Securities and Exchange Commission
                              Washington, DC 20549

                                    FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934 For the fiscal year ended December 31, 1998
                                                         OR
[ ] TRANSITIONAL  REPORT  PURSUANT  TO  SECTION  13  OR 15(d) OF THE  SECURITIES
    EXCHANGE ACT OF 1934 For the transition period from to

                         Commission File Number 1-11484

                       HUNGARIAN TELEPHONE AND CABLE CORP.
             (Exact Name of Registrant as specified in its charter)

         Delaware                                             13-3652685
(State or other jurisdiction of                            (I.R.S. Employer
 incorporation or organization)                            Identification No.)

                  100 First Stamford Place, Stamford, CT 06902
               (Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code: (203) 348-9069

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

Title of Each Class                    Name of Each Exchange on Which Registered
Common Stock, par value $.001 per share          American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:  None

         Indicate  by check  mark  whether  the  Registrant:  (1) has  filed all
reports  required to be filed by Section 13 or 15(d) of the Securities  Exchange
Act of 1934 during the preceding 12 months (or for such shorter  period that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirement for the past 90 days. Yes X No

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [ ]

         As of March 25, 1999, 5,395,864 shares of the Registrant's Common Stock
were  outstanding,  of  which  5,392,764  were  held  by  non-affiliates  of the
Registrant.  The aggregate market value of the Registrant's Common Stock held by
non-affiliates,  computed by reference to the closing  price of the Common Stock
on the  American  Stock  Exchange as of March 24,  1998,  was  $24,604,500.  The
exclusion  of shares owned by any person from such amount shall not be deemed an
admission by the Registrant that such person is an affiliate of the Registrant.

                       Documents Incorporated by Reference

         Part III - Portions of the Registrant's  proxy statement for the Annual
Meeting of Stockholders for the fiscal year ended December 31, 1998.


<PAGE>


            Cautionary Statement Regarding Forward-Looking Statements

         Certain   statements   contained   herein   which   express   "belief,"
"anticipation,"  "expectation," or "intention" or any other projection,  insofar
as  they  may  apply   prospectively   and  are  not   historical   facts,   are
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Because such
statements include risks and uncertainties, actual results may differ materially
from those expressed or implied by such forward-looking statements. Factors that
could cause actual results to differ  materially from those expressed or implied
by such forward-looking  statements include, but are not limited to, the factors
set  forth  in  "Item 7.  Management's  Discussion  and  Analysis  of  Financial
Condition and Results of Operations."

                                     PART I

         In this Part I of Form 10-K,  all  references to "$" or "U.S.  Dollars"
are to United  States  Dollars and all  references  to "HUF" or `Forints" are to
Hungarian  Forints.  Certain  amounts  stated in Forints  herein  also have been
stated in U.S. Dollars solely for the informational  purposes of the reader, and
should not be construed as a  representation  that such Forint amounts  actually
represent such U.S.  Dollar  amounts or could be, or could have been,  converted
into U.S.  Dollars at the rate indicated or at any other rate.  Unless otherwise
stated or the  context  otherwise  requires,  such  amounts  have been stated at
December 31, 1998 exchange rates. The Forint/U.S. Dollar middle exchange rate as
of December 31, 1998 was approximately 216.50 Forints per U.S. Dollar.

                                Item 1. Business
Company Overview

         Hungarian  Telephone and Cable Corp.  ("HTCC" or the "Registrant"  and,
together with its  consolidated  subsidiaries,  the  "Company")  provides  basic
telephone services in five defined regions within the Republic of Hungary (each,
an "Operating  Area" and together,  the "Operating  Areas")  pursuant to 25-year
telecommunications  concessions  granted  by  the  Hungarian  government.  HTCC,
through its four  majority-owned  operating  subsidiaries  (each,  an  Operating
Company and together,  the "Operating  Companies"),  owns and operates virtually
all  existing  public  telephone  exchanges  and local  loop  telecommunications
network  facilities in its Operating Areas and is the exclusive provider through
November 1, 2002 of non-cellular  local voice telephone  services in such areas.
The Company  completed its significant  network  modernization  and construction
program in all of its Operating Areas in 1997 which substantially met its demand
backlog,  increased  the number of basic  telephone  access lines in service and
modernized  existing  facilities.  The Company's networks now have the capacity,
with some additional capital  expenditures,  to provide basic telephone services
to virtually  all of the estimated  276,300 homes and 36,400  business and other
institutional   subscribers  (including  government   institutions)  within  its
Operating Areas.

         The Company acquired its concession rights from the Hungarian  Ministry
of Transportation,  Telecommunications and Water Management (the "Ministry") for
$11.5  million  (at  historical  exchange  rates)  and  purchased  the  existing
telecommunications    infrastructure   in   the   Operating   Areas,   including
approximately  61,400 access lines, from Magyar  Tavkozlesi Rt.  ("MATAV"),  the
formerly  State-controlled  monopoly  telephone  company,  for $23.2 million (at
historical  exchange  rates).  Kelet-Nograd  Com Rt.  ("KNC") and Raba Com.  Rt.
("Raba-Com"),   two  of  the   Operating   Companies,   acquired   the  existing
telecommunications  assets  in their  respective  Operating  Areas in the  first
quarter of 1995, while Papa es Tersege Telefon  Koncesszios Rt.  ("Papatel") and
Hungarotel  Tavkozlesi Rt.  ("Hungarotel"),  the other two Operating  Companies,
acquired the existing  telecommunications  assets in their respective  Operating
Areas on January 1, 1996. Since the acquisition of such existing  networks,  the


                                      -2-
<PAGE>

Operating Companies have incurred capital expenditures through December 31, 1998
of $171  million (at  historical  exchange  rates) to expand and  upgrade  their
network   facilities   which  has  resulted  in  the   completion  of  a  modern
communications  network in each of the Operating  Areas,  which networks include
new digital  switches and increased  network  capacity,  utilizing the latest in
communications  transmission technology.  As of December 31, 1998, the Company's
telecommunications  networks had  approximately  185,000 access lines in service
(including  pay phones).  The completion of the Company's  network  construction
program has resulted in the addition of  approximately  123,600 new access lines
in service (including pay phones) to the 61,400 access lines acquired from MATAV
and the  replacement  of all of the 10,810 manual  exchange  lines acquired from
MATAV.

         The  Company  completed  its  network  modernization  and  construction
program in each of its Operating  Areas primarily  through turnkey  construction
contracts  with  Siemens   Telefongyar   Kft.,   Ericsson   Technika  and  Fazis
Telecommunication System Design and Construction Corporation. The contracts were
primarily  funded with the Company's $170 million  10-year credit  facility with
Postabank es  Takarekpenztar  (the  "Postabank  Credit  Facility"),  a Hungarian
commercial  bank  ("Postabank"),   and  a  $47.5  million  contractor  financing
facility.  See Item 3 "Legal  Proceedings",  Item 7  Management  Discussion  and
Analysis of Financial  Conditions and Results of Operations - Introduction"  and
Notes 1(a) and 9(e) of Notes to Consolidated Financial Statements.

         The following  table sets forth certain  information as of December 31,
1998 with respect to each of the Operating Companies.

<TABLE>

<S>                                            <C>            <C>        <C>         <C>         <C>
                                                Raba-Com       KNC        Papatel     Hungarotel    Total

Population...............................          67,600      152,300     64,000     398,500     682,400
Residences...............................          23,800       61,900     24,000     166,600     276,300
Businesses and other(1)..................           4,300        6,500      3,300      22,300      36,400
Access lines in operation:
     Residential.........................          19,000       34,500     16,400      91,500     161,400
     Business and other(2)...............           2,400        5,500      1,900      13,800      23,600
                                                  --------     --------   --------   ---------    --------
           Total.........................          21,400       40,000     18,300     105,300     185,000
Pay phones...............................             160          360        188       1,111       1,819
Population Penetration rate(3)...........            31.7         26.3       28.6        26.4        27.1
Residential Penetration rate (4).........            79.8         55.7       68.3        54.9        58.4
--------
</TABLE>

(1) Represents Company estimates of business and other institutional subscribers
    or potential subscribers (including government institutions).
(2) Represents  Company  estimates of subscribers which are businesses and other
    institutional subscribers (including government institutions),  leased lines
    and pay phones. Includes ISDN equivalent lines.
(3) Population Penetration rate is defined as the number of access lines per 100
    inhabitants.
(4) Residential  Penetration rate is defined as the number of residential access
    lines per 100 residences.

                                      -3-
<PAGE>



         The  following  table sets forth the number of access  lines  served by
each of the  Operating  Companies at takeover from MATAV and at the end of 1995,
1996, 1997 and 1998.

