaktel retail ASDL. The court accepted the withdrawal. Following a long delayin the procedure due to the illness of the original judge the procedurecontinued with a repeated preliminary hearing under the presidium of a newjudge, where additional provisions and evidence were proposed by MOL. Maktel atthe same time stated that MOL does not have sufficient evidence and that theCourt should reject its claim as ungrounded.

On April 5, 2007, Maktelreceived the decision of the Supreme Court regarding the lawsuit submitted byMaktel against the decision of the Minister of Economy of the Republic ofMacedonia acting as to appellate body to the decision of CA (MOL had based itsclaim upon these decisions). The Supreme Court accepted Maktel’s reasoning andannulled the decision of the Minister of Economy since it did not consider allfacts and evidence, it based its findings on the wrong legal provisions and didnot consider the provisions of Maktel’s Concession Contract. This decisionshall be useful for the MOL case and it is expected that will MOL withdraw itsclaim or that this would be done by the court.

Despite the above-mentioneddecision of the Supreme Court, a misdemeanor procedure was initiated ex officioagainst Maktel on account of the failure to act upon the decision of the CA(later confirmed by the Minister of Economy) which failure, in CA’s view,constitutes a misdemeanor under the Law on the Protection of Competition.

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For the purposes ofestablishing the value of its annual revenue (so that the CA could set theamount of the penalty) Maktel is obliged to submit to the CA (i) itsincome statement for the year 2003 and (ii) revenues generated by means ofconcluding ADSL service contracts with end-users in the course of the periodfrom June 14, 2004 until the day of the receipt of the Conclusion.

According to Maktel, the decision of the CA wasexecuted and Maktel received the positive ruling from the Supreme Court,consequently there is no legal basis for conducting of such procedure.

We believe the possibilityof any outflow in settlement to be remote, therefore no provision was recordedfor this purpose.

*Administrative fee—abuseof dominant position by Maktel*

On February 27, 2006, the Macedonian Commissionfor Protection of Competition (“CPC”) started a procedure against Maktel with acomplaint that in its invoices for telecommunication services from March 2005onwards Maktel charges subscribers an administrative fee of two percent on thetraffic, which - according to the CPC - raises serious suspicion that Maktelabuses its dominant market position. Maktel in its answer stated that itsadministrative fee does not amount to the abuse of its dominant marketposition.

The CPC enacted a first instance decision that Maktelshould stop charging the two percent. Maktel submitted an appeal. TheCommission affirmed the first instance decision from the CPC. The CPC decisionwas final from June 19, 2006, executable from July 5, 2006. Maktelchallenged this second instance decision to the Supreme Court. This will notdelay the execution of the decision. Maktel is still waiting for a decisionfrom Supreme Court.

Starting from June 2006, Maktel stopped chargingthe two percent administrative fee and decided to impose a fixed charge forcovering the costs for preparation of the bill, based on the rationale that theCPC’s decision prohibited only charging the two percent fee and not anadministrative fee as such.

Following the introduction of the fixed charge, CPCstarted a new procedure against Maktel for cancellation of charging the fixedamount administrative fee. Maktel had unsuccessful appeals against both thefirst and the second instance decisions of the CPC. In its decisions the CPCestablished that Maktel has dominant position on the market of public fixedvoice telephone networks and services and that Maktel abuses its dominantposition by charging the fixed amount fee. Maktel is prohibited to charge thefixed amount or any additional amount to cover the expenses of the preparationof the bills, from the day of enforcement of the resolution, upon a threat ofimposing a misdemeanour penalty for Maktel. The decision is enforceable from March 3,2007. Maktel appealed the decision at the Supreme Court but at the same timecomplied with the decision and stopped charging the fixed amount starting fromthe March 2007 bills (and will do so in the future unless the decision ofthe Supreme Court is favourable for Maktel). Currently the parties are waitingfor the decision of the Supreme Court in both cases.

Subscribers may also ask reimbursement onadministrative fee charged by Maktel in a separate civil procedure and thepossibility to win the cases is 70 percent in favor of the subscribers (forboth two percent case and fixed amount case). The amount of the related losscannot be predicted.

Provision in the amount of HUF 0.9 billion was createdfor this purpose.

Even though Maktel complied with the decision of theCA, a misdemeanor procedure has been initiated ex officio on account of theabuse of dominant market position for charging the administrative fee.

For the purposes of establishing the value of itsannual revenue Maktel is obliged to submit to the CA (i) its incomestatement for the year 2006 and (ii) revenues generated fromadministrative fee charged in a fixed amount from July 2006 to February 2007.

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The maximum amount of finethat might be imposed on Maktel is up to 10 percent of the aggregate annualturnover of the company, realized in the business year preceding the year whenthe misdemeanor has been committed. However the amount of the penalty thatcould be imposed can not be assessed reliably, therefore no provision wasrecorded for this purpose.

*CA procedure againstMaktel for abusing dominant position on the market for access to the networkfor data transmission and leased lines*

A procedure has been initiated by the CA upon acomplaint from UNET (Macedonian ISP) stating that it is not possible to make acompetitive offer of Digital Leased Line (“DLL”) service since Maktel has nowholesale offer. Maktel presented evidence before the CA arguing that the lackof a wholesale offer was due to the absence of an official request from anyoperator or service provider up to that point and there had been no relevantstatutory obligation. Maktel proposed that UNET’s request should be refused becausethere is no legal ground for such a case.

Maktel provided the datarequested by the CA. If the CA will not accept the proposal of Maktel on UNET’srequest to be refused, the worst case penalty is up to 10 percent of Maktel’sannual revenue. It is possible, that Maktel will loose the case, however, theprobability of CA’s imposing the highest possible amount is low. There is noprecedence regarding the imposing of fines.

*Procedurefor failing to submit the 2005 financial report to the Macedonian Courtof Registry against Maktel and T-MobileMacedonia*

An official procedure wasinitiated against Maktel, T-Mobile Macedonia and the responsible seniorofficers due to the failure to submit on time the 2005 financial report asrequired by the Macedonian Court of Registry. The first hearing was on March 22,2007 and the next is scheduled for April 24, 2007. According to theMacedonian regulations, the possible penalties amount to MKD 50,000-150,000for the company and MKD 10,000-50,000 for the responsible employees. Inaddition, the operation of the company may be suspended for a period betweenthree months and one year.

*Complaint of Cosmofon AD (“Cosmofon”) regarding Maktel’sfixed to mobile interconnection retail prices*

On August 1, 2005 Maktel changed the retailprices for the traffic from fixed to mobile networks. According to theinterconnection agreements with mobile operators, the change in retail pricesautomatically decreased the interconnection fees for termination in mobilenetwork. Mobile operators were notified for the change in due time. Cosmofoncomplained about this change with arguing that according to the interconnectionagreement, the change in these prices should be first agreed withinterconnection partners. Cosmofon continued to send invoices for theinterconnection traffic according to the old fees.

On February 28, 2006, Cosmofon submitted to theMacedonian regulatory agency a request for dispute resolution with reference tothe interconnection prices for traffic from fixed to mobile network andfulfillment of the obligations of the parties under its interconnection contract.

The director of the Macedonian regulatory agencyadopted a first instance decision rejecting as ungrounded the requests of Cosmofon.Following Cosmofon’s appeal against the decision, the Commission of the Agency,as the second instance body, brought a decision in which they rejected theappeal, because it was submitted on an ungrounded basis.

Cosmofon appealed the decision in front of the SupremeCourt of Republic of Macedonia (as the final instance in the administrativeprocedure) and it has legal right to start the civil procedure in front ofPrimary Court in Skopje.

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The financial risk is calculated as increased costs toCosmofon for mobile termination for the period between August 2005 and endof 2006 and it amounts to EUR 1.6 million.

We believe the possibilityof any outflow in settlement to be remote, therefore no provision was recordedfor this purpose.

*Voluntary leaveprogram in Montenegro*

236 former Crnogorski Telekom employees participatingin the voluntary leave program in 2005 have lodged claims that the companywillfully misled them regarding potential increases in the offered amount ofcompensation. After one and a half years the company offered a larger amount ofcompensation to those who voluntarily left the company at that later time.These employees are claiming compensation equal to the difference between theamount paid at the voluntary leave and the new amount offered by CrnogorskiTelekom within the frame of its new social program.

Crnogorski Telekom formally (by way of an OperativeCommittee decision) refused the proposal of the claimants for an out-of-courtsettlement. The company received a claim in March 2007 and the relevantprovision was booked in March 2007. There have been no hearings to date.The total amount of the claim is EUR 3.6 million (HUF 0.9 billion).

Depending on the outcomeof the clarification with the Montenegrin Ministry of Finance and taxauthorities, any additional payment to these former employees may trigger thepayment of taxes and contributions as well in the maximum total amount of HUF0.7 billion.

***Proceedings before the tax authority affecting MagyarTelekom in excess of HUF 500 million***

Magyar Telekom filed with the Municipal Court a claimagainst the Municipal Administration Office of Budapest to challenge local taxcharges levied since May 1, 2004, in the aggregate amount of HUF 9.6 billion,as we believe that these local taxes were assessed in breach of relevant EUlaws.

Revenues (after certaindeductible expenses) are subject to local tax imposed by numerous localitieswith the maximum rate of two percent. Such revenues are taxed by localitiesfrom which they are derived in Hungary. The Budapest Municipality initiated anaudit of local taxes for the years 1996-2001 in 2002. The BudapestMunicipality in its report challenged the allocation method of TMH for localtaxes. TMH has initiated discussions with the Budapest Municipality and theMinistry of Finance to resolve this issue. Since the beginning of 1998, TMH haspaid local taxes in respect of base stations to local governments. According tothe City of Budapest, TMH should have paid the local tax not to the localgovernments but to the City of Budapest. In its first and second instancedecisions, the Budapest tax authority found that TMH had unpaid tax liabilitiesof HUF 2.1 billion and collected this amount. TMH challenged the decisions ofthe Budapest tax authority in court. The court in its final decision ruledagainst TMH. TMH appealed this decision to the Supreme Court. On April 13,2006, the Supreme Court requested the court of first instance to start newproceedings regarding the allocation of revenues between the differentterritories by TMH. However, this decision shall not impact the obligations ofTMH. TMH made a payment of HUF 519 million, the expected tax liabilities,to the Budapest Municipality in respect of tax years 2002-2003.

***Investigation into certain consultancy contracts***

In the course ofconducting their audit of our 2005 financial statements, PwC identified certaincontracts the nature and business purposes of which were not readily apparent. PwCnotified the Audit Committee and advised them to retain independent counsel toconduct an investigation into these contracts. Our Audit Committee retainedWhite & Case, as its independent legal counsel, to conduct theinvestigation. Based on the documentation and other evidence obtained by it,the White & Case investigation has preliminarily concluded that it wasunable to determine a proper business purpose for 

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fourconsulting contracts entered into in 2005, and further found that certainemployees had destroyed evidence that was relevant to the investigation. Wehave taken and are taking remedial measures to address weaknesses in ourcontrol environment that were revealed by the investigation. The investigationand consequent delay in completing the audit of our 2005 financial statementshas led to a delay in filing the 2005 annual report. See “Item 3—Risk Factors”and “Item 15—Controls and Procedures.”

**Dividend Policy**

Shareholders approved payment of cash dividends of HUF72,994 million, equal to HUF 70 per share for 2006. The record date for paymentof the dividends is May 17, 2007.

Under Hungarian law, the Company is permitted to payannual dividends out of profits and profit reserves, determined on the basis ofthe annual unconsolidated accounts prepared in accordance with HungarianAccounting Rules, following a declaration by the annual general meeting ofshareholders. Prior to the approval of the annual unconsolidated accounts, theCompany’s shareholders at a general meeting may also declare a dividend advanceon the basis of an interim set of financial statements. The general meeting ofshareholders may decide to declare a higher or lower dividend than thatrecommended by the Board of Directors, provided that the Company’s shareholders’equity under Hungarian Accounting Rules would still meet the statutoryrequirements following the dividend payment.

The general meeting of shareholders may also decidenot to declare dividends, even if the Board of Directors recommends such adeclaration. The Company distributes dividends to holders of shares dulyregistered in the shareholders’ register as the legal owners of shares on thedate determined by the general meeting to be the dividend record date.

The determination of whether to pay dividends and ofthe amount of dividends paid depends upon, among other things, the Company’searnings, financial condition and cash requirements, applicable restrictions onthe payment of dividends under Hungarian law and any other factors the Board ofDirectors may consider relevant. As of December 31, 2006*,*the profitreserves available for distribution were approximately HUF 294,000 million.

The Company will declare any cash dividends inHungarian forints. In the case of shares represented by ADSs, cash dividendsare paid to the depository and converted into and paid in U.S. dollars at theprevailing rate of exchange, net of conversion expenses of the depository andapplicable Hungarian withholding tax.

Fluctuations in exchange rates will affect the amountof dividends that ADS holders receive. Dividends paid to non-Hungarian holders,including U.S. holders, of shares or ADSs may be converted into foreigncurrency and repatriated, subject to Hungarian withholding tax.

In the medium-term, ourstrategic priority is to continue our search for and execution ofvalue-accretive acquisitions. According to our current estimate, thesepotential future transactions require balance sheet flexibility with a net debtratio (net debt to net debt plus total equity) in the range of 30-40 percent.

**Significant changes**

For a discussion ofsubsequent events, see Note 36 to the consolidated financial statements.

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**ITEM 9—THE OFFERAND LISTING**

In November 1997, shareholders of Magyar TelekomPlc. completed a Hungarian and international initial public offering of shares.Magyar Telekom Plc. shares were listed in the “A” category of the BudapestStock Exchange, and Magyar Telekom Plc. ADSs, each representing five ordinaryshares, were listed on the New York Stock Exchange. The total number of sharessold in the initial public offering was 272,861,367, or 26.31 percent of thetotal outstanding shares, for an aggregate offering price of over U.S.$ 1billion. The offer price was HUF 730 per share and U.S.$ 18.65 per ADS.

In June 1999, ÁPVsold its remaining 5.75 percent stake in Magyar Telekom Plc. through asecondary offering. The total number of shares sold was 60,096,515, out ofwhich MagyarCom sold 581,319 shares under a greenshoe option. The offer pricewas HUF 1,273 per share and U.S.$ 26.50 per ADS. The ADSs are eligible forquotation and trading on Stock Exchange Automated Quotation System (“SEAQ”)International.

**Trading on the NewYork Stock Exchange**

Thetable below sets forth the high and low closing sales prices for the ADSs onthe New York Stock Exchange for the periods indicated:

| ** **     | ** ** | **Price per ADS** | ** ** |
|----------------|------------|-----------------------------|------------|
| ** **     | ** ** | **High**                    | ** ** | **Low** | ** ** |
| ** **     | ** ** | **(U.S.$)**                 | ** ** |
| **2002**       |       | 19.83                       |       | 13.89 |   |
| **2003**       |       | 21.67                       |       | 15.89 |   |
| **2004**       |       | 24.79                       |       | 18.70 |   |
| **2005**       |       | 26.64                       |       | 19.27 |   |
| First Quarter  |       | 26.64                       |       | 22.44 |   |
| Second Quarter |       | 23.68                       |       | 19.27 |   |
| Third Quarter  |       | 26.15                       |       | 21.12 |   |
| Fourth Quarter |       | 26.20                       |       | 21.48 |   |
| **2006**       |       | 28.03                       |       | 17.26 |   |
| First Quarter  |       | 24.80                       |       | 21.48 |   |
| Second Quarter |       | 24.69                       |       | 17.26 |   |
| Third Quarter  |       | 21.29                       |       | 18.77 |   |
| Fourth Quarter |       | 28.03                       |       | 19.89 |   |
| November       |       | 25.00                       |       | 22.81 |   |
| December       |       | 28.03                       |       | 24.00 |   |
| **2007**       |       |                        |       |   |   |
| January        |       | 26.62                       |       | 24.32 |   |
| February       |       | 26.25                       |       | 24.02 |   |
| March          |       | 26.20                       |       | 23.62 |   |
| April          |       | 22.70                       |       | 21.61 |   |
| May            |       | 24.69                       |       | 20.38 |   |

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Source: Bloomberg

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**Trading on theBudapest Stock Exchange**

Thetable below sets forth the high and low closing sales prices for the shares onthe Budapest Stock Exchange for the periods indicated:

| ** **     | ** ** | **Price per Share** | ** ** |
|----------------|------------|-------------------------------|------------|
| ** **     | ** ** | **High**                      | ** ** | **Low** | ** ** |
| ** **     | ** ** | **(HUF)**                     | ** ** |
| **2002**       |       | 1,056                         |       | 685 |   |
| **2003**       |       | 915                           |       | 711 |   |
| **2004**       |       | 960                           |       | 769 |   |
| **2005**       |       | 1,092                         |       | 800 |   |
| First Quarter  |       | 980                           |       | 854 |   |
| Second Quarter |       | 900                           |       | 800 |   |
| Third Quarter  |       | 1,092                         |       | 855 |   |
| Fourth Quarter |       | 1,085                         |       | 916 |   |
| **2006**       |       | 1,072                         |       | 759 |   |
| First Quarter  |       | 1,030                         |       | 940 |   |
| Second Quarter |       | 985                           |       | 759 |   |
| Third Quarter  |       | 915                           |       | 821 |   |
| Fourth Quarter |       | 1,072                         |       | 863 |   |
| November       |       | 1,014                         |       | 935 |   |
| December       |       | 1,072                         |       | 923 |   |
| **2007**       |       |                          |       |   |   |
| January        |       | 1,060                         |       | 968 |   |
| February       |       | 1,030                         |       | 943 |   |
| March          |       | 965                           |       | 922 |   |
| April          |       | 967                           |       | 941 |   |
| May            |       | 985                           |       | 841 |   |

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Source: Bloomberg

**ITEM10—ADDITIONAL INFORMATION**

**Share Capital**

As of December 31,2006, the share capital of Magyar Telekom Plc. was HUF 104,276,831,500,consisting of 1,042,768,215 Series “A” ordinary shares and one Series “B”voting preference share.

All Series “A”ordinary shares have a nominal value of HUF 100 and the Series “B” Sharehas a nominal value of HUF 10,000. The holder of the Series “B” Shareenjoys certain preferential voting and other rights described below.

Shareholders are entitledto receive dividends in proportion to the aggregate nominal value of sharesheld by such shareholders out of the distributable reserves assigned fordistribution by the general meeting. The dividend entitlement lapses after fiveyears from the first payment date.

**Option to Purchase Securities from Registrant orSubsidiaries**

For a discussion ofshare-based compensation, see Note 24 to the consolidated financial statements.

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**Memorandum and Articles of Association**

Magyar Telekom Plc. is alimited liability stock corporation, organized under the Act IV of 2006 onBusiness Associations and registered with the Court of Registration in Budapestunder the entry number 01-10-041928.

**Corporate Governance**

Magyar Telekom Plc. isgoverned by four separate bodies: the general meeting of shareholders, theSupervisory Board, the Audit Committee and the Board of Directors. Their rolesare defined by law and by the Company’s memorandum and Articles of Associationand may be described generally as follows:

*General Meeting of the Shareholders*

The supreme decisionmaking body of the Company is the general meeting of shareholders. If required,extraordinary general meetings may be held at any time. A general meeting isconvened as frequently as set forth in the Articles of Association, but no lessthan once a year.

The Board of Directorsmust call an annual general meeting to approve the audited statutory financialstatements for the prior year. Shareholders holding at least five percent ofthe outstanding shares may require the Board of Directors to hold anextraordinary general meeting. The Board of Directors and the Supervisory Boardalso have the right to call an extraordinary general meeting. The Court ofRegistration may call a general meeting if, following the request ofshareholders holding at least five percent of the outstanding shares, the Boardof Directors fails to take any action within 30 days, or if the Board ofDirectors fails to call a general meeting within the periods prescribed by lawor the Articles of Association.

TheBoard of Directors must call a general meeting within eight days to takenecessary measures when:

·       dueto losses, the equity of the company has decreased to less than two-thirds ofthe share capital;

·       theequity of the Company has decreased to less than HUF 20 million;

·       theCompany has stopped servicing its debts and its assets are not sufficient torepay its debts;

·       thenumber of members of the Board of Directors falls below six;

·       thenumber of members of the Supervisory Board falls below six;

·       thenumber of members of the Audit Committee falls below three;

·       theauditor and the Board of Directors fail to conclude the assignment contractregarding the auditing activities within 90 days upon the date of the generalmeeting that elects the auditor; or

·       uponthe request of holder of the Series “B” Share.

Typically, the Board ofDirectors calls general meetings. To call a general meeting, the Board ofDirectors must publish a notice of the meeting and an agenda at least 30 daysbefore the scheduled date of the meeting in the official journal of theBudapest Stock Exchange and on the website of the BSE and of the Company. TheCompany must notify each director, the Supervisory Board and the auditor that ageneral meeting has been called within eight days following publication of suchnotice.

A general meeting meets aquorum if shareholders representing more than half of the voting shares arepresent in person or by proxy. If an agenda item requires an affirmative voteof a holder of the Series “B” Share, for a quorum, the holder of the Series “B”Share must also be present at the meeting in person or by proxy.

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If the general meetingdoes not have a quorum, it will be reconvened on the same day. A reconvenedgeneral meeting will have a quorum for those matters on the original agenda,regardless of the number of shareholders present, except for matters requiringthe holder of the Series “B” Share to be present.

Thegeneral meeting of the shareholders has the sole right to:

1.                approveand amend the Articles of Association unless otherwise provided by law;

2.                increase(except for the cases falling into the scope of authority of the Board ofDirectors) or decrease the Company’s registered capital unless otherwiseprovided by law;

3.                amendthe rights attached to a series of shares or change their class;

4.                merge,consolidate, separate, terminate, dissolve, liquidate or transform the Companyinto another form of association;

5.                decideon the approval of a public offer on own shares;

6.                decideon issuing convertible or subscription right bonds unless otherwise provided bylaw;

7.                toelect, remove and determine the remuneration of the members of the SupervisoryBoard, the Audit Committee and the Board of Directors;

8.                elect,remove and determine the remuneration of the Auditor of the Company and todefine the contents of the essential elements of the contract to be concludedwith the auditor;

9.                approvethe financial statements, the management report and to decide on theutilization of after tax earnings;

10.         approvechanges in the Company’s registered scope of activities;

11.         designatepersons entitled to subscribe for new shares in a closed subscription;

12.         alterthe number or nominal value of the Series “B” Share and the rightsattached to the Series “B” Share;

13.         approvelisting of the Company’s shares on a stock exchange;

14.         approvedelisting of the Company’s shares from a stock exchange subject to any group ofshareholders agreeing to make a public tender to purchase the shares of thoseshareholders who do not vote in favor of delisting;

15.         decisionon the acquisition of the Company’s own shares;

16.         approvean issue that is within its competence pursuant to law or the Company’sArticles of Association;

17.         transferor encumber a valuable right held by the Company that enables it to continue aspecific activity of the Company;

18.         transferall or substantial part of the Company’s assets;

19.         generallyapprove acquisition of shares which would result in a person or persons actingin concert holding ten percent or more of the outstanding voting shares of theCompany;

20.         approvepayment of a dividend advance determined on the basis of interim accountingunless otherwise provided by law;

21.         decisionon the exclusion of subscription preference right; and

22.         evaluatethe work of the members of the Board of Directors in the previous business yearand decide on granting relief to the members.

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*The Supervisory Board*

The Supervisory Boardoversees management of the Company. It may request information from executiveofficers or managerial employees of the Company and may inspect books anddocuments of the Company. Supervisory Board members shall bear unlimited, jointand several liability for damages caused to the Company due to violation oftheir supervisory obligations.

The Supervisory Boardcomprises a minimum of three and a maximum of 15 members. Its members shall beelected by the general meeting of shareholders for a period of three years. Itmay assign certain supervisory tasks to any of its members or may delegatesupervisory tasks among its members on a permanent basis. The members must actin person, not through a representative. No members of the Supervisory Boardmay receive any instruction from his or her employer or our shareholders as tofulfillment of their duty and obligations as Supervisory Board members. TheSupervisory Board carries out its activities in accordance with rules ofprocedure established by the Supervisory Board, which are approved by thegeneral meeting of shareholders.

*The Audit Committee*

The general meeting electsa 3-5 member Audit Committee from the independent members of theSupervisory Board for the same duration as the membership of the relevantmembers in the Supervisory Board. The Audit Committee shall act within itsscope of authorities provided for in the Act on Business Associations and theArticles as well as the rules of the Budapest Stock Exchange and the NewYork Stock Exchange and the regulations of the SEC. The Audit Committee overseesthe work of the Company’s independent auditor, evaluates the operation of thefinancial reporting system and the efficiency of the internal audit function.

*The Board of Directors*

The Board of Directors isthe executive body of the Company and represents the Company in dealings withthird parties, courts of law and other authorities. The Board of Directorsexercises its rights and performs its duties as an independent body.

The Board of Directorscomprises a minimum of six and a maximum of eleven members. The members of theBoard of Directors are elected for a term of three years from the date of theannual general meeting until May 31 of the third year subsequent to thedate of the said general meeting, with the exception that if the generalmeeting in the third year is held prior to May 31 than their assignmentlasts until the date of such general meeting. Members of the Board of Directorsmay be removed or re-elected by the general meeting at any time. The Board ofDirectors carries out its activity in accordance with rules of procedureestablished by the Board of Directors and subject to the provisions ofapplicable law and the Articles of Association.

The member of the Board ofDirectors must act with the due care that can be generally expected frompersons in such a position and shall be held liable, in accordance withprovisions of general rules of civil law, for damages to the Companycaused by their failure to carry out their tasks in the best interest of theCompany. If the damage was caused by the resolution of the management as abody, those members are exempted from such liabilities who did not participatein the voting or voted against the resolution in question. The members of theBoard of Directors shall bear unlimited, joint and several liability for alland any damage resulting from untruthfulness of any data, right or fact enteredinto the share register or any damage resulting from a late or non-existingentry.

**Capital Increases and Preemptive Rights**

Any increase in theregistered capital of the Company is implemented in accordance with aresolution of the general meeting of shareholders or a resolution of the Boardof Directors by means of issuance of 

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newshares, either in a public offering or a private placement of shares, byconverting the Company’s reserves in excess of the registered share capitalinto authorized share capital or by converting convertible bonds into shares.If the general meeting authorizes issuance of new shares, the shareholders ofthe Company by a three-quarter majority vote and with the approval of the ‘B’series shareholder may pass a resolution at a general meeting granting existingshareholders preemptive rights in proportion to their shareholdings.

Unless the general meetingor the Board of Directors otherwise determines by a three-quarter majorityvote, if the Company converts all or a portion of its reserves in excess of itsregistered capital into registered capital, it must offer the newly issuedshares free of charge to existing shareholders in proportion to theirshareholding. If the general meeting decides otherwise by a three-quartermajority vote, the decision will be valid only if it also includes the price orprice-setting principles for the issuance of shares.

**Voting Rights and Voting**

Each ordinary shareentitles the holder to one vote. Only shareholders or their proxies registeredin the shareholders’ register six business days prior to a general meeting maycast a vote. The Series “B” Share has special voting rights as describedbelow. The matters listed in clauses 1. to 6. and 11. to 14. above, anydecision overriding a resolution of the Board of Directors and preemptiveshareholder rights in the event of a capital increase, all require athree-quarter majority of votes cast by the shareholders present or representedat the general meeting. All other matters submitted to a general meetingrequire only a simple majority vote.

There is no limitation onthe rights of non-resident or foreign shareholders to hold or exercise votingrights on the ordinary shares.

*Series “B” Share*

TheHungarian government owns the Series “B” Share. Only the Minister or hislegal successor may exercise rights attached to the Series “B” Share.Except as described below, the Series “B” Share has the same rights as theordinary shares. The holder of the Series “B” Share is entitled:

1.                tonominate one member of the Board of Directors and one member of the SupervisoryBoard and effectively to elect, remove or replace these members;

2.                ifthe Company’s registered capital is increased, a new class of shares is issuedor the rights attached to a particular class of shares change, to require theArticles of Association to be amended so that the voting rights of theSeries “B” Share will be sufficient to nominate, elect or remove the Series “B”director or Supervisory Board member;

3.                toinspect the shareholders’ register and the books maintained by a depository ofthe Company’s shares approved by the Company and to request copies of theregister or books;

4.                ifthe Company dissolves without a successor company, to purchase all or part ofthe Company’s assets, including shares of subsidiaries or affiliates, for aprice equal to the appraised fair market value of such assets;

5.                torequest from the Board of Directors detailed information about a material factsignificantly affecting the Company’s financial position; and

6.                to request thatthe Company audit or investigate any issue or prepare reports or provideinformation on issues within the scope of activities of the Company’s auditoror the Supervisory Board pursuant to law or the Articles of Association.

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The holder of the Series “B”Share must be present, in person or by proxy, for a quorum, and its approval isrequired to pass shareholders’ resolutions related to any:

1.                increase anddecrease of the Company’s registered capital;

2.                change of rightsattached to any class of shares, including any amendment to the rights of the Series “B”Share or the creation of a new class of shares with rights superior or equal tothe rights or adversely affecting the rights of the Series “B” Share, orany amendment to the rights attached to any existing class of shares that wouldgrant them rights superior or equal to the rights attached to the Series “B”Share;

3.                merger into orconsolidation with another business entity, de-merger, transformation intoanother form of business association and termination of the Company without alegal successor;

4.                transfer, creationof encumbrance of a valuable right that enables the Company to operateaccording to the Universal Telecommunications Service Contract;

5.                election orremoval of the Series “B” director or Supervisory Board member;

6.                transfer of all ora substantial part of the assets of the Company that would render the Companyincapable of performing its obligations under the Universal TelecommunicationsService Contract;

7.                amendment to theArticles of Association which would impair the rights of the holder of the Series “B”Share, including authorizing the Board of Directors to increase the Company’sregistered capital;

8.                issuance ofconvertible bonds or bonds conferring preemptive rights; and

9.                decisionson significant transfers of shares.

*Transfer of Shares*

The holder of the Series “B” Share and othershareholders holding at least a simple majority of the shares must generallyapprove a transfer of shares that would result in a person or group of personsgaining ten percent or more of the outstanding voting stock of the Company. Theconsent of the holder of the Series “B” Share is also required to transfershares if the transferee would acquire more than 49.9 percent of theoutstanding voting stock of the Company.

When registering atransfer of shares, the registrar may request evidence that the shares weretransferred in accordance with the Articles of Association. If the Companyestablishes that the transfer occurred in violation of the Articles ofAssociation or if the transferee refuses to produce the necessary evidence, theCompany may refuse to register the transfer. The Board of Directors mayinvalidate registrations based on untrue, false or misleading statements. Onlyshareholders registered in the Company’s register may exercise shareholderrights vis-a-vis the Company or transfer shares. If the ownership of theshareholder ceased to exist with the transfer of shares the custodian shallnotify the registrar on this fact within two working days upon such event.

**Significant Differences in Corporate GovernancePractices for Purposes of Section 303A.11 of the New York StockExchange Listed Company Manual (“NYSE Manual”)**

Corporate governance principles for Hungarian stockcorporations are set forth in the Hungarian Act IV of 2006 on BusinessAssociations (the “Companies Act”). The Companies Act, along with other relatedlaws and regulations, describes and summarizes the basic mandatory statutorycorporate governance principles applicable for stock corporations in Hungary.

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In 2004, the Budapest Stock Exchange issued itsCorporate Governance Recommendations (the “Recommendations”) containingsuggestions related to corporate governance for companies listed in theHungarian stock exchange, taking account of the most commonly usedinternational principles, of experiences gathered in Hungary, and of thecharacteristics of the Hungarian market.

We believe the followingto be the significant differences between Hungarian corporate governancepractices, as implemented by us and those applicable to U.S. companies underthe NYSE listing standards.

**The Recommendationsset forth mandatory provisions of law**

The Companies Act of 2006 enacts for companies listedon the stock exchange to prepare a Management Report that describes the actualcorporate governance system of the company and contains the Declaration basedon the Recommendations. The Recommendations, as expressed by the title, makesuggestions regarding recommended, applicable corporate governance practicesfor listed companies on the Budapest Stock Exchange. Alignment and compliancewith the Recommendations are mandatory since 2007.

The publication of a so-called “Declaration”, wherebythe issuers provide information on their corporate governance practices incomparison with the contents of the Recommendations on a “comply or explain”basis, is mandatory for us.

The Recommendations addresses four core areas ofcorporate governance. These are (i) the responsibilities of the Board of Directorsand the Supervisory Board; (ii) transparency and disclosure; (iii) shareholdersrights and treatment of shareholders; and (iv) role of stakeholders incorporate governance.

In general, theRecommendations reiterate the responsibilities of the Board of Directors,Supervisory Board and executive management and encourage listed companies to gobeyond the Hungarian legal requirements in the areas of corporate governanceand disclosure. While the Recommendations touch upon many of the requirementsunder the NYSE Corporate Governance Rules, there are some differences. Forexample, while the Recommendations encourage listed companies to establishaudit, nomination and remuneration committees, the Recommendations suggest thatthose committees be comprised of a majority of independent directors, ratherthan exclusively with independent directors. No provision addresses thecorporate governance committee, shareholder votes on equity compensation orperiodic meetings of non-management directors. The Recommendations howeversuggest the Board of Directors be responsible for and establish guidelines on awide range of corporate governance issues, such as executive compensation,internal control, succession of departing directors and corporate officers,risk management, insider trading and corporate disclosure.

**Magyar Telekom hasa two-tier board system**

A Hungarian public stock corporation’s shareholdershave the power to decide under the new Companies Act whether they want to haveboth a Supervisory Board and a management board named Board of Directors or theunitary board structure. Under the Companies Act, the two boards are separateand no individual may be a member of both boards. Close relatives of a memberof the Board of Directors may not be elected as a member of the SupervisoryBoard or vice versa at the same stock corporation. The members of both boardsare appointed and removed by the general meeting and owe a duty of loyalty andcare to the stock corporation.

The Board of Directors is responsible for managing thecompany and representing the company in its dealings with third parties. TheBoard of Directors is also required to ensure appropriate risk managementwithin the corporation and to establish an internal monitoring system.

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Our Board of Directors, however, is not a managementbody. In other words, it does not conduct the daily operations of the Company.It has the authority to deal with all matters not reserved for the generalmeeting. Amongst other things, it approves the Company’s strategy and businessplan, organizational restructuring actions of major impact, as well as theconclusion of major transactions, employs and dismisses the CEO and other ChiefOfficers, defines their remuneration, sets the targets for top management andevaluates their performance.

The Board of Directors has set up the ManagementCommittee composed of the CEO and all Chief Officers to conduct the day-to-dayoperations of the Company.

The Supervisory Board of a stock corporationsupervises the activities of the management for the general meeting. It acts asan independent body, elects a chairman from among its members, and passes itsresolutions by simple majority. The Audit Committee helps the work of theSupervisory Board.

Although it is not permitted to make management decisions,the Supervisory Board has comprehensive monitoring functions, includingadvising the general meeting on a regular basis in decisions of fundamentalimportance to the company by virtue of preliminary analysis of core businessreports and other submissions on the agenda of the general meeting within theexclusive scope of authority of the general meeting. To ensure that thesemonitoring functions are carried out properly, the Board of Directors must,among other things, regularly report to the Supervisory Board with regard tocurrent business operations and business planning. The Supervisory Board mayalso request special reports from the Board of Directors or any senior employeeat any time.

The Supervisory Board ofMagyar Telekom Plc. is subject to the principle of employee participation inthe decision making process concerning the company’s fundamental businessdirection. Under the Companies Act, the Supervisory Board includesrepresentatives of the shareholders and representatives of the employees. Theemployees have the right under the Companies Act to elect one-third of theSupervisory Board members.

**The committeesrequired by the NYSE Manual are not fully required under the Companies Act.**

Hungarian corporate law allows, but does not requirecommittees to be established in business associations. The only exception isthat public limited companies have to set up an Audit Committee consisting ofat least three members. The Articles of Association of the Company may assigncertain tasks in connection with the work of the Company’s auditor and internalfinancial control system to the Audit Committee under the Hungarianregulations.

The Companies Act gives the exclusive right to thegeneral meeting to establish the audit committee of the Company (the “AuditCommittee”). The new law fully complies with the relevant U.S. laws and SECregulations applicable for NYSE listed companies.

The Audit Committee is a permanent committee besidethe Supervisory Board; its members are selected from independent SupervisoryBoard members.

We are required to disclose information concerning any“audit committee financial expert” (as defined in the relevant SEC rules)serving on our audit committee, the fees we pay to the auditors for variousservices and the policies we have for approving engagements of the auditors inadvance.

Aiming to further enhance accuracy and completeness ofthe information disclosed to security holders and investors, the ManagementCommittee of the Company has resolved to establish a disclosure committee (the “DisclosureCommittee”). This committee ensures that our disclosures are made in a timelymanner and in line with the requirements of the applicable laws and the NYSE,the Budapest Stock Exchange or the Securities and Exchange Commission regulations.

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The Disclosure Committee, made up of individualstogether knowledgeable in the significant and diverse aspects of the Company’sbusiness, finance and risks, assists the CEO and the CFO in fulfilling theirresponsibility for oversight of the processes that assure the accuracy andtimeliness of the disclosures made by the Company.

The Board of Directors hasestablished a remuneration committee (the “Remuneration Committee”) whichperforms the functions of both compensation and nomination committees. All itsmembers are elected by the Board of Directors from among its own members. TheRemuneration Committee makes proposals to the Board of Directors regarding thenomination of CEO and Chief Officers, their compensation, bonus targets andmonitors their performance. The Remuneration Committee is also responsible forthe development of nomination standards and initiates the self-evaluation ofthe members of the Board of Directors.

**Hungarian corporate law generally requires shareholderapproval for a wider range of transactions and activities than the NYSE Manual**

The NYSE Manual requires U.S. companies to seekshareholder approval for certain equity compensation plans and issuances ofcommon stock. Under the Companies Act on the other hand, shareholder approval isrequired for amendments to the Articles of Association, certain corporatemeasures, such as the issuance of new shares and convertible bonds or bondswith subscription rights, the authorization to purchase the corporation’s ownshares and other key corporate events.

Shareholder approval in aHungarian stock corporation is obtained in an Annual General Meeting, whichmust be held at least once a year. At the Annual General Meeting theshareholders also elect their representatives to the Supervisory Board, theAudit Committee and the Board of Directors, approve the management report andthe financial reports of the previous business year, resolve the appropriationof distributable balance sheet profit, may give relief from liability to themembers of the Board of Directors and approve the rules of procedure ofSupervisory Board. In addition, the corporation’s external auditor is appointedby a shareholders’ resolution based on a proposal by the Board of Directors.

**Material contracts**

***Acquisition of Maktel***

In December 2000, we, on behalf of a consortium,reached agreement with the government of Macedonia to acquire a 51 percentinterest in Maktel on its privatization. The acquired interest was thentransferred on January 16, 2001 to a newly established Macedonianacquisition vehicle, Stonebridge.

Under an agreement among Magyar Telekom Plc., SEEFHoldings Ltd. (“SEEF”) and CosmoTelco Added Value Services S.A (“CosmoTelco”),the latter two acquired a 6.1 percent and a 7.4 percent interest respectivelyin Stonebridge, reducing our investment in Stonebridge to EUR 301.5 million. Weretained an 86.5 percent interest in Stonebridge, which represented a 44percent interest in Maktel. Since then, Magyar Telekom Plc. has increased itsownership to 100 percent in Stonebridge, representing a 51 percent interest inMaktel.

On November 24, 2005, Magyar Telekom Plc.announced that it is simplifying the ownership structure of its interest inMaktel through the liquidation of Stonebridge. Following the liquidation,Magyar Telekom Plc. will directly own its shares in Maktel.

The Macedonian governmenthas announced that it plans to sell its 45 percent stake in Maktel. On May 30,2006, the General Meeting of Maktel authorized the management of the company tobuy a maximum of 10 percent of the shares of Maktel from the government. TheMacedonian government’s auction to sell shares in Maktel was held between June 5and June 9, 2006. During the auction, Maktel bought a total of 10 percentof the company’s shares (9.9 percent for EUR 60.3 million plus 0.1 percent for 

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EUR 0.6million), while 0.3 percent was sold to other investors. Following the sharepurchase, Magyar Telekom’s voting rights in Maktel, through its subsidiaryStonebridge, reached 56.7 percent. In terms of share ownership, Magyar Telekom(through Stonebridge) has 51 percent, the government 36.81 percent, IFC 1.88percent and minority shareholders 0.31 percent of Maktel’s shares, while 10percent is held by Maktel as treasury shares.

***Acquisition of Crnogorski Telekom***

On January 14, 2005, the MontenegrinPrivatization Agency declared Magyar Telekom Plc. the winner of a tender for a51.2 percent interest in Crnogorski Telekom. On March 16, 2005, weannounced that we had signed a Share Purchase Agreement to acquire 51.12percent of all outstanding shares of Crnogorski Telekom from the government ofMontenegro for EUR 114 million. The transaction was consummated at the end of March 2005.At the same time, we acquired an additional 21.92 percent interest inCrnogorski Telekom from minority shareholders for EUR 22.87 million.

As a result of the public offer, Magyar Telekom hasacquired an additional 3.49 percent stake in Crnogorski Telekom for EUR 3.64million, increasing its stake to 76.53 percent by May 24, 2005. Hence, thepurchase price of Crnogorski Telekom totaled EUR 140.51 million.

Crnogorski Telekom’sbalance sheet was consolidated in our accounts as at March 31, 2005, whilethe results of Crnogorski Telekom were included in our consolidated incomestatement from the second quarter of 2005.

**Exchange Control**

Investment by foreigners in Hungarian securities isregulated by Act XXIV of 1988 on Foreign Investments, as amended (the “ForeignInvestment Act”), Act XCIII of 2001 on Elimination of Foreign ExchangeRestrictions, as amended (the “Liberalization Act”) and Act CXX of 2001 on theCapital Market, as amended (the “Capital Market Act”) and implementing decrees.The Foreign Investment Act and the Capital Market Act regulate foreigninvestment in Hungarian equities. In addition, the Capital Market Act and theLiberalization Act regulates foreign investment in Hungarian debt instrumentsand flows of cash. The regulations under these acts do not restrict foreignersfrom investing in registered shares issued by Hungarian companies, nor do theylimit the number of shares foreigners may own. In addition, foreigners mayestablish wholly owned subsidiaries in Hungary to acquire all the shares of aHungarian company.

Shares held by foreign investors may be generally soldwithout restrictions to other foreigners or Hungarian persons. Foreigninvestors may deposit proceeds from sales to Hungarian persons in a convertibleHungarian forint account, the balance of which may be converted into foreigncurrency and repatriated without restriction, subject to withholding tax rules,or may be paid into a foreign currency account of the foreigner in Hungary orabroad. Similarly, foreign investors may convert dividends paid by Hungariancompanies into foreign currency and repatriate the proceeds, subject towithholding tax rules. If a foreign shareholder does not wish to repatriatesale proceeds or dividend payments, it may elect to receive and deposit suchpayments in Hungarian forints into a convertible HUF denominated accountestablished with any commercial bank in Hungary. Such accounts will accrueinterest in Hungarian forints. The balance remains freely convertible intoforeign currency and may subsequently be repatriated or reinvested in Hungary.

As of June 16,2001 essentially all of the previous restrictions were eliminated regarding theconversion of Hungarian forint into foreign currencies and transactions betweenforeigners and Hungarian persons. Consequently foreign investors may:

·       freelyconvert HUF funds;

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·       freelysell securities and instruments not qualifying as securities to domesticpersons in HUF and in foreign currency; and

·       freelyinvest in short-term instruments and securities in Hungary (except forreceivables deriving from compensation coupons regulated by Act XXV of 1991onthe Partial Compensation of Damages to Citizens with a View to SettlingProperty Relations, i.e., the “Compensation Act”).

Notwithstandingthe general rules above, according to the Liberalization Act, paymentobligations regarding tax, contributions and other fees to the state must befulfilled in HUF. Additionally, other laws continue to contain specificrequirements affecting foreign exchange transactions (e.g., regulations onmoney laundering).

**Taxation**

The following is a summary,under current law, of the principal Hungarian and U.S. federal income taxconsiderations relevant to an investment by a U.S. taxpayer in our ordinaryshares or ADSs (which we refer to collectively in this summary as the “shares”).This summary applies to you if you are eligible for benefits as a U.S. residentunder the current income tax convention between the United States and Hungary(the “Treaty”) in respect of your investments in shares.