<TABLE>
<S>              <C>             <C>              <C>            <C>            <C>

                     Takeover           1995              1996         1997         1998
                     --------           ----              ----         ----         ----

Raba-Com               2,500(1)         5,100           14,000         20,600       21,400
KNC                   13,000(1)        14,200           20,500         35,500       40,000
Papatel                3,800(2)         3,800           11,100         17,000       18,300
Hungarotel            42,100(2)        42,100           47,800        102,000      105,300
                 -----------      -----------       ----------     ----------    ----------
     Total            61,400           65,200           93,400        175,100      185,000

</TABLE>
(1) 1st Quarter 1995
(2)  Year-End 1995

History

     Overview of Hungarian Telecommunications Industry

         The  Company  believes  that  Hungary  is  an  attractive   market  for
telecommunications   services.  The  Hungarian   telecommunications  market  was
historically  significantly  underdeveloped  without the necessary investment in
the  Hungarian   telecommunications   infrastructure   necessary  to  achieve  a
comparable  level of teledensity to that of Western  Europe.  As of December 31,
1995,  Hungary  had a  basic  telephone  penetration  rate of  approximately  21
telephone access lines per 100 inhabitants  compared to a European Union average
of approximately 48 access lines per 100 inhabitants and a United States average
of approximately  60 access lines per 100  inhabitants.  Of such access lines in
Hungary,  approximately 40% were located in Budapest (in which approximately 20%
of Hungary's population resides).  In the Company's Operating Areas, access line
penetration  was  approximately  nine  access  lines per 100  inhabitants  as of
December 31, 1995. By comparison,  basic  telephone  penetration  rates in other
Eastern  European  countries such as the Czech  Republic,  Poland,  Slovakia and
Bulgaria,  as of December 31, 1995,  were 23, 15, 21 and 28 access lines per 100
inhabitants, respectively. However, MATAV invested approximately HUF 171 billion
($790  million) in its fixed  telecommunications  network  from 1994 to 1996 and
currently has  approximately 2.7 million access lines connected to its networks.
As of September  1998,  all of the LTOs (as defined below)  excluding  MATAV had
invested approximately $822 million in their telecommunications  network. Due to
the completion of the Company's network  modernization and construction program,
access line  penetration  in the Company's  Operating  Areas has increased to 27
access  lines per 100  inhabitants  as of  December  31,  1998.  Given  that the
Company's,   MATAV's,   and  the  other  LTOs'   investments  in  the  Hungarian
telecommunications  market over the last several  years  produced a  significant
increase in the overall  penetration rate in Hungary to  approximately  34%, the
Company  expects  to  benefit  from  a  continued  increase  in  the  use of its
telecommunications services by its customer base.

         In addition, since 1989 Hungary has been the most successful country in
Central Europe in attracting foreign investment,  due to its early start in, and
ongoing  commitment to, economic reform.  According to the Hungarian Ministry of
Industry,  Trade and Tourism,  total  foreign  direct  investment in Hungary was
valued at $19 billion at the end of 1998.  Hungary's gross domestic product rose
5% in 1998, up from a 4% increase in 1997.  Hungary's  exports  increased 14% in
1998 from the 1997 level to $22 billion  while imports  totaled $24 billion,  an
increase of 15% from 1997.

                                      -4-
<PAGE>

         Historically,  the exclusive provider of telecommunications services in
Hungary was MATAV, once a part of the Hungarian Post Office.  Beginning in 1992,
the   Hungarian   government   began  the  process  of   privatizing   Hungary's
telecommunications  industry by selling an initial 30% stake in MATAV (raised to
67% in 1995)  to a  consortium  called  MagyarCom,  a  company  wholly  owned by
Deutsche Telekom,  the German public telephone operator,  and Ameritech,  a U.S.
regional bell operating company.  In addition,  the Ministry divided the country
into 54 primary  telecommunications  service areas in order to take some of such
primary  telecommunications  service areas out of MATAV's  national network with
respect to the provision of local basic  telephone  service while allowing MATAV
to continue its monopoly in the  provision  of domestic and  international  long
distance  services.  In 1993,  the Ministry  solicited  bids for  concessions to
build, own and operate telecommunications networks in the 25 service areas which
had been chosen to exit the MATAV system.  As of December 31, 1998, 23 of the 25
concessions  for which the Ministry  solicited  bids had been  awarded.  Winning
bidders  (each a Local  Telephone  Operator,  "LTO",  and  together  the "LTOs")
included:  the Company (presently 5 areas);  UTI, a consortium formed by Alcatel
Austria AG and US Telecom  East,  Inc.  (4 areas);  affiliates  of Vivendi SA of
France and General Electric Capital Corp. (4 areas) and the Swiss and Dutch PTTs
(1 area); a bidding group  including  United  International  Holdings of Denver,
Colorado (1 area); a consortium  comprised of Bezeq,  the Israeli PTO, and MATAV
(3 areas);  and MATAV (5 areas).  MATAV  also  retained  the rights to service 2
areas for which there were no successful  bidders.  In addition to the fees paid
to the government  which aggregated  approximately  $80.0 million (at historical
exchange rates), each of the non-MATAV LTOs negotiated a separate asset purchase
agreement with MATAV for each  concession  area's existing basic telephone plant
and equipment,  which led to the transfer of approximately  260,000 access lines
from a total of 1.2 million access lines in the MATAV system. MATAV's concession
areas   presently   cover   approximately   75%  of  Hungary's   population  and
approximately 70% of its geographic area.

         In addition to the  liberalization  of basic  telephone  services,  the
Ministry also selected two consortia to provide  nationwide  cellular  telephone
services. A consortium comprised of MATAV and Mediaone Group Inc., formerly part
of U.S.  West  ("Westel")  was  granted  two  licenses  to provide  both  analog
(NMT-450)  and  digital  (GSM-900)  services  while  Pannon  GSM  Tavkozlesi,  a
consortium formed by various  Scandinavian PTOs (including Tele Danmark A/S) and
the Dutch PTT ("Pannon"), was granted a license to provide only digital cellular
services. The Company believes that there are currently  approximately 1,000,000
cellular subscribers in Hungary.

         Hungary and the  Ministry  continue to pursue  industry  liberalization
efforts.  In 1997, MATAV completed its initial public offering pursuant to which
MagyarCom's  stake in MATAV was reduced to  approximately  60% and the Hungarian
State's  stake was reduced to  approximately  6%. The Hungarian  State  retained
certain  shareholder rights by retaining one "golden share." The Hungarian State
recently announced plans to sell its remaining  ownership interests in MATAV. In
2002,  MATAV's  right to  provide  exclusive  domestic  and  international  long
distance voice  transmission  is expected to end as are the exclusive  rights of
MATAV  and the  other  LTOs,  including  the  Operating  Companies,  to  provide
non-cellular  local voice  telephone  services.  In 1998,  the Ministry  awarded
Pan-Tel  Rt., a newly  formed  Hungarian  company  ("Pan-Tel"),  the licenses to
provide such services as data transmission,  voice mail and other services which
are  not  subject  to  exclusive  concessions.   Pan-Tel  started  building  its
telecommunications  network in 1998. If the current regulatory framework remains
unchanged,  the Ministry may invite  tenders for  concessions  to provide local,
long distance and international  basic telephone services when the monopolies of
the  Operating  Companies,  the other LTOs and MATAV  expire.  Pan-Tel  would be
entitled  to submit a bid as would any other  telephone  operator.  The  current
shareholders of Pan-Tel include MAV Rt. (the Hungarian railway company), MOL Rt.
(the Hungarian oil company), KFKI Computer Systems Kft. (a Hungarian information
technology  research  firm)  and the Dutch PTT KPN NV.  In  February  1999,  the
Hungarian State issued a tender for the  1800-megahertz,  or DCS frequency,  for
mobile communications. It is expected that three licenses will be awarded.

                                      -5-
<PAGE>

         In March 1999,  Hungary joined the North Atlantic Treaty  Organization.
In addition,  Hungary's  application for membership in the European Union ("EU")
was  accepted.  Hungary  is now in the  process  of  negotiating  the  terms  of
Hungary's official accession into the EU. The EU has adopted numerous directives
providing for an open  telecommunications  market among its member nations.  The
Company  believes that  Hungary's  potential EU  membership  will not affect its
exclusivity  rights and if Hungary  joins the EU prior to the  expiration of the
Company's  exclusivity  rights,  Hungary  may enter  into  certain  transitional
arrangements to preserve these exclusivity  rights.  Furthermore,  Hungary, as a
member  of  the  World   Trade   Organization   ("WTO"),   ratified   the  WTO's
Telecommunications  Agreement, which agreement began liberalizing the market for
telecommunications  services effective January 1, 1998.  Hungary's  ratification
postponed Hungary's liberalization of its telecommunications market until 2002.
See also "- Competition."

     HTCC and its Operating Companies

         In 1994,  the Ministry  awarded KNC and Raba-Com  concession  rights to
construct  local  telephone  exchanges  and  provide  non-cellular  local  voice
telephone  services  for a period of 25 years,  with  exclusivity  for the first
eight years. The Company  subsequently  acquired two other Operating  Companies,
Hungarotel and Papatel, that had been awarded substantially identical concession
rights by the Ministry.  MATAV continues to be the sole provider of domestic and
international long distance non-cellular voice telephone services through 2002.

         HTCC conducts its operations through the Operating Companies. Set forth
below is an organizational  chart of the Company and its principal  stockholders
as of March 26, 1999. Share ownership percentages of HTCC are based on shares of
HTCC's  common stock (the "Common  Stock")  owned as of March 26, 1999,  without
giving  effect to  outstanding  options  or  warrants.  Additionally,  ownership
percentages for the Operating  Companies do not give effect to future  Hungarian
equity  ownership  requirements.  See  "-Regulation - Hungarian Equity Ownership
Requirements."

                                      -6-
<PAGE>



    Citizens                       Public              Tele Danmark
    18.6%                          63.0%               18.4%



                                    HTCC

Papatel               Raba-Com              KNC                 Hungarotel
79.2%                 90.7%                 94.8%               99.0%

Other                 Other                 Other               Other
Stockholders:         Stockholders:         Stockholders:       Stockholders:
IFC - 20.0%           Municipalities - 9.3% Municipalities 5.0%  Private
Municipalities - 0.8%                       Antenna              Hungarian
                                             Hungaria - 0.2%     Investor - 1.0%


         HTCC was organized under the laws of the State of Delaware on March 23,
1992. The Common Stock is traded on the American Stock Exchange under the symbol
"HTC." The  Company's  United  States  office is  located at 100 First  Stamford
Place,  Stamford,  Connecticut  06902;  telephone (203) 348-9069.  The Company's
principal  office in Hungary is located at  Kiralyhago  u.2,  H-1126,  Budapest;
telephone (361) 457-6300.

Certain Stockholders

         The  Company  has  benefited  from  the  extensive   telecommunications
experience and capabilities of certain of its stockholders. Set forth below is a
brief description of such stockholders.

     Citizens Utilities Company

         Citizens Utilities Company (together with its subsidiaries, "Citizens")
is a New York Stock Exchange  listed  diversified  growth company which provides
communications  services,  competitive  local exchange carrier ("CLEC") services
and public  services  including  gas  transmission  and  distribution,  electric
transmission  and  distribution,  water  distribution  and wastewater  treatment
services to  approximately  1.82 million  customers in 22 states  throughout the
United States.  Citizens also owns approximately 83% of Electric Lightwave Inc.,
a CLEC operating in the western United  States.  At December 31, 1998,  Citizens
had $5.3 billion in assets and $2 billion in equity. For the twelve months ended
December 31, 1998,  Citizens had net income of $57.1 million and $1.5 billion of
revenues. Telecommunications services accounted for 60% of total revenues.

                                      -7-

<PAGE>

         In May 1995,  Citizens  purchased 300,000 shares of Common Stock from a
former  executive of the Company and has since  acquired an  additional  602,908
shares  pursuant to certain  agreements  entered  into with HTCC (as amended and
restated in certain cases to date, the "Citizens Agreements") and 103,000 shares
pursuant  to  certain  open  market  purchases  bringing  its  ownership  of the
outstanding  Common Stock as of March 26,  1999,  to 18.6%.  In  addition,  as a
result of the Citizens  Agreements,  Citizens has  received  certain  options to
purchase 4.5 million  shares of Common Stock.  These options expire in September
2000,  with per share exercise  prices  ranging from $12.75 to $18.00.  Citizens
also has an option to purchase 2.1 million shares of Common Stock at an exercise
price of $13.00 per share with an expiration  date of July 1, 1999. The Citizens
Agreements provide Citizens with certain preemptive rights to purchase, upon the
issuance of Common Stock in certain  circumstances  to third parties,  shares of
Common Stock in order to maintain its percentage  ownership  interest on a fully
diluted basis.  Assuming the exercise of all of its outstanding rights,  options
and warrants to purchase  Common Stock as of March 26, 1999,  Citizens would own
58.7% of the Common Stock on a  fully-diluted  basis.  The  Citizens  Agreements
include a certain  Replacement and  Termination  Agreement dated as of September
30, 1998 ("the  Termination  Agreement") which provides for, among other things,
payments by HTCC to Citizens in the aggregate  amount of $21 million  payable in
28 quarterly  installments of $750,000 each year from 2004 through and including
2010 in part as  agreement  for  Citizens'  agreement  to terminate a management
services agreement and in part as consideration for certain consulting  services
to be provided by Citizens to the Company from 2004 through and including  2010.
Pursuant to the Termination Agreement,  HTCC issued 100,000 shares of its Common
Stock and a $8.4 million  promissory  note to Citizens in  settlement of accrued
management fees pursuant to the terminated  management services  agreement.  The
principal on the note is payable in full in September 2004 and bears interest at
a varying  rate per annum  which is 2-1/2% per annum  above the  one-year  LIBOR
rate. Accrued interest is payable annually.  For a more detailed  description of
some of the Citizens Agreements,  see Note 14 of Notes to Consolidated Financial
Statements,  Item 13 "Certain Relationships and Related Party Transactions." See
also Item 12 "Security Ownership of Certain Beneficial Owners and Management".

     Tele Danmark A/S

         Tele Danmark A/S (together with its affiliates,  "Tele Danmark") is the
preeminent provider of  telecommunications  services in Denmark. Tele Danmark is
the leader in a number of  important  growth  segments of the market,  including
domestic  and   international   telephone   services,   mobile  services,   data
communications, Internet, leased lines, cable television and directory services.
Tele Danmark markets these services and products to a broad and growing customer
base - 3.5 million telephone access lines,  220,000 Internet customers,  995,000
cellular users and 812,000 cable television customers.

         At December  31, 1998,  Tele Danmark had total assets of Danish  Kroner
45.816  billion  (approximately  $7.2  billion  at current  exchange  rates) and
shareholders' equity of Danish Kroner 20.157 billion (approximately $3.2 billion
at current exchange  rates).  During 1998, Tele Danmark had net income of Danish
Kroner 4.013 billion  (approximately  $628 million at current exchange rates) on
net revenues of Danish  Kroner  33.989  billion  (approximately  $5.3 billion at
current exchange rates).

         Over the past few years, Tele Danmark's  activities abroad have been an
important  growth  area.  Tele  Danmark has  investments  in the Nordic  region,
continental  Western  Europe as well as Central  and Eastern  Europe  among them
Belgacom (Belgium),  Sunrise (Switzerland),  Talkline (Germany), Connect Austria
(Austria),  Polkomtel GSM (Poland) and UMC (Ukraine).  In Hungary,  Tele Danmark
has a 6.6% holding in Pannon (defined above),  one of the two Hungarian  digital
cellular operators.

         Tele Danmark's  stock trades on the  Copenhagen  Stock Exchange and the
New York Stock Exchange.  Ameritech owns 42% of the shares in Tele Danmark.  The
remaining shares are owned by individual and institutional shareholders all over
the world.

                                      -8-
<PAGE>

     International Finance Corporation

         The International Finance Corporation (the "IFC") is the private-sector
financing  organization of the World Bank, a global  cooperative  which provides
financial  and  other aid to  developing  countries.  The IFC owns  20.0% of the
capital stock of Papatel.


Recent Developments

     Management Changes

         Ole Bertram,  a former  senior  executive of Tele  Danmark,  joined the
Company on January 1, 1999 as its new President and Chief Executive Officer. Mr.
Bertram brings 36 years of telecommunications experience to the Company.

     Postabank Credit Facility

         The first installment of the repayment of the Postabank Credit Facility
is due on March 31,  1999.  To date,  the Company has  suffered  from  recurring
losses from  operations and has a working  capital  deficiency and a net capital
deficiency.  The Company does not presently have sufficient funds on hand to pay
the first  installment  on the Postabank  Credit  Facility.  Under the Postabank
Credit  Facility,  a failure  to pay any  installment  constitutes  an "Event of
Default".  Upon  notice to the  Company of an Event of  Default,  the Company is
entitled to the benefit of a 60 day cure period. If such Event of Default is not
cured within 60 days,  Postabank could declare all amounts outstanding under the
Postabank Credit Facility due and payable upon 60 days notice. The Company, with
assistance  from its  financial  advisors,  is  currently in  negotiations  with
Postabank and its financial  advisors regarding a restructuring of the Company's
obligations  with the goal of reducing the Company's cash repayment  obligations
so that the Company can  sufficiently  fund its  working  capital  requirements,
capital  expenditures  and meet its financing  obligations  with cash flows from
operations.  The Company is also reviewing various other financing  alternatives
with  several   entities.   While  the  result  of  such  negotiations  and  the
availability  of  alternative  sources of  financing  cannot be  predicted  with
certainty,  the Company  believes  that it will be able to resolve its financial
issues so that it will be able to meet its  obligations  during  1999.  However,
there can be no assurance  that the Company will be able to resolve these issues
on  commercially   reasonable  terms,  or  at  all.  Such  negotiations   and/or
discussions could result in the issuance of equity and/or debt securities of the
Company or one or more of the Operating Companies.

     Year 2000 Issue

         In 1998 the  Company  initiated  a project  designed  to  identify  and
mitigate Year 2000 computer  deficiencies.  The Company formed a Year 2K project
team  (the  "Project  Team")  with  the  mandate  to  identify   problems,   set
methodologies  for resolution,  and budget expenses all in order to minimize the
impact of any Y2K problems from the Company's computer systems.

         The Project  Team  consists  of  employees  from  senior and  mid-level
management from various business units within the Company. The Project Team also
includes several of the Company's computer  technicians and representatives from
the systems' vendors. The Project Team has 10 permanent members from the Company
and 3 permanent  members from the switching and billing  system  vendors.  Other
vendors are  consulted  on an "as  needed"  basis.  The  Company  also formed an
oversight committee comprised of senior management to oversee the Y2K issue.

         The  Project  Team  is  examining  the   Company's   telecommunications
networks, IT business systems, and miscellaneous support systems.  These systems
include computers that support  telephone  services,  bill production,  customer
accounting,  plant  records,  payroll,  and a  variety  of  systems  such as air
conditioners  and building entry systems.  The project has five primary  phases:
(I)  inventory,  (II)  assessment,  (III)  remediation,  (IV)  testing  and  (V)
contingency planning and certification. Phase I is complete and consisted of the
development  of a  comprehensive  working list which  documents all software and
microprocessor  reliant  materials  used by the  Company to ensure that phase II
covers the entire  population  of  potential  Y2K issues.  Phase II consisted of

                                      -9-
<PAGE>

evaluating  the inventory list developed  during Phase I and  determining  which
systems need  replacement,  modification or retirement  during 1999. Phase II is
complete.  Phase III is  currently  underway  and  consists of  replacing  those
hardware and  software  components  identified  as  non-compliant  and should be
completed by the middle of the second  quarter 1999. At this time,  some systems
have already been  modified to make them Y2K  compliant  and other  systems have
been placed on retirement  schedules.  Major switching  components are scheduled
for  replacement in April,  May and June of this year.  Phase IV will consist of
testing  of  existing  and new  hardware  and  software  components  and will be
completed during the second and third quarters of this year. Phase V consists of
developing  a  written  plan for  alternative  methods  of  completing  critical
processes should failure occur at the turn of the century. Contingency plans are
being developed  currently for all systems.  Written  contingency  plans will be
provided  to the  employees  by  September.  The  Company  will begin  awareness
campaigns  to draw  employee and customer  attention to the  potential  problems
associated with Y2K by April 1, 1999.

         The Company  relies upon its  network  construction  vendors to provide
compliant  hardware and software.  The Project Team believes that  compliance of
the telephone  switching systems and the automatic message accounting  interface
with the  billing  system  present the most  significant  Y2K  exposure  for the
Company. In cooperation with  representatives  from the switch manufacturers who
are active  members of the Project  Team,  the Project Team has developed a plan
for Y2K Compliance of the switching  systems.  The switching system vendors have
provided  the Company  with  delivery  schedules  that will bring the  switching
systems  into  compliance  by  June of  this  year,  at  which  time  compliance
certificates will be issued by the vendors.  Compliance of the switching systems
by June  should  allow  sufficient  time to test  the  switching/billing  system
Automatic Message  Accounting  ("AMA") interface and allow problems to be solved
in a timely manner before the turn of the century.