In general, youwill be eligible for benefits under the Treaty in respect of such investmentif:

·       youare an individual U.S. citizen or resident, a U.S. corporation or apartnership, estate, or trust to the extent the shareholders’ income is subjectto taxation in the United States as the income of a resident, either in thehands of the shareholders or in the hands of the shareholder’s partner ofbeneficiaries;

·       youare not also a resident of Hungary for Hungarian tax purposes;

·       youare the beneficial owner of the shares (and the dividends paid with respectthereto);

·       youhold the shares as a capital asset for tax purposes; and

·       youdo not hold the shares in connection with the conduct of business through theperformance of personal services through a fixed base, in Hungary.

Under Hungarian domestic law no Hungarian withholdingtax will apply to dividends paid by the Company to non-individuals after December 31,2005. Therefore, non-individual U.S. taxpayers generally will not need to relyon the Treaty in respect of such dividends.

This summary does not purport to be a comprehensivedescription of all the tax considerations that may be relevant to anyparticular investor, and does not address the tax treatment of investors whoare subject to special rules. We have assumed that you are familiar with thetax rules applicable to investments in securities generally and with anyspecial rules to which you may be subject. You should consult your own taxadvisers regarding the tax consequences of the ownership of our shares in thelight of your own particular circumstances.

You should also note that the United States andHungary are currently in the process of renegotiating their income taxconvention. Any resulting new treaty may have provisions that differ from thosedescribed herein.

With regard toHungarian taxation:

1.                Dividend

Since the Company’s shares are listed in a regulatedstock exchange in the EU, in the case of individuals and in the absence of anybenefits under the Treaty, dividends from 2006 profits that you 

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receive on the shares willgenerally be subject to Hungarian withholding tax at a rate of 10 percent. Thistax rate is lower than the reduced Treaty rate of 15 percent; therefore,individual U.S. taxpayers generally will not need to rely on the Treaty inrespect of such dividends.

Please note that compared to 2005, in the case ofHungarian domestic private individuals and citizens of EU and EEC countrieswith residency permit in Hungary, a four percent health care contribution nolonger will be deducted from the 2006 dividend payments.

The Company informs its non-individual shareholdersdomiciled in the European Union that the European Court of Justice (“ECJ”) in arecent case established that the dividend withholding tax legislation of amember state cannot differentiate between domestic and EU shareholders of thesame type. A law which provides that tax is withheld from dividend paymentsmade to EU shareholders whilst no tax is applicable to dividends paid todomestic shareholders violates the basic freedoms of the EU. The Company isanalyzing the potential impact of this ECJ decision on the Hungarianwithholding tax legislation effective from Hungary’s accession to the EU until December 31,2005, from which date the withholding tax on non-individual foreign persons hasbeen abolished. During this time period, no tax has to be withheld from dividendspaid to Hungarian non-individual shareholders but 20 percent tax was withheldfrom dividends paid to EU non-individual shareholders. If it is proved that theHungarian withholding tax regime violated the EU basic freedoms, the Companyaims to inform the market on the potential reclaim opportunity in applicableform.

2.                Capitalgains

Capital gains thatyou realize on a sale or other disposition of the shares will not be subject toany Hungarian tax provided that you are not a Hungarian resident.

3.                Transfer tax

No Hungarian transfer taxes or stamp duties will applyto a purchase, sale, or other disposition of the shares that you make.

With regard to U.S.federal income taxation:

·       Ifyou hold shares in ADS form, you will be treated as holding the underlyingordinary shares for U.S. federal income tax purposes, and deposits andwithdrawals of ordinary shares in exchange for ADSs will not be taxable events.

·       Youmust include the gross amount of cash dividends paid on the shares, withoutreduction for Hungarian withholding tax, in ordinary income on the date thatyou or the ADS depositary receive them, translating dividends paid in Hungarianforints into U.S. dollars using the exchange rate in effect on date.

·       Subjectto certain exceptions for short-term and hedged positions, the U.S. dollaramount of dividends received by an individual before January 1, 2009, withrespect to the shares will be subject to taxation at a maximum rate of 15percent if the dividends are “qualified dividends.” Dividends paid on theshares will be treated as qualified dividends if (i) the issuer iseligible for the benefits of a comprehensive income tax treaty with the UnitedStates that the IRS has approved for the purposes of the qualified dividendrules, and (ii) the Company was not, in the year prior to the year inwhich the dividend was paid, and is not, in the year in which the dividend ispaid, a passive foreign investment company (“PFIC”). The income tax treatybetween Hungary and the Unites States has been approved for the purposesof the qualified dividend rules. Based on the Company’s audited financialstatements and relevant market and shareholder data, the Company believes thatit was not treated as a PFIC for U.S. federal income tax purposes with respectto its 2004 or 2005 taxable year. In addition, based on the Company’s auditedfinancial statements and its current expectations regarding the value andnature of its assets, the sources and nature of its 

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income, and relevantmarket and shareholder data, the Company does not anticipate becoming a PFICfor its 2006 taxable year.

·       Dispositionsof shares that you make will generally give rise to capital gain or loss, whichwill be long-term capital gain or loss, subject to taxation at reduced ratesfor non-corporate taxpayers, if the shares were held for more than one year.

·       Hungariantax withheld from dividends will be treated, up to the 15 percent rate providedunder the Treaty, as a foreign income tax that, subject to generally applicablelimitations under U.S. tax law, is eligible for credit against your U.S.federal income tax liability or, if you have elected to deduct such taxes, maybe deducted in computing taxable income.

·       Fluctuations in thedollar-forint exchange rate between the date that you receive a dividend andthe date that you receive a related refund of Hungarian withholding tax maygive rise to foreign currency gain or loss, which is generally treated asordinary income or loss for U.S. tax purposes.

**Documents onDisplay**

We are subject to the informational requirements ofthe U.S. Securities Exchange Act of 1934, as amended (“the Exchange Act”). Inaddition, we are required to file annual reports and other information we makepublic in Hungary or with the Budapest Stock Exchange with the U.S. Securities andExchange Commission under the Exchange Act. We file our annual reports on orbefore June 30 each year. We file other information at the time we make itpublic in Hungary or file it with the Budapest Stock Exchange.

You may read and copy theregistration statement, including the attached exhibits, the reports,statements or other information that we file at the Commission’s publicreference room in Washington D.C., which is located at 100 F Street, N.E.,Washington, D.C., 20549. Please call the Commission at 1-800-SEC-0330for further information on the operation of the public reference rooms. Inaddition, you may also obtain the reports and other information we file at theoffices of the New York Stock Exchange, Inc., 20 Broad Street, New York,New York, 10005.

**ITEM 11—QUANTITATIVEAND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

For a discussion of marketrisks, see Note 3, 16 and 17 to the consolidated financial statements.

**ITEM 12—DESCRIPTIONOF SECURITIES OTHER THAN EQUITY SECURITIES**

Not applicable.

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**PART II**

**ITEM 13—DEFAULTS,DIVIDEND ARREARAGES AND DELINQUENCIES**

None.

**ITEM 14—MATERIALMODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS**

None.

**ITEM 15—CONTROLSAND PROCEDURES**

*(a) Investigation*

In the course of conducting their audit of our 2005financial statements, PwC identified two contracts the nature and businesspurposes of which were not readily apparent. PwC notified the Audit Committeeand advised them to retain independent counsel to conduct an investigation intothese contracts. In February 2006, our Audit Committee retainedWhite & Case, as its independent legal counsel, to conduct theinvestigation, with the additional assistance of a financial advisory firm anda digital forensics firm. In December 2006, the investigators delivered anInitial Report of Investigation. We cannot predict when the investigation willbe concluded or what the final findings will be.

PwC initially raised concerns regarding twoconsultancy contracts entered into in 2005 by our Montenegrin subsidiaries CrnogorskiTelekom and T-Mobile Crna Gora. The initial scope of the independentinvestigation was a complete review of these two contracts, including a reviewof all related documents and interviews with our, and Crnogorski Telekom andT-Mobile Crna Gora, employees and third parties with knowledge of thecontracts. The financial advisory firm assisting the investigation alsoreviewed a sampling of our and our Montenegrin subsidiaries’ account and transactionaldata, equaling 72 percent of the value of all transactions and 90 percentof the value of all contracts with third party vendors. For each of these testitems, all available supporting documentation was reviewed. Early in theinvestigation, two additional consultancy contracts entered into by Magyar TelekomPlc. in 2005, were also called into question by the investigators, and ourAudit Committee expanded the scope of the investigation to cover thesecontracts. The total value of these four contracts under investigation isapproximately HUF 2 billion.

During the course of the investigation, it becameevident that certain of Magyar Telekom, Crnogorski Telekom and T-Mobile CrnaGora employees had obstructed the investigation by destroying or tampering withelectronic documents. Specifically, the digital forensics firm assisting theinvestigation found that ten computers assigned to seven employees showedevidence that documents had been deleted from the hard drives and “wiping”software had been used to make those documents permanently unrecoverable. Investigatorsdetermined that the deleted electronic documents included a number of documentsrelated to the contracts under investigation. This deletion and wiping activitytook place after our management had issued document retention memos requiringthat all documents related to these contracts be retained. As a result of thisdeliberate destruction of documents, the investigators have been unable toreview certain documents that could have been relevant to the investigation.

To date, the independent investigators have beenunable to find sufficient evidence to show that any of the four contracts underinvestigation resulted in the provision of services to us or to oursubsidiaries under those contracts of a value commensurate with the payments wemade under those contracts. It is unclear who the true counterparties are tothe contracts, and certain of the contracts are vague as to the actual servicesthat are to be provided. The independent investigators have been unable todetermine definitively the purpose of the contracts, and it is possible thatthe purpose may have been improper.

In our 2005 preliminary results announcement, we hadcapitalized the HUF 1.12 billion payment related to two of these contracts. Asa result of the interim findings of the investigation, we have expensed 

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the total amount of theHUF 2 billion paid under these four contracts and disclosed these expensesunder the caption “Other operating expenses—net” in our 2005 Form 20-Freport. This has resulted in a commensurate effect on, among other items,taxes, minority interest and net income when compared to the correspondingitems reported in our 2005 preliminary results announcement.

As a consequence of the investigation, we havesuspended a number of employees who have since resigned. The suspendedemployees included senior members of our Strategy Group and a senior executiveof Crnogorski Telekom. The Crnogorski Telekom Board of Directors has also beenreplaced.

The independent investigators’ Initial Report ofInvestigation further identified several contracts at our Macedonian subsidiarythat could warrant further review. In February 2007, our Board ofDirectors determined that those contracts should be reviewed and expanded thescope of the independent investigation to cover these additional contracts andrelated transactions.

The investigation has revealed certain weaknesses inthe design and operation of our internal controls and procedures. Accordingly,we have approved and are currently implementing certain remedial measuresdesigned to enhance our internal controls and to ensure compliance withHungarian and U.S. legal requirements and NYSE listing requirements. First, theposition of Magyar Telekom Group Compliance Director has been created,reporting directly to the AuditCommittee and with direct access to the Supervisory Board, Board of Directors,the Company Chief Executive Officer, the Company Chief FinancialOfficer, and other members of seniormanagement. We note that, as required by Hungarian labor law, the employer’srights via-à-vis the Group Compliance Director are exercised by arepresentative of the Company (the CFO). The most significant of the employer’srights, including any substantial amendment to the Compliance Director’semployment contract, shall be exercised in consultation with the AuditCommittee. In conjunction with this new position, we are reviewing, withthe assistance of U.S. counsel, our compliance and corporate governancepolicies and are establishing a comprehensive compliance-training program, witha focus on our code of ethics, insider trading policy, document retentionpolicy, regulatory matters, and compliance with U.S. securities laws and theU.S. Foreign Corrupt Practices Act. Our Board has already approved andimplemented a Magyar Telekom Group CorporateCompliance Program Manual, a Group Financial Code of Ethics to Treasury andFinancial Managers applicable as a Code of Ethics for Senior FinancialOfficers (see Exhibit 11.2 to this Form 20-F), a Group Code of Business Conduct andEthics, a Group Anti Fraud Policy, a Group Document Management Directive, aGroup Directive on Compliance with Anti-Corruption Laws and the U.S. ForeignCorrupt Practices Act, a Group Insider Trading Directive, a Group Procurement Directive, a Group Directive onCompliance with U.S. Sanctions and Export Control Laws, a Group M&A Policy,and a new Disclosure Committee Charter.****Second,we are revising our internal controls relating to procurement, includingcentralized access to all SAP systems of subsidiaries and a requirement thatall contract approvals pass through uniform rules and procedures. Third,we have revised our mergers and acquisitions process, including dividingaccountability for M&A between the Strategy Group, which remainsresponsible for business development, and the area of the Chief FinancialOfficer, which is responsible for execution of M&A transactions. AllM&A activity requires Board approval and will be reported to the AuditCommittee on a semi-annual basis. Fourth,we are reviewing, and modifying where necessary, all other significantprocurement, compliance, governance, M&A, and disclosure-related Groupdirectives. Fifth, we are undertaking a significant compliance and governanceassessment of our Hungarian and non-Hungarian subsidiaries. This assessment includesa review of all significant governance and compliance-related policies and theimplementation of the new and revised Group-level policies and directives.Sixth, we are developing a comprehensive compliance training program, whichwill cover all aspects of our compliance regime and will be effected through acombination of in person, Web-based and other forms of training depending onthe category of employee and the compliance topic. Training will extend to allemployees throughout the Magyar Telekom Group.****Finally, our Board may make further decisionsor recommendations in connection with the involvement of any seniormanagement in the four contracts under investigation.

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As previously reported, the investigation has delayedthe finalization of our 2005 financial statements, and as a result we and someof our subsidiaries have failed and may fail to meet certain deadlinesprescribed by U.S., Hungarian and other applicable laws and regulations forpreparing and filing audited annual results and holding annual generalmeetings. We have to date been fined HUF 13 million as a consequence of thesedelays. We have notified the Hungarian Financial Supervisory Authority, theU.S. Securities and Exchange Commission and the U.S. Department of Justice ofthe investigation, are in contact with these authorities regarding theinvestigation and are responding to inquiries raised by these authorities.

*(b) DisclosureControls and Procedures*

As of December 31, 2006 (the “Evaluation Date”),our CEO and CFO carried out an evaluation of the effectiveness of our“disclosure controls and procedures” (as defined in Rules 13(a)-15(e) and15(d)-15(e) under the Exchange Act). Based on that evaluation, theseofficers have concluded that as of the Evaluation Date, our disclosure controlsand procedures were effective and designed to provide reasonable assurance thatinformation required to be disclosed by us in the reports that we file orsubmit under the Exchange Act is recorded, processed, summarized and reported,within the time periods specified in the applicable rules and forms, andthat it is accumulated and communicated to our management, including our CEOand CFO, as appropriate to allow timely decisions regarding requireddisclosure. Although management has determined that there were weaknesses ininternal controls over financial reporting at the end of 2006, because of thelevel of implementation of remedial measures, the CEO and CFO have determinedthat taken in their totality sufficient progress on the implementation had beenmade for them to reach the conclusions above.

*(c) Management’sAnnual Report on Internal Control over Financial Reporting*

As required by section 404 of the Sarbanes-Oxley Actof 2002, our management is responsible for establishing and maintaining adequate“internal control over financial reporting” (as defined in Rule 13(a)-15(f) underthe Exchange Act). Our system of internal control over financial reporting isdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inconformity with International Financial Reporting Standards as adopted by theEuropean Union (“IFRS”), as well as a reconciliation of profit after incometaxes and shareholders’ equity as reported in the consolidated financialstatements under IFRS to profit after income taxes and shareholders’ equity inaccordance with generally accepted accounting principles in the United States.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

Our Board of Directors, including our CEO and CFOassessed the effectiveness of the Company’s internal control over financialreporting as of December 31, 2006. The Board of Directors’ assessment wasbased on the framework and criteria established in “Internal Control—IntegratedFramework” issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO). Based on the assessment under these criteria, our Board ofDirectors, including our CEO and CFO has concluded that, as ofDecember 31, 2006, the Company’s internal control over financial reportingwas not effective, thus we have a material weakness in internal controls overfinancial reporting: management has failed to sufficiently communicate theimportance of integrity and ethical values (as described above in Item 15(a) wehave initiated a number of remedial actions including senior management changesto address the weaknesses identified). There were deficiencies in controlsrelated to the validity and authorization of transactions in the mergers andacquisitions process and deficiencies in the design and effectiveness ofcontrols related to the validity and authorization of expenditures inprocurement process. 

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Specifically, senior levelmanagers entered into expenditures by circumventing existing controls and theindependent investigation has been unable to determine definitely the purposeof the contracts, and it is possible that they may have been improper. Thesedeficiencies are indications that the importance of integrity and ethicalvalues was not sufficiently communicated and enforced during the course of theyear. Although we initiated remedial actions (as described in Item 15 (a)),these were not effective for sufficient period of time before year-end 2006 toeliminate the control deficiencies which resulted in the ineffectiveness of ourinternal control over financial reporting.

As described in “Management’s Overall Assessment ofMagyar Telekom Group’s internal controls over financial reporting 2006 (incompliance with SOX 404)”, management has excluded KFKI from its assessment ofinternal control over financial reporting as of December 31, 2006 becauseit was acquired by the Company during 2006. KFKI is a wholly-owned subsidiary whosetotal assets and total revenues represent 1.6 percent and 1.2 percent,respectively, of the related consolidated financial statement amounts as of andfor the year ended December 31, 2006.

The Board of Directors’ assessment of theeffectiveness of the Company’s internal control over financial reporting as ofDecember 31, 2006 has been audited by PricewaterhouseCoopers Könyvvizsgáló ésGazdasági Tanácsadó Kft., an independent registered public accounting firm asstated in their report which appears herein.

*(d) Changes inInternal Control Over Financial Reporting*

Except as described above in (a), there were nochanges in our internal control over financial reporting during the periodcovered by this Annual Report that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

**ITEM 16A—AUDITCOMMITTEE FINANCIAL EXPERT**

The Audit Committee has determined that Dr. ÁdámFarkas is an “audit committee financial expert” as defined by Item 401(h) of Regulation S-K of the Securities Exchange Act of 1934, as amended.Dr. Farkas is also “independent,” as that term is defined in Rule 10A-3under the Exchange Act.

For the biography of Mr. Farkas, see “Item 6—Directors,Senior Management and Employees”.

**ITEM 16B—CODE OFETHICS**

We have adopted a code of ethics, as defined in Item16B of Form 20-F under the Securities Exchange Act of 1934, asamended. Our code of ethics applies to our Chief Executive Officer, ChiefFinancial Officer, principal accounting officer and persons performing similarfunctions, as well as to our directors and other officers and employees. Ourcode of ethics is filed as Exhibit 11.1. to this Form 20-F. Ifwe amend the provisions of our code of ethics that apply to our Chief ExecutiveOfficer, Chief Financial Officer, principal accounting officer and personsperforming similar functions or if we grant any waiver of such provisions, wewill disclose such amendment or waiver on our website athttp://www.magyartelekom.hu.

On January 8, 2007, we adopted a financial codeof ethics for financial officers, which is filed as Exhibit 11.2 to thisForm 20-F.

**Other CorporateGovernance Practices Required by the Sarbanes-Oxley Act**

As required by the Sarbanes-Oxley Act, we adoptedprocedures for the treatment of complaints relating to auditing and accountingmatters. We have posted a description of our procedures on our investorrelations page on our website at http://www.magyartelekom.hu.

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**ITEM 16C—PRINCIPALACCOUNTANT FEES AND SERVICES**

**Audit and Non-AuditFees**

The following table sets forth the fees (includingexpenses) of our independent auditors, PwC, related to 2005 and 2006:

| ** **          | ** ** | **At December 31,**    | ** ** |
|---------------------|------------|----------------------------------|------------|
| ** **          | ** ** | **2005**                         | ** ** | **2006** | ** ** |
| ** **          | ** ** | **(in HUF thousands)** | ** ** |
| Audit Fees          |       | 602,258                          |       | 712,819 |   |
| Audit-Related  Fees |       | 27,381                           |       | 315,694 |   |
| Tax Fees            |       | 25,696                           |       | 11,300 |   |
| All Other Fees      |       | 691                              |       | 41,785 |   |
|                | ** ** | **656,026**                      | ** ** | **1,081,598** | ** ** |

 

Audit fees in the above table are the aggregate feesof PwC in connection with the audit of our annual financial statements, reviewsof quarterly reports and services performed in relation to legal obligationsand submissions required by regulatory provisions.

Audit-related fees in the above table are theaggregate fees of PwC for services which are normally performed by the externalauditor in connection with the auditing of the annual financial statements,e.g. advice on issues of accounting and reporting which were not classified asaudit services and support with the interpretation of new accounting andreporting standards. Audit-related fees in 2006 also include HUF 259 millionincurred relating to the ongoing investigation.

Tax fees in the above table are fees of PwC forservices relating to issues of domestic and international taxation (adherenceto tax law, tax planning and tax consulting). Furthermore, services werecommissioned for the assistance with tax audits and appeals, evaluations fortaxation purposes, as well as assistance to tax law.

Other fees in the above table are fees of PwCprimarily related to services like participation by Magyar Telekom employees inconferences and training sessions organized by PwC.

**Audit CommitteePre-Approval Policies and Procedures**

The “Rules of procedure” of Magyar Telekom Plc.’sAudit Committee were approved on December 5, 2006 and the “Pre-approvalpolicy” of Magyar Telekom Plc.’s Audit Committee was approved onDecember 11, 2006. The “Pre-approval policy” requires all services whichare to be performed by our external auditor to be pre-approved. This may be inthe form of general pre-approval or pre-approval on a case-by-case basis. TheAudit Committee has been regularly informed of the external auditor’s servicesand the relevant fees.

See Exhibit 14.2. for “Rules of Procedure ofMagyar Telekom Plc.’s Audit Committee” and Exhibit 14.3. for “Pre-approvalPolicy of Magyar Telekom Plc.’s Audit Committee”.

**ITEM 16D—EXEMPTIONSFROM THE LISTING STANDARDS FOR AUDIT COMMITTEES**

Not applicable.

**ITEM 16E—PURCHASESOF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED**

**PURCHASERS**

Not applicable.

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**PART III**

**ITEM 17—FINANCIALSTATEMENTS**

See pages F-1through F-92 incorporated herein by reference.

**ITEM 18—FINANCIALSTATEMENTS**

**Notapplicable.**

**ITEM19—EXHIBITS**

| 1.1. |   | Articles of Association  of Magyar Telekom (incorporated herein by reference to Exhibit 1.1. of Magyar  Telekom’s 2005 Form 20-F dated February 22, 2007).                                                                                                                                                                                                                                                                                           |
|------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1. |   | Form of  Deposit Agreement, dated as of October 8, 1997, among Matáv, Morgan  Guaranty Trust Company of New York, as Depository, and holders from time to  time of American Depositary Receipts issued thereunder, including the form of  American Depositary Receipt (incorporated herein by reference to  Exhibit 4.1. of Magyar Telekom’s Form F-1 dated  November 13, 1997).                                       |
| 4.1. |   | Agreement to furnish  to the Securities and Exchange Commission copy of the HUF 45 billion Medium  Term Note Program upon request (incorporated herein by reference to  Exhibit 2.2. of Magyar Telekom’s 2001 Form 20-F dated  May 9, 2002).                                                                                                                                                                                          |
| 4.2. |   | Concession  Agreement, dated December 19, 1993, between the Minister and MagyarCom  (incorporated herein by reference to Exhibit 10.1. of Magyar Telekom’s  Form F-1 dated November 13, 1997).                                                                                                                                                                                                                                   |
| 4.3. |   | Assignment and  Assumption, dated December 22, 1993, by and among MagyarCom, Matáv and  the Minister (incorporated herein by reference to Exhibit 10.2. of  Magyar Telekom’s Form F-1 dated November 13, 1997).                                                                                                                                                                                                             |
| 4.4. |   | Concession  Contract, as amended, dated December 22, 1993, between the Minister and  Matáv (incorporated herein by reference to Exhibit 4.3.1. of Magyar  Telekom’s 2001 Form 20-F dated May 9, 2002).                                                                                                                                                                                                                      |
| 4.5. |   | Contract for the  revision and termination of the Nationwide Concession Contract concluded on  December 22, 1993 and the Concession Contract concluded on May 25,  1994 and for the provision of universal telecommunications services, dated  January 28, 2002, by and among the Minister and Matáv (incorporated  herein by reference to Exhibit 4.3.2. of Magyar Telekom’s 2001  Form 20-F dated May 9, 2002). |
| 4.6. |   | Shareholders’  Agreement, dated September 26, 1997, by and among Matáv, MagyarCom and  the Minister (incorporated herein by reference to Exhibit 10.5. of  Magyar Telekom’s Form F-1 dated November 13, 1997).                                                                                                                                                                                                         |
| 4.7. |   | Amended and  Restated Framework Services Agreement, dated January 1, 2000, by and  among Matáv, Deutsche Telekom AG, Ameritech International Inc. and MagyarCom  Services Kft. (incorporated herein by reference to Exhibit 4.5. of  Magyar Telekom’s 2001 Form 20-F dated May 9, 2002).                                                                                                                                    |
| 4.8. |   | Share Purchase  Agreement between the Republic of Macedonia and Matáv relating to the sale of  50 percent of the issued share capital of Makedonski Telekomunikacii dated  December 22, 2000 (incorporated herein by reference to  Exhibit 4.6.1. of Magyar Telekom’s 2001 Form 20-F dated  May 9, 2002).                                                                                                                   |

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| 4.9.  |   | Subscription and Shareholders’  Deed between Matáv, CosmoTelco Added Value Services S.A., SEEF Holdings  Limited and Telemacedonija Ad Skopje, dated December 14, 2000  (incorporated herein by reference to Exhibit 4.6.2. of Magyar Telekom’s  2001 Form 20-F dated May 9, 2002).                                  |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.10. |   | First  Supplemental Deed to the Subscription and Shareholders’ Deed between Matáv,  CosmoTelco Added Value Services S.A., SEEF Holdings Limited and  Telemacedonija Ad Skopje, dated December 14, 2000 (incorporated herein  by reference to Exhibit 4.6.3. of Magyar Telekom’s 2001 Form 20-F  dated May 9, 2002).  |
| 4.11. |   | Second  Supplemental Deed to the Subscription and Shareholders’ Deed between Matáv,  CosmoTelco Added Value Services S.A., SEEF Holdings Limited and  Telemacedonija Ad Skopje, dated December 14, 2000 (incorporated herein  by reference to Exhibit 4.6.4. of Magyar Telekom’s 2001 Form 20-F  dated May 9, 2002). |
| 4.12. |   | Shareholders  Agreement between the Republic of Macedonia and Matáv in relation to  Makedonski Telekomunikacii, dated January 15, 2001 (incorporated herein  by reference to Exhibit 4.6.5. of Magyar Telekom’s 2001 Form 20-F  dated May 9, 2002).                                                                       |
| 4.13. |   | Modification of  the Subscription and Shareholders’ Deed between Matáv and CosmoTelco Added  Value Services S.A. with respect to the option, dated February 7, 2002  (incorporated herein by reference to Exhibit 4.6.6. of Magyar Telekom’s  2001 Form 20-F dated May 9, 2002).                                     |
| 4.14. |   | Agreement for  Call Option Extension between Matáv and CosmoTelco Added Value Services S.A.  with respect to the option, dated February 7, 2003 (incorporated herein  by reference to Exhibit 4.6.7. of Magyar Telekom’s 2002 Form 20-F  dated May 9, 2003).                                                              |
| 4.15. |   | Election of  Exercise the Put Option of SEEF Holdings Limited dated March 7, 2003.  (incorporated herein by reference to Exhibit 4.6.8. of Magyar Telekom’s  2002 Form 20-F dated May 9, 2003).                                                                                                                                |
| 4.16. |   | Share Purchase  Agreement between Matáv and SEEF Holdings Limited on the Sale of 2,077,311  Ordinary Shares in Stonebridge AD, dated June 20, 2003 (incorporated  herein by reference to Exhibit 4.16. of Magyar Telekom’s 2003  Form 20-F dated May 11, 2004).                                                           |
| 4.17. |   | Call Option  Waiver Agreement between Matáv and CosmoTelco Added Value Services S.A. with  respect to the option, dated December 10, 2003 (incorporated herein by  reference to Exhibit 4.17. of Magyar Telekom’s 2003 Form 20-F  dated May 11, 2004).                                                                    |
| 4.18. |   | Share Purchase  Agreement between Matáv and SEEF Holdings Limited on the Sale of 2,077,312  Ordinary Shares in Stonebridge AD, dated July 13, 2004 (incorporated  herein by reference to Exhibit 4.18. of Magyar Telekom’s 2004  Form 20-F dated May 11, 2005).                                                           |
| 4.19. |   | Share Purchase  Agreement between Matáv and CosmoTelco Added Value Services S.A. on the Sale  of 5,078,557 Ordinary Shares in Stonebridge AD, dated October 22, 2004  (incorporated herein by reference to Exhibit 4.19. of Magyar Telekom’s  2004 Form 20-F dated May 11, 2005).                                         |
| 4.20. |   | Call Option  Agreement between Deutsche Telekom AG and Matáv, dated October 20, 1999  (incorporated herein by reference to Exhibit 4.7.1. of Magyar Telekom’s  2001 Form 20-F dated May 9, 2002).                                                                                                                         |
| 4.21. |   | Westel Proxy  between Deutsche Telekom AG and Matáv, dated October 20, 1999  (incorporated herein by reference to Exhibit 4.7.2. of Magyar Telekom’s  2001 Form 20-F dated May 9, 2002).                                                                                                                                  |
| 4.22. |   | Business Share  Sale and Purchase Agreement, dated December 21, 2001 between Deutsche  Telekom AG and Matáv (incorporated herein by reference to Exhibit 4.7.3.  of Magyar Telekom’s 2001 Form 20-F dated May 9, 2002).                                                                                                   |

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| 4.23. |   | Share Sale and  Purchase Agreement, dated December 21, 2001 between Deutsche Telekom AG  and Matáv (incorporated herein by reference to Exhibit 4.7.4. of Magyar  Telekom’s 2001 Form 20-F dated May 9, 2002).                                                                                                               |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.24. |   | Determination of  the foreign exchange rate for the exercise of the Westel Call Option and e-denomination  of purchase price to euro, letter dated October 31, 2001 from Deutsche  Telekom AG to Matáv (incorporated herein by reference to Exhibit 4.7.5.  of Magyar Telekom’s 2001 Form 20-F dated May 9, 2002).           |
| 4.25. |   | Loan Agreement  between Deutsche Telekom International Finance B.V. and Matáv to finance the  acquisition of a 49 percent stake both in Westel and Westel 0660, dated  December 20, 2001 (incorporated herein by reference to  Exhibit 4.7.6. of Magyar Telekom’s 2001 Form 20-F dated  May 9, 2002).                        |
| 4.26. |   | Loan Agreement,  dated July 4, 2003, between Deutsche Telekom International Finance B.V.  and Matáv to refinance the loan taken on December 20, 2001 (incorporated  herein by reference to Exhibit 4.24. of Magyar Telekom’s 2003  Form 20-F dated May 11, 2004).                                                       |
| 4.27. |   | Amendment to the  Loan Agreement, dated August 13, 2004, between Deutsche Telekom  International Finance B.V. and Matáv with respect to the Loan Agreement,  dated July 4, 2003 (incorporated herein by reference to  Exhibit 4.25. of Magyar Telekom’s 2003 Form 20-F dated  May 11, 2004).                            |
| 4.28. |   | Loan Agreement  for the purpose of Financing the Acquisition of Maktel, dated  January 11, 2001 between Matáv and Deutsche Telekom AG (incorporated  herein by reference to Exhibit 4.8. of Magyar Telekom’s 2001  Form 20-F dated May 9, 2002).                                                                             |
| 4.29. |   | Quota Purchase  Agreement by and between T-Systems International GmbH and Matáv relating to  the quotas in T-Systems Hungary Kft, dated July 14, 2004 (incorporated  herein by reference to Exhibit 4.29. of Magyar Telekom’s 2004  Form 20-F dated May 11, 2005).                                                           |
| 4.30. |   | Strategic  Cooperation Agreement between Deutsche Telekom AG and Matáv, dated  December 15, 2004 (incorporated herein by reference to  Exhibit 4.30. of Magyar Telekom’s 2004 Form 20-F dated  May 11, 2005).                                                                                                                |
| 4.31. |   | Strategic  Cooperation Agreement between T-Mobile International AG and Matáv, dated  December 15, 2004 (incorporated herein by reference to  Exhibit 4.31. of Magyar Telekom’s 2004 Form 20-F dated  May 11, 2005).                                                                                                          |
| 4.32. |   | Share  Sale-Purchase Agreement in respect of Certain Shares of Telekom Crne Gore AD  between the Government of the Republic of Montenegro, the Employment Bureau  of Montenegro and Matáv, dated March 15, 2005 (incorporated herein by  reference to Exhibit 4.32. of Magyar Telekom’s 2004 Form 20-F  dated May 11, 2005). |
| 4.33. |   | Loan Agreement  for the purpose of Financing the Acquisition of Telekom Montenegro, dated  March 18, 2005 between Deutsche Telekom International Finance B.V. and  Matáv (incorporated herein by reference to Exhibit 4.33. of Magyar  Telekom’s 2004 Form 20-F dated May 11, 2005).                                         |
| 8.1.  |   | See “Significant  Subsidiaries” in “Item 4—Information on the Company” for significant  subsidiaries as of December 31, 2005.                                                                                                                                                                                                |
| 11.1. |   | Code of Ethics  (incorporated herein by reference to Exhibit 11.1. of Magyar Telekom’s  2003 Form 20-F dated May 11, 2004).                                                                                                                                                                                                            |
| 11.2. |   | Financial Code of  Ethics (incorporated herein by reference to Exhibit 11.2. of Magyar  Telekom’s 2005 Form 20-F dated February 22, 2007).                                                                                                                                                                                             |
| 12.1. |   | Certification of  the CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                  |

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| 12.2. |   | Certification of  the CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                    |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 13.1. |   | Certification of  the CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                    |
| 13.2. |   | Certification of  the CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                    |
| 14.1. |   | Consent of  Independent Registered Public Accounting Firm.                                                                                                                                                   |
| 14.2. |   | Rules of  Procedure of Magyar Telekom Plc.’s Audit Committee (incorporated herein by  reference to Exhibit 14.2. of Magyar Telekom’s 2005 Form 20-F  dated February 22, 2007). |
| 14.3. |   | Pre-approval  Policy of Magyar Telekom Plc.’s Audit Committee (incorporated herein by  reference to Exhibit 14.3. of Magyar Telekom’s 2005 Form 20-F  dated February 22, 2007).     |

 

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**SIGNATURES**

Theregistrant hereby certifies that it meets all of the requirements for filing onForm 20-F and that it has duly caused and authorized the undersigned tosign this annual report on its behalf.
| Date: June 27, 2007 |                     |
|--------------------------|--------------------------|
|                     | **MAGYAR TELEKOM  PLC.** |
|                     | By:                      | /s/ CHRISTOPHER MATTHEISEN |
|                     | Name:                    | Christopher Mattheisen |
|                     | Title:                   | *Chairman and Chief Executive Officer* |
|                     | By:                      | /s/ THILO KUSCH |
|                     | Name:                    | Thilo Kusch |
|                     | Title:                   | *Chief Financial Officer* |

 

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**MAGYAR TELEKOM**

**INDEXTO THE CONSOLIDATED FINANCIAL STATEMENTS**

|                                                                                                               | ** ** | **Page** |
|---------------------------------------------------------------------------------------------------------------|------------|----------|
|                                                                                                          |       |     |
| **Consolidated Financial  Statement:**                                                                        |       |     |
| Report of Independent  Registered Public Accounting Firm                                                      |       | F-2      |
| Consolidated Balance Sheets at  December 31, 2005 and 2006                                               |       | F-4      |
| Consolidated Income Statements  for the years ended December 31, 2004, 2005 and 2006                     |       | F-5      |
| Consolidated Cashflow  Statements for the years ended December 31, 2004, 2005 and 2006                   |       | F-6      |
| Consolidated Statements of  Changes in Equity for the years ended December 31, 2004, 2005  and 2006 |       | F-7      |
| Notes  to the Consolidated Financial Statements                                                               |       | F-10     |

 

F-1

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF MAGYAR TELEKOM PLC.**

We have completed an integrated audit of MagyarTelekom’s (“the Company”) December 31, 2006 consolidated financialstatements and of its internal control over financial reporting as of December 31,2006 and audits of its December 31, 2005 and December 31, 2004consolidated financial statements in accordance with the standards of thePublic Company Accounting Oversight Board (United States). Our opinions, basedon our audits, are presented below.

**Consolidatedfinancial statements**

In our opinion, the accompanying consolidated balancesheets and the related consolidated statements of income, shareholders’ equityand cash flows present fairly, in all material respects, the financial positionof Magyar Telekom and its subsidiaries at December 31, 2006 and December 31,  2005, and the results of their operations andtheir cash flows for each of the three years in the period ended December 31,2006 in conformity with International Financial Reporting Standards as adoptedfor use in the European Union. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits. We conducted ouraudits of these statements in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. An audit offinancial statements includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

Accounting principles generally accepted under IFRS asadopted for use in the European Union vary in certain significant respects fromaccounting principles generally accepted in the United States of America. Informationrelating to the nature and effect of such differences is presented in Note 37to the consolidated financial statements.

**Internal controlover financial reporting**

Also, we have audited management’s assessment,appearing in Item 15 of the Form 20-F Annual report in Management’sAnnual Report on Internal Control over Financial Reporting that Magyar Telekomdid not maintain effective internal control over financial reporting as of December 31,2006, because of management has failed to sufficiently communicate theimportance of integrity and ethical values, as evidenced by controldeficiencies identified in the procurement and merger and acquisitionsprocesses, based on criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO). The Company’s management is responsible for maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting. Ourresponsibility is to express opinions on management’s assessment and on theeffectiveness of the Company’s internal control over financial reporting basedon our audit.

We conducted our audit of internal control overfinancial reporting in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. An audit of internal control over financial reportingincludes obtaining an understanding of internal control over financialreporting, evaluating management’s assessment, testing and evaluating thedesign and operating effectiveness of internal control, and performing suchother procedures as we consider necessary in the circumstances. We believe thatour audit provides a reasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for 

F-2

----

external purposes inaccordance with generally accepted accounting principles. A company’s internalcontrol over financial reporting includes those policies and procedures that (i) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (iii) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

A material weakness is a control deficiency, orcombination of control deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. The following material weaknesshas been identified and included in management’s assessment:  management has failed to sufficientlycommunicate the importance of integrity and ethical values. There weredeficiencies in controls related to the validity and authorization of transactionsin the mergers and acquisitions process and deficiencies in the design andeffectiveness of controls related to the validity and authorization ofexpenditures in procurement process. Specifically, senior level managemententered into expenditures by circumventing existing controls and an independentinvestigation has determined that there is evidence to suggest that it ispossible that the purpose of the expenditures may have been improper. Thesedeficiencies are indications that the importance of integrity and ethicalvalues was not sufficiently communicated and enforced during the course of theyear.  The identified material weaknessdid not have a material impact on the consolidated financial statements.

This material weakness was considered in determiningthe nature, timing, and extent of audit tests applied in our audit of the December 31,2006 consolidated financial statements, and our opinion regarding theeffectiveness of the Company’s internal control over financial reporting doesnot affect our opinion on those consolidated financial statements.

As described in Management’s Annual Report on InternalControl over Financial Reporting, management has excluded the KFKI subsidiariesfrom its assessment of internal control over financial reporting as of December 31,2006 because it was acquired by the Company in a purchase business combinationduring 2006. The KFKI subsidiaries are wholly-owned subsidiaries whose totalassets and total revenues represent 1.6% and 1.2%, respectively, of the relatedconsolidated financial statement amounts as of and for the year ended December 31,2006.

In our opinion, management’s assessment that MagyarTelekom did not maintain effective internal control over financial reporting asof December 31, 2006, is fairly stated, in all material respects, based oncriteria established in Internal Control—Integrated Framework issued by theCOSO. Also, in our opinion, because of the effects of the material weaknessdescribed above on the achievement of the objectives of the control criteria,Magyar Telekom has not maintained effective internal control over financialreporting as of December 31, 2006, based on criteria established inInternal Control—Integrated Framework issued by the COSO.

We do not express an opinion or any other form ofassurance on management’s statements referring to the remedial measures takento enhance internal controls.

PricewaterhouseCoopers Könyvvizsgáló és GazdaságiTanácsadó Kft.

Budapest, HungaryJune 27, 2007

F-3

----

**MAGYAR TELEKOMCONSOLIDATED BALANCE SHEETS**

| ** **                                                                   | ** ** | ** ** | ** ** | **At December 31,**         | ** ** |
|------------------------------------------------------------------------------|------------|------------|------------|---------------------------------------|------------|
| ** **                                                                   | ** ** | ** ** | ** ** | **HUF**                               | ** ** | **USD** | ** ** |
| ** **                                                                   | ** ** | **Notes**  | ** ** | **2005**                              | ** ** | **2006** | ** ** | **2006** | ** ** |
| ** **                                                                   | ** ** | ** ** | ** ** | **as restated  (Note 2.1)** | ** ** | ** ** | ** ** | **(unaudited –   Note 2.1)** | ** ** |
| ** **                                                                   | ** ** | ** ** | ** ** | **(in HUF millions)**       | ** ** | **(million USD)** | ** ** |
| **ASSETS**                                                                   | ** ** |       | ** ** | ** **                            |       |   | ** ** | ** ** |   | ** ** |   |   |   |   |   |
| **Current  assets**                                                          | ** ** |       | ** ** | ** **                            |       |   | ** ** | ** ** |   | ** ** | ** ** |   |   |   |   |
| Cash and cash  equivalents                                                   |       |       | 6          | ** **                            |       |   | 46,060 |   |   | 77,840 |   |   | 406 |   |   |
| Other financial  assets                                                      |       |       | 7          | ** **                            |       |   | 1,817 |   |   | 2,692 |   |   | 14 |   |   |
| Trade and other  receivables                                                 |       |       | 8          | ** **                            |       |   | 95,956 |   |   | 104,016 |   |   | 543 |   |   |
| Current income tax  receivable                                               |       |       | 9          | ** **                            |       |   | 1,679 |   |   | 6,735 |   |   | 35 |   |   |
| Inventories                                                                  |       |       | 10         | ** **                            |       |   | 8,414 |   |   | 10,460 |   |   | 54 |   |   |
| Assets held for  disposal                                                    |       |       | 11         | ** **                            |       |   | 2,302 |   |   | 6,825 |   |   | 36 |   |   |
| **Total  current assets**                                                    | ** ** |       | ** ** | ** **                            |       |   | 156,228 |   |   | 208,568 |   |   | 1,088 |   |   |
| **Non current assets**                                                       | ** ** |       | ** ** | ** **                            |       |   | ** ** | ** ** |   | ** ** | ** ** |   |   |   |   |
| Property, plant  and equipment—net                                      |       |       | 12         | ** **                            |       |   | 580,736 |   |   | 550,900 |   |   | 2,875 |   |   |
| Intangible assets—net                                                   |       |       | 13         | ** **                            |       |   | 319,797 |   |   | 331,740 |   |   | 1,731 |   |   |
| Investments in  associates                                                   |       |       | 14         | ** **                            |       |   | 5,020 |   |   | 5,771 |   |   | 30 |   |   |
| Deferred tax  assets                                                         |       |       | 9          | ** **                            |       |   | 14,966 |   |   | 9,575 |   |   | 50 |   |   |
| Other non current  assets                                                    |       |       | 15         | ** **                            |       |   | 6,201 |   |   | 25,041 |   |   | 131 |   |   |
| **Total  non current assets**                                                | ** ** |       | ** ** | ** **                            |       |   | 926,720 |   |   | 923,027 |   |   | 4,817 |   |   |
| **Total  assets**                                                            | ** ** |       | ** ** | ** **                            |       |   | 1,082,948 |   |   | 1,131,595 |   |   | 5,905 |   |   |
| **LIABILITIES**                                                              | ** ** |       | ** ** | ** **                            |       |   | ** ** | ** ** |   | ** ** | ** ** |   |   |   |   |
| **Current  liabilities**                                                     | ** ** |       | ** ** | ** **                            |       |   | ** ** | ** ** |   | ** ** | ** ** |   |   |   |   |
| Loans from related  parties                                                  |       |       | 16         | ** **                            |       |   | 74,648 |   |   | 74,000 |   |   | 386 |   |   |
| Loans and other  borrowings—third party                                 |       |       | 17         | ** **                            |       |   | 43,602 |   |   | 29,605 |   |   | 155 |   |   |
| Trade and other  payables                                                    |       |       | 18         | ** **                            |       |   | 119,464 |   |   | 200,589 |   |   | 1,047 |   |   |
| Current income tax  payable                                                  |       |       | 9          | ** **                            |       |   | 1,472 |   |   | 1,736 |   |   | 9 |   |   |
| Deferred revenue                                                             |       |       | 19         | ** **                            |       |   | 918 |   |   | 234 |   |   | 1 |   |   |
| Provision for  liabilities and charges                                       |       |       | 20         | ** **                            |       |   | 6,817 |   |   | 8,414 |   |   | 44 |   |   |
| **Total  current liabilities**                                               | ** ** |       | ** ** | ** **                            |       |   | 246,921 |   |   | 314,578 |   |   | 1,642 |   |   |
| **Non current liabilities**                                                  | ** ** |       | ** ** | ** **                            |       |   | ** ** | ** ** |   | ** ** | ** ** |   |   |   |   |
| Loans from related  parties                                                  |       |       | 16         | ** **                            |       |   | 212,000 |   |   | 185,432 |   |   | 968 |   |   |
| Loans and other  borrowings—third party                                 |       |       | 17         | ** **                            |       |   | 14,215 |   |   | 20,697 |   |   | 108 |   |   |
| Deferred revenue                                                             |       |       | 19         | ** **                            |       |   | 267 |   |   | 170 |   |   | 1 |   |   |
| Deferred tax  liabilities                                                    |       |       | 9          | ** **                            |       |   | 3,189 |   |   | 5,647 |   |   | 29 |   |   |
| Provision for  liabilities and charges                                       |       |       | 20         | ** **                            |       |   | 3,141 |   |   | 3,344 |   |   | 17 |   |   |
| Other non current  liabilities                                               |       |       | 18         | ** **                            |       |   | 5,521 |   |   | 8,560 |   |   | 45 |   |   |
| **Total  non current liabilities**                                           |       |       |       | ** **                            |       |   | 238,333 |   |   | 223,850 |   |   | 1,168 |   |   |
| **Total  liabilities**                                                       | ** ** |       | ** ** | ** **                            |       |   | 485,254 |   |   | 538,428 |   |   | 2,810 |   |   |
| **EQUITY**                                                                   |       |       |       | ** **                            |       |   |   |   |   |   |   |   |   |   |   |
| **Shareholders’  equity**                                               |       |       |       | ** **                            |       |   |   |   |   |   |   |   |   |   |   |
| Common stock                                                                 |       |       |       | ** **                            |       |   | 104,281 |   |   | 104,277 |   |   | 544 |   |   |
| Additional paid in  capital                                                  |       |       |       | ** **                            |       |   | 27,382 |   |   | 27,380 |   |   | 143 |   |   |
| Treasury stock                                                               |       |       |       | ** **                            |       |   | (1,926 | ) |   | (1,504 | ) |   | (8 | ) |   |
| Cumulative  translation adjustment                                           |       |       |       | ** **                            |       |   | (420 | ) |   | (1,474 | ) |   | (8 | ) |   |
| Revaluation  reserve for available for sale financial assets—net of tax |       |       |       | ** **                            |       |   | 149 |   |   | — |   |   | — |   |   |
| Reserve for equity  settled share based transactions                         |       |       |       | ** **                            |       |   | 119 |   |   | 49 |   |   | — |   |   |
| Retained earnings                                                            |       |       |       | ** **                            |       |   | 397,982 |   |   | 397,311 |   |   | 2,074 |   |   |
| **Total  shareholders’ equity**                                         |       |       |       | ** **                            |       |   | 527,567 |   |   | 526,039 |   |   | 2,745 |   |   |
| **Minority  interests**                                                      |       |       |       | ** **                            |       |   | 70,127 |   |   | 67,128 |   |   | 350 |   |   |
| **Total  equity**                                                            |       |       |       | ** **                            |       |   | 597,694 |   |   | 593,167 |   |   | 3,095 |   |   |
| **Total  liabilities and equity**                                            |       |       |       | ** **                            |       |   | 1,082,948 |   |   | 1,131,595 |   |   | 5,905 |   |   |

 

Theseconsolidated financial statements were authorized for issue by the Board ofDirectors on March 22, 2007 and signed on their behalf by:
|        | Christopher Mattheisen               | Thilo Kusch              |   |
|--------|--------------------------------------|--------------------------|--------|
|   | Chairman and Chief Executive Officer | Chief Financial  Officer |   |

 

The accompanying notes form an integral part of these consolidated financial statements.