         The  Company  relies  upon  MATAV's  telecommunication  network for all
long-distance  interconnections.  Should MATAV's telephone  switching systems be
non-Y2K  compliant,  the systems  could fail  resulting  in lost revenue for the
Company.  The  Company  is  working  directly  with  MATAV to reduce the risk of
failure.  A  member  of the  Project  Team  employed  by  one  of the  Company's
telecommunications  switching  vendors also sits on MATAV's Y2K committee and is
actively  involved  in the issue.  The  Company  believes  that no costs will be
incurred  related to this  matter.  MATAV will also  provide  the  Company  with
certification for the 2MB backbone of the Company's internal wide area network.

         The  Company's  recently  implemented  Billing and Customer Care system
(BACC)  is Y2K  compliant  according  to its  vendor,  representatives  of which
participate  on the Project Team.  During phase IV of the program,  beginning in
April, and following the upgrades of the Company's  switching systems,  the BACC
system  will be fully  tested in  cooperation  with the  vendor  to  ensure  Y2K
compliance  has been  reached.  The vendor will issue a  compliance  certificate
following successful completion of these tests.

         Various  other IT  systems  have  been  identified  to be  replaced  or
upgraded in association with the Company's efforts to become Y2K compliant.  The
Company  believes  that all such systems will have  completed  all phases of the
project  by the  end  of the  third  quarter  of  1999.  The  Company  maintains
approximately 2 million lines of computer code developed  internally  which will
be tested and modified by the end of the third quarter.


                                      -10-
<PAGE>

         The Company  currently  estimates  that the total costs of  remediation
will be approximately $785,000, which includes the replacement and/or upgrade of
certain  equipment.  $630,000  of such cost will  allow the  Company  to provide
additional services in addition to bringing the Company into Y2K compliance.  At
this time,  no material  costs have been  incurred  for  remediation  of the Y2K
problem.  It is expected that most costs will be incurred  during the second and
third quarters of 1999.  Management  cannot provide assurance that the result of
the project or that the remediation costs will not be materially  different from
estimates.  Accordingly,  contingency  plans are  currently  being  developed to
address high-risk systems.  The contingency plans are expected to be in place by
the third quarter of 1999.

         The Company is dependent  on network  switch  manufacturers  to provide
compliant  hardware and software in a timely  manner.  Within IT, the Company is
dependent  on  the  development  of  software  by  external  experts,   and  the
availability of critical resources with the requisite skill sets. At worst case,
failure by the Company or by certain of its vendors to remediate Y2K  compliance
issues  could  result  in  disruption  of  the  Company's  operations,  possibly
impacting its  telecommunication  network and the Company's  ability to bill and
collect revenues.  However, management believes that this worst case scenario is
unlikely, and that its efforts to mitigate Y2K issues will be successful.

Strategy

         With the completion of the construction program in all of the Operating
Areas in 1997, the Company's primary focus in 1998 was to increase call revenues
and reduce  operating  costs while  continuing to add  residential  and business
customers to its  networks.  To  accomplish  these goals,  the Company  improved
operational  efficiencies,  increased its marketing  efforts,  and increased the
services  and support  provided  to its entire  customer  base.  The Company has
implemented  the  following  operational  strategies  in  order to  further  its
business objectives.

     Revenue Growth

         The Company  plans to continue  its revenue  growth by  increasing  the
penetration levels in the business and residential  sectors. The Company intends
to continue to increase  its call  revenues  with  increased  marketing  to each
customer segment. The Company has placed emphasis on increasing the installation
and usage levels of the Company's  business  customers,  who currently  generate
approximately  46% of the  Company's  total call  revenues.  The Company is also
focusing on the marketing and sales of deregulated  services  including  managed
lease lines, PBX sales and services,  ISDN,  Internet and Digifon Services.  The
Company is also providing special tariffs for Internet usage.

     Operational Efficiency

         The Company is increasing its productivity  and operational  efficiency
by achieving  certain  economies  of scale with  respect to network  management,
administration,   customer  service,  billing,   accounts  receivable,   payroll
processing,  purchasing and network  maintenance.  For example,  the Company has
implemented  its own centralized  operating and accounting  system in all of its
Operating Areas. A significant  increase in operational  efficiency has resulted
from the  implementation  of this system  specifically  in the areas of customer
billing  and  financial  accountability.  In  addition,  some  of the  Company's
Operating  Areas are  contiguous,  which  facilitates the realization of certain
economies  of scale.  For  example,  by using  fiber  optic  technology  between
contiguous   Operating  Areas,   the  Company   realizes   certain   operational
efficiencies by  centralizing  certain  functions.  As of February 28, 1999, the
Operating Companies had a total of 278 access lines per employee.

                                      -11-
<PAGE>

     Marketing

         As the exclusive  provider of basic telephone services in the Operating
Areas, the Company's primary marketing objective is to increase the usage of its
telephone  services by its  existing  residential  and  business  customers.  In
addition,  the Company intends to attract new subscribers by targeting the needs
of various market  segments,  while  maintaining  superior  customer service and
reliability based on current "state of the art"  telecommunications  technology.
The Company's  targeted  market segments are: (i)  residential  customers;  (ii)
small businesses and professionals;  (iii) medium and large businesses; and (iv)
government  institutions.  For its larger  business  customers,  the Company has
trained account  managers to service these customers and potential  customers by
educating  them  on  the  availability  of  "turn-key"  business  communications
solutions  and  several  "value  added  services"  including  the  premium  rate
services, voice mail and all of the Digifon services (e.g. call forwarding, call
waiting,  call  barring).  The Company will also  emphasize ISDN and CCS-7 (high
speed data  transfer)  services in 1999.  The Company  believes that this effort
will result in a greater  understanding by its business  customers and potential
business  customers of the  potential  revenue  gains that can be achieved  with
advanced  telecommunications  technology.  For  its  residential  customers  and
potential  customers,  the Company's  marketing  efforts include  advertising on
radio and television,  door-to-door  marketing surveys,  newspaper  advertising,
participation  in  local  trade  shows,  direct  mail,  community  meetings  and
billboard  advertising.  The Company is also  offering  discounts  for  Internet
users.

    Customer Service

         The Company believes that providing a high level of customer service is
important to achieving  its  objective of  attracting  additional  customers and
increasing the usage of existing services by its current customer base. Prior to
completion of the construction  program, some customers waited for over 20 years
for telephone service. Today, most residences and businesses can be connected to
one of the  Company's  networks  within 10 days.  The Company also operates full
time operator  service  centers in each of the Operating Areas which are staffed
by  operators  capable  of  providing,   among  other  things,  call  completion
assistance,  directory  assistance and trouble  reporting on a 24 hour basis. In
addition, the Company operates customer service centers in each of the Operating
Areas which offer facsimile,  Internet,  photocopying and telephone bill payment
services.  These offices also sell communications  equipment,  process telephone
service  applications  and handle  billing  inquiries.  During 1998, the Company
began to reorganize its customer  service centers by implementing  the necessary
changes to make such centers more "customer  friendly." The Company is providing
more choices for its customers and more product information instruction. For its
business customers, the Company has account representatives for each customer.

         Most  of  the  Company's   subscriber   base  consists  of  residential
customers.  As of  December  31,  1998,  88%  of  subscribers  were  residential
customers and 12% were business and other institutional  subscribers  (including
government institutions).

Operations

     Services

         The Company provides  non-cellular local voice telephone service in the
Operating  Areas  which  allows   subscribers  to  have  facsimile,   and  modem
transmission  capabilities  and  makes  available  to its  subscribers,  through
interconnection  with MATAV,  domestic and international long distance services.
In  addition  to these  standard  services,  the  Company  currently  offers its
subscribers  data  transmission  and  other  value-added   services,   including
Internet, voice mail, call waiting, call forwarding,  and three-way calling. The
Company intends to provide ISDN, caller ID and audio text services in all of its
Operating Areas in 1999.

                                      -12-
<PAGE>

         The  Company's  revenues  are derived  from the  provision of local and
domestic and international long distance telephone services which consist of (i)
charges for measured  telephone  service,  which vary  depending on the day, the
time of day, distance and duration of the call, (ii) connection and subscription
fees, and (iii) other operating revenues  consisting  principally of charges and
fees from leased  lines,  public  phones,  detailed  billing and other  customer
services, including revenues from the sale and lease of telephone equipment.

         Measured Service. Charges for local and domestic and international long
distance  measured  service vary with the number of pulses  generated by a call.
The number of pulses  generated for a particular  call depends upon the day, the
time of day, the distance covered and the duration of the call.  Currently,  the
Company  charges  HUF 12.0  ($.06) per pulse.  The  Ministry  adjusts  such fees
annually based on the Hungarian Consumer Price Index. For all local calls within
an Operating Area, the Company  retains all of the revenues  associated with the
call. For domestic long distance  calls outside of an Operating Area  (including
those between  Operating  Areas,  including  adjacent  Operating  Areas) and all
international  calls,  the Company has a revenue sharing  arrangement with MATAV
the terms of which are governed by a decree of the  Ministry.  Mobile  telephone
calls to  customers  in the  Operating  Areas and calls  from  customers  in the
Operating Areas to mobile phones are included in long-distance  service revenues
shared  with MATAV.  In  February  1999,  the  Ministry  adopted a new decree to
regulate the interconnection revenue sharing arrangement with MATAV. The Company
believes  that the new  regulation  will  result in an overall  increase  in the
Company's  revenue per call in 1999 for domestic long distance and international
calls over the amount  received in 1998.  See "-  Regulation  - Rate Setting and
Revenue Sharing."

         Subscription  and  Connection  Fees.  The  Company  collects  a monthly
subscription fee from its customers. Such fees vary depending on such factors as
whether the services are provided to a residential or business or other customer
(including  government  institutions),  and whether the  customer is linked to a
digital or analog  exchange.  The Company charges a monthly  subscription fee to
digital and single-party exchange customers of HUF 1,160 ($5.36) for residential
customers and HUF 1,670 ($7.71) for business and other institutional subscribers
(including  government  institutions).  Prior to 1999, the  subscription fee for
residential  customers included local calling usage.  Effective January 1, 1999,
the monthly  subscription  fee for  residential  customers  does not include any
fixed  amount of local  calling  usage.  See "-  Regulation  - Rate  Setting and
Revenue Sharing."

         Connection fees are earned when a customer is added to the network. The
Company  may collect  the full  connection  fee  provided  that the  customer is
connected within 30 days;  otherwise,  the Company may only collect a portion of
the  connection  fee and must  connect  the  subscriber  within  one year.  Upon
connection,  the  Company  may collect  the  remaining  portion of the fee.  The
connection  fee is not  recognized  as income  until  the  customer  receives  a
telephone and the connection is made. Currently,  connection fees are HUF 30,000
($138.57)  (plus VAT) for residential  customers and HUF 90,000  ($415.70) (plus
VAT) for  business and other  institutional  subscribers  (including  government
institutions), which are the maximum allowable fees, pursuant to a decree of the
Ministry. Customers requesting additional access lines are charged an additional
connection fee per line.

         Other  Operating  Revenue.  The Company  supplies  private line service
(point-to-point  and  point-to-multi-point)   primarily  to  businesses.  As  of
December 31, 1998, approximately 1176 leased lines were in service. In addition,
as of  December  31,  1998,  the  Company  had 1,819  public  pay  phones in the
Operating  Areas in accordance  with the terms of the  Concession  Contracts (as
defined under "- Network  Design,  Construction  and Performance - Milestones").
The Company  generates  additional  revenues from the  provision of  value-added
services,  including voice mail, call waiting,  call  forwarding,  and three-way
calling, as well as through the sale and leasing of telephone equipment.

                                      -13-

<PAGE>

     Pricing

         Maximum  pricing levels are set by the Ministry and  historically  rate
increases have tracked  inflation,  as measured by the Hungarian  Producer Price
Index  ("PPI").  In 1997,  the Ministry,  pursuant to a decree,  set forth a new
regulatory  framework for regulating  annual increases in the fees for (a) local
calls, (b) domestic long distance and  international  calls and (c) subscription
fees based on the  Hungarian  Consumer  Price  Index  ("CPI").  In  addition  to
separate  price caps for such  categories  of services,  the Ministry  enacted a
rebalancing  formula  which  provides  for  greater  increases  in  charges  for
subscription   fees  and  local  calls  than  in  domestic   long  distance  and
international calls. See also "- Regulation - Rate Setting and Revenue Sharing."
The Company's  customers  are on a one-month  billing  cycle.  For domestic long
distance  and  international  calls,  the Company is required to charge the same
tariffs as MATAV.  For local calls, the Company may choose to increase its rates
up to the permitted amount;  however, price increases in the past generally have
conformed to the price  increases  promulgated by MATAV.  Measured  service rate
increases are effected by the Ministry by either increasing charges per pulse or
reducing  the time  interval  between  pulses,  depending on the time of day and
other factors.  In addition,  the Company  charges  additional fees for services
such as data transmission,  voice mail, call waiting and call transfer in all of
its  Operating  Areas.  The fees  charged for these  services are not subject to
regulation by the Ministry.

         The Company has been allowing its subscribers to pay connection fees on
various  installment  basis  plans  and  encourages  customers  to  lease  their
telephones. The Company believes that to date the various installment plans have
resulted in an increase in the number of subscribers in the Operating Areas.

         The Company currently  purchases  telephone sets in bulk from a variety
of  manufactures.  Customers  can choose to buy the phone or lease the phone and
pay a monthly  fee of HUF 180  ($0.83).  Although  there is no Ministry or other
governmental  regulation relating to lease rates, the Company adjusts such rates
annually  according to the  Hungarian  PPI.  Approximately  58% of the Company's
subscribers as of December 31, 1998 leased their phones from the Company.

Network Design, Construction and Performance

         The Company has constructed a versatile modern  communications  network
which  substantially  replaced the antiquated  system purchased from MATAV. This
new system  provides many of the  technologically  advanced  services  currently
available  in the United  States and  Western  Europe.  The  Company's  networks
maintain  the North  American  standard,  or "P01",  grade of  service.  The P01
standard  means that one call out of 100 will be blocked in the busiest  hour of
the  busiest  season.  The  Company  believes  that  its  ability  to  meet  the
telecommunications  requirements  of its  customers  through  a  combination  of
conventional   fiber  optic  and  wireless  local  loop  technology  affords  it
significant  flexibility with respect to network development and network capital
expenditures.  The Company has replaced all manually  operated local battery and
common  battery  cord type  switchboards  purchased  from MATAV while  retaining
certain analog  switching  systems.  The Company  upgraded such analog switching
systems allowing such systems to mimic many of the features  available in modern
digital switching systems with a minimal investment.

     Conventional Network Design

         In developing its networks, the Company has implemented service quality
and  redundancy  objectives  on par with  Western  European  and North  American
digital  network  standards.  Certain of the networks  constructed  are based on
digital  hosts and  remotes  with  fiber  optic  rings  and  copper  feeder  and
distribution.  Such a distribution system is the conventional system used in the
United States and Western Europe. Telecommunications services are transmitted to
the home through twisted pair copper wire telephone cable.

         The  Company's  conventional  networks  have been designed to employ an
open  architecture,   generally  using  Synchronous  Digital  Hierarchy  ("SDH")
technology for system resilience. The Company's networks are designed to provide
voice and high speed data  services.  The  Company  believes  that the  flexible
design of the  conventional  networks  it has  constructed  allows it to readily
implement new technologies  and provide enhanced or new services.  The Company's
switches in its conventional  networks allow it to connect to networks  operated
by other LTOs or by MATAV in order to route voice and data transmissions between
subscribers.

                                      -14-
<PAGE>


     Wireless Network Design

         In certain  portions of the Operating  Areas,  the Company is deploying
wireless  network   technology   based  upon  the  Digital   Enhanced   Cordless
Telecommunications   ("DECT")  system  which   interfaces  radio  technology  to
fiber-optic,  digital  microwave  or  fixed  copper  networks.  The  use of DECT
technology  generally  reduces the time and expense of installation and securing
rights of way. In a conventional network build,  significant  investment must be
made in order to offer  service to a large  proportion  of  potential  customers
whether or not they become actual  customers.  By contrast,  the use of the DECT
system in a network build-out  provides for capital  investment  proportional to
the number of  customers  actually  connected  because the radio links and other
required equipment are installed only for those households  choosing to take the
service and are installed only at the time service is requested.

         In many areas in which the  Company  is  utilizing  a wireless  network
design,  the  Company is  deploying  a fiber optic cable to the node in the same
fashion as in a conventional network build-out.  At each newly constructed node,
the Company has constructed a radio base station ("RBS"),  rather than switching
to twisted pair copper wire  distribution to the home. Each RBS has the capacity
to provide service to between 200 and 600 customers. As additional customers are
brought onto the network,  the Company  will install a  transceiver  unit at the
subscriber's  premises.  Such  transceiver's  operating  software  is  digitally
encrypted so that it will operate only with its  supporting  RBS. A conventional
telephone  jack  is  then  installed  in  the  subscriber's  household  near  an
electrical  outlet which is used to power the  transceiver  unit. The subscriber
then uses a conventional phone to make outgoing and receive incoming calls.

         The DECT-based  wireless  local loop system  provides the same grade of
service as a conventional  telephone network. In addition,  a DECT-based network
is able to provide many of the same services as a  conventional  copper  network
including voice mail, call forwarding and call barring.

     Network Administration

         The Company  actively  monitors the switching  centers and all critical
network  operational  parameters in each Operating Area. As digital features are
introduced into their  respective  networks,  the network  technicians  have the
ability to monitor  the  networks  and  evaluate  and respond  accordingly.  The
Company  will also be able to analyze the  performance  data  generated by these
systems  in order to make the  operating  adjustments  or  capital  expenditures
necessary to enhance individual network operations.

The Operating Companies

         The  following  is  a  brief  description  of  each  of  the  Operating
Companies:

      Hungarotel

         The  Company  holds a 99.0%  interest  in  Hungarotel  while a  private
Hungarian  investor owns the  remaining  1.0%.  The  Hungarotel  Operating  Area
encompasses the southern  portion of Bekes County,  which borders  Romania.  The
Hungarotel Operating Area is comprised of 75 municipalities and has a population
of  approximately  398,500  with an  estimated  166,600  residences  and  22,300
business and other potential subscribers  (including  government  institutions).
Bekes is the most intensively cultivated agrarian region in Hungary and produces
a substantial portion of Hungary's total wheat production.  Industry,  generally
related  to food  processing,  glass and  textile  production,  is also a strong
employer in the region.  Foreign  investors in the Operating  Area include Owens
Illinois of the United States and a number of European manufacturers. The region
is also a center for natural gas exploration and production.  As of December 31,
1998,  Hungarotel  had  105,300  access  lines  connected  to its  network.  The
Hungarotel  network utilizes a combination of a conventional  build, fiber optic
and wireless local loop technology.