F-4

----

**MAGYAR TELEKOMCONSOLIDATED INCOME STATEMENTS**

| ** **                                                                            | ** ** | ** **                                                                    | ** ** | **For the year ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                            | ** ** | ** **                                                                    | ** ** | **HUF**                                                      | ** ** | **USD** | ** ** |
| ** **                                                                            | ** ** | **Notes**                                                                     | ** ** | **2004**                                                     | ** ** | **2005** | ** ** | **2006** | ** ** | **2006** | ** ** |
| ** **                                                                            | ** ** | ** **                                                                    | ** ** | **as restated  (Note 2.1)**                        | ** ** | **as restated  (Note 2.1)** | ** ** | ** ** | ** ** | **(unaudited –   Note 2.1)** | ** ** |
| ** **                                                                            | ** ** | **(in HUF millions, except per share amounts)** | ** ** | **(million USD)**                                       | ** ** |
| Fixed line  services                                                                  |       |                                                                          | 21         |                                                         |       | 331,983 |   | 329,206 |   | 343,866 |   |   | 1,795 |   |   |
| Mobile services                                                                       |       |                                                                          | 22         |                                                         |       | 264,809 |   | 285,848 |   | 327,330 |   |   | 1,708 |   |   |
| **Revenue**                                                                           |       |                                                                          |       |                                                         |       | 596,792 |   | 615,054 |   | 671,196 |   |   | 3,503 |   |   |
| Employee related expenses                                                             |       |                                                                          | 23         |                                                         |       | (109,497 | ) | (92,783 | ) | (95,253 | ) |   | (497 | ) |   |
| Depreciation and  amortization                                                        |       |                                                                          |       |                                                         |       | (137,666 | ) | (114,686 | ) | (122,249 | ) |   | (638 | ) |   |
| Payments to other  network operators                                                  |       |                                                                          |       |                                                         |       | (87,483 | ) | (88,587 | ) | (93,154 | ) |   | (486 | ) |   |
| Material cost of  telecommunications equipment                                        |       |                                                                          |       |                                                         |       | (40,971 | ) | (37,221 | ) | (59,714 | ) |   | (312 | ) |   |
| Other operating  expenses                                                             |       |                                                                          | 25         |                                                         |       | (134,577 | ) | (148,032 | ) | (168,010 | ) |   | (877 | ) |   |
| **Operating  expenses**                                                               |       |                                                                          |       |                                                         |       | (510,194 | ) | (481,309 | ) | (538,380 | ) |   | (2,810 | ) |   |
| Other operating income                                                                |       |                                                                          | 26         |                                                         |       | 7,121 |   | 8,009 |   | 3,575 |   |   | 19 |   |   |
| **Operating profit**                                                                  |       |                                                                          |       |                                                         |       | 93,719 |   | 141,754 |   | 136,391 |   |   | 712 |   |   |
| Finance expenses                                                                      |       |                                                                          | 27         |                                                         |       | (37,914 | ) | (34,497 | ) | (30,102 | ) |   | (157 | ) |   |
| Finance income                                                                        |       |                                                                          | 28         |                                                         |       | 1,768 |   | 2,996 |   | 4,692 |   |   | 24 |   |   |
| Share of  associates’ profits                                                    |       |                                                                          | 14         |                                                         |       | 1,896 |   | 330 |   | 703 |   |   | 4 |   |   |
| **Profit before income tax**                                                          |       |                                                                          |       |                                                         |       | 59,469 |   | 110,583 |   | 111,684 |   |   | 583 |   |   |
| Income tax expense                                                                    |       |                                                                          | 9          |                                                         |       | (16,142 | ) | (21,858 | ) | (24,220 | ) |   | (126 | ) |   |
| **Profit for the year**                                                               |       |                                                                          |       |                                                         |       | 43,327 |   | 88,725 |   | 87,464 |   |   | 457 |   |   |
| **Attributable  to:**                                                                 | ** ** |                                                                          |       |                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |
| Equity holders of  the Company (Net income)                                           |       |                                                                          |       |                                                         |       | 34,641 |   | 78,415 |   | 75,453 |   |   | 394 |   |   |
| Minority interests                                                                    |       |                                                                          |       |                                                         |       | 8,686 |   | 10,310 |   | 12,011 |   |   | 63 |   |   |
|                                                                                  |       |                                                                          |       |                                                         |       | 43,327 |   | 88,725 |   | 87,464 |   |   | 457 |   |   |
| **Earnings  per share (EPS) information:**                                            |       |                                                                          |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |
| Profit attributable to the equity holders of the  Company                             |       |                                                                          |       |                                                         |       | 34,641 |   | 78,415 |   | 75,453 |   |   | 394 |   |   |
| Weighted average number of common stock outstanding  (thousands) used for basic EPS   |       |                                                                          |       |                                                         |       | 1,037,912 |   | 1,038,803 |   | 1,040,321 |   |   |   |   |   |
| Average number of  dilutive share options (thousands)                                 |       |                                                                          |       |                                                         |       | 318 |   | 417 |   | 290 |   |   |   |   |   |
| Weighted average  number of common stock outstanding (thousands) used for diluted EPS |       |                                                                          |       |                                                         |       | 1,038,230 |   | 1,039,220 |   | 1,040,611 |   |   |   |   |   |
| Basic earnings per share (HUF and USD)                                                |       |                                                                          |       |                                                         |       | 33.38 |   | 75.49 |   | 72.53 |   |   | 0.38 |   |   |
| Diluted earnings per  share (HUF and USD)                                             |       |                                                                          |       |                                                         |       | 33.37 |   | 75.46 |   | 72.51 |   |   | 0.38 |   |   |

 

The accompanying notes form an integral part of these consolidated financial statements.

F-5

----

**MAGYAR TELEKOMCONSOLIDATED CASHFLOW STATEMENTS**

| ** **                                                            | ** ** | ** ** | ** ** | **For the year ended December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------------|------------|
| ** **                                                            | ** ** | ** ** | ** ** | **HUF**                                                      | ** ** | **USD** | ** ** |
| ** **                                                            | ** ** | **Notes**  | ** ** | **2004**                                                     | ** ** | **2005** | ** ** | **2006** | ** ** | **2006** | ** ** |
| ** **                                                            | ** ** | ** ** | ** ** | **as restated  (Note 2.1)**                        | ** ** | **as restated  (Note 2.1)** | ** ** | ** ** | ** ** | **(unaudited –   Note 2.1)** | ** ** |
| ** **                                                            | ** ** | ** ** | ** ** | **(in HUF millions)**                              | ** ** | **(million USD)** | ** ** |
| **Cashflows from operating  activities**                              |       |       |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash generated from operations                                        |       |       | 29         |                                                         |       |   | 245,773 |   |   |   | 243,893 |   |   | 236,888 |   |   | 1,236 |   |   |
| Interest paid                                                         |       |       |       |                                                         |       |   | (34,030 | ) |   |   | (31,078 | ) |   | (29,876 | ) |   | (156 | ) |   |
| Income tax paid                                                       |       |       |       |                                                         |       |   | (21,992 | ) |   |   | (11,479 | ) |   | (19,388 | ) |   | (101 | ) |   |
| **Net  cash generated from operating activities**                     |       |       |       |                                                         |       |   | 189,751 |   |   |   | 201,336 |   |   | 187,624 |   |   | 979 |   |   |
| **Cashflows  from investing activities**                              |       |       |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Purchase of property plant and equipment (PPE) and  intangible assets |       |       | 30         |                                                         |       |   | (91,748 | ) |   |   | (103,587 | ) |   | (96,790 | ) |   | (505 | ) |   |
| Purchase of subsidiaries and business units                           |       |       | 31         |                                                         |       |   | (17,273 | ) |   |   | (35,927 | ) |   | (35,327 | ) |   | (184 | ) |   |
| Cash acquired through business   combinations                         |       |       | 5          |                                                         |       |   | 16 |   |   |   | 1,866 |   |   | 379 |   |   | 2 |   |   |
| Interest received                                                     |       |       |       |                                                         |       |   | 1,452 |   |   |   | 2,195 |   |   | 2,002 |   |   | 10 |   |   |
| Dividend received                                                     |       |       |       |                                                         |       |   | 2,633 |   |   |   | 1,729 |   |   | 157 |   |   | 1 |   |   |
| Proceeds from / (payments for) other financial  assets—net       |       |       |       |                                                         |       |   | 43 |   |   |   | (371 | ) |   | 407 |   |   | 2 |   |   |
| Proceeds from disposal of subsidiaries                                |       |       | 5          |                                                         |       |   | — |   |   |   | — |   |   | 115 |   |   | 1 |   |   |
| Proceeds from disposal of PPE and intangible assets                   |       |       |       |                                                         |       |   | 4,090 |   |   |   | 2,529 |   |   | 6,798 |   |   | 35 |   |   |
| **Net  cash used in investing activities**                            |       |       |       |                                                         |       |   | (100,787 | ) |   |   | (131,566 | ) |   | (122,259 | ) |   | (638 | ) |   |
| **Cashflows  from financing activities**                              |       |       |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividends paid to shareholders and minority interest                  |       |       |       |                                                         |       |   | (78,294 | ) |   |   | (84,551 | ) |   | (77 | ) |   | — |   |   |
| Proceeds from loans and other borrowings                              |       |       |       |                                                         |       |   | 338,680 |   |   |   | 263,329 |   |   | 183,051 |   |   | 955 |   |   |
| Repayment of loans and other borrowings                               |       |       |       |                                                         |       |   | (332,481 | ) |   |   | (242,595 | ) |   | (218,619 | ) |   | (1,141 | ) |   |
| Proceeds from sale of treasury stock                                  |       |       |       |                                                         |       |   | — |   |   |   | 1,969 |   |   | 491 |   |   | 3 |   |   |
| **Net  cash used in financing activities**                            |       |       |       |                                                         |       |   | (72,095 | ) |   |   | (61,848 | ) |   | (35,154 | ) |   | (183 | ) |   |
| Exchange gains / (losses) on cash and cash  equivalents               |       |       |       |                                                         |       |   | (2,122 | ) |   |   | 1,259 |   |   | 1,569 |   |   | 8 |   |   |
| **Change in cash and cash equivalents**                               |       |       |       |                                                         |       |   | 14,747 |   |   |   | 9,181 |   |   | 31,780 |   |   | 166 |   |   |
| Cash and cash equivalents, beginning of year                          |       |       |       |                                                         |       |   | 22,132 |   |   |   | 36,879 |   |   | 46,060 |   |   | 240 |   |   |
| Cash and cash  equivalents, end of year                               |       |       | 6          |                                                         |       |   | 36,879 |   |   |   | 46,060 |   |   | 77,840 |   |   | 406 |   |   |

 

The accompanying notes form an integral part of these consolidated financial statements.

F-6

----

**MAGYAR TELEKOMCONSOLIDATED STATEMENTS OF CHANGES IN EQUITY**

| ** ** | ** ** | **Shares of  common stock**(a) | ** ** | **Common  stock**(a) | ** ** | **Additional  paid in   capital**(b) | ** ** | **Treasury  stock**(c) | ** ** | **Cumulative  translation  adjustment**(d) | ** ** | **Revaluation  reserve for AFS  financial assets  —net of tax**(e) | ** ** | **Reserve for  equity settled  share based  transactions**(f) | ** ** | **Retained  earnings**(g) | ** ** | **Share-  holders’   equity** | ** ** | **Minority  interests**(h) | ** ** | **Equity** | ** ** |
|------------|------------|------------------------------------------|------------|----------------------|------------|------------------------------------------------|------------|------------------------|------------|--------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|---------------------------|------------|-----------------------------------------|------------|----------------------------|------------|------------|------------|

| **Balance  at January 1, 2004**                           |   |   | 1,042,811,600 |   |   |   | 104,281 |   |   |   | 27,382 |   |   |   | (3,842 | )      |   |   | 825    |   |   |   | — |   |   |   | — |   |   |   | 431,464 |   |   |   | 560,110 |   |   |   | 70,274  |   |   | 630,384 |   |
|----------------------------------------------------------------|--------|--------|---------------|--------|--------|--------|---------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|---------|--------|--------|--------|---------|--------|--------|--------|---------|--------|--------|---------|--------|
| Dividend(i)                                                    |   |   |          |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (72,654 | )      |   |   | (72,654 | )      |   |   |    |   |   | (72,654 | )      |
| Dividend declared  to minority interests(j)                    |   |   |          |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |    |   |   |   | —  |   |   |   | (5,651  | )      |   | (5,651  | )      |
| Business  combinations(k)                                      |   |   |          |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |    |   |   |   | —  |   |   |   | (9,109  | )      |   | (9,109  | )      |
| Purchase of  investment in T-Systems Hungary                   |   |   |          |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (1,679  | )      |   |   | (1,679  | )      |   |   |    |   |   | (1,679  | )      |
| Cumulative  Translation Adjustment                             |   |   |          |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   | (3,851 | )      |   |   |   |   |   |   |   |   |   |   |    |   |   |   | (3,851  | )      |   |   | (4,103  | )      |   | (7,954  | )      |
| Profit for the  year                                           |   |   |          |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 34,641  |   |   |   | 34,641  |   |   |   | 8,686   |   |   | 43,327  |   |
| **Balance  at December 31, 2004 as previously reported**  |   |   | 1,042,811,600 |   |   |   | 104,281 |   |   |   | 27,382 |   |   |   | (3,842 | )      |   |   | (3,026 | )      |   |   | — |   |   |   | — |   |   |   | 391,772 |   |   |   | 516,567 |   |   |   | 60,097  |   |   | 576,664 |   |
| Adoption of changes  in IAS 39—net of tax (Note 2.6)      |   |   |          |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (733    | )      |   |   | (733    | )      |   |   |    |   |   | (733    | )      |
| Adoption of IFRS 2  (Note 2.18 c)                              |   |   |          |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 178    |   |   |   | (178    | )      |   |   | —  |   |   |   |    |   |   | —  |   |
| **Balance  at December 31, 2004 as restated**             |   |   | 1,042,811,600 |   |   |   | 104,281 |   |   |   | 27,382 |   |   |   | (3,842 | )      |   |   | (3,026 | )      |   |   | — |   |   |   | 178    |   |   |   | 390,861 |   |   |   | 515,834 |   |   |   | 60,097  |   |   | 575,931 |   |
| Dividend(i)                                                    |   |   |          |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (72,654 | )      |   |   | (72,654 | )      |   |   |    |   |   | (72,654 | )      |
| Dividend declared  to minority interests(j)                    |   |   |          |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |    |   |   |   | —  |   |   |   | (11,913 | )      |   | (11,913 | )      |
| Business  combinations(k)                                      |   |   |          |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |    |   |   |   | —  |   |   |   | 9,447   |   |   | 9,447   |   |
| Sale of Telit                                                  |   |   |          |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 495     |   |   |   | 495     |   |   |   |    |   |   | 495     |   |
| Capital injection  in TSH                                      |   |   |          |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 669     |   |   |   | 669     |   |   |   |    |   |   | 669     |   |
| Share options  exercised by managers(m)                        |   |   |          |   |   |   |    |   |   |   |   |   |   |   | 1,916  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 196     |   |   |   | 2,112   |   |   |   |    |   |   | 2,112   |   |
| Share options  exercised by CEO(m)                             |   |   |          |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (143   | )      |   |   |    |   |   |   | (143    | )      |   |   |    |   |   | (143    | )      |
| Share based  payments (Note 24)                                |   |   |          |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 84     |   |   |   |    |   |   |   | 84      |   |   |   |    |   |   | 84      |   |
| Cumulative  Translation Adjustment                             |   |   |          |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   | 2,606  |   |   |   |   |   |   |   |   |   |   |   |    |   |   |   | 2,606   |   |   |   | 2,141   |   |   | 4,747   |   |
| Profit for the  year—as previously reported               |   |   |          |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 78,564  |   |   |   | 78,564  |   |   |   | 10,355  |   |   | 88,919  |   |
| Effect of changes  in IAS 39—net of tax (Note 2.1.1)      |   |   |          |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (149    | )      |   |   | (149    | )      |   |   | (45     | )      |   | (194    | )      |
| Profit for the  year as restated                               |   |   |          |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 78,415  |   |   |   | 78,415  |   |   |   | 10,310  |   |   | 88,725  |   |
| Change in reserve  for AFS financial assets (Note 7)           |   |   |          |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 149    |   |   |   |   |   |   |   |    |   |   |   | 149     |   |   |   | 45      |   |   | 194     |   |
| **Balance  at December 31, 2005 as restated**             |   |   | 1,042,811,600 |   |   |   | 104,281 |   |   |   | 27,382 |   |   |   | (1,926 | )      |   |   | (420   | )      |   |   | 149    |   |   |   | 119    |   |   |   | 397,982 |   |   |   | 527,567 |   |   |   | 70,127  |   |   | 597,694 |   |
| **Balance  at January 1, 2006**                           |   |   | 1,042,811,600 |   |   |   | 104,281 |   |   |   | 27,382 |   |   |   | (1,926 | )      |   |   | (420   | )      |   |   | 149    |   |   |   | 119    |   |   |   | 397,982 |   |   |   | 527,567 |   |   |   | 70,127  |   |   | 597,694 |   |
| Reduction in  capital as a result of merger with T-Mobile H(n) |   |   | (43,385       | )      |   |   | (4      | )      |   |   | (2     | )      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (12     | )      |   |   | (18     | )      |   |   |    |   |   | (18     | )      |
| Dividend(i)                                                    |   |   |          |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (76,122 | )      |   |   | (76,122 | )      |   |   |    |   |   | (76,122 | )      |
| Dividend declared  to minority interests(j)                    |   |   |          |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |    |   |   |   | —  |   |   |   | (43     | )      |   | (43     | )      |
| Sale of Cardnet(o)                                             |   |   |          |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |    |   |   |   | —  |   |   |   | (71     | )      |   | (71     | )      |
| MakTel’s purchase  of its own shares(p)                   |   |   |          |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |    |   |   |   | —  |   |   |   | (14,856 | )      |   | (14,856 | )      |
| Result of TSH’s  sale of a business unit(l)               |   |   |          |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 205     |   |   |   | 205     |   |   |   |    |   |   | 205     |   |
| Share based  payments (Note 24)                                |   |   |          |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 36     |   |   |   |    |   |   |   | 36      |   |   |   |    |   |   | 36      |   |
| Share options  exercised by CEO(q)                             |   |   |          |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (106   | )      |   |   | (282    | )      |   |   | (388    | )      |   |   |    |   |   | (388    | )      |
| Share options  exercised by managers(m)                        |   |   |          |   |   |   |    |   |   |   |   |   |   |   | 422    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 87      |   |   |   | 509     |   |   |   |    |   |   | 509     |   |
| Change in reserve  for AFS financial assets (Note 7)           |   |   |          |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (149   | )      |   |   |   |   |   |   |    |   |   |   | (149    | )      |   |   | (45     | )      |   | (194    | )      |
| Cumulative  Translation Adjustment                             |   |   |          |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   | (1,054 | )      |   |   |   |   |   |   |   |   |   |   |    |   |   |   | (1,054  | )      |   |   | 5       |   |   | (1,049  | )      |
| Profit for the  year                                           |   |   |          |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 75,453  |   |   |   | 75,453  |   |   |   | 12,011  |   |   | 87,464  |   |
| **Balance  at December 31, 2006**                         |   |   | 1,042,768,215 |   |   |   | 104,277 |   |   |   | 27,380 |   |   |   | (1,504 | )      |   |   | (1,474 | )      |   |   | — |   |   |   | 49     |   |   |   | 397,311 |   |   |   | 526,039 |   |   |   | 67,128  |   |   | 593,167 |   |
| Of which treasury  stock                                       |   |   | (1,917,824    | )      |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |    |   |   |   |    |   |   |   |    |   |   |    |   |
| **Shares  of common outstanding at December 31, 2006**    |   |   | 1,040,850,391 |   |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |    |   |   |   |    |   |   |   |    |   |   |    |   |

 

The accompanying notes form an integral part of these consolidatedfinancial statements.

F-7

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**MAGYAR TELEKOM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (notes)**

(a)                  The total amount of issuedshares of common stock of 1,042,768,215 (each with a nominal value of HUF 100)is fully paid as at December 31, 2006. In addition to these shares, totalshareholders’ equity includes one Series “B” preference share at the nominalvalue of HUF 10,000 at December 31, 2006. This Series “B” share isheld by the Ministry of Economics and Transport, and bestows certain rights onits owner, including access to information, and the appointment of a Director.This share may only be held by the Government or its nominee. A bill has beensubmitted to the Hungarian Parliament which, if approved, will transform the “B”share into an ordinary share and thus abolish these special rights. The numberof authorized ordinary shares on December 31, 2006 is 1,042,768,215.

(b)                 Additional paid in capital represents the amount abovethe nominal value of the shares that was received by the Company during capitalincreases.

(c)                  Treasury stock represents the cost of the Company’s ownshares repurchased.

(d)                 Cumulative translation adjustment represents theforeign exchange differences arising on the consolidation of foreignsubsidiaries

(e)                  Revaluation reserve for available for sale financialassets includes the unrealized gains and losses net of tax on available forsale financial assets. Any realized gains or losses are taken out of thisreserve and recognized in the income statement (Note 7).

(f)                   Reserve for equity settled share based transactionsincludes the compensation expenses accrued in equity related to share settledcompensation programs. When equity instruments are issued or treasury sharesare utilized as part of the program, the accumulated balance is taken out ofthe reserve (Note 24).

(g)                  Retained earnings include the accumulated and undistributednet income of the Group. The distributable reserves of the Company underHungarian law at December 31, 2006 amounted to approximately HUF 294,000million (HUF 282,000 million at December 31, 2005).

(h)                 Minority interests represent the minority shareholders’share of the net assets of subsidiaries, in which the Group has less than 100%ownership.

(i)                   In 2006 Magyar Telekom Plc. declared HUF 73 dividendper share (HUF 70 in 2005, HUF 70 in 2004).

(j)                   The dividend declared to minority interests in 2004 and2005 almost entirely reflects the dividend declared by MakTel, Magyar Telekom’sMacedonian subsidiary, to its minority shareholders. In 2006 MakTel did notdeclare dividends. The amount of dividend declared in 2006 to minoritiesincludes the amount declared to the minority owners of smaller subsidiaries.

(k)                 Business combinations in 2004 include the reduction ofminority interest as a result of the purchase of additional shares inStonebridge and other already consolidated subsidiaries. The increase in 2005is the result of the acquisition of Crnogorski Telekom (CGT), in which theGroup acquired a 76.53% share of ownership (Note 5).

(l)                   In 2006 TSH sold one of its business units to anothermember of Deutsche Telekom group. TSH’s gain on the transaction (HUF 418million) resulted in an increase of TSH’s net assets, the Group’s share ofwhich (HUF 205 million) was recognized directly in retained earnings.

(m)               In 2005 Magyar Telekom’s CEO and other managersexercised a portion of their share options, and the Company used its treasuryshares reserved for the option programs. As a result of these transactions, theCompany sold 2,443,341 of its treasury shares to the CEO and other managers atthe fixed option prices. On the sale of the treasury shares the Company recognizeda gain of HUF 53 million (HUF -143 million recognized against the Reservefor equity settled share based payments and HUF 196 million recognized inRetained earnings). In 2006 managers exercised further options, for which theCompany used its treasury shares. As a result of these transactions, theCompany sold 538,835 of its treasury shares to the managers at the fixed optionprices. On the sale of the treasury shares the Company recognized a gain of HUF87 million, which was recognized in retained earnings. For more details on theprograms see Note 24.

(n)                 In 2006 Magyar Telekom Plc. merged with T-MobileHungary, its 100% subsidiary. During the merger, the owners of 43,385 sharesexpressed their intention not to participate as owners in the merged Company.Consequently, the Company withdrew these shares and paid off these owners witha corresponding decrease in share capital, additional paid in capital andretained earnings, and the merged Company was registered with 43,385 lessshares.

(o)                 In 2006 the Company sold the total of its 72% ownershipin Cardnet, which resulted in the reduction of Minority interests (Note 5.4).

F-8

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**MAGYAR TELEKOM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (notes) (Continued)**

(p)                 In 2006 MakTel repurchased 10% of its shares from theGovernment of Macedonia during a public tender issued for the sale of theGovernment shares. As a result of this transaction, Magyar Telekom’s share ofownership increased from 51% to 56.67% resulting in a decrease in the minorityinterest in MakTel and T-Mobile MK (Note 5.1.5).

(q)                 On December 5, 2006, Elek Straub, the former CEOand Chairman of the Company resigned. As part of the resignation agreement, Mr. Straubexercised 1,181,178 of his share options, of which 487,465 would only havevested on July 1, 2007, which was accelerated. The full transaction wassettled in cash instead of shares as intended by the original agreement. By December 31,2006 the Company has accumulated HUF 155 million (including HUF 7 million forpre-mature vesting) in a Reserve for equity settled share based transactions,of which HUF 106 million was released. The closing balance of this reserve ofHUF 49 million represents the amount reserved for the 103,530 options (grantedin 2000) Mr. Straub still has open (Note 24).

Together with the approval of these financialstatements for issue, the Board of the Company proposes a HUF 70 per sharedividend distribution to be approved by the Annual General Meeting of theCompany in April 2007.

The accompanying notes form an integral part of these consolidated financial statements.

F-9

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

**1**                    General Information

**1.1 About theCompany**

Magyar Telekom Plc., (the “Company” or “Magyar TelekomPlc.”) with its subsidiaries form Magyar Telekom Group (“Magyar Telekom” or “theGroup”). Magyar Telekom is the principal supplier of telecommunications servicesin Hungary, Macedonia and Montenegro and alternative service provider inBulgaria, Romania and in the Ukraine. These services are subject to varioustelecommunications regulations depending on the countries of operations (Note1.3).

The Company was incorporated in Hungary on December 31,1991 and commenced business on January 1, 1992. The Company’s registeredaddress is Krisztina körút 55, 1013 Budapest, Hungary.

Magyar Telekom Plc. is listed on the Budapest and NewYork stock exchanges, its shares are traded on the Budapest Stock Exchange,while Magyar Telekom’s American Depository Shares (ADSs) each representing fiveordinary shares are traded on the New York Stock Exchange.

The immediate controlling shareholder of the Companyis MagyarCom GmbH owning 59.21% of the issued shares, while the ultimatecontrolling parent of Magyar Telekom is Deutsche Telekom AG (DT or DTAG).

The consolidated financial statements are prepared andpresented in millions of Hungarian Forints (HUF), unless stated otherwise, andin accordance with International Financial Reporting Standards (“IFRS”) asadopted by the European Union.

These financial statements of the Company wereapproved for issue by the Company’s Board of Directors (the Board), however,the Annual General Meeting (AGM) of the owners, authorized to accept thesefinancials, have the right to require amendments before acceptance. As theowners are represented in the Board of the Company that approved thesefinancial statements for issuance, the probability of any potential changerequired by the AGM is extremely remote, and has never happened in the past.

On February 22, 2005, the Extraordinary GeneralMeeting approved the renaming of Magyar Távközlési Rt. (Matáv) to MagyarTelekom Rt. and rebranding its products, which was completed by December 2005.As agreed, DTAG supported the renaming and the product rebranding. The impactof renaming and product rebranding on the consolidated financial statements asof December 31, 2005 included HUF 7,281 million of expenditures accountedfor in the operating expenses and a compensation by DTAG of HUF 7,281 milliondisclosed separately in Note 35.

On December 20, 2005,Magyar Telekom’s Extraordinary General Meeting approved the merger of MagyarTelekom Rt. and T-Mobile Magyarország Rt. (T-Mobile Hungary), a 100% subsidiaryof Magyar Telekom Rt. As the merger occurred between the parent company and its100% owned subsidiary, the transaction did not have any impact on theconsolidated financial position of the Group or its operating segments. Themerger was registered by the Hungarian Court of Registration on February 28,2006, from which date the two companies continue as one legal entity, MagyarTelekom Plc.

**1.2 Investigationinto certain consultancy contracts**

On February 13, 2006, the Company announced thatit was investigating certain contracts to determine whether they were enteredinto in violation of Company policy or applicable law or regulation. Concernsregarding two consultancy contracts entered into by one of the Company’ssubsidiaries were initially raised by the Company’s auditors. As a result ofthe investigation, two additional consultancy 

F-10

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

contracts, which wereentered into by the Company, have been called into question. The total amountof the four contracts under investigation is around HUF 2 billion. Concernshave also arisen regarding destruction by certain employees of electronicdocuments obstructing the investigation. As a consequence of the investigation,the Company had suspended a number of employees who have since resigned. Theinvestigation, which is being conducted by an independent law firm andsupervised by the Audit Committee, is still ongoing.

Although the investigation has not been finalized,based on the independent investigators’ findings and conclusions to date, thesecontracts were entered into without full compliance with internal companyprocedures regarding the entry into such contracts. Moreover, sufficientevidence could not be obtained that adequate value was received under thesecontracts. In its 2005 preliminary results announcement the Company hadcapitalized the HUF 1.12 billion payment made related to two of thesecontracts. As a result of the findings of the investigation, the Group hasexpensed the total amount of the HUF 2 billion paid under these four contracts,and discloses these expenses under Other operating expenses (Note 25).

The Company has already implemented certain remedialmeasures designed to enhance its control procedures with respect to the entryinto consultancy contracts, including the introduction of a new governancemodel and replacement of the Board of Directors at Crnogorski Telekom andtermination of work contracts with employees initiating data deletionsinterfering with the investigation.

The Company’s Board of Directors also approved on November 8,2006 a more extensive program of remedial actions, which it expects toimplement in the near future. These decisions include structural and proceduralchanges in relation to mergers and acquisitions and procurement as well as anew internal control regime. The Company’s Board of Directors also decided on December 5,2006 on certain additional enhancements of internal controls and theimplementation thereof.

As a result of the delaysin finalizing its 2005 financial statements due to the investigation, theCompany and some of its subsidiaries have failed and may fail to meet certaindeadlines prescribed by the Hungarian and other applicable laws and regulationsfor preparing and filing audited annual results and holding annual generalmeetings. The Company has been fined HUF 13 million to date as a consequence ofsuch delays. The Company has notified the Hungarian Financial SupervisoryAuthority, the U.S. Securities and Exchange Commission and the U.S. Departmentof Justice of the investigation and is in contact with these authoritiesregarding the investigation and has responded to a number of inquiries theseauthorities have raised.

**1.3 Public serviceconcession and license arrangements**

*Hungarian Fixedline*

Magyar Telekom Plc. is the market leading fixed linetelecom service provider in Hungary. Act C of 2003 on ElectronicCommunications, the latest act on the telecommunications sector, came intoeffect on January 1, 2004. The National Communications Authority (NCA) isthe supreme supervisory body. Magyar Telekom Plc. and its subsidiary, Emitelare designated as universal service providers in their former concession areas.

According to the Act on Electronic Communications,universal services are basic communications services that should be availableto all customers at an affordable price. Universal service providers areentitled to compensation for their net avoidable costs, except for the costsincurred from discount pricing plans offered to residential subscribers.

F-11

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

The NCA assigned 18 relevant markets in the area ofelectronic communications in 2004. In 2004 and 2005 Magyar Telekom wasdesignated as an SMP (an operator with significant market power) in 12 markets.These included all retail and wholesale voice markets, the market of wholesaleleased line and termination, the market of minimum set of leased lines and thewholesale broadband market. At the end of 2006 the analysis of the 18 relevantmarkets was started again by the NCA. Most likely, Magyar Telekom will bedesignated as an SMP on the same 12 markets as before.

Currently in Hungary, beside the universal services,the retail voice tariff regulation is only concerned with the access market forboth business and residential customers. This regulation is based on the price-capmethod. There is a price-cap for universal service packages and the SMPdesignation on residential and business access markets has introduced a newprice cap for all subscription fees.

According to the Act on Electronic Communications,designated SMP operators like Magyar Telekom are obliged to prepare referenceoffers for unbundled local loops (RUO) and bit-stream access and to providethese services when there is a request for them by other telecommunicationsservice providers. The reference offer of each SMP must be approved by the NCA.The price of these services has to be cost based and calculated using FullyDistributed Costs based on a 2003 Ministerial Decree.

The SMPs may refuse the offer for unbundling if thereare technical barriers and providing access to the local loop or bit-streamaccess would endanger the unity of the SMPs’ network. SMPs are also obliged toprepare reference offers for interconnection (RIO) and to provide theseservices in accordance with the reference offer when there is a request forthem by other telecommunications service providers. The reference offers of theSMPs must be approved by the NCA, and prices have to be based on Long RunIncremental Costs (LRIC).

According to the Act on Electronic Communications,voice telephony customers have the right to select different service providersfor each call directions including Internet calls by dialing a pre-selectednumber or by using a call-by-call pre-fixed number. The requirements forcarrier selection are set out in the interconnection agreements between theaffected service providers.

Fixed linetelecommunications service providers are obliged under the law to providenumber portability on their networks starting January 1, 2004. This meansthat service providers must enable subscribers to change service providerwithout changing their telephone numbers within the same numbering area.

*Macedonian Fixedline*

The Group is also present in the Macedonian fixed linetelecommunications market through its subsidiary, MakTel. MakTel is the largestfixed line service provider in Macedonia. The Macedonian telecommunicationssector is regulated by the Electronic Communications Law (ECL), enacted in March 2005.MakTel has a concession contract (under the old Telecommunications Act) to provideservices until December 31, 2018. Further, MakTel had been granted theexclusive rights in (a) fixed voice telephony services, leased lineservices and (b) to construct, lease, own, develop, maintain and operatefixed public telecommunications networks until December 31, 2004. Theseexclusive rights included local, national and international long distancepublic fixed voice services independently of the technology used, includingvoice over Internet Protocol services.

During the exclusivity period MakTel was obliged toprovide universal services. It is expected that the Agency for ElectronicCommunications (Agency) will initiate a public tender proceeding for thepurpose 

F-12

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

of electing one or moreuniversal service providers (USP) in 2007, according to the conditionsdetermined in the relevant by-laws enacted in December 2006.

The regulatory framework for the tariff regulation forMakTel is provided in the currently valid Concession Contract. With theenactment of the ECL, the Agency may regulate retail prices of fixed telephonyservices. Regulated wholesale services are cost based using fully distributedcosts (FDC). Long run incremental costs (LRIC) methodology is to be implementedfrom July 2007.

The concession contracts should be harmonized with theprovisions of the ECL. Under the ECL, MakTel has been designated as an SMP inthe market for fixed line voice telephone networks and services, including themarket for access to the networks for data transmission and leased lines.

MakTel as an SMP operator has the obligationtoenableitssubscriberstoaccesspubliclyavailabletelephoneservicesofanyinterconnectedoperatorwith officially signed interconnection contract. On November 15, 2006,MakTel signed the first RIO based Interconnection Agreement with an alternativefixed network operator. The launch of the competitors’ offers forlong-distance, fixed to mobile and international calls is expected before theend of the first quarter of 2007. Numberportabilityis scheduled to be fully implemented by July 1, 2007. Due to the shortnotice, the implementation of number portability will not be technicallyfeasible within the given timeframe, and MakTel will take the appropriate legalsteps to respond to this.

*Montenegrin Fixedline*

The Group’s Montenegrin subsidiary, Crnogorski Telekom(CGT) is the holder of the only license issued for fixed linetelecommunications services in Montenegro although the period of exclusivityprovided by Telecommunications Law published in 2000 (the “2000 Law”) expiredat the end of 2003. The license allows CGT to provide domestic andinternational voice and data services as well as VOIP, leased line, publicpayphone, value added, etc. services.

The telecommunications sector in Montenegro isregulated by the 2000 Law. The 2000 Law established the TelecommunicationsAgency with broad authority and instituted a licensing regime whereby alltelecommunications activity must be licensed by the Telecommunications Agency.Although a new Competition Law came into force in 2006, a competition agencyhas not yet been instituted. To date, there is no consumer protection law oragency in Montenegro.

Prices of CGT must be approved by theTelecommunications Agency. CGT’s tariff structure is currently highlyunbalanced, monthly access fees and local calls are inexpensive, whereaslong-distance and international calls are very expensive, and businesses arecharged approximately twice as much as individuals. During the privatizationprocess, a schedule for the cost-based re-alignment of prices for access linesand traffic, rebalancing tied to the timing of market liberalization was agreedwith the Montenegrin government. The first rebalancing due in the fourthquarter of 2006 was postponed to the second quarter of 2007 in order to avoidoverlap with the re-branding of the company.

Although the 2000 Law defines universal service, nolegislation covering universal service has been enacted to date.

CGT has an obligation to enter into interconnectagreements in a transparent and non-discriminatory way with operatorsrequesting access to CGT’s network. The 2000 Law requires CGT to publish areference interconnection offer (“RIO”) however CGT has the freedom to agreewith operators on terms different from those set in the RIO.

F-13

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

There is no obligation for number portability, localloop unbundling, bit stream access or accounting separation in Montenegro.

A cable television tender was launched in the fourthquarter of 2006 as well as a fixed wireless access tender in the first quarterof 2007 enabling potential fixed line competitors to enter the market in 2007using alternative technologies.

The State Union of Serbiaand Montenegro had been negotiating a Stabilization and Association Agreementwith the EU. It was expected that the agreement would be very similar to theagreements signed with Croatia and Macedonia requiring the harmonization of thetelecommunications regulations with the regulatory framework of the EU. In thecase of Montenegro the expected amendment of the 2000 Law will achieve most ofthat goal. As Montenegro became an independent state in 2006, the country willhave to restart negotiations about a Stabilization and Association Agreement ofits own, however, this will expectedly have no impact on the telecommunicationssection of the document.

*Hungarian Mobile*

The Group is the market leader in the Hungarian mobilemarket through its Mobile operations, T-Mobile Hungary (T-Mobile H).

The initial duration of the concession regarding theGSM 900 public mobile radio telephone service is a period of 15 yearscalculated from the execution of the concession agreement (November 4,1993 to November 4, 2008). On October 7, 1999 an amended concessioncontract was signed between the Ministry of Transport, Communications and WaterManagement and T-Mobile H extending T-Mobile H’s rights and obligations to alsoprovide service in the 1800 MHz band in Hungary. The DCS 1800 public mobileradio telephone service shall be 15 years from the execution of the newconcession agreement (October 7, 1999 to October 7, 2014).

The Minister is entitled to extend the concessionperiod for both the GSM 900 and the DCS 1800 public mobile radio telephoneservices upon their expiration. The extension can be for another 7.5 yearswithout the issuance of a tender invitation.

In November 2002, the NCA designated T-Mobile Has having significant market power in the interconnections market.

On December 7, 2004, T-Mobile H obtained theexclusive right of use of certain frequency blocks for the deployment andoperation of an IMT2000/UMTS mobile telecommunications system (3G system). Theduration of the frequency usage right is 15 years (until December 7, 2019)with an option to extend it for another 7.5 years. T-Mobile H was obliged bythe term of the license decree to start commercial 3G service within 12 monthsafter the acquisition of the license within the inner city of Budapest, whichwas met. It is also obliged to reach a population-wide coverage of 30% within36 months of license acquisition. As of August 26, 2005 T-Mobile H hadstarted to provide 3G service and has been operating it in compliance with thelicense conditions.

T-Mobile H is subject to number portability regulationsince May 2004.

In January 2005 and October 2006the NCA designated T-Mobile H as having significant market power in the mobilevoice call termination market, and it is currently subject to regulatoryobligations regarding the termination charge of calls into its network.

F-14

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

*Macedonian Mobile*

T-Mobile Macedonia (T-Mobile MK), Magyar Telekom’ssubsidiary, is the leading mobile service provider in Macedonia, which has aconcession contract (under the old Telecommunications Act) to provide mobiletelecommunications services until December 31, 2018, which can be renewedfor an additional 20 years without a tender. According to the concessionagreement, T-Mobile MK has the authorization to provide public cellular mobiletelephony services and to construct, lease, own, develop, maintain and operatemobile public telecommunications networks throughout the entire territory ofthe Republic of Macedonia and between locations within Macedonia and placesoutside of Macedonia. T-Mobile MK is also registered to provide a publicnetwork for data transmission and radio transmission, with the correspondingdata transmission and radio communications services, according to the ECL.

Prices of mobile services may be freely set byoperators and providers. However, as a measure against a dominant position, theECL provides the possibility to the Agency to impose regulated retail tariffson the mobile market.

If the Agency determines that any of the existingmobile operators has significant market power, it will request theinterconnection prices to be transparent and cost-oriented.

Carrier selection may be imposed on T-Mobile MK afterthe SMP announcement. Number portability is also applicable to the Mobilemarket.