                                      -15-
<PAGE>


      KNC

         The Company  holds a 94.8%  interest  in KNC.  The KNC  Operating  Area
municipalities  own 5.0% and Antenna  Hungaria owns the remaining  0.2%. The KNC
Operating  Area is  comprised  of 74  municipalities  in the eastern  portion of
Nograd County,  which borders Slovakia.  The KNC Operating Area has a population
of approximately 152,300, with an estimated 61,900 residences and 6,500 business
and  other  potential  subscribers  (including  government  institutions).   The
principal   economic   activities  in  the  KNC  Operating  Area  include  light
manufacturing,  tourism, some coal mining and agriculture.  Foreign investors in
the region include the Irish dairy producer, Avonmore, and the Japanese company,
Paramount Glass. The Operating Area's proximity to Budapest, 1-1/2 hours by car,
and its many  cultural  attractions  makes it a  desirable  weekend  and tourist
destination.  As of December 31, 1998, KNC had 40,000 access lines  connected to
its network.  The KNC network  utilizes a combination of a  conventional  build,
fiber optic and wireless local loop technology.

      Papatel

         The Company  holds a 79.2%  interest  in Papatel.  The IFC owns a 20.0%
interest and Papa, the principal city in the Papatel  Operating  Area,  owns the
remainder.  The Operating Area is composed of 51  municipalities  located in the
northern  portion  of  Veszprem  County  and is  contiguous  with  the  Raba-Com
Operating  Area. The population of the Papatel  Operating Area is  approximately
64,000  with an  estimated  24,000  residences  and  3,300  business  and  other
potential  subscribers  (including  government  institutions).   The  region  is
relatively  underdeveloped  economically with the principal economic  activities
centering around light industry, appliance manufacturing, agriculture and forest
products.  Significant foreign investors in the Operating Area include ATAG, the
Dutch  appliance  maker,  and  Electricite  de France.  As of December 31, 1998,
Papatel had 18,300 access lines  connected to its network.  The Papatel  network
utilizes a combination of a conventional  build,  fiber optic and wireless local
loop technology.

      Raba-Com

         The Company holds a 90.7% interest in Raba-Com.  Municipalities  in the
Raba-Com  Operating Area own the remaining 9.3%. The Raba-Com  Operating Area is
comprised  of 63  municipalities  in  Vas  County,  which  borders  Austria  and
Slovenia.  The Raba-Com Operating Area has a population of approximately 67,600,
with an estimated 23,800  residences and 4,300 business and other  institutional
subscribers   (including  government   institutions).   The  principal  economic
activities  in  the  Raba-Com   Operating  Area  include  heavy   manufacturing,
agriculture and tourism.  Significant  employers  include:  Linde (the Hungarian
central   natural  gas   distributor):   Phillips  (a  Dutch-owned   electronics
manufacturer); EcoPlast (a plastics producer); and Saga (a British-owned poultry
processor).  As of December 31, 1998, Raba-Com had 21,400 access lines connected
to its network.  The Raba-Com  network  utilizes a combination of a conventional
build and fiber optic infrastructure.

Regulation

         In November  1992,  the  Hungarian  Parliament  enacted  the  Hungarian
Telecommunications  Act of 1992 (the  "Telecom  Act") which took effect in 1993.
The Hungarian Telecom Act provided for, among other things, the establishment of
the conditions under which individuals and companies  (including MATAV,  foreign
persons and foreign owned companies) could bid for concessions to build, own and
operate local  telecommunications  networks in  designated  service  areas.  The
Hungarian  Telecom Act also gave the  Ministry  the  authority  to regulate  the
industry,   including   the  setting  of  local,   domestic  long  distance  and
international  rates,  the sharing of revenues  between the LTOs and MATAV,  the
accrediting  of  equipment  vendors and the setting of  standards  in respect of
network  development and services offered.  In order to meet these  obligations,
the  Hungarian  Telecom  Act  created  a  professional   supervisory  body,  the
Telecommunications  Chief Inspectorate (the "Inspectorate")  which is supervised
by the  Ministry.  Its tasks include  supervising  the progress of the LTOs with
respect to build-out scheduling,  equipment purchases and the quality of network
construction.


                                      -16-
<PAGE>

     Concession Contracts

         Pursuant  to the  Hungarian  Telecom  Act and in  accordance  with  the
Concession  Act of 1991, in connection  with the award of a concession,  each of
the LTOs entered  into a Concession  Contract  with the Ministry  governing  the
rights  and  obligations  of the LTO with  respect  to each  concession.  Topics
addressed by individual concession contracts include the royalties to be paid to
the Ministry, guidelines concerning LTO capital structure, build-out milestones,
employment guidelines and the level of required contributions to meet social and
educational  requirements.  For example, the Concession Contracts stipulate that
an LTO may not change its capital structure by more than 10% without the express
written consent of the Ministry and that former MATAV  employees  generally must
be retained  for the first five to eight years of  operation.  The Company  may,
however, enter into termination agreements with its employees.

         Corporate  Governance.  The amended Concession Contracts for Hungarotel
and  Papatel  provide  that two out of every  five  members  of their  Boards of
Directors and one-half of the members of their  Supervisory  Boards be Hungarian
citizens.

         Exclusivity.  The  Concession  Contracts  provide  that each  Operating
Company has the exclusive  right to provide  non-cellular  local voice telephone
services for eight years.  Commencing in 2002,  the Ministry will have the right
to grant additional concessions for non-cellular local voice telephone services.

         Milestones/Network  Construction.  Each  of  the  Concession  Contracts
prescribe  certain  build-out  obligations   ("milestones")  that  require  each
Operating  Company  to  install  a  specified  number  of  access  lines  within
prescribed  time periods.  Each of the Operating  Companies met their  build-out
requirements in 1998.
See "- Fines."

         Presently,   only  three  vendors  have  been   accredited  to  provide
telecommunications  switching equipment to LTOs, namely, Siemens, Ericsson and a
Hungarian subsidiary of Northern Telecom. Although only these three vendors have
been  accredited,  the Operating  Companies have not  encountered  any equipment
supply shortfalls.

         Royalties.  Each of the LTOs is required by the terms of its individual
concession  contract  to  pay  annual  royalties  to  the  Ministry  equal  to a
percentage of net revenue from basic  telephone  services.  Net revenue for this
purpose are  generally  defined as gross revenue from basic  telephone  services
less interconnect fees paid to MATAV. The royalty  percentage may also differ by
region. For example, the Operating Companies must pay royalties in the following
percentage  amounts:  KNC 0.1%;  Raba-Com 1.5%;  Hungarotel  (Bekescsaba)  2.3%;
Hungarotel  (Oroshaza)  0.3%; and Papatel 2.3%. These amounts are paid annually,
in arrears.

         Social and  Educational  Contributions.  In addition  to the  royalties
described above,  Concession  Contracts may also call for social and educational
contributions  based on revenues of the Operating  Company,  excluding  VAT. The
Concession  Contracts for KNC and Raba-Com  require them to contribute  1.5% and
1.0% of such revenues,  respectively, to support social and educational projects
in their Operating Areas. The Concession  Contracts for Hungarotel require it to
pay an  amount  equal  to 10  times  the  local  occupational  excise  tax.  The
applicability  and  enforceability  of such  obligation is presently  uncertain.
Therefore, it is not possible to predict with certainty the effect, if any, such
provision will have on the Company.

         Renewal.  Each Concession Contract provides for a 25-year term with the
right to submit a  proposal,  within 18 months  prior to the  expiration  of the
Concession  Contract to apply for an additional  12-1/2 years which the Ministry
may  grant  if  it  approves  the  Operating  Company's  proposal,   subject  to
consultation  with local  authorities and professional  and consumer  protection
bodies. Such extension would involve the payment of an additional concession fee
to be set by the Ministry prior to the submission of the proposal.  In the event
the  proposal  is  rejected  or is not timely  filed,  the  concession  would be
auctioned by the Ministry,  although the existing  Operating  Company would have
priority in the event the  Operating  Company's  proposal  provides for the same
terms and conditions as that of another bidder.

                                      -17-
<PAGE>

         Fines.  The failure to meet  required  construction  milestones  may
result in the levying of fines by the Ministry.  Such fines are computed  based
on a contractual  formula and may be  substantial.  Each of the Operating
Companies met their build-out requirements in 1998.

         Termination  upon  Lack of  Performance.  If an LTO is unable to comply
with its  Concession  Contracts,  the  Ministry  has the right to  abrogate  the
Concession  Contract.  In  such an  instance,  the  Ministry  has  authority  to
determine alternative provisions for such service, which may include the sale of
the LTO's  telecommunications  assets to another provider. In such case, the LTO
would be  obligated  to sell its  assets  under the terms of a  contract  to the
provider to whom the concession is transferred. The Company believes that it has
demonstrated  substantial performance to date under its Concession Contracts and
that its relations with the Ministry are good and, therefore,  the chance of any
termination of any Concession Contract are remote.

         Dispute  Resolution.  Any disputes  arising with respect to the
interpretation  of a Concession  Contract will be adjudicated by a Hungarian
court.

     Hungarian Equity Ownership Requirements.

         The Ministry has stipulated in the Concession  Contracts for Hungarotel
and Papatel,  as amended in June 1996, that each of the Operating Companies must
meet certain Hungarian ownership  requirements so that by the end of the seventh
year of their Concession  Contracts Hungarian ownership must consist of 25% plus
one share of the relevant  Operating  Company.  For the first three months after
assuming  operations of an Operating Area from MATAV, no Hungarian ownership was
required.  For the  seven-year  period  following  the  date or  amendment  of a
Concession  Contract,  as the case may be, Hungarian  ownership must be at least
10%, except that during such period,  such ownership may be reduced to as low as
1% for a period of up to two years.  During such  seven-year  period,  while the
Hungarian  ownership  block is required to be at least 10%, such block must have
voting power of at least 25% plus one share, thus providing Hungarian owners the
right to block  certain  transactions  which,  under  Hungarian  corporate  law,
require a  supermajority  (75%) of  stockholders  voting on the matter,  such as
mergers and consolidations, increases in share capital and winding-up.

         For these purposes, Hungarian ownership of shares means shares owned by
Hungarian citizens. Shares owned by a corporation are considered Hungarian owned
only in proportion to the Hungarian ownership of such corporation.  The LTOs can
also fulfill the 25% plus one share Hungarian  ownership  requirement by listing
such shares on the Budapest Stock Exchange.

         The equity ownership  requirements  and exceptions  described above are
contained in the June 1996  amended  Concession  Contracts  for  Hungarotel  and
Papatel.  The equity  ownership  requirements  expressly  set forth in KNC's and
Raba-Com's Concession Contracts call for a stricter 25% plus one share Hungarian
ownership  requirement.  However, the Ministry has stated,  pursuant to a letter
dated September 18, 1996, that it intends that all of the Operating Companies be
treated equally with respect to such ownership  requirements  which requirements
KNC and Raba-Com are currently in compliance.

         Each of the Operating  Companies,  other than Papatel,  is currently in
compliance  with  the  1%  ownership  requirement  but  not  the  10%  ownership
requirement  which  was  supposed  to be  effective  in  June  1998.   Papatel's
Concession  Contract permits an initial Hungarian ownership level of its current
0.8%. If the Hungarian  ownership does not meet the required levels,  the LTO is
required  to give  notice to the  Ministry,  which may then  require  the LTO to
rectify the situation  within three months,  or a shorter period if the Ministry
considers that there has been a delay in the required notification. The Ministry
is currently reviewing the Hungarian equity ownership requirements.  In the case
of one other LTO, the Ministry has granted a waiver on the 10% ownership  issue.
Presently,  the Ministry has  indicated  that it is not going to enforce at this
time the 10%  Hungarian  equity  ownership  requirement.  In the event  that the
Ministry  decides to enforce the existing  Hungarian  ownership  requirements or
adopts new Hungarian equity ownership  requirements,  the Company will formulate
plans to meet the Hungarian equity ownership requirements.  Failure to do so, or
failure to comply with the greater than 25% Hungarian  ownership  requirement at
the end of the  seven-year  period  might be  considered  a serious  breach of a
Concession  Contract,  giving the Ministry  the right,  among other  things,  to
terminate the  Concession  Contract.  There can be no assurance that the Company
will be able to increase the Hungarian ownership in the Operating Companies in a
manner sufficient to comply with such requirements in the future.

                                      -18-
<PAGE>

         The Hungarian  ownership  requirements  would effectively give minority
Hungarian  stockholders in the Operating  Companies the ability to block certain
corporate  transactions  requiring the approval of 75% of stockholders voting on
the matter, including mergers and consolidations, increases in share capital and
winding-up.  In  addition,  unless  the  Hungarian  ownership  requirements  are
formally  changed,  compliance  would  result in a  reduction  in the  Company's
ownership in the Operating Companies, and, consequently,  the Company's share of
income,   if  any,  or  loss  of  the  Operating   Companies   will  be  reduced
proportionately.

     Rate-Setting and Revenue Sharing

         Pursuant to the  Hungarian Act LXXXVII of 1990 on Pricing (the "Pricing
Act") and the Telecom Act, the Ministry, issues, in agreement with the Hungarian
Ministry  of Finance,  decrees  regulating  the  tariffs for  telecommunications
services provided by the Company, MATAV and the other LTOs. Through December 31,
1997 the Ministry  regulated,  pursuant to Decree No.  30/1993  (XL.23) KHVM, as
amended,  on the Rates Charged for Public  Telephone  Services (the "1993 Tariff
Decree"),  the  revenue  sharing  arrangements  between  the  Company  and MATAV
applicable  to long  distance and  international  calls and the fees the Company
could charge its customers for services.  The Ministry  regulates the subscriber
connection  fees pursuant to Decree 11/1995  (VII.12)  KHVM, as amended,  on the
One-Time Access Fee Payable for Establishment of Public Telephone Service Access
Points (the "Connection Fee Decree").

         Through  December 31, 1997, the 1993 Tariff Decree regulated the prices
that the Company  could charge its customers  for: (a)  subscription  fees,  (b)
local calls,  and (c) long  distance and  international  calls.  The 1993 Tariff
Decree  provided  for an aggregate  price cap and  separate  price caps for each
separate  service.  The 1993 Tariff Decree  permitted  annual increases in these
categories  of services  according to a formula  tied to the PPI. The  Operating
Companies  were  required to charge the same tariffs as MATAV for long  distance
and  international  calls. The Company increased its tariffs 28.3% and 23.3% for
1996 and 1997,  respectively.  In December 1997 the Ministry  adopted Decree No.
31/1997 of the KHVM on Fees  Related to  Telecommunication  Services  Subject to
Concession (the "1997 Tariff  Decree") which regulated the Operating  Companies'
tariffs for  services  effective  January 1, 1998.  The 1997  Tariff  Decree set
separate price caps for each category of service through 2000,  which price caps
provided for annual rate increases based on the CPI for the prior year. Based on
the 1997 Tariff  Decree,  the  Operating  Companies'  aggregate  tariffs in 1998
increased  by up to 18.0% from the  Operating  Companies'  1997 rates.  The 1997
Decree also provided for a rebalancing  formula which allowed greater  increases
in the charges  for  subscription  fees and local  calls than in  domestic  long
distance or  international  calls. For 1999, in accordance with the policies set
forth in the 1997 Tariff Decree,  the Ministry amended the 1997 Tariff Decree by
adopting  Decree No. 31/1998  (XII.23) (the "1998 Tariff Decree") which provides
for an aggregate  retail tariff increase of  approximately  11.2% as compared to
the 12.5%  increase in the benchmark  CPI.  According to the 1997 Tariff Decree,
the  Ministry  may  reduce  the  CPI  percentage  increase  by as  much  as a 2%
efficiency factor to obtain the maximum allowable price increase. The efficiency
factor applied to the Company in the 1997 Tariff Decree was zero and in the 1998
Tariff Decree is about 1.3%. With respect to rebalancing, the 1998 Tariff Decree
provided for  rebalancing  factors in addition to the price increase as follows:
plus 10% for  subscription  rates,  plus 6.4% for local  calling rates and minus
8.0% for long distance and international call rates. The total increase provided
for a 12.47%  weighted  average  increase in local call rates, a 27.49% weighted
average  increase in subscription  fees and a 3.6% weighted  average increase in
long distance and international call rates. The 1998 Tariff Decree also provided
for the shifting of a local calling  allowance for  residential  customers  (HUF
240, about 17% of the residential subscription fee) to local call revenue.

                                      -19-
<PAGE>


         Pursuant  to the 1993  Tariff  Decree,  the  Ministry  set the  revenue
sharing  arrangements  between the Operating Companies and MATAV with respect to
long distance and  international  calls through  December 31, 1997.  The revenue
sharing  arrangements   provided  for  the  Operating  Companies  to  retain  an
interconnection  fee from  the fees  collected  from  the  Operating  Companies'
customers for long distance and international  calls. The  interconnection  fees
were fixed based on a complex  formula  which was intended to result in the LTOs
(including MATAV, in its role as an LTO, and the Operating  Companies) receiving
67% of the  telecommunications  revenue  and  MATAV,  in its  role  as the  long
distance and international  provider,  receiving 33% of such revenue.  For 1997,
the weighted average  interconnection fee was fixed at HUF 12.82/minute for long
distance  and  international  calls,  depending  on the  tariff  period.  An LTO
received  60% of  the  interconnection  fee  for a  domestic  long  distance  or
international  call  initiated by such LTO's customer and an LTO received 40% of
the  interconnection  fee for  domestic  long  distance or  international  calls
terminating  with one of such  LTO's  customers.  In January  1998 the  Ministry
adopted  Decree  1/1998  of the KHVM on  Distribution  of  Revenues  Related  to
Telecommunication  Services  Subject  to  Concession,  on  Fees of  Leased  Line
Services  Utilized  for  Provision  of  Telecommunication  Services  Subject  to
Concession and on Settlement of Fees ("the 1998  Interconnection  Decree") which
regulated the interconnection fees for 1998 and provided for each LTO to receive
an average  interconnection  fee of HUF 8.14/minute for either the initiation or
termination  of a domestic long  distance or  international  call.  For 1999 and
future years,  the Ministry  announced that it intended to start  regulating the
interconnection fees based on internationally  accepted benchmarks with the goal
of creating a cost-based  interconnection  fee regime. To that end, the Ministry
adopted Decree 6/1999 (II.19) (the "1999 Interconnection  Decree") which amended
the 1998 Interconnection  Decree. The 1999  Interconnection  Decree provides for
each LTO to receive in 1999 an average  interconnection  fee of HUF 16.28/minute
for the  initiation  of a domestic long  distance or  international  call and an
average fee of HUF 7.5/minute for the termination of a domestic long distance or
international  call. For 2000 and future years, the Ministry has asked MATAV and
the other  LTOs to  provide  cost  based  data for  January  to June 1999 to the
Ministry  by  September  30,  1999 so that the  Ministry  could use such data to
introduce  a  cost-based   interconnection  fee  regime,   which  is  already  a
requirement for EU members. See " - Competition."

         The Connection Fee Decree  provides for maximum  subscriber  connection
fees at HUF 90,000 ($415.70) for business customers and HUF 30,000 ($138.57) for
residential customers.  See "- Operations - Services Subscription and Connection
Fees."

     Wireless Networks

         The use of radio frequencies for wireless communications  technology is
licensed and  regulated by the  Ministry  and the  Inspectorate,  which have the
authority  to grant  such  licenses  after a formal  review  process,  including
licenses for use of the DECT system  frequency  band of 1880 MHz to 1900 MHz. In
Hungary,  the  service  provider  having the  concession,  after  acquiring  the
necessary  permits  and  licenses,  will have the  authority  to: (i)  establish
subscriber  radio lines with fixed service or with DECT;  (ii) establish a radio
telecommunication  system to be accessed  by a building  or group of  buildings,
with fixed  service or with  DECT;  and (iii)  provide  PBX  service  with fixed
service or with DECT.