Under the ConcessionAgreement, T-Mobile MK has the exclusive license to use bandwidth 3 in the GSM900 band and is entitled to operate all radio stations it reasonably requiresto provide mobile public telephony services. T-MobileMK’s use of these frequencies is subject to terms and conditions set forth inthe Concession Agreement.

*Montenegrin Mobile*

T-Mobile Crna Gora (T-Mobile CG), Magyar Telekom’ssubsidiary, is the holder of one of the two GSM licenses issued in Montenegro.T-Mobile CG was launched on July 1, 2000. It arrived as the second mobiletelecommunications operator in Montenegro—four years after the first one.

The telecommunications sector in Montenegro isregulated by the Telecommunications Law, however, it has no specificprescriptions for mobile operators.

T-Mobile CG has to inform the TelecommunicationsAgency about planned changes in its tariffs, however, the Agency has no rightto interfere with the pricing policy of the company.

No obligation for number portability is in force.

A tender for 3G mobile frequencies was launched in December 2006.The government plans to issue two 3G licenses and a combined 2G/3G license fora third operator. The Group intends to participate in the tender.

F-15

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**2**                    Summaryof significant accounting policies

**2.1 Basis ofpreparation**

The consolidated financial statements have beenprepared under the historical cost convention, except as disclosed in theaccounting policies below, and in accordance with International FinancialReporting Standards (IFRS) as adopted by the European Union. In Magyar Telekom’scase these are identical to the IFRS as issued by the IASB and effective for2006.

The consolidated financial statements are shown inmillions of HUF. For the convenience of the reader, the consolidated balancesheet, income statement and cashflow statement for the year 2006 are alsopresented in millions of U.S. dollars (USD) translated at a rate of HUF 191.62to USD 1 (the official rate of the National Bank of Hungary at December 31,2006). These translations are supplementary information, and are unaudited.

The preparation offinancial statements in conformity with IFRS requires the use of certaincritical accounting estimates. It also requires management to exercise itsjudgment in the process of applying the Group’s accounting policies. The areasinvolving a higher degree of judgment or complexity, or areas where assumptionsand estimates are significant to the consolidated financial statements, aredisclosed in Note 4.

**2.1.1 Amendments topublished standards effective and adopted by the Group in 2006**

·       IAS39 (Amendment), The Fair Value Option

The Group adopted the changes in its accountingpolicies required by IAS 39 (Amendment), The Fair Value Option. The amendmentto the existing standard has been applied by the Group, and resulted inchanges, as follows.

The Group had investments classified as financialasset at fair value through profit and loss in 2005. In 2006 these investmentswere no longer in accordance with the amended criteria of IAS 39 for thedesignation of financial instruments at fair value through profit and loss,therefore were reclassified to the available-for-sale financial asset category.

In 2005 the gain orloss arising from a change in the fair value of the financials asset wasrecognized through the income statement, but as it is reclassified toavailable-for-sale financial asset, the gain shall have been recognizeddirectly in equity. As the amendment is applied retrospectively, the opening balanceof retained earnings for 2006 and the comparative amounts for the prior yearhave been restated accordingly (Note 7).

·       IFRIC4, Determining whether an Arrangement contains a Lease

The Group adoptedIFRIC Interpretation 4, Determining whether an Arrangement contains a Lease,which gives further guidance on the topics of how to determine whether anarrangement is, or contains a lease, when the assessment of the above should bemade as well as how the payments for a lease arrangements should be separatedfrom payments for any other elements in the arrangement. The PMR services (Note33 c) commenced in 2006 were accounted for according to IFRIC 4.

·       IFRIC6, Liabilities arising from Participating in a Specific Market—Waste Electricaland Electronic Equipment

F-16

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

The Interpretationprovides guidance on the recognition, in the financial statements of producers,of liabilities for waste management under the EU Directive on WE&EE inrespect of sales of historical household equipment. The Interpretation has nomaterial impact on the Group’s accounts.

·       IAS21 (Amendment), The Effects of Changes in Foreign Exchange Rates;

The Amendment has nomaterial impact on the Group’s accounts.

**2.1.2Standards, amendments and interpretations effective in 2006 but not relevant forthe Group**

The followingstandards, amendments and interpretations are mandatory for accounting periodsbeginning on January 1, 2006, but are not relevant to the Group’soperations:

·       IAS19 (Amendment), Employee Benefits

·       IAS39 (Amendment), Cash Flow Hedge Accounting of Forecast Intragroup Transactions;

·       IAS39 and IFRS 4 (Amendment), Financial Guarantee Contracts;

·       IFRS1 (Amendment), First-time Adoption of International Financial ReportingStandards and IFRS 6 (Amendment), Exploration for and Evaluation of MineralResources;

·       IFRS6, Exploration for and Evaluation of Mineral Resources;

·       IFRIC 5, Rights toInterests arising from Decommissioning, Restoration and EnvironmentalRehabilitation Funds.

**2.1.3 Interpretations toexisting standards and new standards that are not yet effective and have notbeen early adopted by the Group**

The following interpretations to existing standardshave been published that will have to be applied by Magyar Telekom from January 1,2007, and which the Group has not early adopted.

·       IFRS 7         Financial Instruments: Disclosures, andthe complementary Amendment to IAS 1, Presentation of Financial Statements—CapitalDisclosures. IFRS 7 introduces new disclosures relating to financialinstruments. This standard will not have any impact on the recognition ormeasurement of the Group’s financial instruments.

·       IFRIC 8       Scope of IFRS 2. IFRIC 8 requiresconsideration of transactions involving the issuance of equity instruments—wherethe identifiable consideration received is less than the fair value of theequity instruments issued—to establish whether or not they fall within thescope of IFRS 2. We do not expect IFRIC 8 to have material impact on the Group’saccounts.

·       IFRIC9       Reassessment of EmbeddedDerivatives. IFRIC 9 requires an entity to assess whether an embeddedderivative is required to be separated from the host contract and accounted foras a derivative when the entity first becomes a party to the contract.Subsequent reassessment is prohibited unless there is a change in the terms ofthe contract that significantly modifies the cashflows that otherwise would berequired under the contract, in which case reassessment is required. We do notexpect IFRIC 9 to have material impact on the Group’s accounts.

F-17

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

·       IFRIC 10    Interim Financial Reporting and Impairment.IFRIC 10 prohibits the impairment losses recognized in an interim period ongoodwill, investments in equity instruments and investments in financial assetscarried at cost to be reversed at a subsequent balance sheet date. We do notexpect IFRIC 10 to have any impact on the Group’s accounts as Magyar Telekomhas always carried out the impairment tests on these assets in the last quarterof the year unless a triggering event required an impairment in an interimperiod, which would not be reversed in the same financial  year.

·       IFRIC 11    Interpretation to IFRS 2—Group and Treasuryshares transactions. Under IFRS 2 it was not defined exactly how it should becalculated where the employees of a subsidiary received the shares of a parent.IFRIC 11 clarifies that certain types of transactions are accounted for asequity-settled or cash-settled transactions under IFRS 2. It also addresses theaccounting for share-based payment transactions involving two or more entitieswithin one group. We do not expect IFRIC 11 to have material impact on theGroup’s accounts.

·       IFRIC 12    Service Concession Agreements. Thisinterpretation applies to companies that participate in service concessionarrangements and provides guidance on the accounting by operators inpublic-to-private service concession arrangements. The Group is currentlyanalyzing the potential changes IFRIC 12 may cause in the Group’s accountingtreatments.

·       IFRS 8         Operating Segments. Under IFRS 8,segments are components of an entity regularly reviewed by an entity’s chiefoperating decision-maker. Items are reported based on the internal reporting.IFRS 8 also sets out requirements for related disclosures about products andservices, geographical areas and major customers. The Group has been planningto change its operating segments from 2007, regardless of the issuance of IFRS8, and we will comply with the requirements of IFRS 8.

·       IAS23         Borrowing Costs (Revised March 2007).Under the revised IAS 23 an entity shall capitalize borrowing costs that aredirectly attributable to the acquisition, construction or production of aqualifying asset as part of the cost of that asset. The Group does not expectIAS 23 (revised) to have material impact on Group’s accounting policies.

**2.1.4 Interpretationsto existing standards that are not yet effective and not relevant for the Group’soperations**

The followinginterpretation to existing standards has been published that is mandatory forthe Group from January 1, 2007, but is not relevant for the Group’soperations.

·       IFRIC 7       Applying the Restatement Approach underIAS 29, Financial Reporting in Hyperinflationary Economies (effective from March 1,2006). IFRIC 7 provides guidance on how to apply the requirements of IAS 29 ina reporting period in which an entity identifies the existence ofhyperinflation in the economy of its functional currency, when the economy wasnot hyperinflationary in the prior period. As none of the group entitiesoperate in a hyperinflationary economy, IFRIC 7 is not relevant to the Group’soperations.

F-18

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**2.1.5 Revenuerecognition**

Magyar Telekom has reassessed its status in theprovision of a number of value added services, where revenue was accounted foron a gross basis implying a principal status rather than an agent status in theprovision of the service. A gross basis means that revenues included the fullamount of fees collected from customers, and payments to related serviceproviders were included in operating expenses. After analyzing therelationships with our subcontractors one by one, we have changed our judgmentof the situation in some cases and determined that in these cases the Group ismore the selling agent of these products than the principal provider of theservice.

This change had adecreasing impact on the Fixed line Voice—retail revenues and the Mobile Nonvoice revenues, with equivalent corresponding effects in operating expenses.The change resulted in netting revenues with expenses, and has no impact onoperating profit, net income or equity. Prior year’s reported numbers have beenrestated accordingly (Note 2.1.7).

**2.1.6 Taxes**

The Group has changed its accounting policy todisclose the Hungarian local business tax and innovation fee as income taxes aswe have established that these taxes have the characteristics of income taxesrather than operating expenses. In previous years, these taxes were disclosedamong operating expenses.

This change in thedisclosure of these taxes had a decreasing impact on operating expenses and anequivalent increase in income taxes. The change resulted in no impact on netincome or equity. Prior year’s reported numbers have been restated accordingly(Note 2.1.7).

F-19

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**2.1.7 Summary of impacts on the income statement**

Thetable below shows the impact on the income statement of the above changes.

| ** **                                                     | ** ** | **2004**                        | ** ** | **2005** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------|------------|----------|------------|
| ** **                                                     | ** ** | **(in HUF millions)** | ** ** |
| *Revenue*                                                      |       |                            |       |     |       |
| As reported                                                    |       | 601,438                         |       | 620,697  |       |
| Change in revenue recognition—netting (Note 2.1.5)        |       | (4,646                          | )          | (5,643   | )          |
| As restated                                                    |       | 596,792                         |       | 615,054  |       |
| *Operating  expenses*                                          |       |                            |       |     |       |
| As reported                                                    |       | (516,174                        | )          | (487,309 | )          |
| Change in revenue recognition—netting (Note 2.1.5)        |       | 4,646                           |       | 5,643    |       |
| Change in accounting policy for taxes (Note 2.1.6)             |       | 8,455                           |       | 8,366    |       |
| As restated                                                    |       | (503,073                        | )          | (473,300 | )          |
| *Finance  income*                                              |       |                            |       |     |       |
| As reported                                                    |       | 1,768                           |       | 3,209    |       |
| Change in accounting policy for financial assets  (Note 2.1.1) |       | —                          |       | (213     | )          |
| As restated                                                    |       | 1,768                           |       | 2,996    |       |
| *Income  tax expense*                                          |       |                            |       |     |       |
| As reported                                                    |       | (7,687                          | )          | (13,511  | )          |
| Change in accounting policy for taxes (Note 2.1.6)             |       | (8,455                          | )          | (8,366   | )          |
| Change in accounting policy for financial assets  (Note 2.1.1) |       | —                          |       | 19       |       |
| As restated                                                    |       | (16,142                         | )          | (21,858  | )          |

 

**2.2 Consolidation**

***(a) Subsidiaries***

Subsidiaries (including Special Purpose Entities) inwhich the Group has an interest of more than one half of the voting rights orotherwise has power to govern the financial and operating policies, areconsolidated.

The existence and effect of potential voting rightsthat are presently exercisable or presently convertible are also consideredwhen assessing whether the Group controls another entity.

Subsidiaries are consolidated from the date on whichcontrol is transferred to the Group and are no longer consolidated from thedate control ceases. The purchase method of accounting is used to account forbusiness combinations. The cost of an acquisition is measured as the fair valueof the assets given up, shares issued or liabilities undertaken at the date ofacquisition plus costs directly attributable to the acquisition. The excess ofthe cost of acquisition over the fair value of the net assets and contingent liabilitiesof the subsidiary acquired is recorded as goodwill.

In case of acquisitions where the transaction takesplace between companies under common control (i.e. with other Deutsche Telekomgroup companies), the transaction is recorded at cost and any gains, losses ordifferences between the book value and the sale-purchase price are recognizedin retained earnings.

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Inter-company transactions, balances and unrealizedgains on transactions between the Magyar Telekom group companies areeliminated. Accounting policies of subsidiaries have been adjusted to ensureconsistency with the policies adopted by the Group.

Transactions with minority interests are treated asthird party transactions. Gains or losses arising on disposals to minorityinterests are recorded in the income statement. Purchases from minorityinterests result in goodwill, being the difference between any considerationpaid and the relevant share acquired of the carrying value of net assets of thesubsidiary.

Since March 31, 2004,Magyar Telekom has been applying the provisions of IFRS 3—BusinessCombinations. Although IFRS 3 continues to require purchase price allocationfor new acquisitions, in case of additional shares acquired in subsidiariesalready controlled (step acquisition), no purchase price allocation is made.Consequently, the difference between the consideration paid and the share ofthe carrying value of net assets acquired is accounted for as goodwill.

***(b) Associates and joint ventures***

Associates are all entities over which the Group hassignificant influence but not control, generally embodying in a shareholding ofbetween 20% and 50% of the voting rights. Investments in associates areaccounted for using the equity method of accounting and are initiallyrecognized at cost. The Group’s investment in associates includes goodwillidentified on acquisition, net of any accumulated impairment loss.

The Group’s share of its associates’ post-acquisitionprofits or losses is recognized in the income statement (Share of associates’profits). The cumulative post-acquisition movements are adjusted against thecarrying amount of the investment. When the Group’s share of losses in anassociate equals or exceeds its interest in the associate, the Group does notrecognize further losses, unless it has incurred legal or constructiveobligations or made payments on behalf of the associate.

Unrealized gains on transactions between the Group andits associates are eliminated to the extent of the Group’s interest in theassociates. Accounting policies of associates have been adjusted wherenecessary to ensure consistency with the policies adopted by the Group.

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

At December 31,2006 and 2005 the principal operating subsidiaries and associates of the Groupwere as follows:

|                                       | ** ** | **Group  interest  in capital  as at December 31,** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|-------------------------------------------------------------------------|------------|------------|------------|
| **Subsidiaries**                      | ** ** | ** **                                                              | ** ** | **2005**   | ** ** | **2006** | ** ** | **Activity** | ** ** |
| *Incorporated in Hungary:*            |       |                                                                    |       |       |       |   |   |
| T-Online                              |       | 100.00                                                                  | %          | 100.00     | %          | Internet service  and content provider |   |
| T-Kábel                          |       | 100.00                                                                  | %          | 100.00     | %          | Cable TV operator |   |
| Emitel                                |       | 100.00                                                                  | %          | 100.00     | %          | Local fixed line telecom  service provider |   |
| Dataplex                              |       | —                                                                  |       | 100.00     | %          | IT hardware co-location  service provider |   |
| BCN Rendszerház (BCNR)           |       | 100.00                                                                  | %          | 100.00     | %          | System integration and  IT services |   |
| KFKI-LNX (KFKI)                       |       | —                                                                  |       | 100.00     | %          | System integration and  IT services |   |
| T-Mobile Hungary  (T-Mobile H)        |       | 100.00                                                                  | %          | n/a        | (a)        | Cellular telecom service  provider |   |
| Pro-M                                 |       | 100.00                                                                  | %          | 100.00     | %          | Professional Mobile  Radio (PMR)  network operator (Note 33 c) |   |
| *Incorporated in Macedonia:*          |       |                                                                    |       |       |       |   |   |
| Makedonski  Telekommunikacii (MakTel) |       | 51.00                                                                   | %          | 56.67      | %          | Fixed line  telecom service provider |   |
| T-Mobile Macedonia  (T-Mobile MK)     |       | 51.00                                                                   | %          | 56.67      | %          | Cellular telecom service  provider |   |
| Stonebridge                           |       | 100.00                                                                  | %          | 100.00     | %          | Holding company |   |
| *Incorporated in Montenegro:*         |       |                                                                    |       |       |       |   |   |
| Crnogorski Telekom (CGT)              |       | 76.53                                                                   | %          | 76.53      | %          | Fixed line  telecom service provider |   |
| T-Mobile Crna Gora  (T-Mobile CG)     |       | 76.53                                                                   | %          | 76.53      | %          | Cellular telecom service  provider |   |
| Internet Crna Gora (ICG)              |       | 76.53                                                                   | %          | 76.53      | %          | Internet service and  content provider |   |
| *Incorporated in Romania:*            |       |                                                                    |       |       |       |   |   |
| Combridge                             |       | 100.00                                                                  | %          | 100.00     | %          | Alternative  telecommunications service  provider |   |
| *Incorporated in Bulgaria:*           |       |                                                                    |       |       |       |   |   |
| Orbitel                               |       | —                                                                  |       | 100.00     | %          | Alternative  telecommunications and  internet service provider |   |
|                                       |            |                                                                         |            |            |            |  |  |  |  |

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(a)                  T-MobileHungary merged into Magyar Telekom Plc. during 2006 (Note 1.1)

| ** **                                     | ** ** | **Group  interest  in capital  as at December 31,** | ** ** | ** **                       | ** ** |
|------------------------------------------------|------------|-------------------------------------------------------------------------|------------|----------------------------------|------------|
| **Associates / Joint ventures** | ** ** | ** **                                                              | ** ** | **  2005  ** | ** ** | **  2006  ** | ** ** | **Activity** | ** ** |
| *Incorporated in Hungary:*                     |       |                                                                    |       |                             |       |   |   |   |   |   |   |
| Hunsat                                         |       |                                                                    | 50.00      | %                                |       |   | 50.00 | % |   | Satellite telecommunications |   |
| T-Systems Hungary  (TSH)                       |       |                                                                    | 49.00      | %                                |       |   | 49.00 | % |   | System  integration and IT services |   |
| Magyar RTL (M-RTL)                             |       |                                                                    | 25.00      | %                                |       |   | 25.00 | % |   | Television broadcast  company |   |
|                                                |            |                                                                         |            |                                  |            |  |  |  |  |  |  |  |  |

 

The Group’s interest inthe capital of the above subsidiaries and associates equals the voting rightstherein.

F-22

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**2.3 Foreigncurrency translation**

**2.3.1 Functionaland presentation currency**

Items included in the financial statements of each ofthe Group’s entities are measured using the currency of the primary economicenvironment in which the entity operates (‘the functional currency’).

The consolidated financialstatements are presented in millions of HUF, which is the Company’s functionaland presentation currency.

**2.3.2 Transactionsand balances**

Foreign currencytransactions are translated into the functional currency using the exchangerates prevailing at the dates of the transactions. Foreign exchange gains andlosses resulting from the settlement of such transactions and from thetranslation at year-end exchange rates of monetary assets and liabilitiesdenominated in foreign currencies are recognized in the income statement(Finance income).

**2.3.3 Groupcompanies**

The results andfinancial position of all of the Group’s entities (none of which has thecurrency of a hyperinflationary economy) that have a functional currencydifferent from the presentation currency are translated into the presentationcurrency as follows:

·       Forthe initial consolidation of foreign subsidiaries acquired, their assets andliabilities at the acquisition date are incorporated into the consolidatedfinancial statements after translating the balances into HUF using the exchangerate prevailing at that date. The fair value adjustments resulting from thepurchase price allocation and goodwill are accounted for in HUF foracquisitions before March 31, 2004, after which date these adjustmentsarising on consolidation are accounted for in the functional currency of thesubsidiary as required by IAS 21—The Effects of Changes in Foreign ExchangeRates.

·       Assetsand liabilities for each balance sheet presented are translated at the closingrate at the date of that balance sheet.

·       Incomestatements are translated at average exchange rates.

·       All resulting exchangedifferences are recognized directly in the consolidated equity (Cumulativetranslation adjustment). When a foreign operation is fully or partiallydisposed of, exchange differences that were recorded in equity are recognizedin the income statement as part of the gain or loss on sale (Finance income).

**2.4 Cash and cashequivalents**

Cash and cash equivalentsinclude cash on hand and in banks, and all highly liquid deposits andsecurities with original maturities of three months or less, and exclude alloverdrafts.

**2.5 Financialassets**

The Groupclassifies its financial assets in the following categories:

·       atfair value through profit or loss,

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

·       loansand receivables, and

·       availablefor sale (AFS).

The classification dependson the purpose for which the financial asset was acquired. Managementdetermines the classification of financial assets at their initial recognition.

***(a)**Financial assets at fair value through profit orloss***

Financialassets at fair value through profit or loss are financial assets held fortrading. A financial asset is classified in this category if acquiredprincipally for the purpose of selling in the short term. Derivatives areclassified as held for trading. Assets in this category are classified ascurrent assets (Other financial assets).

***(b)**Loans and receivables***

Loans and receivables arenon-derivative financial assets with fixed or determinable payments that arenot quoted in an active market. They are included in current assets (Trade andother receivables), except for maturities greater than 12 months after thebalance sheet date. These are classified as non-current assets (Other noncurrent assets).

***(c)**Available-for-sale financial assets (AFS)***

AFS financial assets arenon derivative financial assets that are either designated in this category ornot classified in any of the other categories. They are included in Othernon-current assets unless management intends to dispose of the investmentwithin 12 months of the balance sheet date. In this latter case they areincluded in current assets (Other financial assets).

***(d)**Recognition, measurement and disclosure***

Gains or losses on the re-measurement or sale offinancial assets or the directly related transaction costs are recognized ineither the income statement (Finance income), or in the equity (Revaluationreserve for AFS financial assets—net of tax), as described below.

Regular purchases and sales of financial assets arerecognized on the trade-date, the date on which the Group commits to purchaseor sell the asset. Investments are initially recognized at fair value plustransaction costs for all financial assets not carried at fair value throughprofit or loss. Financial assets carried at fair value through profit or lossare initially recognized at fair value, and transaction costs are expensed inthe income statement.

AFS financial assets and ‘financial assets at fairvalue through profit or loss’ are subsequently carried at fair value. Loans andreceivables are carried at amortized cost using the effective interest method.Gains or losses arising from changes in the fair value of the ‘financial assetsat fair value through profit or loss’ category are recognized in the incomestatement (Finance income) in the period in which they arise. Dividend incomefrom ‘financial assets at fair value through profit or loss’ is recognized inthe same way when the Group’s right to receive payments is established.

Changes in the fair value of monetary and non-monetarysecurities classified as available-for-sale financial assets are recognized inequity (Revaluation reserve for AFS financial assets—net of tax).

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Financial assets are derecognized when the rights toreceive cashflows from the investments have expired or have been transferredand the Group has transferred substantially all risks and rewards of ownership.

When securities classified as available-for-sale aresold or impaired, the accumulated fair value adjustments recognized in equityare included in the income statement.

Interest on available-for-sale securities calculatedusing the effective interest method is recognized in the income statement(Finance income).

Dividends on available-for-sale equity instruments arerecognized in the income statement (Finance income) when the Group’s right toreceive payments is established.

The fair values of quoted investments are based oncurrent bid prices. If the market for a financial asset is not active (and forunlisted securities), the Group establishes fair value by using valuationtechniques. These include the use of recent arm’s length transactions,reference to other instruments that are substantially the same, discountedcashflow analyses and option pricing models, making maximum use of marketinputs and relying as little as possible on entity-specific inputs.

The Group assesses at each balance sheet date whetherthere is objective evidence that a financial asset or a group of financialassets is impaired. In the case of equity securities classified asavailable-for-sale, a significant or prolonged decline in the fair value of thesecurity below its cost is considered as an indicator that the securities areimpaired. If any such evidence exists for AFS financial assets, the cumulativeloss—measured as the difference between the acquisition cost and the currentfair value, less any impairment loss on that financial asset previouslyrecognized in the income statement—is removed from equity and recognized in theincome statement. Impairment losses recognized in the income statement onequity instruments are not reversed through the income statement. Impairmenttesting of trade receivables is described in Note 2.7.

Amounts due to, andreceivable from, other network operators are shown net where a right of set-offexists and the amounts are settled on a net basis.

**2.6 Derivativefinancial instruments and hedging activities**

Derivatives are initially recognized at fair value onthe date a derivative contract is entered into and are subsequently re-measuredat their fair value. Magyar Telekom does not apply hedge accounting for itsfinancial instruments, therefore all gains and losses are recognized in theincome statement (Finance income).

The fair value of derivative financial instruments isincluded in current Other financial assets or other current liabilities.

The revised interpretation of IAS 39—FinancialInstruments—Recognition and Measurement does not consider contracts denominatedin a currency that is not the functional currency of either of the contractingparties as a separable host contract and an embedded derivative if the contractcurrency is widely used in that market.

The Group determined that USD and EUR are currenciescommonly used in local business transactions and external trade in areas wherethe Group operates. For business transactions, it is in this region common toset prices in EUR or USD, without reference to the currency of eithercontracting 

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

party. In many cases,there is practically no option to avoid contracting in the above currencies. Onthis basis, the Group derecognized derivates embedded in contracts denominatedin either USD or EUR.

As of Dec 31, 2004, all contracts where embeddedderivatives had been identified where either EUR or USD denominated contracts,accordingly, all previously recognized derivates were derecognized in the 2005Financial Statements. The underlying contracts are contracts for complex ITservices, billing services, equipment purchases and system maintenancecontracts.

As a result of the changein the interpretation, Magyar Telekom restated its opening retained earnings asat January 1, 2005, and eliminated the carrying amounts of these embeddedderivatives previously recognized (HUF 873 million) and the related deferredtax liability (HUF 140 million) in the balance sheet against Retained earningsas at December 31, 2004.

**2.7 Trade and otherreceivables**

Trade and otherreceivables are recognized initially at fair value and subsequently measured atamortized cost using the effective interest method, less provision forimpairment. A provision for impairment of trade and other receivables isestablished when there is objective evidence that the Group will not be able tocollect all amounts due according to the original terms of the receivables.Significant financial difficulties of the debtor, probability that the debtorwill enter bankruptcy or financial reorganization, and default or delinquencyin payments (more than 30 days overdue) are considered indicators that thetrade receivable is impaired. The amount of the provision is the differencebetween the asset’s carrying amount and the present value of estimated futurecashflows, discounted at the original effective interest rate. The carryingamount of the asset is reduced through the use of an allowance account, and theamount of the loss is recognized in the income statement (Other operatingexpenses—Bad debt expense). When a trade receivable is established to beuncollectible, it is written off against the allowance account for tradereceivables. Subsequent recoveries of amounts previously written off arecredited against the period’s bad debt expense.

**2.8 Inventories**

Inventories are stated at the lower of cost or netrealizable value using the historical cost method of accounting, and are valuedon a weighted average or FIFO basis.

Phone sets are often soldfor less than cost in connection with promotions to obtain new subscribers withminimum commitment periods (Note 4 g). Such loss on the sale of equipment isonly recorded when the sale occurs if the normal resale value of the phone setsexceeds cost.

**2.9 Assets held fordisposal**

Assets held for disposalinclude real estate that is no longer needed for the future operations of theGroup, and has been identified for sale, which is expected to take place within12 months. These assets are accounted for at the lower of carrying value orfair value less cost to sell. These assets continued to be depreciated untilthe sale, in accordance with IAS 16—Property, Plant and Equipment until December 31,2004. From January 2005 Magyar Telekom applies the regulations of IFRS 5—NonCurrent Assets held for Sale and Discontinued Operations, whereby thedepreciation is discontinued from the date of designation to the held for salestatus. When an asset is designated for sale, and the fair value is determinedto be lower than the carrying amount, the difference is recognized in theincome statement (Depreciation and amortization) as an impairment loss.

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**2.10 Property,plant and equipment (PPE)**

Property, plant and equipment are stated at historicalcost less accumulated depreciation and impairment losses.

The cost of an item of property, plant and equipmentcomprises its purchase price, including import duties and non-refundablepurchase taxes, after deducting trade discounts and rebates, any costs directlyattributable to bringing the asset to the location and condition necessary forit to be capable of operating in the manner intended by management. The initialestimate of the costs of dismantling and removing the item and restoring thesite on which it is located is also included in the costs if the obligationincurred can be recognized as a provision according to IAS 37—Provisions,Contingent Liabilities and Contingent Assets.

Government grants relating to the purchase ofproperty, plant and equipment are deducted from the original cost of the itemsand are recognized in the income statement through the reduced amount ofdepreciation of the related assets over their useful lives. Investment taxcredits relating to qualifying investment projects (Note 9) are also recognizedin this manner.

Cost in the case of telecommunications equipmentcomprises of all expenditures including the cabling within customers’ premisesand interest on related loans.

When assets are scrapped, the cost and accumulateddepreciation are removed from the accounts and the loss is recognized in theincome statement as depreciation expense.

When assets are sold, the cost and accumulateddepreciation are removed from the accounts and any related gain or loss isrecognized in the income statement (Other operating income).

Maintenance and repairs are charged to expense whenincurred.

Depreciation is calculated on a straight-line basisfrom the time the assets are deployed and charged over their economic usefullives. On an annual basis, Magyar Telekom reviews the useful lives and residualvalues for consistency with current development plans and advances intechnology.

Theuseful lives assigned are as follows: 

| ** **                           | ** ** | **Years** | ** ** |
|--------------------------------------|------------|-----------|------------|
| Buildings                            |       | 10 - 50   |       |
| Duct, cable and  other outside plant |       | 25 - 38   |       |
| Other  telecommunications equipment  |       | 7 - 15    |       |
| Other fixed assets                   |       | 3 - 12    |       |

 

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**2.11 Intangibleassets**

Intangible assets are stated at historical cost lessaccumulated amortization and impairment losses.

Acquired computer software licenses are capitalized onthe basis of the costs incurred to acquire and bring to use. These costs are amortizedover the estimated useful life of the software. Costs associated withdeveloping or maintaining computer software programs are recognized as anexpense as incurred. Costs directly associated with the production ofidentifiable and unique software products controlled by the Group, and thatwill probably generate economic benefits exceeding costs beyond one year, arerecognized as intangible assets. Direct costs include the software developmentemployee related costs and an appropriate portion of relevant overheads.Computer software development costs recognized as assets are amortized overtheir estimated useful lives. As these assets represent an immaterial portionof all software, these are not disclosed separately. 

Costs associated with the acquisition of long termfrequency licenses are capitalized including any related borrowing costs. Theuseful lives of concessions and licenses are determined based on the underlyingagreements and are amortized on a straight line basis over the period from thebeginning of commercial use of the frequency until the end of the initialconcession or license term. No renewal periods are considered in thedetermination of useful life.

Goodwill represents the excess of the cost of anacquisition over the fair value of the Group’s share of the net assets andcontingent liabilities of the acquired subsidiary at the date of acquisition.Goodwill on acquisitions completed before March 31, 2004 was amortizedusing the straight-line method over its estimated useful life. Goodwill arisingon acquisitions after this date is not amortized. Following the change in theIFRS regulations, amortization of goodwill arising on acquisition before March 31,2004 was discontinued from January 1, 2005, and the accumulatedamortization was eliminated against the gross book value of the goodwill. From2004 impairment testing is carried out on an annual basis for all goodwill inthe last quarter of the year based on the carrying values as at September 30of the year. 

Goodwill is carried at cost less accumulatedimpairment losses. Impairment losses on goodwill are not reversed. Gains andlosses on the disposal of an entity include the carrying amount of goodwillrelating to the entity sold.

Intangibleassets other than goodwill are amortized over their respective economic usefullives. 

| ** **                | ** ** | **Years**     | ** ** |
|---------------------------|------------|---------------|------------|
| Software                  |       | 3   | -          | 5 |   |
| Concessions and  licenses |       | 8        | -          | 25 |   |
| Brand-name                |       | 5        | -          | 10 |   |
| Other intangible assets   |       | 3        | -          | 10 |   |

                                                                                                

Other than goodwill, theGroup has no intangible assets with indefinite life.

**2.12 Impairment ofPPE and intangible assets**

Assets that are subject to amortization ordepreciation are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount may not be recoverable. Animpairment loss is recognized for the amount by which the asset’s carryingamount exceeds its recoverable amount. The recoverable amount is the higher ofan assets’ fair value less costs to sell and value in use. For the purposes 

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

of assessing impairment,assets are grouped at the lowest levels for which there are separatelyidentifiable cashflows (cash-generating units—CGUs).

Goodwill is allocated to cash generating units. Theallocation is made to those CGUs or groups of CGUs that are expected to benefitfrom the business combination in which the goodwill arose. Magyar Telekomallocates goodwill to the Hungarian and Foreign operations of its businesssegments (Fixed line and Mobile), and conducts the impairment testing at thislevel, which is the lowest level at which management monitors goodwill.Goodwill is tested for impairment annually or more frequently if circumstancesindicate that impairment may have occurred.

The fair values of investments in subsidiaries listedon active stock exchanges are based on current bid prices. If the market forthe shares of subsidiaries is not active or the subsidiaries are not listed andfor 100% owned subsidiaries the Group establishes fair value by using valuationtechniques. These include the use of recent arm’s length transactions, referenceto other instruments that are substantially the same, discounted cashflowanalyses and option pricing models, making maximum use of market inputs andrelying as little as possible on entity-specific inputs. The fair valuesdetermined as described above are used as a basis when establishing the needfor an impairment on the goodwill allocated to the cash generating units of thesegments.

See also Note 4.

**2.13 Loans andother borrowings**

Borrowings are recognized initially at fair value lesstransaction costs, and subsequently measured at amortized costs using theeffective interest rate method. The effective interest is recognized in theincome statement (Finance expense) over the period of the borrowings.

Fair values of loans andother borrowings calculated using the discounted cashflow method is alsopresented in the financial statements (Notes 16 and 17).

**2.14 Trade andother payables**

Trade and other payablesare recognized initially at fair value and subsequently measured at amortizedcost using the effective interest method. The carrying values of trade andother payables approximate their fair values due to their short maturity.

**2.15 Provisions**

Provisions are recognized when Magyar Telekom has apresent legal or constructive obligation as a result of past events and it isprobable that an outflow of resources embodying economic benefits will berequired to settle the obligation, and a reliable estimate of the amount of theobligation can be made.

Provisions are measured and recorded as the bestestimate of the expenditure required to settle the present obligation at thebalance sheet date.

Provisions for obligationsexpected to fall due after 12 months are recognized at their present value andare accreted until utilization or reversal against Finance expense.

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**2.16 Treasury stock**

When the Company or itssubsidiaries purchase the Company’s equity shares, the consideration paidincluding any attributable incremental external costs are deducted from theShareholders’ equity as Treasury stock until they are re-sold or cancelled.When such shares are subsequently sold, the treasury share balance decreases bythe original cost of the shares, thereby increasing the equity, while any gainsor losses are also recognized in equity (Retained earnings). Treasury stocktransactions are recorded on the transaction date.

**2.17 Revenues**

Revenue is primarily derived from services provided toMagyar Telekom’s customer subscribers and other third parties using MagyarTelekom’s telecommunications network, and equipment sales. Revenues for allservices and equipment sales (Notes 21 and 22) are shown net of VAT, discountsand after eliminating sales within the Group, and are recognized when theamount of the revenue can be reliably measured, it is probable that futureeconomic benefits will flow to the Group and specific criteria are met for theprovision of each of the Group’s services described below.

Customer subscriber arrangements typically include anactivation fee, equipment sale, subscription fee and monthly charge for theactual airtime used. The Company considers the various elements of thesearrangements to be separate earnings processes for IFRS purposes and classifiesthe revenue for each of the deliverables into the categories as disclosed inNotes 21 and 22 using the residual method. These units are identified andseparated, since they have value on a standalone basis and are sold not only ina bundle but separately as well. Therefore the Group recognizes revenues forall of these elements using the residual method that is the amount ofconsideration allocated to the delivered elements of the arrangements equalsthe total consideration less the fair value of the undelivered elements.

Customers may also purchase public phone cards,prepaid mobile and internet cards which allow those customers to use MagyarTelekom’s telecommunications network for a selected amount of time. Customersmust pay for such services at the date when the card is purchased. Revenuesfrom the sale of public phone cards, prepaid mobile cards and prepaid internetcards are recognized when used by the customers or when the cards expired withunused units.

Third parties using Magyar Telekom’stelecommunications network include roaming customers of other service providersand other telecommunications providers which terminate or transit calls onMagyar Telekom’s network.

Wholesale (incoming)traffic revenue is recognized in the period of related usage. A proportion ofthe revenue received is often paid to other operators (interconnect) for theuse of their networks, where appropriate. The revenues and costs of thesetransit calls are stated gross in these consolidated financial statements asthe Group is the principal supplier of these services using its own networkfreely defining the pricing of the services, and recognized in the period ofrelated usage.

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**2.17.1 Fixed lineservice revenues**

The Fixed line segmentcomprises the activities of the residential and business units of the Group.

***(a)*****Residential service revenues**

The Group provides customers with narrow and broadbandaccess to its fixed network. It also sells, leases, and servicestelecommunications equipment for its customers and provides additionaltelecommunications services. Service revenues are recognized when the servicesare provided in accordance with contractual terms and conditions.

Revenue and expenses associated with the sale oftelecommunications equipment and accessories are recognized when the productsare delivered, provided there are no unfulfilled company obligations thataffect the customer’s final acceptance of the arrangement.

Revenues from rentals and operating leases arerecognized monthly as the fees accrue.

Internet revenues consist primarily of revenues fromsubscriber fees and charges for advertising and e-commerce. Subscriber fees—consistingprimarily of basic monthly charges for Internet services and Internet access aswell as use-related fees—are recognized as revenue in the period the service isprovided.

Advertising revenues are recognized in the period thatthe advertisements are exhibited.

Transaction revenues arerecognized upon notification from the customer that qualifying transactionshave occurred and collection of the resulting receivable by the Group isreasonably assured.

***(b) Business service revenues***

Contracts for network services, which consist of theinstallation and operation of communication networks for customers, have anaverage duration of 2-3 years. Revenues for voice and data services arerecognized under such contracts when used by the customer.

Revenue from outsourcing contracts reflects the extentof actual services delivered in the period in accordance with the terms of thecontract. The contracts are analyzed based on the requirements of IFRIC 4,and if they include embedded lease elements, the revenues attributable to theseare recognized according to IAS 17, Leases as disclosed in Note 2.22.

Revenue from service contracts billed on the basis oftime and material used is recognized as the services are provided.

Revenue from systems integration contracts requiringthe delivery of customized products and/or services is generally covered by oneof the following types of contracts: fixed-price or time and material-based.For fixed-price contracts, revenue is generally recognized based onproportional performance. In the case of contracts billed on the basis of timeand material, revenue is recognized as the services are rendered.

Revenue from maintenance services is recognized overthe contractual period or as the services are provided.

Revenue from hardware sales or sales-type leases isrecognized when the product is shipped to the customer, provided there are nounfulfilled company obligations that affect the customer’s final acceptance 

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

of the arrangement. Anycosts of these obligations are recognized when the corresponding revenue isrecognized.

Revenue from rentals andleases is recognized monthly as the fees accrue.

Revenues from constructioncontracts are accounted for using the percentage-of-completion method. Thestage of completion is determined on the basis of the costs incurred to date asa proportion of the estimated total costs. Receivables from constructioncontracts are classified in the balance sheet item as Trade and otherreceivables. If the total actual and estimated expenses exceed revenues for aparticular contract, the loss is recognized immediately.

**2.17.2 Mobile service revenues**

Mobile Communicationsrevenues primarily include revenues from the provision of voice and non-voicemobile services and sales of mobile handsets and accessories.

Mobile services revenuesinclude monthly service charges, charges for special features, call charges,and roaming charges billed to T-Mobile customers, as well as other mobileoperators. Mobile services revenue is recognized based upon minutes of use andcontracted fees less credits and adjustments for discounts.

Revenues from roamingcustomers of the Group and other service providers are recognized and presentedon a gross basis.

The revenue and relatedexpenses associated with the sale of mobile phones, wireless data devices, andaccessories are recognized when the products are delivered and accepted by thecustomer.

Value added servicesmostly include SMS, MMS, WAP as well as directory assistance and similarservices. Value added services, where the Group does not act as a principal inthe transaction, are included in this category on a net basis. Revenues frompremium rate services are also included in this category, recognized on a grossbasis when the delivery of the service over Magyar Telekom’s network is theresponsibility of the Group and the Group also bears substantial risks of theseservices, otherwise presented on a net basis.

**2.18 Employee benefits**

***(a) Short term employee benefits***

Short term employeebenefits are recognized as a current expense in the period when employeesrender their services. These include wages, social security contributions,bonuses, paid holidays, discounted telephone bills, meal and holidaycontributions and other fringe benefits and the tax charges thereon.

***(b)****Pensions*

Payments to definedcontribution pension and other welfare plans are recognized as an expense inthe period in which they are earned by the employees.

Magyar Telekom does nothave significant defined post-employment benefit schemes.

***(c) Sharebased compensation***

Magyar Telekom adoptedIFRS 2—Share-based Payment as of January 1, 2005. The standard requiresthe Group to reflect in its income statement and balance sheet the effects ofshare based payment 

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

transactions,including expenses associated with transactions in which share options aregranted to employees. Accordingly, Magyar Telekom recognizes the costs ofservices received from its employees in a share based payment transaction whenservices are received. Magyar Telekom recognizes a corresponding increase inits equity reserves (Reserve for equity settled share based transactions) ifthe services are received in an equity-settled share based payment transaction.Before the adoption of IFRS 2, the Group did not recognize employee expenses inrelation to share based compensations.

As at December 31, 2004 the Group set up thisreserve and transferred the amount from its Retained earnings that would havebeen recognized to that date in this reserve. Compensation expense for sharesettled share based transactions is recognized against this reserve in 2005 and2006.

If the services are received in a cash-settled sharebased payment transaction, the Group recognizes the expense against aliability, re-measured at each balance sheet date.

Fair values are determined using option pricing models(such as Black-Scholes) and other relevant techniques. As Magyar Telekom Plc.is listed and actively traded on the Budapest and New York Stock Exchanges, theshare price and its history is readily available as a basis for fair valuecalculations.

Bonuses tied to the longterm performance of the Magyar Telekom share are recognized in the incomestatement at their time-proportioned fair value (Note 24) against anaccumulating liability in Trade and other payables.

***(d) Terminationbenefits***

Termination benefits arepayable whenever an employee’s employment is terminated before the nominalretirement date or whenever an employee accepts voluntary redundancy inexchange for these benefits. The Group recognizes termination benefits when itis demonstrably committed to either terminate the employment of currentemployees according to a detailed formal plan without possibility of withdrawalor to provide termination benefits as a result of an offer made to encouragevoluntary redundancy.

**2.19 Research andMarketing expenses**

Research as well asmarketing costs are expensed as incurred.

**2.20 Borrowingcosts**

Borrowing costs are recognized as an expense asincurred, net of amounts capitalized. Interest on borrowings (that were alltaken for construction purposes) was capitalized as part of the cost of therelevant fixed asset, up to the date of commissioning and is then amortizedover the period the asset is depreciated. The rate used to determine the amountof borrowing costs eligible for capitalization was defined as the ratio ofequity to debt financing, where debt excludes short term borrowings and loansrelated to the financing of acquisitions. As all loans taken for capitalexpenditure on tangible and intangible assets were repaid by the end of 2003,no interest was capitalized in 2004 and 2005. In 2006 the Group took adedicated loan for the expansion of the broadband technology in Hungary,therefore interest is capitalized as part of the cost of the assets constructedfrom this source of finance.

The weighted averageinterest rate on borrowings is calculated using the average amount of loans andother borrowings during the year and the interest expense charged. As the Groupdoes not incur significant 

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

amountsof additional borrowing costs, the weighted average interest rate equals theeffective borrowing costs.

**2.21 Income taxes**

***(a) Corporateincome taxes***

Corporate income taxes arepayable to the central tax authorities of the countries in which the Group’sconsolidated entities operate. The basis of the tax is the taxable entities’accounting profit adjusted for non-deductible and non-taxable items. The taxrates and the determination of the tax base vary among the countries in whichthe Group operates.

***(b) Otherincome taxes***

Other income taxes includecertain local and central taxes levied in Hungary on the companies’ netmargins, determined at a substantially higher level than the corporate taxbase. These other income taxes are deductible from the corporate tax base.

***(c) Deferredtaxes***

Deferred tax is recognized applying the liabilitymethod, on temporary differences arising between the tax bases of assets andliabilities and their carrying amounts in the consolidated financialstatements. However, deferred tax is not accounted for if it arises frominitial recognition of an asset or liability in a transaction other than abusiness combination that at the time of the transaction affects neitheraccounting nor taxable profit. Deferred tax is determined using income taxrates that have been enacted or substantially enacted by the balance sheet dateand are expected to apply when the related deferred tax asset is realized orthe deferred tax liability is settled.

Deferred tax assets are recognized to the extent thatit is probable that future taxable profit will be available against which thetemporary differences can be utilized.

Deferred tax is alsoprovided on taxable temporary differences arising on investments insubsidiaries and associates, except where the timing of the reversal of the temporarydifference is controlled by the Group and it is probable that the temporarydifference will not reverse in the foreseeable future.

**2.22 Leases**

***(a) Operatinglease—Group as lessor***

Assets leased to customersunder operating leases are included in Property, plant and equipment in thebalance sheet. They are depreciated over their expected useful lives on a basisconsistent with similar fixed assets. Rental income is recognized on astraight-line basis over the lease term.

***(b) Financelease—Group as lessor***

Leases of assets whereMagyar Telekom transfers substantially all the benefits and risks of ownershipare recognized and disclosed as sales revenue against a finance leasereceivable. The revenue equals the estimated present value of the future minimumlease payments receivable and any un-guaranteed residual value (net investmentin the lease). Thereby, any gains are deferred and recognized over the periodof the lease, while any losses are recognized immediately. Each lease receiptis then allocated between the 

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

receivableand finance income so as to achieve a constant rate of return on the financebalance outstanding. The interest element of the lease receipt is recognized asFinance income.

***(c) Financelease—Group as lessee***

Leases of property, plantand equipment where Magyar Telekom assumes substantially all the benefits andrisks of ownership are classified as finance leases. Finance leases arecapitalized at the fair value of the asset or if lower, at the estimatedpresent value of the future minimum lease payments. Each lease payment isallocated between the liability and finance charges so as to achieve a constantrate of interest on the finance balance outstanding. The corresponding leaseobligations, net of finance charges, are included in the balance sheet (Thirdparty loans and other borrowings). The interest element of the lease paymentsis charged to the income statement (Finance expense) over the lease period.Property, plant and equipment acquired under finance lease contracts aredepreciated over the shorter of the lease term or the useful life of the asset.

***(d) Operatinglease—Group as lessee***

Costs in respect ofoperating leases are charged to the income statement (Other operating expenses)on a straight-line basis over the lease term.

***(e) Saleand leaseback transactions***

Sale and leasebacktransactions involve the sale of an asset by Magyar Telekom and the leasing ofthe same asset or part of it back to Magyar Telekom. When sale and leasebacktransactions qualify as finance leases any gain on the sale is deferred andrecognized in the income statement over the lease term through lowerdepreciation expense. If the leaseback qualifies as an operating lease, anygains or losses on the sale are recognized in the income statement (Otheroperating income), while the lease payments are also recognized in the incomestatement (Other operating expenses) on a straight line basis over the periodof the lease.

**2.23 Earnings pershare**

Basic earnings per shareis calculated by dividing profit attributable to the equity holders of theCompany for the period by the weighted average number of common stocksoutstanding. Diluted earnings per share is calculated considering the weightedaverage number of diluting share options in addition to the number of common stocksoutstanding.

**2.24 Dividends**

Dividends payable to theCompany’s shareholders and to minority shareholders of the subsidiaries arerecorded as a liability and debited against equity (Retained earnings orMinority interests) in the Group’s financial statements in the period in whichthey are approved by the shareholders.

**2.25 Segmentreporting**

Magyar Telekom determines segments primarily based onproducts and services that are subject to risks and returns that are differentfrom those of other businesses. The primary segments are based on the businesslines (Fixed line and Mobile operations) both including Hungarian and Foreignoperations. The Company’s secondary format for reporting segment information isgeographical.

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**2.26 Comparativeinformation**

In order to maintainconsistency with the current year presentation, certain items have beenreclassified for comparative purposes.

**3****                    Financialrisk management**

**3.1 Financial riskfactors**

The Group’s activities expose us to a variety offinancial risks: market risk (including currency risk, fair value interest raterisk and cashflow interest rate risk), credit risk and liquidity risk. TheGroup’s overall risk management program focuses on the unpredictability offinancial markets and seeks to minimize potential adverse effects on the Group’sfinancial performance. The Group occasionally uses derivative financialinstruments to hedge certain risk exposures.

Risk management is carriedout by a central treasury department (Group Treasury) in line with the mainguidelines approved by the Board of Directors. Group Treasury identifies,evaluates and hedges financial risks in close co-operation with the Group’soperating units.

**3.1.1 Market risk**

***(a) Foreignexchange risk***

Magyar Telekom is exposed to interest and foreignexchange rate risk associated with its cash and debt portfolio and anticipatedtransactions. Magyar Telekom is exposed to foreign exchange risk related toholding foreign currency cash balances, and operating activities throughrevenues from and payments to international telecommunications carriers as wellas capital expenditure contracted with vendors in foreign currency. As the vastmajority of the revenues and expenses of the Hungarian entities arise in HUF,the functional currency of Magyar Telekom is HUF, and as a result, MagyarTelekom’s objective is to minimize the level of its financial risk in HUFterms. During 2006 and 2005, the Group’s borrowings were denominated primarilyin HUF. The Group operates internationally and is exposed to foreign exchangerisk arising from various currency exposures, primarily with respect to the EURand USD. Foreign exchange risk arises from future commercial transactions,recognized assets and liabilities.

The Group has subsidiaries in the Southern and EasternEuropean region, whose net assets are exposed to foreign**currencytranslation risk. The Group is present in Macedonia, Montenegro, and to alesser extent in Bulgaria, Romania and Ukraine. Romania and Bulgaria joined theEuropean Union on January 1, 2007, which over time mitigates the currencyrisk of these countries. The high amount of foreign currency (EUR and USD)denominated cash portfolio accumulated by the Macedonian subsidiaries createsadditional foreign exchange risk exposure on local and Group level.

Magyar Telekomoccasionally enters into derivative contracts for risk reduction purposes.These foreign currency forward contracts are taken to reduce the exchange raterisk related to the foreign exchange denominated payment obligations andexpected cash inflows.

***(b) Cashflowand fair value interest rate risk***

The Group’s interest raterisk primarily arises from long-term borrowings. Borrowings taken at variablerates expose the Group to cashflow interest rate risk. Borrowings taken atfixed rates expose the Group to fair value interest rate risk. It is the Group’spolicy to maintain more than 50% of its borrowings 

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

in fixedrate instruments. As the Group also has increasing amount of interest-bearingassets in Macedonia and Montenegro, managing the interest rate feature of theportfolio in these countries is also in focus.

**3.1.2 Credit risk**

Credit risk is managed on a group basis. Credit riskarises from cash and cash equivalents and deposits with banks and financialinstitutions, as well as credit exposures to wholesale and retail customers,including outstanding receivables and committed transactions.

The Group’s cash balances in Hungary are deposited inbanks and financial institutions with a minimum rating of ‘A’. This risk is verylow, since the policy is to use the excess cash for debt repayment purposesinstead of accumulating cash. As to the international subsidiaries, the creditrisk, if any, is mitigated by keeping the cash in a number of local banks.

For wholesale customers, risk control assesses thecredit quality of the customer, taking into account its financial position,past experience and other factors. Individual risk limits are set based oninternal or external ratings in accordance with limits set by the Board. Theutilization of credit limits is regularly monitored.

The risk related to retailcustomers is limited due to the large number of customers comprising MagyarTelekom’s customer base and their dispersion across many different industriesand geographic areas.

**3.1.3 Liquidityrisk**

Prudent liquidity risk management includes maintainingsufficient cash and marketable securities, the availability of funding from anadequate amount of committed credit facilities including facilities with local(Hungarian) banks and with Deutsche Telekom.

Management monitorsrolling forecasts of the Group’s liquidity reserve on the basis of expectedcashflows.

**3.2 Capital riskmanagement**

The Group’s objectives when managing capital are tosafeguard the Group’s ability to continue as a going concern in order toprovide returns for shareholders and benefits for other stakeholders and tomaintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure,the Group may adjust the amount of dividends paid to shareholders, returncapital to shareholders, issue new shares or sell assets to reduce debt.Consistent with others in the industry, the Group monitors capital on the basisof the gearing ratio. This ratio is calculated as net debt divided by equity(including minority interest) and net debt. Net debt is calculated as totalborrowings less cash and cash equivalents.

During 2006, the Group’sstrategy, which was unchanged from 2005, was to maintain a gearing ratio within30% to 40% and a BBB (investment grade) credit rating. The gearing ratio at December 31,2006 was 27.9% (2005: 33.2%). The decrease in the gearing ratio during 2006resulted from delayed declaration of dividends as a result of the on-goinginvestigation (Note 1.2).

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**3.3 Fair valueestimation**

The fair value of financial instruments traded inactive markets (such as trading and available-for-sale securities) is based onquoted market prices at the balance sheet date. The quoted market price usedfor financial assets held by the Group is the current bid price.

The fair value of financial instruments that are nottraded in an active market (for example, over-the-counter derivatives) isdetermined by using valuation techniques. The Group uses a variety of methodsand makes assumptions that are based on market conditions existing at eachbalance sheet date. Other techniques, such as estimated discounted cashflows,are used to determine fair value for the remaining financial instruments. Thefair value of forward foreign exchange contracts is determined using quotedspot exchange rates and appropriate interest rates at the balance sheet date.

The carrying value lessimpairment provision of trade and other receivables and trade and otherpayables are assumed to approximate their fair values due to their short-termnature. The fair value of financial liabilities for disclosure purposes isestimated by discounting the future contractual cashflows at the current marketinterest rate that is available to the Group for similar financial instruments.

**4**                    Criticalaccounting estimates and judgments

Estimates and judgments are continually evaluated andare based on historical experience and other factors, including expectations offuture events that are believed to be reasonable under the circumstances.

The Group makes estimatesand assumptions concerning the future. The resulting accounting estimates will,by definition, rarely equal the related actual results. The estimates andassumptions that have a significant risk of causing a material adjustment tothe carrying amounts of assets and liabilities are outlined below.

***(a) Usefullives of assets***

The determination of theuseful lives of assets is based on historical experience with similar assets aswell as any anticipated technological development and changes in broad economicor industry factors. The appropriateness of the estimated useful lives isreviewed annually, or whenever there is an indication of significant changes inthe underlying assumptions. We believe that the accounting estimate related tothe determination of the useful lives of assets is a critical accountingestimate since it involves assumptions about technological development in aninnovative industry. Further, due to the significant weight of depreciableassets in our total assets, the impact of any changes in these assumptionscould be material to our financial position, and results of operations. As anexample, if Magyar Telekom was to shorten the average useful life of its assetsby 10%, this would result in additional annual depreciation and amortizationexpense of approximately HUF 12 billion.

***(b) Estimatedimpairment of goodwill***

Goodwill is no longer amortized, but tested forimpairment annually or more frequently. As all of our subsidiaries are eithernot listed on stock exchanges or there is no active market for their shares,the recoverable amounts of the business units and reportable segments arecalculated based on fair value determined by the discounted projected cashflowsof these units over the next ten years and a terminal value. This is highlyjudgmental, which carries the inherent risk of arriving at materially differentfair values if estimates used in the calculations would prove to beinappropriate. The Group has an 

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

implemented policy to makethe impairment test based on a 10-year cashflow projection on areasonable and supportable assumption that presents the management’s bestestimate. In the calculations, Magyar Telekom used a weighted average cost ofcapital (WACC) of 7.95% to 10.35% depending on the country of operations andthe sub-sector of telecommunications. Perpetual growth rate estimates rangebetween -6.76% and +3% also depending on the country of operations andthe sub-sector of telecommunications. The WACC was determined based on CAPMmodel using the average betas of the peer group, 10 year zero coupon yields andthe group average debt ratio of 35%, which is in line with the usualindebtedness of listed peer telecommunications companies, while the perpetualgrowth rates used are in line with the long-term average growth rate for thetelecommunications sector.

For the Hungariansub-units of the Fixed line CGU, we used a WACC of 10.35% and perpetual growthrates ranging between -6.76% and +3%. If we had used a growth rate of 0%for all these units of the CGU, it would have resulted in an impairment chargeof approximately HUF 9,498 million. If Magyar Telekom had used a WACC of 10.85%(an increase of 0.50%) and an unchanged perpetual growth rate compared to thecurrent calculations after the ten year projected period in the same CGU, itwould have resulted in an impairment charge of approximately HUF 6,287 million.Any further increase in the WACC or a negative growth rate applied would haveresulted in further amounts of impairment, initially related to goodwillallocated to the Hungarian CGU of the Fixed line segment.

***(c) Estimatedimpairment of property, plant and equipment, and intangibles***

We assess the impairmentof identifiable property, plant, equipment and intangibles whenever there is areason to believe that the carrying value may materially exceed the recoverableamount and where impairment in value is anticipated. The recoverable amountsare determined by value in use calculations, which use a broad range ofestimates and factors affecting those. Among others, we typically considerfuture revenues and expenses, technological obsolescence, discontinuance ofservices and other changes in circumstances that may indicate an impairment. Ifan impairment is identified using the value in use calculations, we alsodetermine the fair value less cost to sell (if determinable), to calculate theexact amount of impairment to be charged. As this exercise is highlyjudgmental, the amount of potential impairment may be significantly differentfrom that of the result of these calculations.

***(d) Estimatedimpairment of trade and other receivables***

We calculate impairmentfor doubtful accounts based on estimated losses resulting from the inability ofour customers to make required payments. For large customers, impairment iscalculated on an individual basis, while for other customers it is estimated ona portfolio basis, for which we base our estimate on the aging of our accountreceivables balance and our historical write-off experience, customercredit-worthiness and changes in our customer payment terms. These factors arereviewed periodically, and changes are made to the calculations when necessary.In addition, we consider also the nature of the business (fixed line, mobile,internet, cable TV, etc.) and the environment in which the Group’s entitiesoperate on the various markets. The estimates also involve assumptions aboutfuture customer behavior and the resulting future cash collections. If thefinancial condition of our customers were to deteriorate, actual write-offs ofcurrently existing receivables may be higher than expected and may exceed thelevel of the impairment losses recognized so far.

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***(e) Provisions***

Provisions in general arehighly judgmental, especially in the cases of legal disputes. The Groupassesses the probability of an adverse event as a result of a past event and ifthe probability is evaluated to be more than fifty percent, the Group fullyprovides for the total amount of the liability.

***(f) Assetretirement obligations***

The Group is exposed tolegal asset retirement obligations mainly related to its fixed network. Theamounts and timing of such future expenses are difficult to predict. Provisionshave been calculated based on past history of costs related to dismantling andremoving network assets and restoring the site on which they were located.Estimates of future cashflows have been discounted using credit adjusted riskfree rates ranging from 7.35 % to 8.30 %. Due to the high level of uncertainty,future expenses may be different from those provided for.

***(g) Subscriberacquisition costs***

Subscriber acquisitioncosts primarily include the loss on the equipment sales (revenues and costsdisclosed separately) and fees paid to subcontractors that act as agents toacquire new customers. The Group’s agents spend a portion of their agent feesfor marketing the Group’s products. A part of the Group’s marketing costs couldalso be considered as subscriber acquisition cost. The up-front fees collectedfrom customers for activation or connection are marginal compared to the costs.These revenues, costs and losses are recognized when the customer is connectedto the Group’s fixed or mobile networks. No such costs or revenues aredeferred. These acquisition costs (losses) are recognized immediately as theyare not accurately separable from other marketing costs and there is noguarantee of recovering these subsidies from the future revenue generated fromthe customers. Among these costs, net equipment losses of the Group amounted toHUF 11,088 million, while agent fees amounted to HUF 11,012 million in 2006.

**5**                    Businesscombinations

**5.1 Acquisitions in2006**

**5.1.1 Orbitel**

On November 29, 2005 Magyar Telekom concluded anagreement to acquire a 100% stake in Orbitel for EUR 7.85 million (HUF 1,944million). Orbitel is a Bulgarian alternative telecommunications and internetservice provider offering countrywide voice and data services to the businesscommunity utilizing IP technology. In 2005, the company generated revenues ofEUR 11.5 million. Orbitel has been consolidated from the date of the financialclosing, February 3, 2006.

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Thecarrying values and the fair values of Orbitel’s net assets at acquisition aswell as the consideration paid are disclosed in the table below.

| ** **                                                          | ** ** | **Fair  values**                | ** ** | **Carrying  values** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------|------------|----------------------|------------|
| ** **                                                          | ** ** | **(in HUF millions)** | ** ** |
| Purchase price of  ownership acquired                               |       | 1,944                           |       |                 |       |   |   |
| Additional costs  directly attributable to the business combination |       | 38                              |       |                 |       |   |   |
| Consideration  paid                                                 |       | 1,982                           |       |                 |       |   |   |
| Net assets acquired                                                 |       | 1,013                           |       |                 |       |   |   |
| Goodwill                                                            |       | 969                             |       |                 |       |   |   |
| *Net  assets acquired:*                                             |       |                            |       |                 |       |   |   |
| Cash                                                                |       | 22                              |       |                 | 22         |   |   |
| Other financial  assets                                             |       | 6                               |       |                 | 6          |   |   |
| Receivables                                                         |       | 335                             |       |                 | 335        |   |   |
| Income tax  receivable                                              |       | 7                               |       |                 | 7          |   |   |
| Inventory                                                           |       | 12                              |       |                 | 12         |   |   |
| Property, plant  and equipment                                      |       | 524                             |       |                 | 381        |   |   |
| Intangible assets                                                   |       | 812                             |       |                 | 221        |   |   |
| Other non current  assets                                           |       | 3                               |       |                 | 3          |   |   |
| Trade and other payables                                            |       | (384                            | )          |                 | (384       | ) |   |
| Loans and other  borrowings                                         |       | (190                            | )          |                 | (190       | ) |   |
| Net deferred tax  liability                                         |       | (134                            | )          |                 | (24        | ) |   |
|                                                                |       | 1,013                           |       |                 | 389        |   |   |

 

The goodwill arising onthis acquisition partly represents the assembled workforce that can not berecognized as a separable asset. Further, the customer value recognized onlyrepresents the customers and services rendered to them existing on theacquisition date, while the majority of the goodwill represents the value of,and the future revenues from, customers to be acquired from the acquisitiondate or the planned extension of services.

**5.1.2 Dataplex**

On December 12, 2005 Magyar Telekom agreed toacquire a 100% stake in Dataplex Kft. for HUF 5.1 billion, based on the netdebt position of the company at the time of the agreement. Dataplex is majorplayer in the Hungarian IT hardware co-location market with revenues of aroundHUF 1.3 billion in 2005. The financial closing of the transaction took placefollowing the approval by the Hungarian Competition Authority, on April 5,2006. Dataplex is consolidated in the Fixed line segment of the Group sincethat date.

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Thecarrying values and the fair values of Dataplex’s net assets at acquisition aswell as the consideration paid are disclosed in the table below.

| ** **                                                          | ** ** | **Fair  values**                | ** ** | **Carrying  values** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------|------------|----------------------|------------|
| ** **                                                          | ** ** | **(in HUF millions)** | ** ** |
| Purchase price of  ownership acquired                               |       | 5,113                           |       |                 |       |   |   |
| Additional costs  directly attributable to the business combination |       | 35                              |       |                 |       |   |   |
| Consideration  paid                                                 |       | 5,148                           |       |                 |       |   |   |
| Net assets acquired                                                 |       | 1,100                           |       |                 |       |   |   |
| Goodwill                                                            |       | 4,048                           |       |                 |       |   |   |
| *Net  assets acquired:*                                             |       |                            |       |                 |       |   |   |
| Cash                                                                |       | 1                               |       |                 | 1          |   |   |
| Receivables                                                         |       | 148                             |       |                 | 148        |   |   |
| Inventory                                                           |       | 6                               |       |                 | 12         |   |   |
| Property, plant  and equipment                                      |       | 811                             |       |                 | 801        |   |   |
| Intangible assets                                                   |       | 933                             |       |                 | 1          |   |   |
| Trade and other payables                                            |       | (556                            | )          |                 | (556       | ) |   |
| Loans and other  borrowings                                         |       | (56                             | )          |                 | (56        | ) |   |
| Net deferred tax  liability                                         |       | (187                            | )          |                 | —     |   |   |
|                                                                |       | 1,100                           |       |                 | 351        |   |   |

 

The goodwill arising onthis acquisition partly represents the assembled workforce that can not berecognized as a separable asset. Further, the customer value recognized onlyrepresents the customers existing on the acquisition date, while the majorityof the goodwill represents the value of, and future revenues from, customers tobe acquired from the acquisition date.

**5.1.3 KFKI Group**

In June 2006 Magyar Telekom signed a sharepurchase agreement to acquire the 100% ownership of KFKI-LNX Zrt., one of theleading Hungarian IT companies for a purchase price of HUF 8.2 billion plus anoptional earn-out payment of HUF 1.5 billion dependent on the 2006 financialperformance. The acquisition was closed on September 15, 2006, from whichdate KFKI Group has been consolidated in the Fixed line segment of the Group.In 2005, KFKI Group’s revenues amounted to approximately HUF 17 billion.KFKI-LNX has two 100% owned subsidiaries, ICON and IQSYS.

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Thecarrying values and the fair values of KFKI Group’s net assets at acquisitionas well as the consideration paid are disclosed in the table below.

| ** **                                                          | ** ** | **Fair  values**                | ** ** | **Carrying  values** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------|------------|----------------------|------------|
| ** **                                                          | ** ** | **(in HUF millions)** | ** ** |
| Purchase price of  ownership acquired                               |       | 8,170                           |       |                 |       |   |   |
| Additional  purchase price contingent upon results                  |       | 1,500                           |       |                 |       |   |   |
| Additional costs  directly attributable to the business combination |       | 170                             |       |                 |       |   |   |
| Consideration  paid                                                 |       | 9,840                           |       |                 |       |   |   |
| Net assets acquired                                                 |       | 5,372                           |       |                 |       |   |   |
| Goodwill                                                            |       | 4,468                           |       |                 |       |   |   |
| *Net  assets acquired:*                                             |       |                            |       |                 |       |   |   |
| Cash                                                                |       | 344                             |       |                 | 344        |   |   |
| Receivables                                                         |       | 2,629                           |       |                 | 2,629      |   |   |
| Income tax  receivable                                              |       | 33                              |       |                 | 33         |   |   |
| Inventory                                                           |       | 656                             |       |                 | 656        |   |   |
| Property, plant  and equipment                                      |       | 663                             |       |                 | 632        |   |   |
| Intangible assets                                                   |       | 5,514                           |       |                 | 233        |   |   |
| Trade and other payables                                            |       | (2,687                          | )          |                 | (2,687     | ) |   |
| Loans and other  borrowings                                         |       | (587                            | )          |                 | (587       | ) |   |
| Provisions                                                          |       | (154                            | )          |                 | (154       | ) |   |
| Net deferred tax  liability                                         |       | (1,039                          | )          |                 | 23         |   |   |
|                                                                |       | 5,372                           |       |                 | 1,122      |   |   |

 

The goodwill arising onthis acquisition partly represents the assembled workforce that can not berecognized as a separable asset. Further, the customer value recognized onlyrepresents the customers existing on the acquisition date, while the majorityof the goodwill represents the value of, and future revenues from, customers tobe acquired from the acquisition date.

**5.1.4 IWIW,Adnetwork, MFactory**

In April 2006 Magyar Telekom acquired the 100%ownership of iWiW Kft., the leading Hungarian online social network, for apurchase price of HUF 1.1 billion. iWiW (‘who is who’) operates the only onlinesocial network for existing friendships and relationships with more than half amillion registered members at the time of the acquisition, which made it thefourth most visited web page in Hungary. In 2005 iWiW generated revenuesof HUF 5 million.

In May 2006 Magyar Telekom acquired the 100%ownership of Adnetwork Kft, the leading Hungarian online advertisement networkfor an initial purchase price of HUF 168 million and additional price of HUF 10million. Adnetwork was established in 2005 and generated revenues of HUF 28million in 2005.

In December 2006 Magyar Telekom acquired a 75.05%stake in MFactory, one of the leading Hungarian mobile content producers andaggregators for HUF 469 million. In addition, the Company also has an option toincrease its stake in MFactory to 100% from 2009, while MFactory’s minorityowners have a put option for their shares. The Group considers this combinationof the options to be of a liability 

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

nature (in an amount ofHUF 166 million), therefore MFactory is consolidated as a 100% subsidiary inthe Fixed line segment of the Group in 2006, while the initial goodwill arisingon the business combination is allocated to the Mobile segment. MFactory’srevenue amounted to HUF 190 million in 2006.

The carrying values of the net assets of the abovecompanies (iWiW, Adnetwork and MFactory) acquired in individually immaterialbusiness combinations are disclosed in their aggregate amounts in the tablebelow.

Thefair values of the net assets of iWiW equal their carrying values. Due itsimmaterial size, no fair valuation was done for Adnetwork’s net assets, whiledue to the late acquisition of MFactory, the purchase price allocation has notbeen finalized until the approval of these financial statements.

| ** **                                                                                       | ** ** | **Carrying  values**            | ** ** |
|--------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                       | ** ** | **(in HUF millions)** | ** ** |
| Purchase price of  ownership acquired                                                            |       |                            | 1,767      |   |   |
| Further purchase  price payable for the remaining shares in MFactory                             |       |                            | 166        |   |   |
| Additional  purchase price and costs directly attributable to the business combination |       |                            | 11         |   |   |
| Consideration  paid                                                                              |       |                            | 1,944      |   |   |
| Net assets acquired                                                                              |       |                            | 83         |   |   |
| Goodwill                                                                                         |       |                            | 1,861      |   |   |
| *Net assets acquired:*                                                                           |       |                            |       |   |   |
| Cash                                                                                             |       |                            | 12         |   |   |
| Receivables                                                                                      |       |                            | 73         |   |   |
| Intangible assets                                                                                |       |                            | 53         |   |   |
| Income tax payable                                                                               |       |                            | (5         | ) |   |
| Trade and other  payables                                                                        |       |                            | (50        | ) |   |
|                                                                                             |       |                            | 83         |   |   |

 

**5.1.5 MakTel—ownshares**

In June, 2006 MakTelacquired 10% of its own shares at a public auction held by the MacedonianGovernment (the minority owner) for EUR 60.9 million (HUF 16,579 millionincluding additional costs). Following the share repurchase transaction, MagyarTelekom’s voting rights in MakTel increased from 51.0% to 56.7%, while theMacedonian Government’s share of ownership fell to 36.8%, with the rest of theshares owned by smaller minority shareholders. The difference between thepurchase price of the shares and the decrease in the minority interests wasrecognized as goodwill in an amount of HUF 1,724 million, all allocated to theMobile segment.

**5.1.6 MobilPress**

In December 2006 Magyar Telekom agreed to acquirea 100% stake in MobilPress for HUF 600 million plus the dividend to be declaredfor 2006 (max. HUF 50 million). The transaction was subject to the approval ofthe Hungarian Competition Authority. The transaction was closed on January 25,2007, and MobilPress has been consolidated since that date, included in theFixed line segment. MobilPress is 

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

one of the major Hungarianmobile content providers and manages, among others, the t-zones portal, with revenuesaround HUF 1.5 billion in 2006.

Thecarrying values of MobilPress’s net assets at acquisition as well as theconsideration paid are disclosed in the table below. The Group has notfinalized the purchase price allocation for this recent acquisition, thereforethe fair values are not available at the date of these financial statements.

| ** **                            | ** ** | **Carrying  values**            | ** ** |
|---------------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **(in HUF millions)** | ** ** |
| Purchase price of  ownership acquired |       |                            | 600        |   |   |
| Additional  expected purchase price   |       |                            | 50         |   |   |
| Consideration  paid                   |       |                            | 650        |   |   |
| Net assets acquired                   |       |                            | 93         |   |   |
| Goodwill                              |       |                            | 557        |   |   |
| *Net assets acquired:*                |       |                            |       |   |   |
| Cash                                  |       |                            | 64         |   |   |
| Receivables                           |       |                            | 266        |   |   |
| Non current  assets                   |       |                            | 56         |   |   |
| Trade and other payables              |       |                            | (285       | ) |   |
| Short term  borrowings                |       |                            | (2         | ) |   |
| Non current  liabilities              |       |                            | (6         | ) |   |
|                                  |       |                            | 93         |   |   |

 

**5.2 Acquisitions in2005**

**5.2.1 CrnogorskiTelekom (CGT)**

In 2005, the Company acquired a 76.53% stake in CGT inthe course of the privatization tender. The purchase price of the stake was EUR140.5 million. From this purchase price, Magyar Telekom paid EUR 114.0 millionfor a stake of 51.12% to the Government of Montenegro and EUR 22.9 million fora stake of 21.92% to minority shareholders. For the remaining 3.49% MagyarTelekom paid EUR 3.6 million through a public offering. CGT owns 100% of theshare capital of T-Mobile CG, the second Montenegrin mobile company, 100% ofthe share capital of Internet Crna Gora, and 51% of the share capital ofMontenegrocard. The total cost of the acquisition was HUF 35,927 millionincluding directly related expenses.

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

CGT and its subsidiaries have been consolidated sinceMarch 31, 2005.

Thefair value of the net assets acquired and the consideration paid for theacquisition is disclosed in the table below.

| **In HUF millions**                                             | ** ** | ** ** | ** ** | **Total** | ** ** | **Net assets  included in the  Fixed line  segment on first  consolidation** | ** ** | **Net assets  included in the  Mobile segment  on first  consolidation** | ** ** |
|---------------------------------------------------------------------------|------------|------------|------------|-----------|------------|------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| Purchase price of  ownership acquired                                     |       | 34,954     |       |      |       |                                                                                                       |       |                                                                                              |       |   |   |
| Additional costs  directly attributable to the business combination  |       | 973        |       |      |       |                                                                                                       |       |                                                                                              |       |   |   |
| Consideration paid                                                        |       | 35,927     |       |      |       |                                                                                                       |       |                                                                                              |       |   |   |
| Fair value of net assets acquired                                         |       | 30,805     |       |      |       |                                                                                                       |       |                                                                                              |       |   |   |
| Goodwill                                                                  |       | 5,122      |       |      | —     |                                                                                                       |       |                                                                                              | 5,122      |   |   |
| *Fair  value of net assets acquired:*                                     |       |       |       |      |       |                                                                                                       |       |                                                                                              |       |   |   |
| Cash                                                                      |       | 1,866      |       |      | —     |                                                                                                       |       |                                                                                              | —     |   |   |
| Receivables                                                               |       | 7,678      |       |      | 6,442      |                                                                                                       |       |                                                                                              | 1,236      |   |   |
| Income tax  receivable                                                    |       | 339        |       |      | —     |                                                                                                       |       |                                                                                              | —     |   |   |
| Inventory                                                                 |       | 609        |       |      | 426        |                                                                                                       |       |                                                                                              | 183        |   |   |
| Property, plant  and equipment                                            |       | 28,687     |       |      | 22,495     |                                                                                                       |       |                                                                                              | 6,192      |   |   |
| Intangible assets                                                         |       | 9,958      |       |      | 3,700      |                                                                                                       |       |                                                                                              | 6,258      |   |   |
| Other non current  assets                                                 |       | 1,080      |       |      | 1,080      |                                                                                                       |       |                                                                                              | —     |   |   |
| Trade and other payables                                                  |       | (3,917     | )          |      | (3,148     | )                                                                                                          |       |                                                                                              | (769       | ) |   |
| Loans and other  borrowings                                               |       | (3,290     | )          |      | —     |                                                                                                       |       |                                                                                              | —     |   |   |
| Provisions                                                                |       | (1,951     | )          |      | (1,914     | )                                                                                                          |       |                                                                                              | (37        | ) |   |
| Net deferred tax  liability                                               |       | (807       | )          |      | —     |                                                                                                       |       |                                                                                              | —     |   |   |
|                                                                      |       | 40,252     |       |      | 29,081     |                                                                                                       |       |                                                                                              | 13,063     |   |   |
| Minority interests                                                        |       | (9,447     | )          |      |       |                                                                                                       |       |                                                                                              |       |   |   |
| Total                                                                     |       | 30,805     |       |      |       |                                                                                                       |       |                                                                                              |       |   |   |

 

The goodwill arising onthis acquisition partly represents the assembled workforce that can not berecognized as a separable asset. Further, the customer values recognized onlyrepresent the customers existing on the acquisition date, while the majority ofthe goodwill represents the value of customers to be acquired from theacquisition date.

F-46

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**5.3 Pro formainformation on business combinations**

Thefollowing pro forma information shows the most important financial data of theGroup, including the subsidiaries acquired as if they had been consolidated atthe beginning of the financial year in which the acquisition was made, and alsohow much the business combinations contributed to the reported figures sincethe acquisition date.

| ** **                                            | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2006** | ** ** |
|-------------------------------------------------------|------------|---------------------------------|------------|----------|------------|----------|------------|
| ** **                                            | ** ** | **(in HUF millions)** | ** ** |
| Revenues                                              |       |                            |       |     |       |     |       |
| Reported                                              |       | 596,792                         |       | 615,054  |       | 671,196  |       |
| Pro forma—if consolidated from beginning of year |       | 596,792                         |       | 620,376  |       | 684,099  |       |
| Contribution since date of business combination       |       | —                          |       | 20,521   |       | 12,465   |       |
| Net income                                            |       |                            |       |     |       |     |       |
| Reported                                              |       | 34,641                          |       | 78,415   |       | 75,453   |       |
| Pro forma—if consolidated from beginning of year |       | 34,641                          |       | 78,049   |       | 76,267   |       |
| Contribution  since date of business combination      |       | —                          |       | 1,364    |       | 191      |       |

 

**5.4 Disposal ofCardnet in 2006**

During2006 the Company sold the total of its 72% ownership in Cardnet. The tablebelow shows the amount of assets and liabilities disposed of, the saleconsideration received and the gain on the sale. The gain was recognized in theincome statement (Finance income).

| ** **                                  | ** ** | **HUF  millions** | ** ** |
|---------------------------------------------|------------|-------------------|------------|
| Fair value of  consideration received       |       |              | 305        |   |   |
| Carrying amounts  of net assets disposed of |       |              | (255       | ) |   |
| Reduction of  Minority interest             |       |              | 71         |   |   |
| Gain on the sale                            |       |              | 121        |   |   |
| *Net  assets disposed of:*                  |       |              |       |   |   |
| Cash                                        |       |              | 190        |   |   |
| Receivables and  inventory                  |       |              | 74         |   |   |
| PPE and  Intangible assets                  |       |              | 43         |   |   |
| Trade and other  payables                   |       |              | (52        | ) |   |
|                                        |       |              | 255        |   |   |

 

F-47

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**6**                    Cash and cashequivalents

| ** ** | ** ** | **At December 31,**   | ** ** |
|------------|------------|---------------------------------|------------|
| ** ** | ** ** | **2005**                        | ** ** | **2006** | ** ** |
| ** ** | ** ** | **(in HUF millions)** | ** ** | **Average  interest  rate** | ** ** |
| HUF        |       | 1,794                           |       | 1,873 |   |   | 4.37 | % |   |
| MKD        |       | 21,916                          |       | 32,717 |   |   | 3.35 | % |   |
| EUR        |       | 13,527                          |       | 34,029 |   |   | 3.38 | % |   |
| Other      |       | 8,823                           |       | 9,221 |   |   | 4.21 | % |   |
|       |       | 46,060                          |       | 77,840 |   |   | 3.49 | % |   |

 

| ** **                                | ** ** | **At December 31,**   | ** ** |
|-------------------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **2005**                        | ** ** | **2006** | ** ** |
| ** **                                | ** ** | **(in HUF millions)** | ** ** |
| Cash on hand                              |       | 166                             |       | 1,556 |   |
| Cash in banks and  other cash equivalents |       | 45,894                          |       | 76,284 |   |
|                                      |       | 46,060                          |       | 77,840 |   |

 

**7****                    Otherfinancial assets**

| ** **                            | ** ** | **At December 31,**    | ** ** |
|---------------------------------------|------------|----------------------------------|------------|
| ** **                            | ** ** | **  2005  ** | ** ** | **  2006  ** | ** ** |
| ** **                            | ** ** | **(in HUF millions)**  | ** ** |
| Finance lease  receivable (Note 33 c) |       |                             | —     |   |   |   | 1,856 |   |   |
| Derivative  financial instruments     |       |                             | —     |   |   |   | 378 |   |   |
| Available for  sale financial assets  |       |                             | 1,817      |   |   |   | 458 |   |   |
|                                  |       |                             | 1,817      |   |   |   | 2,692 |   |   |

 

The carrying value of the other financial assetsincluded in the table above approximates or equals their fair value dependingon the measurement policy applied to them.

The Finance lease receivable represents the short termportion of the finance lease receivable from the PMR services (Note 33 c).

Derivative financial instruments as at December 31,2006 include the fair value of open currency forwards.

Available for sale financial assets as at December 31,2005 included the fair value of the Group’s investment in CKB, a MontenegrinBank. The Group had the intention to sell this investment acquired through thebusiness combination with Crnogorski Telekom in 2005, but there was no activemarket for these shares. In 2005, the Group received additional shares in theform of a dividend and also participated in the share capital increase of CKBto maintain its relatively significant share of ownership (11.8%) to benefitfrom the planned sale. As these additional shares were acquired at a discountcompared to the estimated fair value, the Group recognized a revaluation gain (asrestated—Note 2.1.1) against an equity reserve (Revaluation of AFS financialassets—net of tax) in 2005. In 2006 the Group sold its CKB shares with a gainand released the revaluation reserve to the income statement (Finance income).

F-48

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Thetable below shows the revaluation related to the CKB shares.

| ** **                                                                  | ** ** | **At December 31,**                | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                  | ** ** | **   2005   ** | ** ** | **   2006   ** | ** ** |
| ** **                                                                  | ** ** | **(in HUF millions)**              | ** ** |
| Revaluation gain                                                            |       |                                         | 213        |   |   |   | — |   |   |
| Less tax                                                                    |       |                                         | (19        | ) |   |   | — |   |   |
| Revaluation—net                                                        |       |                                         | 194        |   |   |   | — |   |   |
| Less minority interest                                                      |       |                                         | (45        | ) |   |   | — |   |   |
| Included in Revaluation  reserve for AFS financial   assets—net of tax |       |                                         | 149        |   |   |   | — |   |   |

 

**8**                    Trade andother receivables

| ** **                                         | ** ** | **At December 31,**   | ** ** |
|----------------------------------------------------|------------|---------------------------------|------------|
| ** **                                         | ** ** | **2005**                        | ** ** | **2006** | ** ** |
| ** **                                         | ** ** | **(in HUF millions)** | ** ** |
| Domestic trade  receivables                        |       | 100,206                         |       | 102,009 |   |
| Foreign trade  receivables                         |       | 5,252                           |       | 2,827 |   |
| Receivables from  associates                       |       | 1,008                           |       | 771 |   |
| Receivables from  Deutsche Telekom Group companies |       | 3,771                           |       | 7,991 |   |
| Advances paid for  current assets                  |       | 2,577                           |       | 1,680 |   |
| Other taxes receivable                             |       | 1,515                           |       | 3,318 |   |
| Prepayments and accrued  income                    |       | 3,686                           |       | 7,598 |   |
| Other receivables                                  |       | 7,932                           |       | 6,603 |   |
|                                               |       | 125,947                         |       | 132,797 |   |
| Allowance for impairment  loss                     |       | (29,991                         | )          | (28,781 | ) |
| ** **                                         |       | 95,956                          |       | 104,016 |   |

 

The allowance forimpairment loss and changes therein for 2005 and 2006 are as follows:

| ** **                                                 | ** ** | **At December 31,**   | ** ** |
|------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                 | ** ** | **2005**                        | ** ** | **2006** | ** ** |
| ** **                                                 | ** ** | **(in HUF millions)** | ** ** |
| Impairment loss,  beginning of period                      |       | (24,276                         | )          | (29,991 | ) |
| Charged to  expense (included in other operating expenses) |       | (6,266                          | )          | (5,066 | ) |
| Impairment losses  of acquired companies on acquisition    |       | (3,674                          | )          | (116 | ) |
| Utilized and  translation differences                      |       | 4,225                           |       | 6,392 |   |
| Impairment loss, end of  period                            |       | (29,991                         | )          | (28,781 | ) |

 

**9**                    Income tax

| ** **               | ** ** | **For the year ended December 31,** | ** ** |
|--------------------------|------------|--------------------------------------------------------------|------------|
| ** **               | ** ** | **2004**                                                     | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **               | ** ** | **(in HUF millions)**                              | ** ** |
| Corporate income  tax    |       | 9,352                                                        |       | 11,686 |   | 6,423 |   |
| Other income  taxes      |       | 8,455                                                        |       | 8,366 |   | 8,529 |   |
| Deferred income  taxes   |       | (1,665                                                       | )          | 1,806 |   | 9,268 |   |
| Total income tax expense |       | 16,142                                                       |       | 21,858 |   | 24,220 |   |

 

F-49

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Current income taxreceivable and payable in the balance sheet represent the amount of corporateand other income taxes receivable from, and payable to, the tax authorities ofthe countries in which the Group operates.

**9.1 Tax ratereconciliation**

Thereconciliation between the reported income tax expense and the theoreticalamount arising by applying the statutory income tax rates is as follows:

| ** **                                        | ** ** | **For the year ended December 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                        | ** ** | **Note**                                                     | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                        | ** ** | **(in HUF millions)**                              | ** ** |
| IFRS profit  before income tax                    |       |                                                         |       |   |   | 59,469 |   | 110,583 |   | 111,684 |   |
| Tax at 16%                                        |       |                                                         |       |   |   | (9,515 | ) | (17,693 | ) | (17,869 | ) |
| Impact of different tax rates                     |       |                                                         | (a)        |   |   | 491 |   | 435 |   | (323 | ) |
| Tax on items not subject to tax                   |       |                                                         | (b)        |   |   | 2,091 |   | 1,394 |   | 2,405 |   |
| Tax on non deductible expenses                    |       |                                                         | (c)        |   |   | (3,204 | ) | (1,093 | ) | (1,955 | ) |
| Impact of tax incentives                          |       |                                                         | (d)        |   |   | 584 |   | 897 |   | 778 |   |
| Other income taxes                                |       |                                                         | (e)        |   |   | (8,455 | ) | (8,366 | ) | (8,529 | ) |
| Impact of tax deductibility of other income taxes |       |                                                         | (f)        |   |   | 1,691 |   | 2,008 |   | 2,701 |   |
| Withholding tax                                   |       |                                                         | (g)        |   |   | — |   | — |   | (2,034 | ) |
| De-recognized deferred tax on tax losses          |       |                                                         | (h)        |   |   | — |   | — |   | (255 | ) |
| Broadband tax credit accretion                    |       |                                                         | (i)        |   |   | 175 |   | 560 |   | 861 |   |
| Income tax expense                                |       |                                                         |       |   |   | (16,142 | ) | (21,858 | ) | (24,220 | ) |

 

***(a) Impactof different tax rates***

The corporate tax rate in Hungary was 16% in 2004,2005 and in the first 8 months of 2006. As of September 1, 2006 a socalled Solidarity tax was introduced in Hungary, which is an extra 4% tax on abase very similar to the corporate tax base, with fewer adjusting items fromaccounting profit before tax to arrive at the tax base. Therefore, the tax ratein the last 4 months of 2006 can be considered 20%. The tax rate reconciliationfor 2006 also includes 16%, while the difference arising due to theintroduction of the Solidarity tax is included in this line of the reconciliation.

The Group is also present in foreign countries wherethe tax rate is generally lower than in Hungary. The tax rate in Macedonia was15% in 2004, 2005 and 2006, while the enacted tax rate for 2007 is 12%, whilefrom 2008 this will be reduced further, to 10%. Deferred tax balances have beenrecalculated accordingly.

The corporate tax rate is 9% in Montenegro, 16% inRomania, 15% in Bulgaria, and 25% in the Ukraine.

This line of thereconciliation also includes the tax impacts of the different tax rates of theforeign countries where the Group is also present through its subsidiaries.

F-50

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***(b)**Tax on items not subject to tax***

Items not subject toincome tax consist primarily of the other income from DTAG (Note 35), which isnot taxable, as well as the share of associates’ profit as it is included netof tax in the Profit before income tax. This line of the reconciliationincludes the tax impact of the above items.

***(c)**Tax on non deductible expenses***

This line of thereconciliation shows the tax impact of the non deductible expenses, includingpremature receivable write-downs, certain impairment losses and entertainmentexpenses.

***(d)**Tax incentives***

Tax incentives include thetax impact of qualifying investments in property, plant and equipment inMacedonia, which can be utilized as a reducing item in the calculation of thecorporate tax base.

***(e) Otherincome taxes***

Other income taxes includecertain local and central taxes levied in Hungary on the companies’ netmargins, determined at a substantially higher level than the corporate taxbase. As the first line of the reconciliation calculates theoretical taxexpense calculated using the corporate tax rate, the Hungarian local businesstax and the innovation fee impose additional tax expenses for the Hungarianentities of the Group.

***(f)**Deductibility of other income taxes from thecorporate tax base***

These Hungarian otherincome taxes are deductible expenses for corporate tax purposes. In addition, acertain percentage of the local business tax paid is deductible further fromthe corporate tax base (25% in 2004, 50% in 2005 and 100% in 2006).

***(g)**Withholding tax***

The Group is presentthrough its subsidiaries in Macedonia, which introduced withholding tax of 5%on dividend distribution to Hungary as of January 1, 2006. Montenegro alsolevies a 5% withholding tax on dividend distribution to Hungary. Thereconciliation includes the amount of deferred tax calculated and recognized onthe undistributed profits of these subsidiaries that are expected to be subjectto withholding tax in case of dividend distributions.

***(h)**De-recognized deferred tax on tax losses***

Deferred tax asset iscreated on tax losses only to the extent that the realization of the relatedtax benefit is probable. Deferred tax assets on tax losses that will probablynot be recovered are de-recognized.

***(i)**Broadband investment tax credit accretion***

Broadband investment taxcredit accretion shows the increase of net present value of the investment taxcredit deriving from the utilization of the tax credits in year(s) followingthe year of recognition.

F-51

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**9.2 Deferred taxes**

MagyarTelekom’s deferred tax balances are as follows:

| ** **                                                                          | ** ** | **Balance at  Dec. 31,  2004** | ** ** | **Income  statement  effect** | ** ** | **Other  movements** | ** ** | **Balance at  Dec. 31,  2005** | ** ** | **Income  statement  effect** | ** ** | **Other  movements** | ** ** | **Balance at  Dec. 31,  2006** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------------------------|------------|-------------------------------|------------|----------------------|------------|------------------------------------------|------------|-------------------------------|------------|----------------------|------------|------------------------------------------|------------|
| *Deferred tax assets and (liabilities)*                                             |       |                                     |       |                          |       |                 |       |                                     |       |                          |       |                 |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment tax credits                                                              |       |                                     | 6,849      |                          |       |                 | 741        |                                     |       |                          | 3,066      |                 |       |                                     | 10,656     |   |   |   | 856 |   |   |   | 2,788 |   |   |   | 14,300 |   |   |
| Net operating loss carry-forward                                                    |       |                                     | 3,721      |                          |       |                 | 2,354      |                                     |       |                          | 1          |                 |       |                                     | 6,076      |   |   |   | (4,859 | ) |   |   | — |   |   |   | 1,217 |   |   |
| Investments in subsidiaries                                                         |       |                                     | (1,334     | )                             |       |                 | 434        |                                     |       |                          | —     |                 |       |                                     | (900       | ) |   |   | (300 | ) |   |   | — |   |   |   | (1,200 | ) |   |
| Withholding tax                                                                     |       |                                     | —     |                          |       |                 | —     |                                     |       |                          | —     |                 |       |                                     | —     |   |   |   | (2,034 | ) |   |   | — |   |   |   | (2,034 | ) |   |
| Other financial assets                                                              |       |                                     | (140       | )                             |       |                 | 43         |                                     |       |                          | 121        |                 |       |                                     | 24         |   |   |   | (350 | ) |   |   | 19 |   |   |   | (307 | ) |   |
| Impairment of receivables, inventory                                                |       |                                     | 3,464      |                          |       |                 | 264        |                                     |       |                          | —     |                 |       |                                     | 3,728      |   |   |   | (678 | ) |   |   | — |   |   |   | 3,050 |   |   |
| Property, plant and equipment and intangible  assets                           |       |                                     | (4,795     | )                             |       |                 | (1,918     | )                                        |       |                          | (852       | )                    |       |                                     | (7,565     | ) |   |   | (88 | ) |   |   | (1,388 | ) |   |   | (9,041 | ) |   |
| Goodwill                                                                            |       |                                     | —     |                          |       |                 | (1,864     | )                                        |       |                          | —     |                 |       |                                     | (1,864     | ) |   |   | (2,262 | ) |   |   | — |   |   |   | (4,126 | ) |   |
| Trade and other payables                                                            |       |                                     | 81         |                          |       |                 | 23         |                                     |       |                          | —     |                 |       |                                     | 104        |   |   |   | 259 |   |   |   | — |   |   |   | 363 |   |   |
| Loans and other borrowings                                                          |       |                                     | 205        |                          |       |                 | (49        | )                                        |       |                          | —     |                 |       |                                     | 156        |   |   |   | 123 |   |   |   | — |   |   |   | 279 |   |   |
| Deferred revenue                                                                    |       |                                     | 380        |                          |       |                 | (223       | )                                        |       |                          | —     |                 |       |                                     | 157        |   |   |   | (157 | ) |   |   | — |   |   |   | — |   |   |
| Provisions for liabilities and  charges                                             |       |                                     | 2,816      |                          |       |                 | (1,611     | )                                        |       |                          | —     |                 |       |                                     | 1,205      |   |   |   | 222 |   |   |   | — |   |   |   | 1,427 |   |   |
| Total net deferred tax assets                                                       |       |                                     | 11,247     |                          |       |                 | (1,806     | )                                        |       |                          | 2,336      |                 |       |                                     | 11,777     |   |   |   | (9,268 | ) |   |   | 1,419 |   |   |   | 3,928 |   |   |
| Add back: deferred tax liability                                                    |       |                                     | 1,280      |                          |       |                 |       |                                     |       |                          |       |                 |       |                                     | 3,189      |   |   |   |   |   |   |   |   |   |   |   | 5,647 |   |   |
| Deferred tax assets                                                                 |       |                                     | 12,527     |                          |       |                 |       |                                     |       |                          |       |                 |       |                                     | 14,966     |   |   |   |   |   |   |   |   |   |   |   | 9,575 |   |   |
| *Items  included in other movements*                                                |       |                                     |       |                          |       |                 |       |                                     |       |                          |       |                 |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment tax credit recognized against cost of PPE                                |       |                                     |       |                          |       |                 |       |                                     |       |                          | 5,373      |                 |       |                                     |       |   |   |   |   |   |   |   | 3,109 |   |   |   |   |   |   |
| Utilization of investment tax  credit                                               |       |                                     |       |                          |       |                 |       |                                     |       |                          | (2,307     | )                    |       |                                     |       |   |   |   |   |   |   |   | (321 | ) |   |   |   |   |   |
| Change in accounting policy— embedded derivatives                              |       |                                     |       |                          |       |                 |       |                                     |       |                          | 140        |                 |       |                                     |       |   |   |   |   |   |   |   | — |   |   |   |   |   |   |
| AFS financial assets—valuation differences recognized  directly in equity |       |                                     |       |                          |       |                 |       |                                     |       |                          | (19        | )                    |       |                                     |       |   |   |   |   |   |   |   | 19 |   |   |   |   |   |   |
| Currency translation adjustment arising on  consolidation                           |       |                                     |       |                          |       |                 |       |                                     |       |                          | (44        | )                    |       |                                     |       |   |   |   |   |   |   |   | (29 | ) |   |   |   |   |   |
| Arising on business combinations                                                    |       |                                     |       |                          |       |                 |       |                                     |       |                          | (807       | )                    |       |                                     |       |   |   |   |   |   |   |   | (1,359 | ) |   |   |   |   |   |
|                                                                                |       |                                     |       |                          |       |                 |       |                                     |       |                          | 2,336      |                 |       |                                     |       |   |   |   |   |   |   |   | 1,419 |   |   |   |   |   |   |

 

Deferred tax assets and liabilities are determined bythe legal entities of the Group and disclosed as assets or liabilitiesaccordingly in the balance sheet.

Deferred tax arising on investment tax credits arerecognized against the cost of the related investment.

Deferred tax on certain embedded derivatives (HUF 140million) was derecognized against the opening retained earnings as at December 31,2004 as a result of the change in accounting policy in 2005 for the recognitionof embedded derivatives.

F-52

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Deferred tax arising on the revaluation ofavailable-for-sale financial assets recognized directly in equity is alsorecognized directly in equity.

Temporary differences associated with investments insubsidiaries for which deferred tax liabilities have not been recognizedamounts to HUF 4,602 million at December 31, 2006 (2005: HUF 7,452million).

If the Group’s Macedonian subsidiaries distributed alltheir distributable reserves in the form of a dividend, the Group would have topay HUF 1,275 million withholding tax in addition to the amount for which adeferred tax liability is recognized as at December 31, 2006 (HUF 1,640million). If the Group’s Montenegrin subsidiaries distributed all theirdistributable reserves in the form of a dividend, the Group would have to payHUF 1,081 million withholding tax in addition to the amount for which adeferred tax liability is recognized as at December 31, 2006 (HUF 394million). As the Group can control the timing and the form of the dividends,deferred tax liabilities have only been recognized to the extent of the planneddividend distributions of the subsidiaries’ retained earnings (results of 2005and 2006) in the foreseeable future.

Deferred tax assets are recognized for tax loss carryforwards only to the extent that realization of the related tax benefit isprobable. Tax losses amounting to HUF 1,572 million will expire in 2007 and HUF1,674 million in 2008. The remaining balance of tax losses of 4,361 million isnot subject to statutory limitations.

In order to increase broadband internet penetration inHungary, companies investing over HUF 100 million in a year in broadband assets(e.g. DSL lines, UMTS assets) from 2003 can apply for a corporate taxreduction. The potential reduction of the corporate tax charge is defined as apercentage of the companies’ capital investment in broadband assets.

As the recoverability of these investment tax creditswas uncertain in 2003, no deferred tax asset was recognized in 2003. Due to thechange of the assessment of the recoverability, Magyar Telekom recognized adeferred tax asset of HUF 6,849 million in 2004 (HUF 3,879 million related to2004 and HUF 2,970 million related to 2003). As these investment tax creditsare of a governmental grant nature, Magyar Telekom recognized the deferred taxasset against the cost of the related investment. If the tax credits are notutilized in the year when earned, the amount of tax credits carried forward canbe utilized at a higher amount as outstanding amounts can be accreted. This accretionis recognized as an increase in the deferred tax asset against a reduction inthe income tax expense.

Thefollowing table shows the details of the tax credits in HUF millions:

| **Earned  in year** | ** ** | ** ** | ** ** | **Amount of  broadband  investment** | ** ** | **Amount of  tax credit  earned** | ** ** | **Tax credit  utilized** | ** ** | **Accretion  recognized in tax  expense to date** | ** ** | **Tax credit  carried forward at  December 31, 2006** | ** ** |
|--------------------------|------------|------------|------------|-------------------------------------------|------------|---------------------------------------------|------------|-------------------------------|------------|-----------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| 2003                     |       |       | 6,356      |                                      |       |                                        | 2,765      |                          |       | (171                                                                  | )          |                                                                           | 745        |   |   |   | 3,339 |   |   |
| 2004                     |       |       | 7,115      |                                      |       |                                        | 3,174      |                          |       | (90                                                                   | )          |                                                                           | 569        |   |   |   | 3,653 |   |   |
| 2005                     |       |       | 13,959     |                                      |       |                                        | 5,563      |                          |       | (2,204                                                                | )          |                                                                           | 282        |   |   |   | 3,641 |   |   |
| 2006                     |       |       | 12,347     |                                      |       |                                        | 3,844      |                          |       | (177                                                                  | )          |                                                                           | —     |   |   |   | 3,667 |   |   |
| Total                    |       |       | 39,777     |                                      |       |                                        | 15,346     |                          |       | (2,642                                                                | )          |                                                                           | 1,596      |   |   |   | 14,300 |   |   |
|                     |       |       |       |                                      |       |                                        |       |                          |       | Expires in                                                            |       |                                                                           | 2007       |   |   |   | 3,339 |   |   |
|                     |       |       |       |                                      |       |                                        |       |                          |       |                                                                  |       |                                                                           | 2014       |   |   |   | 7,242 |   |   |
|                     |       |       |       |                                      |       |                                        |       |                          |       |                                                                  |       |                                                                           | 2015       |   |   |   | 1,124 |   |   |
|                     |       |       |       |                                      |       |                                        |       |                          |       |                                                                  |       |                                                                           | 2016       |   |   |   | 2,595 |   |   |
|                     |       |       |       |                                      |       |                                        |       |                          |       |                                                                  |       |                                                                           |       |   |   |   | 14,300 |   |   |

 

F-53

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

In order to utilize the tax credits and certain taxdeductibility opportunities earned by the Group’s entities, they have to complywith strict requirements as set out in the relevant tax regulations. Managementbelieves that the Group has complied with the requirements to recognize theseas deferred tax assets.

The tax authorities may atany time inspect the books and records within five years from the end of theyear when tax declarations were submitted and may impose additional tax assessmentswith penalties and penalty interest. Management is not aware of anycircumstances which may give rise to a potential material liability in thisrespect.

**10**             Inventories

| ** **                              | ** ** | **At December 31,**   | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **2005**                        | ** ** | **2006** | ** ** |
| ** **                              | ** ** | **(in HUF millions)** | ** ** |
| Cables, wires and other materials       |       | 3,493                           |       | 4,143 |   |
| Inventory for resale                    |       | 6,215                           |       | 7,473 |   |
| Subtotal                                |       | 9,708                           |       | 11,616 |   |
| Less allowances  for obsolete inventory |       | (1,294                          | )          | (1,156 | ) |
|                                    |       | 8,414                           |       | 10,460 |   |

 

**11**             Assetsheld for disposal

Assets held for disposalinclude land and buildings identified for sale, which is expected within 12 months,as a result of the continuing improvement of utilization of properties andheadcount reductions.

F-54

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**12**             Property, plant andequipment—net

| ** **                                   | ** ** | **Land and  related  rights** | ** ** | **Buildings** | ** ** | **Telecom.  equipment** | ** ** | **Other  equipment** | ** ** | **Total** | ** ** |
|----------------------------------------------|------------|------------------------------------|------------|---------------|------------|-------------------------|------------|----------------------|------------|-----------|------------|
| ** **                                   | ** ** | **(in HUF millions)**    | ** ** |
| **At January 1, 2005**                  | ** ** |                               | ** ** | ** **    |       |                    | ** ** | ** **           |       |      | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| Cost                                         |       |                               | 5,543      |          |       |                    | 112,328    |                 |       |      | 868,615    |   |   |   | 135,396 |   |   | 1,121,882 |   |
| Accumulated depreciation                     |       |                               | (1,629     | )             |       |                    | (20,756    | )                    |       |      | (428,763   | ) |   |   | (96,581 | ) |   | (547,729 | ) |
| Carrying amount                              |       |                               | 3,914      |          |       |                    | 91,572     |                 |       |      | 439,852    |   |   |   | 38,815 |   |   | 574,153 |   |
| Of which held for disposal                   |       |                               |       |          |       |                    |       |                 |       |      |       |   |   |   |   |   |   | (3,063 | ) |
| ** **                                   |       |                               |       |          |       |                    |       |                 |       |      |       |   |   |   |   |   |   | 571,090 |   |
| Carrying amount—January 1, 2005    |       |                               | 3,914      |          |       |                    | 91,572     |                 |       |      | 439,852    |   |   |   | 38,815 |   |   | 574,153 |   |
| Exchange differences                         |       |                               | 27         |          |       |                    | 500        |                 |       |      | 2,106      |   |   |   | 149 |   |   | 2,782 |   |
| Acquisitions                                 |       |                               | 1,226      |          |       |                    | 6,502      |                 |       |      | 19,116     |   |   |   | 1,843 |   |   | 28,687 |   |
| Additions                                    |       |                               | 185        |          |       |                    | 6,625      |                 |       |      | 54,194     |   |   |   | 14,701 |   |   | 75,705 |   |
| Disposals                                    |       |                               | (203       | )             |       |                    | (818       | )                    |       |      | (201       | ) |   |   | (313 | ) |   | (1,535 | ) |
| Impairment charge                            |       |                               | —     |          |       |                    | (75        | )                    |       |      | (199       | ) |   |   | (117 | ) |   | (391 | ) |
| Depreciation charge                          |       |                               | (214       | )             |       |                    | (3,137     | )                    |       |      | (76,916    | ) |   |   | (16,096 | ) |   | (96,363 | ) |
| Carrying amount—December 31,  2005 |       |                               | 4,935      |          |       |                    | 101,169    |                 |       |      | 437,952    |   |   |   | 38,982 |   |   | 583,038 |   |
| **At  December 31, 2005**               | ** ** |                               | ** ** | ** **    |       |                    | ** ** | ** **           |       |      | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| Cost                                         |       |                               | 6,743      |          |       |                    | 124,636    |                 |       |      | 931,111    |   |   |   | 143,832 |   |   | 1,206,322 |   |
| Accumulated depreciation                     |       |                               | (1,808     | )             |       |                    | (23,467    | )                    |       |      | (493,159   | ) |   |   | (104,850 | ) |   | (623,284 | ) |
| Carrying amount                              |       |                               | 4,935      |          |       |                    | 101,169    |                 |       |      | 437,952    |   |   |   | 38,982 |   |   | 583,038 |   |
| Of which held for disposal                   |       |                               |       |          |       |                    |       |                 |       |      |       |   |   |   |   |   |   | (2,302 | ) |
|                                         |       |                               |       |          |       |                    |       |                 |       |      |       |   |   |   |   |   |   | 580,736 |   |
| Carrying amount—January 1, 2006    |       |                               | 4,935      |          |       |                    | 101,169    |                 |       |      | 437,952    |   |   |   | 38,982 |   |   | 583,038 |   |
| Exchange differences                         |       |                               | 2          |          |       |                    | (14        | )                    |       |      | 194        |   |   |   | 37 |   |   | 219 |   |
| Acquisitions                                 |       |                               | —     |          |       |                    | 134        |                 |       |      | 518        |   |   |   | 1,321 |   |   | 1,973 |   |
| Additions                                    |       |                               | 123        |          |       |                    | 4 217      |                 |       |      | 57,070     |   |   |   | 13,005 |   |   | 74,415 |   |
| Disposals                                    |       |                               | (187       | )             |       |                    | (3,254     | )                    |       |      | (701       | ) |   |   | (394 | ) |   | (4,536 | ) |
| Impairment charge                            |       |                               | (85        | )             |       |                    | (174       | )                    |       |      | (1,404     | ) |   |   | (64 | ) |   | (1,727 | ) |
| Depreciation charge                          |       |                               | (172       | )             |       |                    | (3,400     | )                    |       |      | (78,151    | ) |   |   | (13,934 | ) |   | (95,657 | ) |
| Carrying amount—December 31,  2006 |       |                               | 4,616      |          |       |                    | 98,678     |                 |       |      | 415,478    |   |   |   | 38,953 |   |   | 557,725 |   |
| **At  December 31, 2006**               | ** ** |                               | ** ** | ** **    |       |                    | ** ** | ** **           |       |      | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| Cost                                         |       |                               | 6,654      |          |       |                    | 124,145    |                 |       |      | 972,654    |   |   |   | 154,113 |   |   | 1,257,566 |   |
| Accumulated depreciation                     |       |                               | (2,038     | )             |       |                    | (25,467    | )                    |       |      | (557,176   | ) |   |   | (115,160 | ) |   | (699,841 | ) |
| Carrying amount                              |       |                               | 4,616      |          |       |                    | 98,678     |                 |       |      | 415,478    |   |   |   | 38,953 |   |   | 557,725 |   |
| Of which held for disposal                   |       |                               |       |          |       |                    |       |                 |       |      |       |   |   |   |   |   |   | (6,825 | ) |
| ** **                                   |       |                               |       |          |       |                    |       |                 |       |      |       |   |   |   |   |   |   | 550,900 |   |

 

F-55

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

The closing balance of Property, plant and equipmentincludes assets in the course of construction in an amount of HUF 19,232million as at December 31, 2006 (2005: HUF 28,069 million). In the tableabove the assets in course of construction are shown in the categories wherethe capitalization is expected.

Acquisitions include the fair value of the assets ofthe companies that were acquired by Magyar Telekom in the reported years.

Additions to property, plant and equipment are shownnet of the investment tax credit related to broadband investments of HUF 3,109million in 2006 (2005: HUF 5,373 million). For more details, see Note 9.

Impairment losses charged in 2005 related to variousassets, the recoverable amounts of which were defined based on the respectiveassets’ fair value less cost to sell as these were found higher than theirvalue in use.

Impairment losses charged in 2006 relate to variousassets, the recoverable amounts of which were defined based on the respectiveassets’ values in use as these were found higher than their fair value lesscost to sell. Value in use was determined using discounted cashflow analyses.The discount rates used were in the range of 11.49-11.86% in 2006.

Included in buildings are assets sold and leased backunder finance lease conditions. At December 31, 2006 the gross book valueof the leased back assets is HUF 1,134 million (2005: HUF 752 million) and thenet book value is HUF 903 million (2005: HUF 645 million).

Included mainly in other equipment are assets leasedunder finance lease conditions. At December 31, 2006 the gross book valueof the leased assets is HUF 1,142 million and the net book value is HUF 1,057million. The Group had no such assets as at December 31, 2005.

Included in telecommunications equipment at December 31,2006 are assets leased under operating lease contracts to customers with agross book value of HUF 7,744 million (2005: HUF 5,657 million) and net book valueof HUF 2,125 million (2005: HUF 2,217 million). Depreciation for the year ofthese assets amounted to HUF 876 million (2005: HUF 934 million). The futureminimum lease payments receivable under these contracts are disclosed in Note33 (d).

As a result of the annual review of the useful life ofthe Group’s assets, the lives of certain assets were changed as of January 1,2006 due to technical obsolescence. These assets mainly included IT equipmentand software, and the change in life resulted in HUF 58 million higherdepreciation expense in 2006.

HUF 2,369 million of PPE has restricted titles as at December 31,2006 (2005: HUF 1,094 million), which serve as pledges for loans or otherborrowings.

F-56

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**13**             Intangible assets—net

| ** **                                   | ** ** | **Goodwill**                    | ** ** | **Software** | ** ** | **Concessions  and licenses** | ** ** | **Brand name** | ** ** | **Other** | ** ** | **Total** | ** ** |
|----------------------------------------------|------------|---------------------------------|------------|--------------|------------|------------------------------------|------------|---------------------|------------|-----------|------------|-----------|------------|
| ** **                                   | ** ** | **(in HUF millions)** | ** ** |
| **At January 1, 2005**                  |       |                            |       |         |       |                               |       |                |       |      |       |      |       |   |   |   |   |
| Cost                                         |       | 297,858                         |       | 90,101       |       |                               | 36,829     |                |       |      | 160        |      |       | 6,026 |   | 430,974 |   |
| Accumulated amortization                     |       | (70,938                         | )          | (50,019      | )          |                               | (7,877     | )                   |       |      | (24        | )         |       | (3,765 | ) | (132,623 | ) |
| Carrying amount                              |       | 226,920                         |       | 40,082       |       |                               | 28,952     |                |       |      | 136        |      |       | 2,261 |   | 298,351 |   |
| Carrying amount—January 1, 2005    |       | 226,920                         |       | 40,082       |       |                               | 28,952     |                |       |      | 136        |      |       | 2,261 |   | 298,351 |   |
| Exchange differences                         |       | 115                             |       | 336          |       |                               | 61         |                |       |      | 35         |      |       | 81 |   | 628 |   |
| Acquisitions                                 |       | 5,122                           |       | 1,698        |       |                               | 2,820      |                |       |      | 1,740      |      |       | 3,700 |   | 15,080 |   |
| Additions                                    |       | —                          |       | 16,705       |       |                               | —     |                |       |      | —     |      |       | 6,964 |   | 23,669 |   |
| Amortization charge                          |       | —                          |       | (14,676      | )          |                               | (2,055     | )                   |       |      | (278       | )         |       | (922 | ) | (17,931 | ) |
| Carrying amount—December 31,  2005 |       | 232,157                         |       | 44,145       |       |                               | 29,778     |                |       |      | 1,633      |      |       | 12,084 |   | 319,797 |   |
| **At  December 31, 2005**               |       |                            |       |         |       |                               |       |                |       |      |       |      |       |   |   |   |   |
| Cost                                         |       | 232,157                         |       | 110,038      |       |                               | 40,139     |                |       |      | 1 940      |      |       | 16,562 |   | 400,836 |   |
| Accumulated amortization                     |       | —                          |       | (65,893      | )          |                               | (10,361    | )                   |       |      | (307       | )         |       | (4,478 | ) | (81,039 | ) |
| Carrying amount                              |       | 232,157                         |       | 44,145       |       |                               | 29,778     |                |       |      | 1,633      |      |       | 12 084 |   | 319,797 |   |
| Carrying amount—January 1, 2006    |       | 232,157                         |       | 44,145       |       |                               | 29,778     |                |       |      | 1,633      |      |       | 12,084 |   | 319,797 |   |
| Exchange differences                         |       | (78                             | )          | 84           |       |                               | 4          |                |       |      | 71         |      |       | 27 |   | 108 |   |
| Acquisitions                                 |       | 13,070                          |       | 391          |       |                               | 177        |                |       |      | 1,418      |      |       | 5,308 |   | 20,364 |   |
| Additions                                    |       | —                          |       | 16,379       |       |                               | 7          |                |       |      | —     |      |       | 72 |   | 16,458 |   |
| Disposals                                    |       | —                          |       | (122         | )          |                               | —     |                |       |      | —     |      |       | — |   | (122 | ) |
| Impairment                                   |       | —                          |       | —       |       |                               | —     |                |       |      | (1,302     | )         |       | (44 | ) | (1,346 | ) |
| Amortization charge                          |       | —                          |       | (17,659      | )          |                               | (2,741     | )                   |       |      | (400       | )         |       | (2,719 | ) | (23,519 | ) |
| Carrying amount—December 31,  2006 |       | 245,149                         |       | 43,218       |       |                               | 27,225     |                |       |      | 1,420      |      |       | 14,728 |   | 331,740 |   |
| **At  December 31, 2006**               |       |                            |       |         |       |                               |       |                |       |      |       |      |       |   |   |   |   |
| Cost                                         |       | 245,149                         |       | 121,675      |       |                               | 40,705     |                |       |      | 1,578      |      |       | 20,339 |   | 429,446 |   |
| Accumulated amortization                     |       | —                          |       | (78,457      | )          |                               | (13,480    | )                   |       |      | (158       | )         |       | (5,611 | ) | (97,706 | ) |
| Carrying amount                              |       | 245,149                         |       | 43,218       |       |                               | 27,225     |                |       |      | 1,420      |      |       | 14,728 |   | 331,740 |   |

 

Acquisitions include the assets of the companies thatwere acquired by Magyar Telekom in the reported years and the goodwill arisingon these acquisitions.

The amortization expense as well as the impairmentlosses of intangible assets including goodwill is accounted for in thedepreciation and amortization line of the income statement.

The Group regularly carries out an impairment test ongoodwill in the last quarter of the financial years. We established in allcases that the carrying amount of goodwill allocated to the cash generatingunits did not suffer impairment as the recoverable amounts of the CGUs based onfair values determined using discounted projected cashflows proved to be higherthan the carrying values. Consequently, no goodwill impairment was charged inany of the reported years. The cashflows attributable to the national CGUs wereprojected for the coming ten years with terminal values determined.

F-57

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

The most significant amounts of goodwill are allocatedto the Hungarian and the Foreign operations of the Mobile segment. Beyond the 10-yearplanning period, the perpetual growth rates of these Mobile operations weredetermined from 0% to 2% depending on the country of operations. The weightedaverage cost of capital was determined at 10.54% for the Hungarian Mobileoperations, and in the range of 9.5% to 10.14% for the Foreign Mobileoperations depending on the country of operations.

Themost significant individual intangible assets as of December 31, 2006 arelisted in the table below.

| **Description**                             | ** ** | ** ** | ** ** | **Carrying amount  in HUF millions** | ** ** | **Remaining  useful life** | ** ** |
|---------------------------------------------|------------|------------|------------|-----------------------------------------------------|------------|---------------------------------|------------|
| ** **                                  | ** ** | ** ** | ** ** | **(years)**                                         | ** ** |
| Goodwill  allocated to Hungarian Mobile     |       |       | 161,935    |                                                |       |                            | —     |   |   |
| Goodwill  allocated to Foreign Mobile       |       |       | 45,803     |                                                |       |                            | —     |   |   |
| Goodwill  allocated to Hungarian Fixed line |       |       | 23,472     |                                                |       |                            | —     |   |   |
| Goodwill  allocated to Foreign Fixed line   |       |       | 13,939     |                                                |       |                            | —     |   |   |
| T-Mobile H UMTS  licence                    |       |       | 15,463     |                                                |       |                            | 13         |   |   |
| T-Mobile H DCS  1800 licence                |       |       | 7,413      |                                                |       |                            | 8          |   |   |
| Other intangible  assets                    |       |       | 63,715     |                                                |       |                            | 8          |   |   |
|                                        |       |       | 331,740    |                                                |       |                            |       |   |   |

 

**14**             Investments inassociates

| ** **                        | ** ** | **For the year ended  December 31,** | ** ** |
|-----------------------------------|------------|----------------------------------------------------------|------------|
| ** **                        | ** ** | **   2005   **             | ** ** | **   2006   ** | ** ** |
| ** **                        | ** ** | **(in HUF millions)**                          | ** ** |
| Opening balance  of associates    |       |                                                     | 5,750      |   |   |   | 5,020 |   |   |
| Capital injection to TSH          |       |                                                     | 669        |   |   |   | 205 |   |   |
| Share of associates’ profits |       |                                                     | 330        |   |   |   | 703 |   |   |
| Dividends                         |       |                                                     | (1,729     | ) |   |   | (157 | ) |   |
| Closing balance of  associates    |       |                                                     | 5,020      |   |   |   | 5,771 |   |   |

 

Thefollowing table shows the total assets and liabilities as at December 31,2006, and revenues and profit for the year ended December 31, 2006 of themajor associates of the Group.

| ** **          | ** ** | **Hunsat**                      | ** ** | **T-Systems  Hungary** | ** ** | **Magyar  RTL** | ** ** |
|---------------------|------------|---------------------------------|------------|------------------------|------------|-----------------|------------|
| ** **          | ** ** | **(in HUF millions)** | ** ** |
| Total assets        |       |                            | 1,173      |                   |       |            | 11,051     |   |   | 30,190 |   |
| Total liabilities   |       |                            | 1,073      |                   |       |            | 7,909      |   |   | 18,213 |   |
| Revenues            |       |                            | 3,494      |                   |       |            | 14,004     |   |   | 31,814 |   |
| Profit for the year |       |                            | 145        |                   |       |            | 21         |   |   | 3,340 |   |

 

The profit of T-SystemsHungary in 2006 includes the profit on the sale of a business unit to asubsidiary of its majority owner, T-Systems International in an amount of HUF418 million, the Group’s share of which was recognized directly in the Retainedearning of the Group. See more details in the Equity notes.

F-58

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**15**             Other non currentassets

| ** **                 | ** ** | **At December 31,**   | ** ** |
|----------------------------|------------|---------------------------------|------------|
| ** **                 | ** ** | **2005**                        | ** ** | **2006** | ** ** |
| ** **                 | ** ** | **(in HUF millions)** | ** ** |
| Finance lease  receivable  |       | —                          |       | 16,163 |   |
| Employee loans             |       | 4,089                           |       | 4,305 |   |
| Prepaid employee  benefits |       | —                          |       | 1,183 |   |
| Other                      |       | 2,014                           |       | 3,390 |   |
|                       |       | 6,103                           |       | 25,041 |   |

 

Other non current assets are either carried at fairvalue or at amortized cost, in which case it usually approximates fair value.

The Finance leasereceivable represents the long term portion of the finance lease receivablefrom the PMR services (Note 33 c).

**16**             Loansfrom related parties

Related party loans are taken from Deutsche TelekomInternational Finance (DTIF), the treasury vehicle of Deutsche Telekom Group,and are denominated in HUF.

Thetable below shows the details of the loans outstanding as at December 31,2006.

| ** **        | ** ** | **Carrying  amount**    | ** ** | **Interest rate  (%)** | ** ** | **Fixed /  variable** | ** ** | **Repayable** | ** ** |
|-------------------|------------|-------------------------|------------|-----------------------------|------------|----------------------------|------------|---------------|------------|
| ** **        | ** ** | **(HUF millions)** | ** ** | ** **                  | ** ** | ** **                 | ** ** | ** **    | ** ** |
|              |       |                    | 20,000     |                        |       |                       | 7.55       |          |       | fixed |   | Jan 2007 |   |
|              |       |                    | 14,000     |                        |       |                       | 10.20      |          |       | fixed |   | May 2007 |   |
|              |       |                    | 20,000     |                        |       |                       | 7.61       |          |       | fixed |   | May 2007 |   |
|              |       |                    | 20,000     |                        |       |                       | 7.45       |          |       | fixed |   | Dec 2007 |   |
| Due within 1 year |       |                    | 74,000     |                        |       |                       |       |          |       |   |   |   |   |
|              |       |                    | 5,000      |                        |       |                       | 9.68       |          |       | fixed |   | Sep 2009 |   |
|              |       |                    | 25,000     |                        |       |                       | 9.61       |          |       | fixed |   | Oct 2009 |   |
|              |       |                    | 20,000     |                        |       |                       | 7.53       |          |       | fixed |   | Oct 2009 |   |
|              |       |                    | 28,000     |                        |       |                       | 8.91       |          |       | variable |   | Oct 2009 |   |
|              |       |                    | 60,000     |                        |       |                       | 8.56       |          |       | fixed |   | May 2012 |   |
|              |       |                    | 47,432     |                        |       |                       | 8.35       |          |       | variable |   | Jan 2013 |   |
| Due after 1 year  |       |                    | 185,432    |                        |       |                       |       |          |       |   |   |   |   |
|              |       |                    | 259,432    |                        |       |                       |       |          |       |   |   |   |   |

 

F-59

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Thetable below shows the carrying amounts and fair values of the related partyloans

| ** **                 | ** ** | **At December 31,**   | ** ** |
|----------------------------|------------|---------------------------------|------------|
| ** **                 | ** ** | **2005**                        | ** ** | **2006** | ** ** |
| ** **                 | ** ** | **(in HUF millions)** | ** ** |
| ** **                 | ** ** | **Book value**             | ** ** | **Fair value** | ** ** | **Book value** | ** ** | **Fair value** | ** ** |
| Fixed rate                 |       |                            | 257,675    |   |   |   | 268,599 |   |   |   | 184,000 |   |   |   | 188,914 |   |   |
| Variable rate              |       |                            | 28,973     |   |   |   | 28,973 |   |   |   | 75,432 |   |   |   | 75,432 |   |   |
| Total related party  loans |       |                            | 286,648    |   |   |   | 297,572 |   |   |   | 259,432 |   |   |   | 264,346 |   |   |

 

The weighted average interest rate on related partyloans was 8.45% in 2006 (8.45% in 2005, 10.14% in 2004).

The majority of the Group’srelated party loans is subject to fixed interest rates that are exposed to fairvalue risk as it is stated in the table above. Any decrease of market interestrates will result in an increase of the fair value of the liabilities.

**17**             Loans and otherborrowings—third party

| ** **                        | ** ** | ** ** | ** ** | **At December 31,**   | ** ** |
|-----------------------------------|------------|------------|------------|---------------------------------|------------|
| ** **                        | ** ** | ** ** | ** ** | **2005**                        | ** ** | **2006** | ** ** |
| ** **                        | ** ** | ** ** | ** ** | **(in HUF millions)** | ** ** |
| Current bank loans                |       |       |       | 43,196                          |       | 28,846 |   |
| Non current bank loans            |       |       |       | 13,278                          |       | 18,250 |   |
| Total bank loans                  |       | (a)        |       | 56,474                          |       | 47,096 |   |
| Current other borrowings          |       |       |       | 406                             |       | 759 |   |
| Non current other borrowings      |       |       |       | 937                             |       | 2,447 |   |
| Total other  borrowings           |       | (b)        |       | 1,343                           |       | 3,206 |   |
|                              |       |       |       | 57,817                          |       | 50,302 |   |
| Total falling due within one year |       |       |       | 43,602                          |       | 29,605 |   |
| Total falling due  after one year |       |       |       | 14,215                          |       | 20,697 |   |
|                              |       |       |       | 57,817                          |       | 50,302 |   |

 

***(a) Bank loans***

At December 31,2006, principal repayments of bank loans fall due in: 

| ** **    | ** ** | **Maturity  As at December 31,** | ** ** |
|---------------|------------|-------------------------------------------------|------------|
| ** **    | ** ** | **2005**                                        | ** ** | **2006** | ** ** |
| **Year**      | ** ** | ** **                                      | ** ** | **(in HUF millions)** | ** ** |
| Within 1 year |       | 43,196                                          |       | 28,846 |   |
| 1-5 years     |       | 13,278                                          |       | 18,250 |   |
| After 5 years |       | —                                          |       | — |   |
|          |       | 56,474                                          |       | 47,096 |   |
|               |            |                                                 |            |  |  |  |  |

 

F-60

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

All bank loans are denominated in HUF. The weightedaverage interest rate on bank loans was 7.86% in 2006 (6.53% in 2005, 10.25% in2004).

Loans totaling HUF 17,708 million at December 31,2006 are revolving loans (2005: HUF 3,825 million) which can be prepaid atany time and may be drawn down in one to six month rolling periods.

Thefollowing table shows the weighted average interest rates of bank loans as at December 31,2006.

| ** **            | ** ** | **Maturities**                                                | ** ** | ** ** | ** ** |
|-----------------------|------------|---------------------------------------------------------------|------------|------------|------------|
| ** **            | ** ** | **2007**                                                      | ** ** | **2008**   | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| ** **            | ** ** | **(in HUF millions, except percentages)** | ** ** |
| Variable rate         |       | 25,474                                                        |       | 5,500      |       | 8,750 |   | 4,000 |   |   | — |   |   |   | — |   |   | 43,724 |   |
| Average interest rate |       | 7.4                                                           | %          | 8.47       | %          | 8.41 | % | 8.52 | % |   | — |   |   |   | — |   |   | 7.84 | % |
| Fixed rate            |       | 3,372                                                         |       | —     |       | — |   | — |   |   | — |   |   |   | — |   |   | 3,372 |   |
| Average interest rate |       | 8.14                                                          | %          | —     |       | — |   | — |   |   | — |   |   |   | — |   |   | 8.14 | % |
| Total                 |       | 28,846                                                        |       | 5,500      |       | 8,750 |   | 4,000 |   |   | — |   |   |   | — |   |   | 47,096 |   |

 

Thefollowing table compares the carrying values and the fair values of the Group’sbank loans.

| ** **       | ** ** | **At December 31,**   | ** ** |
|------------------|------------|---------------------------------|------------|
| ** **       | ** ** | **2005**                        | ** ** | **2006** | ** ** |
| ** **       | ** ** | **Book value**             | ** ** | **Fair value** | ** ** | **Book value** | ** ** | **Fair value** | ** ** |
| ** **       | ** ** | **(in HUF millions)** | ** ** |
| Fixed rate       |       |                            | 848        |   |   |   | 848 |   |   |   | 3,372 |   |   |   | 3,372 |   |   |
| Variable rate    |       |                            | 55,626     |   |   |   | 55,626 |   |   |   | 43,724 |   |   |   | 43,724 |   |   |
| Total bank loans |       |                            | 56,474     |   |   |   | 56,474 |   |   |   | 47,096 |   |   |   | 47,096 |   |   |

 

Variable interest rate loans are subject to interestscalculated based on mostly BUBOR (Budapest Inter-Bank Offered Rate) plus amargin interest formula.

The majority of the Group’sthird party loans and borrowings are subject to variable interest rates, whichare exposed to cashflow risks. If interest rates are rising, it results inhigher cash outflows through interest payments.

***(b) Other borrowings***

The majority of otherborrowings is finance lease payables. See Note 33 (a) for more detail.

***(c) Credit facilities and pledges***

At December 31, 2006,Magyar Telekom had un-drawn committed credit facilities of HUF 91,864 million.These credit facilities, should they be drawn down, are subject to an interestrate of LIBOR, BUBOR and commercial floating bank prime rates plus a margindepending on the currency and institution providing the facilities.

F-61

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**18**             Tradeand other payables

***(a) Currentliabilities***

| ** **                                 | ** ** | **At December 31,**   | ** ** |
|--------------------------------------------|------------|---------------------------------|------------|
| ** **                                 | ** ** | **2005**                        | ** ** | **2006** | ** ** |
| ** **                                 | ** ** | **(in HUF millions)** | ** ** |
| Domestic trade  payables                   |       | 58,292                          |       | 59,526 |   |
| Foreign trade  payables                    |       | 5,919                           |       | 7,486 |   |
| Salaries and  wages                        |       | 8,794                           |       | 7,222 |   |
| Other taxes and  social security           |       | 12,190                          |       | 13,162 |   |
| Amounts received  in advance               |       | 6,861                           |       | 6,603 |   |
| Accrued expenses  and prepayments received |       | 6,587                           |       | 9,965 |   |
| Accrued interest  to DTIF                  |       | 6,198                           |       | 3,756 |   |
| Accrued interest  to third parties         |       | 461                             |       | 298 |   |
| Amounts owed to  DT Group companies        |       | 3,567                           |       | 6,207 |   |
| Payable to  associates                     |       | 694                             |       | 1,287 |   |
| Dividend payable  to MagyarCom GmbH        |       | —                          |       | 45,074 |   |
| Dividends payable  to others               |       | 77                              |       | 31,091 |   |
| Other payables                             |       | 9,824                           |       | 8,912 |   |
| ** **                                 |       | 119,464                         |       | 200,589 |   |

 

Dividends payable increased significantly as theGeneral Meeting of Magyar Telekom approved the 2005 financial statements in December 2006,and the dividends approved were only paid in January 2007. In all prioryears these dividends were approved in April and almost entirely paidbefore the end of the financial year. The delay in 2006 was due to theinvestigation (Note 1.2).

Included in other payablesas at December 31, 2006 is an amount of HUF 4,590 million (2005: HUF 2,950million) potentially repayable to universal customers related to the reduced fixedto mobile termination charges (Note 34), which was accounted for as a reductionof revenues.

***(b) Non current liabilities***

The majority of Other noncurrent liabilities is the long term portion of payables in relation to theacquisition of a service contract in 2005 for the operation of a Hungariangovernmental backbone network. The total amount of these payables amount to HUF6,192 million as at December 31, 2006 (2005: HUF 6,098 million), the shortterm portion of which (HUF 1,075 million) is included in Trade and otherpayables (Other payables).

**19**             Deferredrevenue

Deferred revenue includesamounts collected for services to be delivered in future periods.

F-62

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**20**             Provision forliabilities and charges

| ** **                              | ** ** | **Severance**                   | ** ** | **Customer  loyalty  programs** | ** ** | **Legal cases** | ** ** | **Other** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|----------------------|------------|-----------|------------|-----------|------------|
| ** **                              | ** ** | **(in HUF millions)** | ** ** |
| January 1,  2005                   |       |                            | 13,022     |                            |       |                 | 1,785      |      |       |      | 3,160      |   |   | 331 |   | 18,298 |   |
| Acquired through  business combinations |       |                            | —     |                            |       |                 | —     |      |       |      | 173        |   |   | 1,778 |   | 1,951 |   |
| Amounts utilized  / retired             |       |                            | (10,721    | )                               |       |                 | (1,701     | )         |       |      | (2,945     | ) |   | (509 | ) | (15,876 | ) |
| Additions                               |       |                            | 1,328      |                            |       |                 | 1,823      |      |       |      | 2,257      |   |   | 177 |   | 5,585 |   |
| December 31,  2005                 |       |                            | 3,629      |                            |       |                 | 1,907      |      |       |      | 2,645      |   |   | 1,777 |   | 9,958 |   |
| January 1, 2006                    |       |                            | 3,629      |                            |       |                 | 1,907      |      |       |      | 2,645      |   |   | 1,777 |   | 9,958 |   |
| Acquired through  business combinations |       |                            | —     |                            |       |                 | —     |      |       |      | —     |   |   | 154 |   | 154 |   |
| Amounts utilized  / retired             |       |                            | (2,639     | )                               |       |                 | (1,837     | )         |       |      | (2,455     | ) |   | (1,145 | ) | (8,076 | ) |
| Additions                               |       |                            | 3,063      |                            |       |                 | 1,965      |      |       |      | 2,462      |   |   | 2,232 |   | 9,722 |   |
| December 31,  2006                 |       |                            | 4,053      |                            |       |                 | 2,035      |      |       |      | 2,652      |   |   | 3,018 |   | 11,758 |   |
| Less: non current portion               |       |                            | (220       | )                               |       |                 | (1,401     | )         |       |      | (411       | ) |   | (1,312 | ) | (3,344 | ) |
| Current provision                       |       |                            | 3,833      |                            |       |                 | 634        |      |       |      | 2,241      |   |   | 1,706 |   | 8,414 |   |

 

***(a) Severance***

The provision for severance as at December 31,2006 mostly relates to the employee terminations in 2007 in Macedonia andMontenegro. The long term portion relates to severances payable in 2008, inaccordance with the agreement made with employee representatives of MagyarTelekom Plc. in 2004.

771 employees were dismissed in 2006 (2005: 1600),related to which severance payments were made. The balance of provision as at December 31,2006 relates to 1,032 employees (2005: 600) primarily working in network andback office areas.

The total payments made inrelation to employee termination in 2006 amounted to HUF 6,099 million (2005:HUF 14,535 million), of which HUF 2,639 million (2005: HUF 10,721 million) wascharged against the provision for liabilities and charges as at December 31,2005, while the rest was recognized as employee related expense in 2006.

***(b) Customer loyalty***

Provision for customerloyalty programs includes the fair value of discount credits earned bycustomers that have not been utilized.

***(c) Legal cases***

Provisions for legal casesmainly include amounts expected to be paid to tax, regulatory and competitionauthorities as well as to ex-employees as a result of legal disputes. Thebalance also includes amounts expected to be paid as compensation for loss ofvalue of real estates of inhabitants allegedly caused by cellular base stationsinstalled on neighboring sites. There are numerous legal cases for whichprovisions were recognized, but none of these cases are individually material.

F-63

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***(d) Other provisions***

Other provisions as at December 31,2006 include asset retirement and guarantee obligations and further otherindividually small items.

**21**             Revenues—Fixed lineservices

| ** **                  | ** ** | **For the year ended December 31,** | ** ** |
|-----------------------------|------------|--------------------------------------------------------------|------------|
| ** **                  | ** ** | **2004**                                                     | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                  | ** ** | **(in HUF millions)**                              | ** ** |
| Voice retail                |       | 218,526                                                      |       | 197 679 |   | 182,280 |   |
| Voice wholesale             |       | 22,179                                                       |       | 25,579 |   | 28,691 |   |
| Internet                    |       | 30 138                                                       |       | 39 783 |   | 49 733 |   |
| Data                        |       | 24,931                                                       |       | 26,792 |   | 27,121 |   |
| System  integration—IT |       | 9,422                                                        |       | 9,023 |   | 24,679 |   |
| Multimedia                  |       | 13 364                                                       |       | 15 037 |   | 17 506 |   |
| Equipment                   |       | 4,834                                                        |       | 5,205 |   | 4,249 |   |
| Other revenues              |       | 8,589                                                        |       | 10,108 |   | 9,607 |   |
| Total Fixed line  revenues  |       | 331,983                                                      |       | 329,206 |   | 343,866 |   |

 

**22**             Revenues—Mobileservices

| ** **                | ** ** | **For the year ended December 31,** | ** ** |
|---------------------------|------------|--------------------------------------------------------------|------------|
| ** **                | ** ** | **2004**                                                     | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                | ** ** | **(in HUF millions)**                              | ** ** |
| Voice                     |       | 207,636                                                      |       | 225,003 |   | 240,285 |   |
| Non voice                 |       | 30,047                                                       |       | 36,539 |   | 40,258 |   |
| Equipment and  activation |       | 25,369                                                       |       | 23,472 |   | 25,280 |   |
| Other revenues            |       | 1,757                                                        |       | 834 |   | 21,507 |   |
| Total Mobile revenues     |       | 264,809                                                      |       | 285,848 |   | 327,330 |   |

 

Other revenues in 2006include the revenue from the sale of network assets (Note 33 c) constructed forthe PMR services commenced in 2006 and the services rendered on this network.The related costs of the sale of these network assets are included in Material costof equipment.

**23**             Employee relatedexpenses

| ** **                                                                        | ** ** | **For the year ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2004**                                                     | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                                        | ** ** | **(in HUF millions)**                              | ** ** |
| Short term benefits                                                               |       | 92,733                                                       |       | 90,605 |   | 92,638 |   |
| Share based payments (Note 24)                                                    |       | 70                                                           |       | 270 |   | 281 |   |
| Termination benefits                                                              |       | 20,180                                                       |       | 5,142 |   | 6,523 |   |
| Total before  capitalization                                                      |       | 112,983                                                      |       | 96,017 |   | 99,442 |   |
| Expenses  capitalized                                                             |       | (3,486                                                       | )          | (3,234 | ) | (4,189 | ) |
|                                                                              |       | 109,497                                                      |       | 92,783 |   | 95,253 |   |
| Total amount paid to  defined contribution plans (including social security) |       | 25,876                                                       |       | 21,797 |   | 21,737 |   |

 

F-64

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**24**             Share-basedcompensation

***(a)**Management share option plan***

On April 26, 2002, the annual Shareholders’Meeting approved the introduction of a new management share option plan andauthorized the Company’s Board of Directors to purchase 17 million “A” seriesregistered ordinary shares, each having a nominal value of HUF 100 as treasuryshares. Consequently, the Company issued 4,900,000 shares on July 1, 2002,which were repurchased immediately as treasury shares.

On July 1, 2002, the Company granted 3,964,600options to participants of the stock option plan at an exercise price of HUF933 for the first tranche (exercisable in 2003) and HUF 950 for the second andthird tranches (exercisable in 2004 and 2005). As the Company’s share price asquoted on the BÉT (Budapest Stock Exchange) on the grant date was HUF 833 pershare, there was no intrinsic value to the options. The options have a life offive years from the grant date, meaning that the options are forfeited withoutreplacement or compensation on June 30, 2007.

The option with respect to a maximum of one-third ofthe shares that can be purchased under the first tranche may be exercised from July 1,2003 until the end of the term. The option with respect to a maximum of afurther one-third of the shares that can be purchased under the second tranchemay be exercised from July 1, 2004 until the end of the term. The optionwith respect to the rest of the shares that can be purchased under the thirdtranche may be exercised from July 1, 2005 until the end of the term.

As the management share option plan does not fall intothe scope of IFRS 2—Share based Payments, the Group did not recognizecompensation expense in any of the periods.

Thetable below shows the movements in the number of management stock options inthousands.

| ** **                                    | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **Average exercise  price (HUF)** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|---------------------------------------------|------------|
| Opening number of  share options              |       | 3,655    |       | 3,207    |       | 1,929    |       |                                        | 944        |   |   |
| Number of share  options exercised            |       | —   |       | (991     | )          | (539     | )          |                                        | 944        |   |   |
| Forfeited share  options                      |       | (448     | )          | (287     | )          | (83      | )          |                                        | 944        |   |   |
| Closing number of  share options              |       | 3,207    |       | 1,929    |       | 1,307    |       |                                        | 944        |   |   |
| Number of exercisable  options at end of year |       | 2,138    |       | 1,929    |       | 1,307    |       |                                        | 944        |   |   |

 

The average share price onthe exercise dates in 2006 was HUF 1,060.

***(b)**The former CEO’s share option plan***

The former CEO of Magyar Telekom was granted shareoptions in 2000, 2001, 2002, 2003 and 2004. The exercise price of the optionswas determined in US dollars and the options had no intrinsic values on thegrant dates in 2000, 2001, 2002 and 2003, while those granted in 2004 had anintrinsic value of HUF 63 million. One third of the options granted vestedafter one year, another one third vested two years after the grant date, whilethe last third vested after three years. The options are exercisable for tenyears after the grant date. The Group recognized compensation expense in anamount of HUF 36 million in 2006 (2005: HUF 84 million) among employee relatedexpenses against equity (Reserve for equity settled share based transactions).

F-65

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Thetable below shows the details of the CEO’s share options.

| ** **                                                    | ** ** | **Options granted in year** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------|------------|------------|------------|
| ** **                                                    | ** ** | **2000**                                   | ** ** | **2001**   | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **Total** | ** ** |
| Number of options  granted (thousand)                         |       | 103                                        |       | 250        |       | 303 |   | 619 |   | 1,462 |   | 2,737 |   |
| Exercised  (thousand)—in 2005                            |       | —                                     |       | (250       | )          | (303 | ) | (413 | ) | (487 | ) | (1,453 | ) |
| Exercised  (thousand)—in 2006                            |       | —                                     |       | —     |       | — |   | (206 | ) | (975 | ) | (1,181 | ) |
| Outstanding  (thousand) at December 31, 2006             |       | 103                                        |       | —     |       | — |   | — |   | — |   | 103 |   |
| Exercisable  (thousand) at December 31, 2006             |       | 103                                        |       | —     |       | — |   | — |   | — |   | 103 |   |
| Exercise price in  USD                                        |       | 7.36                                       |       | 2.93       |       | 3.48 |   | 3.62 |   | 3.87 |   |   |   |
| Remaining contractual  life at December 31, 2006 (years) |       | 3.5                                        |       | —     |       | — |   | — |   | — |   |   |   |

 

In 2006, the former CEOresigned and exercised his remaining options from 2003 and 2004. Although thelast third of the 2004 grant would not have been exercisable, the resignationagreement concluded between the Company and the CEO allowed the earlyexercising of these 487 thousand options. Further, the settlement was concludedin cash even though the plan was originally intended as equity settled. Theoptions granted in 2000 remain exercisable with the original conditions. Theclosing share price on the exercise date was HUF 1,060.

***(c) Mid-termincentive plan (MTIP*)**

In 2004 Magyar Telekom launched a Mid Term IncentivePlan (MTIP) for its top management, whereby the targets to be achieved are basedon the performance of the Magyar Telekom share. The MTIP is a cash settled longterm incentive instrument which is planned to cover five years, with a newpackage being launched in each year, and with each tranche lasting for threeyears.

The first tranche of the program spans the periodbetween January 1, 2004 and December 31, 2006. The second tranche ofthe program spans the period between January 1, 2005 and December 31,2007, while the third tranche of the program spans the period between January 1,2006 and December 31, 2008. Participants include top and senior managersof the Group.

At the beginning of the plan each participant has anoffered bonus. This value will be paid out at the end of the plan, depending onthe achievement of the two fixed targets, an absolute Magyar Telekom sharespecific and a relative Index target.

The absolute performance target is achieved when theMagyar Telekom share price, adjusted for dividends paid during the tenure, ismore than 35 percent higher at the end of the lock–up period than at thebeginning of the plan. The basis of the calculation is the unweighted averageclosing price of the Magyar Telekom share at the Budapest Stock Exchange duringthe last 20 trading days before the beginning and the end of the plan. Theshare price calculated according to the above was HUF 755 at the grant date ofthe first tranche, HUF 843 at the grant date of the second tranche and HUF 949at the grant date of the third tranche.

The relative performance target is linked to the TotalReturn of the Magyar Telekom share compared to the performance of the Dow JonesEuro STOXX Total Return Index during the vesting period, each at the last 20trading days. Measurement is the unweighted average Magyar Telekom share priceplus dividend payments.

F-66

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

These target figures are weighted with theprobabilities of achieving these targets. The probability figures arecalculated using the Monte Carlo technique. The target figures are multipliedby the relevant probabilities and these amounts are then accrued for the giventranche period. This technique aims to determine the fair values of the shareoptions granted and present it in accordance with the accruals concept.

The 2004 program ended on December 31, 2006. Theabsolute performance target was met, while the relative target was not.

Total compensation expenseaccrued for the three tranches of the program as at December 31, 2006 isHUF 501 million (HUF 245 million expensed in 2006, HUF 186 million in 2005 andHUF 70 million in 2004). The expenses are included in employee related expensesrecognized against payables to employees.

**25**             Other operatingexpenses

| ** **                               | ** ** | **For the year ended December 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                               | ** ** | **2004**                                                     | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                               | ** ** | **(in HUF millions)**                              | ** ** |
| Materials,  maintenance and service fees |       | 58,104                                                       |       | 60,696 |   | 79,043 |   |
| Subcontractors  and agent commissions    |       | 17,942                                                       |       | 21,593 |   | 24,960 |   |
| Marketing                                |       | 22,189                                                       |       | 24,888 |   | 21,868 |   |
| Fees and levies                          |       | 11,813                                                       |       | 13,455 |   | 14,919 |   |
| Consulting                               |       | 7,082                                                        |       | 7,571 |   | 11,621 |   |
| Rental and  operating lease              |       | 6,716                                                        |       | 7,246 |   | 7,925 |   |
| Bad debt expense                         |       | 6,114                                                        |       | 6,266 |   | 5,066 |   |
| Other expenses                           |       | 4,617                                                        |       | 6,317 |   | 2,608 |   |
|                                     |       | 134,577                                                      |       | 148,032 |   | 168,010 |   |

 

Other expenses in 2005include HUF 2,059 million paid under four consulting contracts entered into bythe Group, as to which the Company has not been able to obtain sufficient evidencethat it or its subsidiaries received adequate value. This amount also includesthe operating tax implications of the payments as well. See Note 1.2 for moredetails.

**26****             Other operating income**

| ** **                                                                | ** ** | **For the year ended December 31,** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                | ** ** | **   2004   **                 | ** ** | **   2005   ** | ** ** | **   2006   ** | ** ** |
| ** **                                                                | ** ** | **(in HUF millions)**                              | ** ** |
| Compensation for  rebranding (Note 35)                                    |       |                                                         | 5,920      |   |   |   | 7,281 |   |   |   | 1,435 |   |   |
| Gain on sale of  PP&E, Intangible assets and assets held for disposal |       |                                                         | 1,201      |   |   |   | 728 |   |   |   | 2,140 |   |   |
|                                                                      |       |                                                         | 7,121      |   |   |   | 8,009 |   |   |   | 3,575 |   |   |

 

F-67

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**27**             Financeexpenses

| ** **                  | ** ** | **For the year ended December 31,** | ** ** |
|-----------------------------|------------|--------------------------------------------------------------|------------|
| ** **                  | ** ** | **2004**                                                     | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                  | ** ** | **(in HUF millions)**                              | ** ** |
| Interest expense            |       | 34,731                                                       |       | 31,340 |   | 27,325 |   |
| Other finance  expenses     |       | 3,183                                                        |       | 3,157 |   | 2,831 |   |
| Less: Interest  capitalized |       | —                                                       |       | — |   | (54 | ) |
|                        |       | 37,914                                                       |       | 34,497 |   | 30,102 |   |

 

The capitalization rateused to determine the amount of borrowing costs eligible for capitalization is3 month BUBOR + 0.17525%.

**28**             Finance income

| ** **                                                             | ** ** | **For the year ended December 31,** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **   2004   **                 | ** ** | **   2005   ** | ** ** | **   2006   ** | ** ** |
| ** **                                                             | ** ** | **(in HUF millions)**                              | ** ** |
| Gain on sale of  financial instruments                                 |       |                                                         | —     |   |   |   | — |   |   |   | 1,190 |   |   |
| Gain on sale of  subsidiary                                            |       |                                                         | 191        |   |   |   | — |   |   |   | 121 |   |   |
| Gains / (losses)  on the valuation of derivative financial instruments |       |                                                         | 647        |   |   |   | — |   |   |   | 377 |   |   |
| Net foreign  exchange gains / (losses)                                 |       |                                                         | (523       | ) |   |   | 1,014 |   |   |   | (659 | ) |   |
| Finance lease  interest income                                         |       |                                                         | —     |   |   |   | — |   |   |   | 480 |   |   |
| Interest and  other financial income                                   |       |                                                         | 1,453      |   |   |   | 1,982 |   |   |   | 3,183 |   |   |
|                                                                   |       |                                                         | 1,768      |   |   |   | 2,996 |   |   |   | 4,692 |   |   |

 

**29**             Cashgenerated from operations

| ** **                        | ** ** | **For the year ended December 31,** | ** ** |
|-----------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                        | ** ** | **2004**                                                     | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                        | ** ** | **(in HUF millions)**                              | ** ** |
| Profit for the  year              |       | 43,327                                                       |       | 88,725 |   | 87,464 |   |
| Income tax expense                |       | 16,142                                                       |       | 21,858 |   | 24,220 |   |
| Finance expenses                  |       | 37,914                                                       |       | 34,497 |   | 30,102 |   |
| Finance income                    |       | (1,768                                                       | )          | (2,996 | ) | (4,692 | ) |
| Share of associates’ profits |       | (1,896                                                       | )          | (330 | ) | (703 | ) |
| Depreciation and amortization     |       | 137,666                                                      |       | 114,686 |   | 122,249 |   |
| Change in payables                |       | (3,517                                                       | )          | 9,715 |   | 9,694 |   |
| Change in inventory               |       | 2,825                                                        |       | (303 | ) | (732 | ) |
| Change in receivables             |       | 7,180                                                        |       | (9,497 | ) | (19,532 | ) |
| Amortization of deferred revenue  |       | (1,758                                                       | )          | (1,503 | ) | (781 | ) |
| Other financial expenses paid     |       | (3,183                                                       | )          | (3,157 | ) | (3,604 | ) |
| Other cashflows from operations   |       | 12,841                                                       |       | (7,802 | ) | (6,797 | ) |
| Cash generated from  operations   |       | 245,773                                                      |       | 243,893 |   | 236,888 |   |

 

F-68

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**30**             Purchase of  property plant and equipment and intangibleassets

| ** **                                           | ** ** | **For the year ended December 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2004**                                                     | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                           | ** ** | **(in HUF millions)**                              | ** ** |
| Additions to property, plant and equipment           |       | 60,973                                                       |       | 75,705 |   | 74,415 |   |
| Additions to intangible assets                       |       | 34,177                                                       |       | 23,669 |   | 16,458 |   |
| Total additions  to tangible and intangible assets   |       | 95,150                                                       |       | 99,374 |   | 90,873 |   |
| Recognition of  investment tax credit (Note 9.2)     |       | 6,849                                                        |       | 5,373 |   | 3,109 |   |
| Change in  payables relating to capital expenditures |       | (10,251                                                      | )          | (1,160 | ) | 2,808 |   |
|                                                 |       | 91,748                                                       |       | 103,587 |   | 96,790 |   |

 

**31**             Purchase of subsidiariesand business units

| ** **                                         | ** ** | **For the year ended December 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                         | ** ** | **    2004    **     | ** ** | **    2005    ** | ** ** | **    2006    ** | ** ** |
| ** **                                         | ** ** | **(in HUF millions)**                              | ** ** |
| KFKI                                               |       |                                                         | —     |   |   |   | — |   |   |   | 9,840 |   |   |
| Dataplex                                           |       |                                                         | —     |   |   |   | — |   |   |   | 5,148 |   |   |
| Orbitel                                            |       |                                                         | —     |   |   |   | — |   |   |   | 1,982 |   |   |
| CGT                                                |       |                                                         | —     |   |   |   | 35,927 |   |   |   | — |   |   |
| T-Systems Hungary                                  |       |                                                         | 3,430      |   |   |   | — |   |   |   | — |   |   |
| Stonebridge /  MakTel                              |       |                                                         | 13,355     |   |   |   | — |   |   |   | 16,579 |   |   |
| Other                                              |       |                                                         | 488        |   |   |   | — |   |   |   | 1,778 |   |   |
| Total purchase of  subsidiaries and business units |       |                                                         | 17,273     |   |   |   | 35,927 |   |   |   | 35,327 |   |   |

 

Other items include theconsideration paid for smaller business combinations and for additional sharesof ownership in subsidiaries already consolidated.

**32**             Segmentinformation

Magyar Telekom has two primary segments, Fixed lineand Mobile services, both of which include Hungarian and Foreign operations.Certain disclosures below are extended to show further details on Fixed lineand Mobile segments accordingly. 

The Fixed line segment is the primarytelecommunications service provider in Hungary, Macedonia and Montenegro. To alesser extent, Magyar Telekom is also present through its subsidiaries inRomania, Bulgaria and Ukraine, providing alternative telecommunicationsservices. 

The Mobile segment provides digital services invarious frequency bandwidths in Hungary, Macedonia and Montenegro. 

Inter-segment pricing ison an arms’ length basis.

F-69

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***(a)**Primary reporting format***

Thefollowing tables present a summary of operating results of the Group bybusiness segment. The segments presented below are substantially consistentwith the format used by the Company’s Management Committee.

| ** **                                  | ** ** | **For the year ended December 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                  | ** ** | **    2004    **     | ** ** | **    2005    ** | ** ** | **    2006    ** | ** ** |
| ** **                                  | ** ** | **(in HUF millions)**                              | ** ** |
| **Revenues**                                |       |                                                         |       |   |   |   |   |
| Fixed line—Hungary                     |       | 298,707                                                      |       | 284,985 |   | 292,193 |   |
| Fixed line—Foreign operations          |       | 45,693                                                       |       | 57,983 |   | 68,953 |   |
|                                        |       | 344,400                                                      |       | 342,968 |   | 361,146 |   |
| Less: intra-segment revenue                 |       | (1,271                                                       | )          | (2,284 | ) | (3,569 | ) |
| Total revenue of  Fixed line segment        |       | 343,129                                                      |       | 340,684 |   | 357,577 |   |
| Less: revenue from Mobile segment           |       | (11,146                                                      | )          | (11,478 | ) | (13,711 | ) |
| Fixed line revenue  from external customers |       | 331,983                                                      |       | 329,206 |   | 343,866 |   |
| Mobile—Hungary                         |       | 260,568                                                      |       | 266,217 |   | 297,209 |   |
| Mobile—Foreign operations              |       | 33,734                                                       |       | 42,693 |   | 52,399 |   |
|                                        |       | 294,302                                                      |       | 308,910 |   | 349,608 |   |
| Intra-segment  revenue                      |       | (58                                                          | )          | (27 | ) | (42 | ) |
| Total revenue of  Mobile segment            |       | 294,244                                                      |       | 308,883 |   | 349,566 |   |
| Less: revenue from Fixed line segment       |       | (29,435                                                      | )          | (23,035 | ) | (22,236 | ) |
| Mobile revenue  from external customers     |       | 264,809                                                      |       | 285,848 |   | 327,330 |   |
| Total revenue of  the Group                 |       | 596,792                                                      |       | 615,054 |   | 671,196 |   |

 

F-70

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

| ** **                                       | ** ** | **For the year ended December 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                       | ** ** | **    2004    **     | ** ** | **    2005    ** | ** ** | **    2006    ** | ** ** |
| ** **                                       | ** ** | **(in HUF millions)**                              | ** ** |
| **Depreciation and amortization**                |       |                                                         |       |   |   |   |   |
| Amortization of goodwill—Hungary            |       | 1,601                                                        |       | — |   | — |   |
| Amortization of goodwill—Foreign operations |       | 684                                                          |       | — |   | — |   |
| Impairment of tangible and intangible assets     |       | 5,355                                                        |       | 316 |   | 2,457 |   |
| Other depreciation and amortization              |       | 74,021                                                       |       | 71,579 |   | 72,617 |   |
| Fixed line  segment                              |       | 81,661                                                       |       | 71,895 |   | 75,074 |   |
| Amortization of goodwill—Hungary            |       | 9,540                                                        |       | — |   | — |   |
| Amortization of goodwill—Foreign operations |       | 2,051                                                        |       | — |   | — |   |
| Impairment of tangible and intangible assets     |       | 4,426                                                        |       | 75 |   | 616 |   |
| Other depreciation and amortization              |       | 39,988                                                       |       | 42,716 |   | 46,559 |   |
| Mobile segment                                   |       | 56,005                                                       |       | 42,791 |   | 47,175 |   |
| Total depreciation and amortization of the Group |       | 137,666                                                      |       | 114,686 |   | 122,249 |   |
| **Segment  results (Operating profit)**          |       |                                                         |       |   |   |   |   |
| Fixed line—Hungary                          |       | 17,941                                                       |       | 45,269 |   | 32,128 |   |
| Share of associates’ profits—(Hungary) |       | 1,896                                                        |       | 330 |   | 703 |   |
| Fixed line—Foreign operations               |       | 7,024                                                        |       | 8,961 |   | 11,492 |   |
| Fixed line  segment                              |       | 26,861                                                       |       | 54,560 |   | 44,323 |   |
| Mobile—Hungary                              |       | 59,707                                                       |       | 75,219 |   | 75,677 |   |
| Mobile—Foreign operations                   |       | 9,047                                                        |       | 12,305 |   | 17,095 |   |
| Mobile segment                                   |       | 68,754                                                       |       | 87,524 |   | 92,772 |   |
| Less: Share of associates’ profits          |       | (1,896                                                       | )          | (330 | ) | (703 | ) |
| Total operating  profit of the Group             |       | 93,719                                                       |       | 141,754 |   | 136,391 |   |

 

F-71

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

| ** **                       | ** ** | ** ** | ** ** | **At December 31,**   | ** ** |
|----------------------------------|------------|------------|------------|---------------------------------|------------|
| ** **                       | ** ** | ** ** | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                       | ** ** | ** ** | ** ** | **(in HUF millions)** | ** ** |
| **Assets**                       |       |       |       |                            |       |   |   |   |   |
| Goodwill—Hungary            |       |       |       | 13,655                          |       | 13,655 |   | 23,472 |   |
| Goodwill—Foreign operations |       |       |       | 12,972                          |       | 12,972 |   | 13,939 |   |
| Associates                       |       |       |       | 5,750                           |       | 5,020 |   | 5,771 |   |
| Assets held for disposal         |       |       |       | 3,063                           |       | 2,302 |   | 5,937 |   |
| Other assets                     |       |       |       | 519,841                         |       | 541,239 |   | 513,703 |   |
| Fixed line  segment              |       |       |       | 555,281                         |       | 575,188 |   | 562,822 |   |
| Goodwill—Hungary            |       |       |       | 161,374                         |       | 161,374 |   | 161,935 |   |
| Goodwill—Foreign operations |       |       |       | 38,918                          |       | 44,156 |   | 45,803 |   |
| Associates                       |       |       |       | —                          |       | — |   | — |   |
| Assets held for disposal         |       |       |       | —                          |       | — |   | 888 |   |
| Other assets                     |       |       |       | 226,754                         |       | 247,872 |   | 269,119 |   |
| Mobile segment                   |       |       |       | 427,046                         |       | 453,402 |   | 477,745 |   |
| Inter-segment elimination        |       |       |       | (8,404                          | )          | (8,347 | ) | (3,122 | ) |
| Total segment  assets            |       |       |       | 973,923                         |       | 1,020,243 |   | 1,037,445 |   |
| Unallocated  assets              |       | (a)        |       | 55,645                          |       | 62,705 |   | 94,150 |   |
| Total assets of  the Group       |       |       |       | 1,029,568                       |       | 1,082,948 |   | 1,131,595 |   |
| **Liabilities**                  |       |       |       |                            |       |   |   |   |   |
| Fixed line segment               |       |       |       | 88,711                          |       | 90,170 |   | 172,389 |   |
| Mobile segment                   |       |       |       | 50,604                          |       | 54,305 |   | 52,044 |   |
| Inter-segment  elimination       |       |       |       | (8,404                          | )          | (8,347 | ) | (3,122 | ) |
| Total segment  liabilities       |       |       |       | 130,911                         |       | 136,128 |   | 221,311 |   |
| Unallocated liabilities          |       | (b)        |       | 321,993                         |       | 349,126 |   | 317,117 |   |
| Total liabilities of the  Group  |       |       |       | 452,904                         |       | 485,254 |   | 538,428 |   |

(a)           Unallocated assets include cash and cash equivalentsand current and deferred income tax assets

(b)          Unallocated liabilities include loans and otherborrowings and current and deferred income tax liabilities

| ** **                                           | ** ** | **For the year ended December 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2004**                                                     | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                           | ** ** | **(in HUF millions)**                              | ** ** |
| **Capital expenditure on PPE and Intangible assets** | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Additions to Goodwill                                |       | 2,958                                                        |       | — |   | 11,777 |   |
| Other additions due to  business combinations        |       | 832                                                          |       | 26,195 |   | 9,267 |   |
| Purchases of tangible  and intangible assets         |       | 38,351                                                       |       | 53,052 |   | 49,645 |   |
| Fixed line segment                                   |       | 42,141                                                       |       | 79,247 |   | 70,689 |   |
| Additions to Goodwill                                |       | 5,717                                                        |       | 5,122 |   | 1,293 |   |
| Other additions due to  business combinations        |       | —                                                       |       | 12,450 |   | — |   |
| Purchases of tangible  and intangible assets         |       | 56,799                                                       |       | 46,322 |   | 41,228 |   |
| Mobile segment                                       |       | 62,516                                                       |       | 63,894 |   | 42,521 |   |
| Total Group                                          |       | 104,657                                                      |       | 143,141 |   | 113,210 |   |

 

F-72

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***(b)**Secondary reporting format***

MagyarTelekom’s Fixed line and Mobile segments operate in Hungary, Macedonia andMontenegro. The Group also has Fixed line points of presence in Romania,Bulgaria and Ukraine, which are shown in one amount in the table below. Thegeographical segment reporting information is included in the tables below.

| ** **                                            | ** ** | **For the year ended December 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                            | ** ** | **2004**                                                     | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                            | ** ** | **(in HUF millions)**                              | ** ** |
| **Revenues**                                          |       |                                                         |       |   |   |   |   |
| Revenue generated in  Hungary                         |       | 529,059                                                      |       | 526,947 |   | 565,770 |   |
| Less: inter-segment  revenue                          |       | (682                                                         | )          | (1,020 | ) | (2,254 | ) |
| Revenue from external  customers—Hungary         |       | 528,377                                                      |       | 525,927 |   | 563,516 |   |
| Revenue generated in  Macedonia                       |       | 68,352                                                       |       | 67,547 |   | 74,056 |   |
| Less: inter-segment  revenue                          |       | (283                                                         | )          | (311 | ) | (760 | ) |
| Revenue from external  customers—Macedonia       |       | 68,069                                                       |       | 67,236 |   | 73,296 |   |
| Revenue generated in  Montenegro                      |       | —                                                       |       | 20,521 |   | 30,683 |   |
| Less: inter-segment  revenue                          |       | —                                                       |       | (62 | ) | (229 | ) |
| Revenue from external  customers—Montenegro      |       | —                                                       |       | 20,459 |   | 30,454 |   |
| Revenue generated in  other countries                 |       | 509                                                          |       | 2,133 |   | 4,784 |   |
| Less: inter-segment  revenues                         |       | (163                                                         | )          | (701 | ) | (854 | ) |
| Revenue from external  customers—other countries |       | 346                                                          |       | 1,432 |   | 3,930 |   |
| Total revenue of the Group                            |       | 596,792                                                      |       | 615,054 |   | 671,196 |   |

 

| ** **                                            | ** ** | **For the year ended December 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                            | ** ** | **2004**                                                     | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                            | ** ** | **(in HUF millions)**                              | ** ** |
| **Capital  expenditure on PPE and Intangible assets** | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Additions to Goodwill                                 |       | 1,001                                                        |       | — |   | 10,377 |   |
| Other additions due to business combinations          |       | 832                                                          |       | — |   | 9,138 |   |
| Purchases of tangible and intangible assets           |       | 84,191                                                       |       | 84,764 |   | 77,875 |   |
| Hungary                                               |       | 86,024                                                       |       | 84,764 |   | 97,390 |   |
| Additions to Goodwill                                 |       | 7,624                                                        |       | — |   | 1,724 |   |
| Other additions due to business combinations          |       | —                                                       |       | — |   | — |   |
| Purchases of tangible and intangible assets           |       | 10,756                                                       |       | 9,052 |   | 7,340 |   |
| Macedonia                                             |       | 18,380                                                       |       | 9,052 |   | 9,064 |   |
| Additions to Goodwill                                 |       | —                                                       |       | 5,122 |   | — |   |
| Other additions due to business combinations          |       | —                                                       |       | 38,645 |   | — |   |
| Purchases of tangible and intangible assets           |       | —                                                       |       | 4,278 |   | 3,541 |   |
| Montenegro                                            |       | —                                                       |       | 48,045 |   | 3,541 |   |
| Additions to Goodwill                                 |       | 50                                                           |       | — |   | 969 |   |
| Other additions due to business combinations          |       | —                                                       |       | — |   | 129 |   |
| Purchases of tangible and intangible assets           |       | 203                                                          |       | 1,280 |   | 2,117 |   |
| Other countries                                       |       | 253                                                          |       | 1,280 |   | 3,215 |   |
| Total Group                                           |       | 104,657                                                      |       | 143,141 |   | 113,210 |   |

 

F-73

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

| ** **                 | ** ** | ** ** | ** ** | **At December 31,**   | ** ** |
|----------------------------|------------|------------|------------|---------------------------------|------------|
| ** **                 | ** ** | ** ** | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                 | ** ** | ** ** | ** ** | **(in HUF millions)** | ** ** |
| **Assets**                 | ** ** | ** ** |       |                            |       |   |   |   |   |
| Hungary                    |       |       |       | 822,742                         |       | 817,984 |   | 846,969 |   |
| Macedonia                  |       |       |       | 151,215                         |       | 146,867 |   | 139,835 |   |
| Montenegro                 |       |       |       | —                          |       | 54,541 |   | 49,331 |   |
| Other countries            |       |       |       | 961                             |       | 2,758 |   | 7,671 |   |
| Total                      |       |       |       | 974,918                         |       | 1,022,150 |   | 1,043,806 |   |
| Inter-segment elimination  |       |       |       | (995                            | )          | (1,907 | ) | (6,361 | ) |
| Total segment  assets      |       |       |       | 973,923                         |       | 1,020,243 |   | 1,037,445 |   |
| Unallocated assets         |       | (a)        |       | 55,645                          |       | 62,705 |   | 94,150 |   |
| Total assets of the  Group |       |       |       | 1,029,568                       |       | 1,082,948 |   | 1,131,595 |   |

 

(a)           Unallocated assets include cash and cash equivalentsand current and deferred income tax assets

**33**             Commitments

***(a) Financelease—Group as lessee***

Finance leases in 2005 and 2006 relate to the sale andlease back of spaces in buildings accommodating telephone exchanges. Theaverage contract term of these leases is 10 years, and the contracts includerenewal options but no purchase options.

Futurelease payments under finance leases related to sale and lease back transactionsat December 31, 2005 and 2006 are as follows:

| ** **                                 | ** ** | **2005**   | ** ** | **2006**           | ** ** |
|--------------------------------------------|------------|------------|------------|--------------------|------------|
| **Amounts in HUF millions** | ** ** | ** ** | ** ** | **Present  value** | ** ** | **Interest  component** | ** ** | **Minimum  lease  payment** | ** ** | **Present  value** | ** ** | **Interest  component** | ** ** | **Minimum  lease  payment** | ** ** |
| Within 1 year                              |       |       | 51         |               |       |   | 160 |   |   |   | 211 |   |   |   | 124 |   |   |   | 274 |   |   |   | 398 |   |   |
| 1-5 years                                  |       |       | 336        |               |       |   | 519 |   |   |   | 855 |   |   |   | 668 |   |   |   | 794 |   |   |   | 1,462 |   |   |
| After 5 years                              |       |       | 474        |               |       |   | 265 |   |   |   | 739 |   |   |   | 585 |   |   |   | 280 |   |   |   | 865 |   |   |
| Total                                      |       |       | 861        |               |       |   | 944 |   |   |   | 1,805 |   |   |   | 1,377 |   |   |   | 1,348 |   |   |   | 2,725 |   |   |
|                                            |            |            |            |                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Finance leases other than sale and lease back in 2006mainly relate to vehicles and IT equipment. The average contract term of theleases is 3-5 years. No such finance leases existed at December 31,2005.

Futurelease payments under finance leases other than sale and lease back transactionsat December 31, 2006 are as follows:

| ** **                                 | ** ** | **At December 31, 2005** | ** ** | **At December 31, 2006** | ** ** |
|--------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| **Amounts in HUF millions** | ** ** | ** **                              | ** ** | **Present  value**                      | ** ** | **Interest  component** | ** ** | **Minimum  lease  payment** | ** ** | **Present  value** | ** ** | **Interest  component** | ** ** | **Minimum  lease  payment** | ** ** |
| Within 1 year                              |       |                                    | —     |                                    |       |   | — |   |   |   | — |   |   |   | 288 |   |   |   | 99 |   |   |   | 387 |   |   |
| 1-5 years                                  |       |                                    | —     |                                    |       |   | — |   |   |   | — |   |   |   | 1,071 |   |   |   | 129 |   |   |   | 1,200 |   |   |
| After 5 years                              |       |                                    | —     |                                    |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Total                                      |       |                                    | —     |                                    |       |   | — |   |   |   | — |   |   |   | 1,359 |   |   |   | 228 |   |   |   | 1,587 |   |   |
|                                            |            |                                         |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***(b) Operatinglease—Group as lessee***

Operatinglease commitments are mainly in respect of the rental of cell sites, and to alesser extent, related to buildings, network and other telecommunicationsfacilities.

| ** **                                 | ** ** | **At December 31,** | ** ** |
|--------------------------------------------|------------|-------------------------------|------------|
| **Amounts in HUF millions** | ** ** | ** **                    | ** ** | **2005** | ** ** | **2006** | ** ** |
| Within 1 year                              |       | 5,410                         |       | 6,869 |   |
| 1-5 years                                  |       | 13,903                        |       | 18,813 |   |
| After 5 years                              |       | 10,494                        |       | 17,667 |   |
| Total                                      |       | 29,807                        |       | 43,349 |   |
|                                            |            |                               |            |  |  |  |  |

 

The lease commitmentsrepresent a high amount of individually immaterial lease agreements, the termsof which vary on a wide range, spanning from 3 to 20 years with renewal optionsin most cases.

***(c)**Finance lease—Group as lessor***

The Group won a governmental tender in Hungary in 2005to build and operate a Professional Mobile Network (PMR) for the emergencyservices of the country. As the service is provided to one buyer, the HungarianGovernment, and required the construction of a customer specific asset, theGroup analyzed the revenue to be generated over the coming 9 years to accountfor the sale type lease of the network separately from the continuoustelecommunications services to be provided.

Thetable below shows the lease receivables during the term of the agreement.

| ** **                                 | ** ** | **At December 31, 2005** | ** ** | **At December 31, 2006** | ** ** |
|--------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| **Amounts in HUF millions** | ** ** | ** **                              | ** ** | **Present  value**                      | ** ** | **Interest  component** | ** ** | **Minimum  lease  receipt** | ** ** | **Present  value** | ** ** | **Interest  component** | ** ** | **Minimum  lease  receipt** | ** ** |
| Within 1 year                              |       |                                    | —     |                                    |       |   | — |   |   |   | — |   |   | 1,856 |   |   | 1,330 |   |   |   | 3,186 |   |   |
| 1-5 years                                  |       |                                    | —     |                                    |       |   | — |   |   |   | — |   |   | 8,907 |   |   | 4,690 |   |   |   | 13,597 |   |   |
| After 5 years                              |       |                                    | —     |                                    |       |   | — |   |   |   | — |   |   | 7,256 |   |   | 902 |   |   |   | 8,158 |   |   |
| Total                                      |       |                                    | —     |                                    |       |   | — |   |   |   | — |   |   | 18,019 |   |   | 6,922 |   |   |   | 24,941 |   |   |
|                                            |            |                                         |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The interest componentrepresents the unearned finance income. The present value due within one yearis included in Current assets (Other financial assets), while the present valueafter one year is included in Other non current assets. The finance incomeaccruing to the Group over the lease term is recognized in the income statement(Finance income).

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***(d)**Operating lease—Group as lessor***

Thefollowing table sets forth the future minimum lease payments receivable by theGroup for the operating leases of PBX equipment where Magyar Telekom is thelessor.

| ** **                                 | ** ** | **At December 31,  2006** | ** ** |
|--------------------------------------------|------------|-------------------------------------|------------|
| **Amounts in HUF millions** | ** ** | ** **                          | ** ** | **Minimum lease  receipt** | ** ** |
| Within 1 year                              |       |                                | 1,508      |   |   |
| 1-5 years                                  |       |                                | 1,664      |   |   |
| After 5 years                              |       |                                | 38         |   |   |
| Total                                      |       |                                | 3,210      |   |   |
|                                            |            |                                     |            |  |  |  |  |

* *

***(e)**Purchase commitments for tangible assets***

As of December 31,2006, Magyar Telekom had contractual commitments for capital expenditures ofHUF 6.3 billion (HUF 3.2 billion in 2005, HUF 6.1 billion in 2004) falling duewithin 1 year.

***(f)**Purchase commitments for investments***

In December 2006, Magyar Telekom agreed toacquire a 100% stake in MobilPress. The transaction was closed on January 25,2007. See Note 5.1.6 for more details.

As agreed in December 2006,the Company signed a sale-purchase agreement to acquire an additional 2%ownership in TSH effective from January 1, 2007 for a purchase price ofHUF 60 million. TSH has been an associate of the Group since September 2004.

**34**             Contingencies

**Mobile terminationcharges in Hungary**

Magyar Telekom’s most significant contingency isrelated to the fixed to mobile termination charges in Hungary.

The Hungarian National Communications Authority (NHH)published several decisions in 2004 and 2005 as to how the termination chargesof the fixed to mobile calls should be reduced in the interconnect contracts ofthe fixed line and mobile telecom operators. Both SMP mobile telecom operatorsappealed against the decisions at court and in most cases did not change theircontracts with the fixed line telecom operators.

As the interconnect contracts were not amended toreflect the appealed decisions of the NHH, the fixed line operators did notchange their charges to their customers for the fixed to mobile calls. There isa high level of uncertainty as to whether any of these NHH decisions will befound properly established by the Hungarian Court. If so, it is also uncertainas of when these new interconnect rates should be applied and whetherretrospectively or prospectively and whether the fixed line telecom operatorscan be forced to repay the difference to their customers for these calls.

These consolidatedfinancial statements reflect the Group’s estimate of the most probable outcome.Thereby the fixed line operators can be forced to repay the difference only totheir customers with universal packages, while the interconnect charges betweenthe fixed line and mobile companies are 

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

accruedbased on the fees required by the NHH decisions, regardless of the actualamounts invoiced, the difference being treated as payables.

**CA procedure against Maktel for abusing dominantposition on the market for access to the network for data transmission andleased lines**

A procedure has been initiated by the CompetitionAuthority’s (“CA”) upon a complaint from UNET (Macedonian ISP) stating that itis not possible to make a competitive offer of Digital Leased Line (“DLL”)service since Maktel has no wholesale offer. Maktel presented evidence beforethe CA arguing that the lack of a wholesale offer was due to the absence of anofficial request from any operator or service provider up to that point andthere had been no relevant statutory obligation. Maktel proposed that UNET’srequest should be refused because there is no legal ground for such a case.

Maktel provided the datarequested by the CA. If the CA will not accept the proposal of Maktel on UNET’srequest to be refused, the worst case penalty is up to 10 percent of Maktel’sannual revenue. It is possible, that Maktel will lose the case, however, theprobability of CA’s imposing the highest possible amount is low. There is noprecedence regarding the imposing of fines.

***Administrative fee—abuse of dominant position byMaktel***

On February 27, 2006, the Macedonian Commissionfor Protection of Competition (“CPC”) started a procedure against Maktel with acomplaint that in its invoices for telecommunication services from March 2005onwards Maktel charges subscribers an administrative fee of two percent on thetraffic, which—according to the CPC—raises serious suspicion that Maktel abusesits dominant market position. Maktel in its answer stated that itsadministrative fee does not amount to the abuse of its dominant market position.The CPC enacted a first instance decision that Maktel should stop charging thetwo percent, which was upon appeal.  Maktel has challenged to the Supreme Court.

Starting from June 2006, Maktel stopped chargingthe two percent administrative fee and decided to impose a fixed charge forcovering the costs for preparation of the bill, based on the rationale that theCPC’s decision prohibited only charging the two percent fee and not anadministrative fee as such. Following the introduction of the fixed charge, CPCstarted a new procedure against Maktel relating to fixed amount administrativefee. Maktel had unsuccessful appeals against both the first and the secondinstance decisions of the CPC. Currently the parties are waiting for thedecision of the Supreme Court in this case as well.

Maktel is also subject toa misdemeanor procedure has been initiated ex officio on account of the abuseof dominant market position for charging the administrative fee. The maximumamount of fine that might be imposed on Maktel is up to 10 percent of theaggregate annual turnover of the company, realized in the business yearpreceding the year when the misdemeanor has been committed. However the amountof the penalty that could be imposed can not be assessed reliably, therefore noprovision was recorded for this purpose.

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**35**             Relatedparty transactions

All transactions withrelated parties are on an arm’s length basis.

***(a)**Deutsche Telekom Group***

Deutsche Telekom AG is the ultimate controlling ownerof Magyar Telekom Plc. holding 59.21% of the issued shares. Deutsche Telekom(DT) Group has a number of fixed line and mobile telecom service providersubsidiaries worldwide, with whom Magyar Telekom Group has regulartransactions.

The Company is directly owned by MagyarCom GmbH, whichis a holding company of DTAG. Magyar Telekom pays dividends annually to itsowners including MagyarCom GmbH.

MagyarCom Services Kft., a Hungarian company owned byDeutsche Telekom, provides Magyar Telekom with management and consultingservices.

Deutsche Telekom International Finance (DTIF) is thetreasury vehicle of DT Group, which provides loan financing across the DT Groupincluding Magyar Telekom.

The Company’s Hungarian mobile subsidiary, Westel wasrenamed as T-Mobile Hungary during 2004, while other Hungarian companies wererenamed in 2005. The renaming continued in 2006 in Macedonia and Montenegro.The expenditures incurred in connection with the launch and promotion of thenew brands and the loss of value caused by discontinuing the old brands werecompensated in value by Deutsche Telekom AG. The compensation received wasrecognized in the income statement (Other operating income).

Thetable below summarizes the above related party transactions with DT group.

| ** **                                                 | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2006** | ** ** |
|------------------------------------------------------------|------------|---------------------------------|------------|----------|------------|----------|------------|
| ** **                                                 | ** ** | **(in HUF millions)** | ** ** |
| Revenues from  telecom services provided to DT Group       |       | 9,548                           |       | 8,056    |       | 7,127    |       |
| Costs of telecommunications services provided by DT  Group |       | (9,560                          | )          | (11,303  | )          | (13,016  | )          |
| Consulting  expenses to MagyarCom Services Kft.            |       | (1,488                          | )          | (1,140   | )          | (918     | )          |
| Other income from  DTAG                                    |       | 5,920                           |       | 7,281    |       | 1,435    |       |
| Interest expense to DTIF                                   |       | (23,271                         | )          | (24,518  | )          | (21,389  | )          |
| Dividends paid to MagyarCom GmbH                           |       | (43,222                         | )          | (43,222  | )          | —   |       |
| Dividend payable  to MagyarCom GmbH                        |       | —                          |       | —   |       | (45,074  | )          |
| Accounts receivable from DT Group                          |       | 1,396                           |       | 3,711    |       | 7,991    |       |
| Accounts payable to MagyarCom Services Kft                 |       | (410                            | )          | (313     | )          | (163     | )          |
| Accounts payable  to other DT Group companies              |       | (2,358                          | )          | (3,254   | )          | (6,044   | )          |
| Accrued interests  payable to DTIF                         |       | (5,491                          | )          | (6,198   | )          | (3,756   | )          |
| Loans payable to DTIF  and DTAG                            |       | (237,675                        | )          | (286,648 | )          | (259,432 | )          |

 

Deutsche Telekom haspledged its support for Magyar Telekom’s financing needs through to June 30,2008.

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***(b) Governments***

Magyar Telekom providesservices to Government departments and businesses in Hungary, Macedonia andMontenegro, but individually none of these customers represent a significantsource of revenue.

***(c) Associates***

Hunsat is an enterprisefounded by the Company (50%) and Antenna Hungária Rt. (50%). The revenues ofHunsat include commissions received from Hungarian telecommunications companiesfor the use of services of international satellite agencies. The operationaltransactions and balances with Hunsat are insignificant. Dividends receivedfrom Hunsat amounted to HUF 157 million in 2006 (2005: HUF 1,376 million, 2004:HUF 2,133 million).

M-RTL is a Hungariantelevision broadcast company, in which Magyar Telekom has a 25% effective shareof ownership through a holding company, IKO-Telekom Média Holding Rt. M-RTLsells airtime through media agencies to Magyar Telekom, and Magyar Telekomprovides telecom services to M-RTL mainly through an interactive serviceprovider. Consequently, the direct operating transactions between M-RTLand the Group are insignificant. M-RTL declared dividends to Magyar Telekomdirectly and indirectly in an amount of HUF 605 million in 2006 (2005: HUF 550million, 2004: HUF 500 million).

T-Systems Hungary (TSH) isan associated company of Magyar Telekom, in which the Company acquired a 49%share of ownership in September 2004. The acquisition took place throughshare purchase from T-Systems International, a Deutsche Telekom Group company,and a capital increase in TSH. The All inter-company transactions and balanceswith TSH are included in the Deutsche Telekom Group relations table, earlier inthis note.

***(d) Board and supervisory board members***

The remuneration of themembers of the Company’s Board of Directors amounted to HUF 8 million in 2006(2005: HUF 10 million, 2004: HUF 9 million). The remuneration of the members ofthe Company’s Supervisory Board amounted to HUF 17 million in 2006 (2005: HUF14 million, 2004: HUF 10 million).

***(e) Key management***

Key management has beenidentified as the members of the Group’s Management Committee, which is themain operational decision making body of Magyar Telekom.

Thetable below shows in total the compensation expenses (including social securityand payroll related taxes as well) incurred by the Group in relation to the keymanagement.

| ** **                                       | ** ** | **At December 31,**   | ** ** |
|--------------------------------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                       | ** ** | **(in HUF millions)** | ** ** |
| Salaries and  other short-term employee benefits |       |                            | 800        |   |   | 670 |   | 647 |   |
| Contractual  termination expense                 |       |                            | —     |   |   | 350 |   | 432 |   |
| Share based  compensation (Note 24)              |       |                            | 101        |   |   | 130 |   | 112 |   |
|                                             |       |                            | 901        |   |   | 1,150 |   | 1,191 |   |

 

The Group does not provide loans to its key management.

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**36**             Events after the balancesheet date

**Employeetermination disputes in Montenegro**

In 2005 CGT offered a voluntary lay-off program with beneficial termsfor employees accepting the offer. In 2006 CGT announced another voluntaryredundancy which had even more beneficial terms. After the announcement of the2006 program, employees laid off in 2005 believe that they had been misledabout the conditions of the lay-off. These former employees have announced thatunless CGT indemnifies them for the difference in the terms, they would sue forbeing mislead in 2005. 

Although the Groupmay have to pay indemnity to the former employees, currently the Group cannotestimate the outcome of the future legal action, and the amount of theindemnity payments that could be ruled. The Group has no legal or constructiveobligation as at December 31, 2006, and has not raised a valid expectationon part of the former employees that they will be indemnified.

F-80

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**37**             Reconciliationto U.S. GAAP

Magyar Telekom’s consolidated financial statements areprepared in accordance with International Financial Reporting Standards, whichin certain respects differ from U.S. GAAP, the generally accepted accountingprinciples in the USA. The principal differences between IFRS and U.S. GAAP arepresented below, together with explanations of the adjustments that affectconsolidated profit for each of the three years in the period ended December 31,2006 and total shareholders’ equity as of December 31, 2005 and 2006.

| ** **                                        | ** ** | ** ** | ** ** | **For the year ended December 31,** | ** ** |
|---------------------------------------------------|------------|------------|------------|--------------------------------------------------------------|------------|
| ** **                                        | ** ** | **Notes**  | ** ** | **    2004    **     | ** ** | **    2005    ** | ** ** | **    2006    ** | ** ** |
| ** **                                        | ** ** | ** ** | ** ** | **(in HUF millions)**                              | ** ** |
| Net income under  IFRS—as reported           |       |       |       |                                                         |       |   | 34,641 |   |   |   | 78,564 |   |   |   | 75,453 |   |   |
| Restatement for  changes in IAS 39                |       |       | (e)        |                                                         |       |   | — |   |   |   | (149 | ) |   |   | — |   |   |
| Net income under  IFRS—as restated           |       |       |       |                                                         |       |   | 34,641 |   |   |   | 78,415 |   |   |   | 75,453 |   |   |
| Minority interests under IFRS                     |       |       |       |                                                         |       |   | 8,686 |   |   |   | 10,355 |   |   |   | 12,011 |   |   |
| Restatement for  changes in IAS 39                |       |       | (e)        |                                                         |       |   | — |   |   |   | (45 | ) |   |   | — |   |   |
| Minority interest  under IFRS—as restated    |       |       |       |                                                         |       |   | 8,686 |   |   |   | 10,310 |   |   |   | 12,011 |   |   |
| Adjustments of  Net income for U.S. GAAP:         |       |       |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue recognition                               |       |       | (a)        |                                                         |       |   | 4,749 |   |   |   | 4,237 |   |   |   | 3,608 |   |   |
| Asset retirement obligation                       |       |       | (b)        |                                                         |       |   | (871 | ) |   |   | (402 | ) |   |   | (320 | ) |   |
| Employee expenses                                 |       |       | (c)        |                                                         |       |   | 950 |   |   |   | (1,110 | ) |   |   | (108 | ) |   |
| Interest capitalized                              |       |       | (d)        |                                                         |       |   | 420 |   |   |   | 472 |   |   |   | 140 |   |   |
| Derivatives                                       |       |       | (e)        |                                                         |       |   | — |   |   |   | (227 | ) |   |   | 676 |   |   |
| Other income (rebranding)                         |       |       | (f)        |                                                         |       |   | (5,920 | ) |   |   | (7,281 | ) |   |   | (1,435 | ) |   |
| Purchase price allocation (business combinations) |       |       | (g)        |                                                         |       |   | (6,977 | ) |   |   | (4,775 | ) |   |   | (4,513 | ) |   |
| Goodwill                                          |       |       | (h)        |                                                         |       |   | 13,876 |   |   |   | — |   |   |   | — |   |   |
| Tax                                               |       |       | (i)        |                                                         |       |   | (1,503 | ) |   |   | 591 |   |   |   | (748 | ) |   |
| Profit after tax                                  |       |       |       |                                                         |       |   | 4,724 |   |   |   | (8,282 | ) |   |   | (2,700 | ) |   |
| Minority interest                                 |       |       | (j)        |                                                         |       |   | 319 |   |   |   | (873 | ) |   |   | (1,272 | ) |   |
| Total U.S. GAAP  adjustments on Net income        |       |       |       |                                                         |       |   | 5,043 |   |   |   | (9,155 | ) |   |   | (3,972 | ) |   |
| Net income under U.S. GAAP                        |       |       |       |                                                         |       |   | 39,684 |   |   |   | 69,260 |   |   |   | 71,481 |   |   |
| Minority  interests under U.S. GAAP               |       |       | (j)        |                                                         |       |   | 8,367 |   |   |   | 11,183 |   |   |   | 13,283 |   |   |
| Basic earnings per share under U.S. GAAP (HUF)    |       |       |       |                                                         |       |   | 38.23 |   |   |   | 66.67 |   |   |   | 68.71 |   |   |
| Diluted earnings  per share under U.S. GAAP (HUF) |       |       |       |                                                         |       |   | 38.22 |   |   |   | 66.65 |   |   |   | 68.69 |   |   |
| Net income under U.S. GAAP                        |       |       |       |                                                         |       |   | 39,684 |   |   |   | 69,260 |   |   |   | 71,481 |   |   |
| Other  comprehensive income                       |       |       | (k)        |                                                         |       |   | (3,851 | ) |   |   | 312 |   |   |   | (1,384 | ) |   |
| Total comprehensive  income                       |       |       |       |                                                         |       |   | 35,833 |   |   |   | 69,572 |   |   |   | 70,097 |   |   |

 

The amounts in the tableabove show by topic how much more or less income or expense was recognized inthe U.S. GAAP accounts in comparison to the IFRS accounts.

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

| ** **                                                | ** ** | ** ** | ** ** | **At December 31,**   | ** ** |
|-----------------------------------------------------------|------------|------------|------------|---------------------------------|------------|
| ** **                                                | ** ** | **Notes**  | ** ** | **2005**                        | ** ** | **2006** | ** ** |
| ** **                                                | ** ** | ** ** | ** ** | **(in HUF millions)** | ** ** |
| Total  Shareholders’ equity under IFRS               |       |       |       |                            |       | 527,567 |   | 526,039 |   |
| Minority interests under IFRS                             |       |       |       |                            |       | 70,127 |   | 67,128 |   |
| Total equity  under IFRS                                  |       |       |       |                            |       | 597,694 |   | 593,167 |   |
| *Adjustments  for U.S. GAAP:*                             |       |       |       |                            |       |   |   |   |   |
| Revenue recognition                                       |       |       | (a)        |                            |       | (9,468 | ) | (5,860 | ) |
| Asset retirement obligation                               |       |       | (b)        |                            |       | (1,409 | ) | (1,729 | ) |
| Employee expenses                                         |       |       | (c)        |                            |       | (213 | ) | — |   |
| Interest capitalized                                      |       |       | (d)        |                            |       | 5,465 |   | 5,605 |   |
| Derivatives                                               |       |       | (e)        |                            |       | 646 |   | 1,322 |   |
| Purchase price allocation (business combinations)         |       |       | (g)        |                            |       | 8,132 |   | 5,594 |   |
| Goodwill                                                  |       |       | (h)        |                            |       | 14,237 |   | 12,403 |   |
| Tax                                                       |       |       | (i)        |                            |       | (5,049 | ) | (6,102 | ) |
| Minority interest                                         |       |       | (j)        |                            |       | 2,190 |   | 918 |   |
| Total U.S. GAAP  adjustments on Shareholders’ equity |       |       |       |                            |       | 14,531 |   | 12,151 |   |
| U.S. GAAP adjustment on Minority interest                 |       |       | (j)        |                            |       | (2,190 | ) | (918 | ) |
| Total U.S. GAAP  adjustments on Equity                    |       |       |       |                            |       | 12,341 |   | 11,233 |   |
| Total Shareholders’ equity under U.S. GAAP           |       |       |       |                            |       | 542,098 |   | 538,190 |   |
| Minority  interests under U.S. GAAP                       |       |       |       |                            |       | 67,937 |   | 66,210 |   |
|                                                      |       |       |       |                            |       | 610,035 |   | 604,400 |   |

 

The amounts included inthe table above show the cumulative adjustments on the net assets byreconciling item. 

***(a) Revenue recognition***

In Magyar Telekom’s IFRS accounts fixed lineconnection fees collected after October 1997 are recognized immediatelytogether with the directly related expenses. Mobile activation fees are alsorecognized when customers’ subscriptions are activated. In the U.S. GAAPaccounts, however, fixed line connection fees and mobile activation fees until December 31,2003 were deferred and recognized as revenue over the expected customerrelationship period as regulated by SAB 101. Directly related expenses of theconnections and activations were also deferred up to the amount of therevenues.

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

In theU.S. GAAP accounts there is a higher amount of deferred revenues and there aredeferred expenses as well related to the direct costs of the activations andconnections. The table below shows the deferred connection and activationrevenue and related deferred expense balances in IFRS and in U.S. GAAP.

| ** **                                            | ** ** | **At December 31,**   | ** ** |
|-------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **2005**                        | ** ** | **2006** | ** ** |
| ** **                                            | ** ** | **(in HUF millions)** | ** ** |
| IFRS deferred  connection and activation revenue      |       | 1,185                           |       | 404 |   |
| U.S. GAAP  adjustment                                 |       | 12,200                          |       | 7,831 |   |
| U.S. GAAP  deferred connection and activation revenue |       | 13,385                          |       | 8,235 |   |
| IFRS deferred expenses                                |       | —                          |       | — |   |
| U.S. GAAP  adjustment                                 |       | 2,732                           |       | 1,971 |   |
| U.S. GAAP  deferred expenses                          |       | 2,732                           |       | 1,971 |   |
| U.S. GAAP  adjustment on Shareholders’ equity    |       | 9,468                           |       | 5,860 |   |

 

Further, as of January 1, 2004 Magyar Telekomadopted EITF 00-21 and SAB 104 in its U.S. GAAP accounts, according to whichbundled customer packages are analyzed by the elements of the bundle. Revenuesfrom the individual elements are recognized in proportion of the relative fairvalues of the elements. Connections in all cases are bundled with otherdeliverables such as equipment and/or prepaid usage. As connections andactivations are no longer considered separate earning events, the fair value ofthese elements is considered zero. Accordingly, amounts collected forconnections and activations are allocated to the other elements of thepackages, and recognized according to revenue the recognition policies appliedto those services (such as equipment sales, prepaid airtime, etc.).

The application of EITF00-21 and SAB 104 results in insignificant differences between IFRS and U.S.GAAP as the bundled packages in most cases include subsidized equipment thattakes up the marginal amounts collected for the connection or activation, whileany traffic is used in a short period of time.

***(b) Asset retirement obligation***

On January 1, 2003 Magyar Telekom adoptedStatement of Financial Accounting Standards (SFAS) No. 143—Accounting forAsset Retirement Obligations in its U.S. GAAP accounts. SFAS 143 requires thatthe fair value of a liability for an asset retirement obligation be recognizedin the period in which it is incurred (i.e. when the asset is constructed) if areasonable estimate of fair value can be made. The associated asset retirementcosts are capitalized as part of the carrying amount of the long-lived asset.

Assets considered for retirement obligation primarilyinclude antenna towers and switching and transmission equipment constructed onrented properties of the mobile segment. In addition, the cost of the publicpayphones and other assets constructed in public and private areas and assetsconstructed in rented shops are also adjusted for the potential retirementobligation. 

Although there is a legal obligation to remove allunused cabling of the fixed network from public and third parties’ properties,the Group believes that the probability of an event of having to remove suchcables in the future is very low. As a result, provision is only recognized forthe removal of a limited amount of these assets estimated based on theexpenditures incurred in the past. As the fixed line service 

F-83

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

providers of MagyarTelekom are universal service providers and have significant market power, theseentities are obliged to provide fixed line services in its geographical areasof service. In addition, the Group also has to make their lines available toother service providers on a contractual basis. As a result, Magyar Telekom cannot be forced to remove its cables from private and public properties as theGroup has indefinite right of use on these properties free of recurring charge.Any removals are only initiated by the Company once it decides to abandon agiven section of its network.

The method applied for mobile equipment constructed onleased property assumes two prolongations after the expiry of the originalrental term. The expected cash outflows occurring at the end of the thirdrental period are discounted to the time of the construction and capitalized aspart of the cost of the asset, and recognized as an expense throughdepreciation over the useful life of the asset. The present value of the futureobligation is also recognized as a provision. The provision is then accretedusing the discount rate that was applied when the obligation was determined.This accretion expense is recognized in the income statement. In subsequentperiods the Group may reassess the expected cash outflows to settle the assetretirement obligation, in which case the liability is increased against thecarrying amount of the asset. 

The asset retirement obligation adjustment in theincome statement reconciliation table reflects the net impact of the annualchanges in the carrying amount of the assets and that of the provision. In theequity reconciliation table the adjustment reflects the difference between thecarrying amount of the capitalized asset retirement obligation and that of theprovision.

Thetable below shows the U.S. GAAP adjustments to the carrying amount of assetretirement obligations (ARO) capitalized as part of the cost of the relatedassets and the adjustment on the provisions.

| ** **                                           | ** ** | **At December 31,**   | ** ** |
|------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                           | ** ** | **2005**                        | ** ** | **2006** | ** ** |
| ** **                                           | ** ** | **(in HUF millions)** | ** ** |
| IFRS—Carrying  amount of capitalized ARO        |       | —                          |       | 354 |   |
| U.S. GAAP adjustment                                 |       | 2,359                           |       | 2,781 |   |
| U.S. GAAP—Carrying amount of capitalized ARO    |       | 2,359                           |       | 3,135 |   |
| IFRS—Carrying  amount of provision for ARO      |       | —                          |       | 1,168 |   |
| U.S. GAAP  adjustment                                |       | 3,768                           |       | 4,510 |   |
| U.S.  GAAP—Carrying amount of provision for ARO |       | 3,768                           |       | 5,678 |   |
| U.S. GAAP adjustment  on Shareholders’ equity   |       | (1,409                          | )          | (1,729 | ) |

 

F-84

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***(c) Employeeexpenses***

*(1) Severance payments*

Certainseverance related expenses recognized as a provision in 2004 in the IFRSaccounts related to redundancies in 2005 did not meet the criteria to berecognized as a liability in U.S. GAAP (SFAS 88 and 146). These expenses wererecognized in the U.S. GAAP accounts in 2005. The table below shows the amountof severance related expenses recognized in the IFRS accounts (IAS 37) and inthe U.S. GAAP accounts (SFAS 88 and 146) in the reported years.

| ** **                       | ** ** | **For the year ended December 31,** | ** ** |
|----------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                       | ** ** | **2004**                                                     | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                       | ** ** | **(in HUF millions)**                              | ** ** |
| Termination expense in  IFRS     |       | (20,180                                                      | )          | (5,142 | ) | (6,523 | ) |
| U.S. GAAP adjustment             |       | 960                                                          |       | (960 | ) | — |   |
| Termination expense in U.S. GAAP |       | (19,220                                                      | )          | (6,102 | ) | (6,523 | ) |

 

In addition, more expensewas recognized in the IFRS accounts for share based payments according to IFRS2 than in the U.S. GAAP accounts according to APB 25 in 2004 and 2005. Untilthe release of IFRS 2—Share Based Payments in March 2004 there was noguidance in IFRS for the accounting for share based payments, and the Group hadnot recognized compensation expenses in its IFRS accounts related to sharebased compensations before 2004. In its U.S. GAAP accounts, the Group appliedthe provisions of APB 25 in 2004 and 2005, whereby the intrinsic value of theshare options granted were recognized evenly over the vesting period of theinstruments.

As of January 1, 2006the Group adopted SFAS 123(R)—Share-Based Payment. SFAS 123(R) requiresall share-based awards to employees, including grants of employee stockoptions, to be recognized in the financial statements based on their grant-datefair values. The related compensation costs are to be recognized over theperiod during which an employee is required to provide service in exchange forthe award. Magyar Telekom adopted the modified prospective provisions of SFAS123(R) to new and existing plans as of January 1, 2006. Thegrant-date fair values of unvested awards that were outstanding on the date ofadoption are charged to expense over their remaining vesting periods startingfrom 2006. The adoption of SFAS 123(R) did not have a material impact onthe 2006 financial statements of the Group.

Differences between theaccounting for the share based compensation programs are described below.

*(2) Share options of the CEO (Note 24)*

The CEO of Magyar Telekomwas granted share options in 2000, 2001, 2002, 2003 and 2004. The options hadno intrinsic values on the grant dates in 2000, 2001, 2002 and 2003, while theoptions granted in 2004 had an intrinsic value of HUF 63 million. The tablebelow shows the amount of expenses recognized in the IFRS accounts and in theU.S. GAAP accounts in the reported years.

| ** **                                     | ** ** | **For the year ended December 31,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                     | ** ** | **    2004    **     | ** ** | **    2005    ** | ** ** | **    2006    ** | ** ** |
| ** **                                     | ** ** | **(in HUF millions)**                              | ** ** |
| Compensation expense in IFRS                   |       |                                                         | —     |   |   |   | (84 | ) |   |   | (36 | ) |   |
| U.S. GAAP adjustment                           |       |                                                         | (10        | ) |   |   | 63 |   |   |   | (321 | ) |   |
| Compensation expense in U.S. GAAP (APB 25)     |       |                                                         | (10        | ) |   |   | (21 | ) |   |   | — |   |   |
| Compensation expense in U.S. GAAP (FAS 123(R)) |       |                                                         | —     |   |   |   | — |   |   |   | (357 | ) |   |

 

F-85

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

*(3) Managementshare option plan (Note 24)*

On July 1,2002, the Company granted 3,964,600 options to participants of the managementshare option plan. As the Company’s share price as quoted on the Budapest StockExchange on the grant date was HUF 833 per share, there was no intrinsic valueto the options, thus no compensation expense was recognized in the IFRS or theU.S. GAAP accounts (APB 25), and the options had vested before the adoption ofFAS 123(R).

*(4) Mid TermIncentive Plan—MTIP (Note 24)*

The MTIP is a cash settled long term incentive programlasting for three years whereby the targets to be achieved are based on theperformance of the Magyar Telekom share.

Thetable below shows the amount of expenses recognized in the IFRS accounts and inthe U.S. GAAP accounts in the reported years.

| ** **                                      | ** ** | **For the year ended December 31,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                      | ** ** | **    2004    **     | ** ** | **    2005    ** | ** ** | **    2006    ** | ** ** |
| ** **                                      | ** ** | **(in HUF millions)**                              | ** ** |
| Compensation  expense in IFRS                   |       |                                                         | (70        | ) |   |   | (186 | ) |   |   | (557 | ) |   |
| U.S. GAAP  adjustment                           |       |                                                         | —     |   |   |   | (213 | ) |   |   | 213 |   |   |
| Compensation  expense in U.S. GAAP (APB 25)     |       |                                                         | (70        | ) |   |   | (399 | ) |   |   | — |   |   |
| Compensation expense in  U.S. GAAP (FAS 123(R)) |       |                                                         | —     |   |   |   | — |   |   |   | (344 | ) |   |

 

The difference betweenIFRS and U.S. GAAP accruals disappeared in 2006 with the adoption of FAS 123(R) throughthe income statement.

*(5) Assumptionsused in the fair value calculations*

At thegrant dates, the underlying assumptions and the resulting fair values peroption were as follows:

| ** **                                           | ** ** | **CEO’s  share  options  2000** | ** ** | **CEO’s  share  options  2001** | ** ** | **CEO’s  share  options  2002** | ** ** | **CEO’s  share  options  2003** | ** ** | **CEO’s  share  options  2004** | ** ** | **Management  share option  plan** | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|-----------------------------------------|------------|
| Risk free  interest rate (%)                         |       | 7.4-7.6                              |       | 7.3-7.5                              |       | 7.9-8.2                              |       | 6.9-7.2                              |       | 8.9-9.4                              |       |                                    | 8.31       |   |   |
| Expected dividend  yield (%)                         |       | 0.45                                 |       | 1.21                                 |       | 1.29                                 |       | 2.16                                 |       | 8.41                                 |       |                                    | 1.51       |   |   |
| Expected lives  (years)                              |       | 7-9                                  |       | 7-9                                  |       | 7-9                                  |       | 7-9                                  |       | 7-9                                  |       |                                    | 5          |   |   |
| Expected stock  volatility (%)                       |       | 9.39                                 |       | 10.16                                |       | 9.58                                 |       | 9.23                                 |       | 8.82                                 |       |                                    | 40         |   |   |
| Fair value per option  granted during the year (HUF) |       | 1,420                                |       | 166                                  |       | 189                                  |       | 122                                  |       | 350                                  |       |                                    | 284        |   |   |

 

***(d) Interest capitalized***

In the IFRS accounts Magyar Telekom capitalized agradually decreasing amount of interest in prior years, and did not capitalizeany interest in 2004 and 2005. This was the case as all loans taken for capitalinvestment projects in prior years had been gradually repaid by the end of2003. In 2006 the Company took a loan dedicated to finance the capitalexpenditure on the broadband network expansion, therefore, interest expenseswere capitalized again in 2006 (Note 2.20).

F-86

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

In accordance with U.S. GAAP, Magyar Telekom does notdifferentiate the loans based on the purpose for which they were taken, all areconsidered for interest capitalization. In contrast, under IFRS, we capitalizedthe appropriate part of only that interest that arose in connection with eitherloans taken out for the construction of qualifying assets, or those loans thatare taken out for general purpose. As a result, a higher amount of interest iscapitalized in the U.S. GAAP accounts, which results in a higher balance ofproperty, plant and equipment, and consequently a higher amount ofdepreciation.

Thetable below is the summary of the U.S. GAAP adjustments related to interestcapitalization.

| ** **                                                                             | ** ** | **For the year ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2004**                                                     | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                                             | ** ** | **(in HUF millions)**                              | ** ** |
| IFRS interest  capitalized                                                             |       | —                                                       |       | — |   | 54 |   |
| U.S. GAAP  adjustment                                                                  |       | 1,624                                                        |       | 2,093 |   | 1,736 |   |
| U.S. GAAP  interest capitalized                                                        |       | 1,624                                                        |       | 2,093 |   | 1,790 |   |
| IFRS depreciation of Property, plant and equipment                                     |       | 98,788                                                       |       | 96,363 |   | 95,657 |   |
| U.S. GAAP  adjustment                                                                  |       | 1,204                                                        |       | 1,621 |   | 1,596 |   |
| U.S. GAAP  depreciation of Property, plant and equipment                               |       | 99,992                                                       |       | 97,984 |   | 97,253 |   |
| Carrying amount  of U.S. GAAP adjustment on interest capitalized—end of year |       | 4,993                                                        |       | 5,465 |   | 5,605 |   |

 

***(e) Derivatives***

The revised interpretation of IAS 39—FinancialInstruments—Recognition and Measurement does not consider contracts denominatedin a currency that is not the functional currency of either of the contractingparties as a separable host contract and an embedded derivative if the contractcurrency is widely used in that market. As a result of the change in theinterpretation, Magyar Telekom restated its IFRS retained earnings to eliminatethe carrying amounts of these embedded derivatives (HUF 873 million) and therelated deferred tax liability (HUF 140 million) as at December 31, 2004.

The change in the IFRS interpretation does not have animpact on the U.S. GAAP accounts, in which these embedded derivatives remain tobe recognized and re-measured to fair value.

Thetable below shows the U.S. GAAP adjustment on the fair value of derivatives.

| ** **                                   | ** ** | **At December 31,**                | ** ** |
|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                   | ** ** | **   2005   ** | ** ** | **   2006   ** | ** ** |
| ** **                                   | ** ** | **(in HUF millions)**              | ** ** |
| IFRS fair value  of derivatives (forwards)   |       |                                         | —     |   |   |   | 378 |   |   |
| U.S. GAAP  adjustment (embedded derivatives) |       |                                         | 646        |   |   |   | 1,322 |   |   |
| U.S. GAAP fair value of  derivatives         |       |                                         | 646        |   |   |   | 1,700 |   |   |

 

***(f) Other income (rebranding)***

The Company’s mobile subsidiary, Westel was renamed asT-Mobile Hungary during 2004, while other companies of the Group were renamedin 2005 and 2006. In the IFRS accounts, the compensation received from DTAG isshown as other income and the write off of the impacted brand names and the costsof launching and promoting the new brands are shown gross as expensesrespectively.

F-87

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Under U.S. GAAP, MagyarTelekom recognizes the brand name write off and the additional costs mentionedabove in the income statement, while the compensation received is recognized asa contribution of capital by the majority shareholder in accordance with APB 25and SAB Topic 5-T. This results in a lower net income in the U.S. GAAPaccounts, but the Shareholders’ equity is no different in this respect.

***(g) Purchase price allocation (business combinations)***

Due to the different intangible asset recognition rules ofIFRS and U.S. GAAP in earlier years, the fair values of the net assets ofT-Mobile, Maktel and Emitel on the acquisitions in 2001 were different. WhileSFAS 141 allows the recognition of customer bases as an intangible asset inU.S. GAAP, IAS 38 only allowed the recognition if the customers werecontractually tied to the service provider. As in earlier years (e.g. in 2001)when the Company acquired new subsidiaries, pre-paid customers of the acquiredsubsidiaries were not contractually bound for a period over one year,therefore, based on the non-contractual relationship no intangible asset wasrecognized in the IFRS accounts. In contrast to IFRS, in its U.S. GAAP accountsthe Company recognized the customer bases of the acquired subsidiaries onacquisition.

In the U.S. GAAP accounts, this resulted in a higheramount of intangible assets recognized on acquisition. Consequently, theamortization expense of these intangibles is higher than in the IFRS accounts.

In addition, from March 31, 2004 in the IFRS accountsthe total amount of fair value adjustments on the net assets of the acquiredcompanies are recognized on consolidation, while in the U.S. GAAP accounts thefair value adjustments are only recognized in proportion to the share ofownership acquired, as was the policy in the IFRS accounts before the abovementioned date. This results in a lower amount of fair value adjustments in theU.S. GAAP accounts for intangible and tangible assets arising on businesscombinations since March 31, 2004.

Further, since the adoption of IFRS 3, in case ofacquisition of additional shares in already consolidated subsidiaries, nopurchase price allocation is conducted, i.e. the whole surplus over thecarrying amount of additional net assets acquired (reduction in minorityinterest) is recognized as goodwill in the IFRS accounts. In the U.S. GAAPaccounts, however, purchase price allocation is made for these acquisitions aswell. This generally results in a higher amount of assets recognized (otherthan goodwill) with corresponding deferred tax liabilities, and a subsequentlyhigher amount of depreciation and amortization.

Thefollowing table shows the carrying amounts of the U.S. GAAP adjustments on thebalance sheet lines that have arisen on the acquisition of subsidiaries.

| ** **                                         | ** ** | **At December 31,**    | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                         | ** ** | **  2005  ** | ** ** | **  2006  ** | ** ** |
| ** **                                         | ** ** | **(in HUF millions)**  | ** ** |
| Property, plant  and equipment                     |       |                             | 358        |   |   |   | 439 |   |   |
| Intangible assets                                  |       |                             | 7,754      |   |   |   | 5,155 |   |   |
| Other liabilities                                  |       |                             | 20         |   |   |   | — |   |   |
| U.S. GAAP adjustment on  Shareholders’ equity |       |                             | 8,132      |   |   |   | 5,594 |   |   |

 

F-88

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Thefollowing table shows the expected amortization expense of all intangibleassets recorded under U.S. GAAP in the following years.

| ** ** | ** ** | ** ** | ** ** | **Amortization**                | ** ** |
|------------|------------|------------|------------|---------------------------------|------------|
| **Year**   | ** ** | ** ** | ** ** | **(in HUF millions)** | ** ** |
| 2007       |       |       | 25,122     |                            |       |
| 2008       |       |       | 21,448     |                            |       |
| 2009       |       |       | 12,503     |                            |       |
| 2010       |       |       | 7,461      |                            |       |
| 2011       |       |       | 5,416      |                            |       |
| thereafter |       |       | 91,746     |                            |       |

 

***(h)**Goodwill***

Due to the different asset recognition rules of IFRSand U.S. GAAP in earlier years, the fair value of the net assets of T-Mobile,Maktel and Emitel on the acquisitions in 2001 was different. In the U.S. GAAPaccounts, in general, a higher amount of intangible assets was recognized inthose years on business combinations. Consequently, the goodwill recognized inthe U.S. GAAP accounts was lower than in the IFRS accounts.

In addition, while according to Magyar Telekom’s IFRSaccounting policy, connection and activation fees are not deferred, SAB 101required the deferral of these fees. This resulted in a zero fair value ofdeferred revenue in the IFRS balance sheet of the companies acquired in 2001,while the fair value of the acquired companies’ liabilities included deferredrevenue in U.S. GAAP. Related to these deferred revenues, there were alsodeferred expenses in the U.S. GAAP balance sheets of the acquired companies.This difference also resulted in a different amount of goodwill arising on theacquisition of these subsidiaries.

Further, according to SFAS 141 and 142, goodwill isnot amortized under U.S. GAAP in the 3-year period presented, which resulted insignificant differences between the IFRS and U.S. GAAP accounts in 2004. FromJanuary 1, 2005 no goodwill is amortized in IFRS either, consequently nofurther differences arise in this respect.

Further, goodwill is recorded in the currency of theacquired company under U.S. GAAP, while in earlier years goodwill wasrecognized in HUF under IFRS. This results in currency translation adjustmentsin the Shareholders’ equity when compared to IFRS, the impact of which isincluded in the Goodwill line of the reconciliation table.

F-89

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Thetable below shows the development of the carrying amount of goodwill comparingIFRS and U.S. GAAP.

| ** **                                                                            | ** ** | **IFRS** | ** ** | **U.S. GAAP  adjustment** | ** ** | **U.S. GAAP** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------|------------|--------------------------------|------------|--------------------|------------|
| Carrying amount—January  1, 2005                                                 |       | 226,920  |       |                           | 16,290     |               |       |   | 243,210 |   |   |
| Exchange differences                                                                  |       | 115      |       |                           | (2,443     | )                  |       |   | (2,328 | ) |   |
| Increase due to acquisitions                                                          |       | 5,122    |       |                           | —     |               |       |   | 5,122 |   |   |
| Deferred tax expense  credited to the carrying amount of goodwill                     |       | —   |       |                           | (118       | )                  |       |   | (118 | ) |   |
| Carrying amount—December  31, 2005                                               |       | 232,157  |       |                           | 13,729     |               |       |   | 245,886 |   |   |
| Exchange differences                                                                  |       | (78      | )          |                           | (103       | )                  |       |   | (181 | ) |   |
| Increase due to acquisitions                                                          |       | 13,070   |       |                           | (1,731     | )                  |       |   | 11,339 |   |   |
| Deferred tax expense  credited to the carrying amount of goodwill                     |       | —   |       |                           | (134       | )                  |       |   | (134 | ) |   |
| Carrying amount—December  31, 2006                                               |       | 245,149  |       |                           | 11,761     |               |       |   | 256,910 |   |   |
| Add back cumulative  deferred tax expense credited to the carrying amount of goodwill |       |     |       |                           | 642        |               |       |   |   |   |   |
| U.S. GAAP adjustment on  Shareholders’ equity                                    |       |     |       |                           | 12,403     |               |       |   |   |   |   |

 

Goodwill was tested forimpairment by reporting segment as of January 1, 2002 and in the last quarterof every year since then. As the fair value of the net assets of the reportingsegments was always higher than the book values, no impairment charge wasnecessary to be recognized in any of the reported periods.

***(i) Tax***

Most of the abovedescribed U.S. GAAP adjustments result in temporary differences for whichdeferred tax is recognized.

***(j) Minority interest***

Some of the above described adjustments are related tosubsidiaries in which Magyar Telekom’s share of ownership is less than 100%. Inthese cases the minority interests take their share of the adjustments.

Further, the Company hadseveral call options for the remaining shares of certain consolidatedsubsidiaries. Co-owners of subsidiaries also had call and put options forshares held by Magyar Telekom in certain consolidated subsidiaries. Therecognition and measurement of these options differed in certain cases underIFRS and U.S. GAAP. The differences between the recognition and measurement ofthese options resulted in U.S. GAAP adjustments in 2003 and 2004, which wereaccounted for in the minority interest line of the reconciliation tables.

***(k) Other comprehensive income***

Other comprehensive incomeincludes the cumulative translation adjustments arising on consolidation, whichis not subject to tax, and the revaluation differences from AFS financial instruments(Note 7).

F-90

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***(l) Recent accounting pronouncements***

In February 2006, the Financial Accounting StandardsBoard (FASB) issued SFAS No. 155, “Accounting for Certain Hybrid FinancialInstruments” (“SFAS 155”). SFAS 155 allows any hybrid financial instrument thatcontains an embedded derivative that otherwise would require bifurcation underSFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,”to be carried at fair value in its entirety, with changes in fair valuerecognized in earnings. In addition, SFAS 155 requires that beneficialinterests in securitized financial assets be analyzed to determine whether theyare freestanding derivatives or contain an embedded derivative. SFAS 155 alsoeliminates a prior restriction on the types of passive derivatives that aqualifying special purpose entity is permitted to hold. SFAS 155 is applicableto new or modified financial instruments in fiscal years beginning afterSeptember 15, 2006, though the provisions related to fair value accounting forhybrid financial instruments can also be applied to existing instruments. TheGroup does not expect the adoption of SFAS 155 to have a material impact on theconsolidated financial position or results of operations.

In March 2006, the FASB issued SFAS No. 156,“Accounting for Servicing of Financial Assets” (“SFAS 156”). SFAS 156 addressesthe accounting for recognized servicing assets and servicing liabilitiesrelated to certain transfers of the servicer’s financial assets and foracquisitions or assumptions of obligations to service financial assets that donot relate to the financial assets of the servicer and its related parties.SFAS 156 requires that all recognized servicing assets and servicingliabilities are initially measured at fair value, and subsequently measured ateither fair value or by applying an amortization method for each class ofrecognized servicing assets and servicing liabilities. SFAS 156 is effective infiscal years beginning after September 15, 2006. The Group does not expect theadoption of SFAS 156 to have a material impact on the consolidated financialposition or results of operations.

In April 2006, the FASB issued FASB Staff Position(“FSP”) FSP FIN 46(R)-6, “Determining the Variability to Be Considered inApplying FASB Interpretation No. 46(R)” (“FSP FIN 46(R)-6”). FSP FIN 46(R)-6addresses whether certain arrangements associated with variable interestentities should be treated as variable interests or considered as creators ofvariability, and indicates that the variability to be considered shall be basedon an analysis of the design of the entity. FSP FIN 46(R)-6 is required to beapplied prospectively to all entities with which the Group first becomesinvolved and to all entities previously required to be analyzed under FIN 46(R)upon the occurrence of certain events, beginning the first day of the firstreporting period after June 15, 2006. The Company does not expect the adoptionof FSP FIN 46(R)-6 to have a material impact on the consolidated financialposition or results of operations.

In June 2006, the FASB ratified the consensus onEmerging Issues Task Force (EITF) Issue No. 06-3, “How Taxes Collected fromCustomers and Remitted to Governmental Authorities Should Be Presented in theIncome Statement” (“EITF 06-3”). The scope of EITF 06-3 includes any taxassessed by a governmental authority that is directly imposed on arevenue-producing transaction between a seller and a customer and may include,but is not limited to, sales, use, value added, and certain excise taxes. EITF06-3 states that presentation of taxes within the scope of this EITF on eithera gross basis or a net basis is an accounting policy decision which should bedisclosed pursuant to APB No. 22, Disclosure of Accounting Policies. If suchtaxes are significant, and are presented on a gross basis, the amounts of thosetaxes should be disclosed. The consensus on EITF 06-3 will be effective forinterim and annual reporting periods beginning after December 15, 2006. MagyarTelekom previously disclosed that the Group records revenues net of value-addedtaxes and other taxes collected from customers that are remitted togovernmental authorities.

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**MAGYAR TELEKOM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

In July 2006, the FASB issued FASB Interpretation No.48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASBStatement No. 109,” (FIN 48). FIN 48 prescribes a comprehensive model for how acompany should recognize, measure, present, and disclose in its financialstatements uncertain tax positions that it has taken or expects to take on atax return. FIN 48 is effective for Magyar Telekom as of January 1, 2007. TheGroup is currently evaluating the potential impact, if any, that the adoptionof FIN 48 will have on the consolidated financial position or results ofoperations.

In September 2006, the FASB issued SFAS No. 157, “FairValue Measurements,” (“SFAS 157”). SFAS 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles,and expands disclosures about fair value measurements. The provisions of thisstandard apply to other accounting pronouncements that require or permit fairvalue measurements. SFAS 157 becomes effective for Magyar Telekom on January 1,2008. Upon adoption, the provisions of SFAS 157 are to be applied prospectivelywith F-141 limited exceptions. The Group is currently evaluating the potentialimpact, if any, that the adoption of SFAS 157 will have on the consolidatedfinancial position or results of operations.

In September 2006, the FASB ratified Emerging IssuesTask Force Issue No. 06-1, “Accounting for Consideration Given by a ServiceProvider to Manufacturers or Resellers of Equipment Necessary for anEnd-Customer to Receive Service from the Service Provider”(“EITF 06-1”). Thisguidance requires the application of EITF 01-9, “Accounting for ConsiderationGiven by a Vendor to a Customer” (“EITF 01-9”), when consideration is given toa reseller or manufacturer for benefit to the service provider’s end customer.EITF 01-9 requires the consideration given be recorded as a liability at thetime of the sale of the equipment and, also, provides guidance for theclassification of the expense. EITF 06-1 is effective for the first annualreporting period beginning after June 15, 2007. The Group is currentlyevaluating the potential impact, if any, that the adoption of EITF 06-1 willhave on the consolidated financial position or results of operations.

In February 2007, the FASB issued SFAS No. 159, TheFair Value Option for Financial Assets and Financial Liabilities Including anAmendment of FASB Statement No. 115 (SFAS No. 159), which permits entities tochoose to measure many financial instruments and certain other items at fairvalue. The provisions of SFAS No.159 are effective as of the beginning of our2008 fiscal year. The Group’s adoption of SFAS No. 159 is not expected to havea material impact on the Company’s consolidated financial statements.

In September 2006 SEC issued Staff Accounting BulletinNo. 108, “Considering the Effects of Prior Year Misstatement when QuantifyingMisstatements in Current Year Financial Statements” (“SAB No. 108”). SABNo. 108 requires the use of both the rollover and iron curtain approaches inaccumulating and quantifying the amounts of misstatements in a company’sfinancial statements. The rollover approach looks at the amount by which thecurrent-year income statement is misstated. The iron curtainapproach looks at the cumulative amount by which the balance sheet is misstatedto determine materiality. The Group’s adoption of SAB No. 108 did not havea material impact on the Company’s consolidated financial statements.

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