                                      -20-
<PAGE>

     Hungarian Taxation

         Corporate  Income  Tax.  The  operations  of  the  Company's  Hungarian
subsidiaries,  including  the  Operating  Companies,  are  subject to  Hungarian
corporate income tax. Generally, Hungarian corporations are subject to tax at an
annual rate of 18.0%.  Companies which fulfilled  certain criteria were entitled
to a 100.0%  reduction in income taxes for the five year period ending  December
31, 1998 and a 60.0%  reduction  in income  taxes for the  subsequent  five year
period ending December 31, 2003,  provided certain criteria  continue to be met.
See Note  1(j) of Notes to  Consolidated  Financial  Statements.  The  Operating
Companies are currently eligible for such tax treatment.  However, the corporate
income tax is  reviewed,  and subject to change,  annually.  Any tax increase or
change in the tax exempt status of the Operating Companies could have a material
adverse effect on the Company.

         Value  Added  Tax  ("VAT").  The  Hungarian  VAT  system  is  virtually
identical to the one used in most European  countries.  VAT is a consumption tax
which is fully borne by the final consumer of a product or service.  The current
rates of VAT in Hungary vary  between  0.0% and 25.0%,  depending on the type of
product or service.

         Social Insurance  Contributions.  The level of contributions for social
insurance  in Hungary is one of the highest in Europe.  In 1998  employers  were
required to pay the state 39% (reduced to 33% for 1999) of an  employee's  gross
salary as a social security  contribution and 4.5% (reduced to 3.0% for 1999) of
an employee's  gross salary as the employer's  contribution to the  unemployment
fund.  In addition,  the Company  must pay HUF 3600  ($16.63) per month for each
employee for health  insurance.  The Company's  share of pension,  unemployment,
social  security and health  insurance  payments are  reflected in operating and
maintenance expenses.

Competition

         The  Concession   Contracts   provide  for  an  eight-year   period  of
exclusivity in the provision of  non-cellular  local voice  telephone  services,
which ends in 2002, while the initial 25-year terms of the Concession  Contracts
are  scheduled to expire in 2019.  Other  telecommunications  service  providers
presently are permitted to apply for licenses to provide non-exclusive  services
(e.g.,  data  transmission  and voice mail)  throughout  Hungary,  including the
Operating Areas. In addition, beginning in 2002, other competitors may choose to
enter the non-cellular  local voice telephone services market, but the terms and
conditions upon which such market entry will be effected are today unclear.

         In  1998,  the  Ministry   awarded   Pan-Tel  the  license  to  provide
non-exclusive  telecommunications  services such as data  transmission and voice
mail.  Pan-Tel  started  building its  telecommunications  network in 1998.  The
current shareholders of Pan-Tel include MAV Rt. (the Hungarian railway company),
MOL Rt.  (the  Hungarian  oil and gas  company),  KFKI  Computer  Systems Rt. (a
Hungarian information technology research firm) and Koninklijke PTT Nederland NV
(the Dutch telephone company). Another entrant into the marketplace, Novacom Rt.
("Novacom") owned by affiliates of RWE Telliance AG, a German telecommunications
company and EnBW AG, a German electricity provider, is expanding the fiber optic
infrastructure  of the  Budapest  electricity  distributor  Elmu Rt. in order to
enter the  telecommunications  market. There are also several companies entering
the market by building new wireless  networks.  The Hungarian  cable  television
industry  is  undergoing  consolidation.  United  Pan-Europe  Communications,  a
subsidiary of the global television operator United International Holdings, Inc.
of Denver, Colorado, is the largest cable television operator in Hungary.

                                      -21-
<PAGE>


         The  Company  faces  competition  from  the  three  Hungarian  cellular
providers-Westel  900 GSM Mobil Tavkozlesi  ("Westel 900"),  Westel Radiotelefon
Kft.  ("Westel")  and Pannon,  which are able to provide  consumers  with mobile
telephones  rather  than fixed  telephones.  Westel 900 and  Westel,  both joint
ventures between  Mediaone Group Inc.  (formerly part of US West) and MATAV have
the  national  licenses to provide both  digital and analog  cellular  services,
while Pannon, a consortium  comprised of the  Scandinavian  PTOs (including Tele
Danmark)  and the  Dutch  PTT,  may  only  provide  digital  cellular  services.
Presently,  the airtime and monthly fees charged by the cellular  operators  are
generally more than the fees for comparable  services charged by the Company. In
addition,  Hungary issued a tender in February 1999 for the  1800-megahertz,  or
DCS frequency for mobile communications. It is expected that three licenses will
be  awarded at least one of which  will be  awarded  to a new  entrant  into the
cellular market.

         If the current regulatory framework remains unchanged, the Ministry may
invite tenders for concessions to provide local, long distance and international
basic  telephone  services when the monopolies of the Operating  Companies,  the
other LTOs and MATAV expire.  Pan-Tel and these other entities would be entitled
to submit a bid as will any other telephone operator.

         Hungary's  application  for membership in the European Union (the "EU")
was  accepted.  Hungary is now in the  process of  negotiating  the terms of its
accession into the EU. The EU has adopted numerous  directives  providing for an
open  telecommunications  market among its member nations.  The Company believes
that its exclusivity  rights will not be affected by Hungary's  accession in the
EU.

         Furthermore,  Hungary,  as a member  of the  World  Trade  Organization
("WTO"), ratified the WTO's Telecommunications  Agreement, which agreement began
liberalizing the market for  telecommunications  services  effective  January 1,
1998.  Hungary's   ratification   postponed  Hungary's   liberalization  of  its
telecommunications  market  until  2002.  In the  event  Pan-Tel  or  any  other
competitor  builds a  telecommunications  infrastructure  with the  capacity  to
provide  non-exclusive  services  prior to 2002  and  non-cellular  local  voice
telephone  services  beginning in 2002 in an  Operating  Area,  such  competitor
could, assuming it obtains the proper authorizations,  directly compete with the
Company in the Operating Areas with respect to such services. Prior to 2002, the
Company may consider adopting plans to compete in other local telecommunications
concession  areas  in  Hungary  or  in  the  long  distance  and   international
telecommunications  markets in Hungary,  which may include  joint  ventures with
Hungarian or international entities.

Employees

         The Company had a total of  approximately  665 employees,  including 11
expatriates,  as of March 1999. The Company hired  approximately  700 persons in
connection with the assets acquired from MATAV for its five Operating Areas. The
Company has recently  completed the 1999 wage negotiations with its unions.  The
Company considers its relations with its employees to be satisfactory.

                                      -22-
<PAGE>


                               Item 2. Properties

         The  Company  leases  1,157  square  feet of office  space at 100 First
Stamford Place,  Stamford,  CT at a monthly rental of $2,508.  The lease expires
March 31, 2000.  The Company owns 365 square  meters of office space in Budapest
at Kiralyhago  u.2. The Company  believes that its leased and owned office space
is adequate for its present needs but is currently reviewing its alternatives as
to its future needs.

         In addition, each Operating Company owns or leases the following office
or customer  service space in its respective  Operating Area: KNC owns or leases
57,000 square feet of total space; Raba-Com owns or leases 15,000 square feet of
total space;  Hungarotel owns or leases 119,594 square feet of total space;  and
Papatel owns or leases 18,000 square feet of total space.

                            Item 3. Legal Proceedings

         Hungarotel  is  a  defendant  in  a  lawsuit  filed  by  Dialcont  Kft.
("Dialcont")  on March 28,  1996 in Hungary  alleging a breach of  contract  for
services  allegedly  provided  by  Dialcont  during  1994 and 1995.  The Company
believes that  Dialcont's  claim is without  merit.  Dialcont is seeking HUF 270
million ($1.2  million).  This action is still  pending in the  Hungarian  court
system.

         Raba-Com is a defendant in a lawsuit filed by an individual residential
customer  in Hungary on  December 4, 1997.  The  plaintiff  sought a refund of a
minimal amount alleging that his home was connected to Raba-Com's  network in an
untimely  fashion.  Raba-Com  prevailed  on the merits in the lower  court.  The
plaintiff  appealed the case in the appellate  court which court  overturned the
lower court's  decision.  Raba-Com  filed an appeal with the  Hungarian  Supreme
Court which is still pending.  Should, however,  Raba-Com lose its appeal at the
Supreme  Court  level,  the Company  could be subject to  additional  claims for
refunds.  The Company  believes  its  meritorious  defense to this claim and any
others that may be filed regarding this matter.

         In January 1999,  the Company  settled a lawsuit  brought by one of its
former employees alleging wrongful termination of the plaintiff's employment.

         HTCC  Consulting  Rt.  ("Consulting"),  Papatel and KNC are involved in
several disputes with the Hungarian taxing  authorities (the "APEH") pursuant to
which the APEH  alleges  that  Consulting  owes HUF 105  million  (approximately
$485,000), Papatel owes HUF 26 million (approximately $120,000) and KNC owes HUF
26 million (approximately $122,000) for various reasons. The Operating Companies
believe  that the APEH claims are  without  merit and are  vigorously  defending
themselves against such claims.

         During 1996 and 1997,  the Company  entered into  several  construction
contracts  with a  Hungarian  contractor  which  totaled  $59.0  million  in the
aggregate,  $47.5 of which was financed by a contractor  financing facility.  To
date, the balance on the  contractor  financing  facility is $36.6 million.  The
Company and the contractor  have a  disagreement  with respect to several issues
relating  to the quality and  quantity of the work done by the  contractor.  The
Company has rejected  invoices  totaling  $3.2  million.  The Company has claims
against the contractor for  substantially  more than the amount being claimed by
the contractor. During 1998 the Company and the contractor engaged in settlement
discussions but were unable to reach a settlement.  The Company is reviewing its
options with respect to such  dispute.  At this time the outcome of such dispute
can not be predicted with certainty.  The Company  believes that it will prevail
on the merits such that it will not be  responsible  for the full payment on the
aggregate  contractual  amount.  There can, however,  be no assurances as to the
final outcome or course of action of such dispute.

                                      -23-

<PAGE>

         The Company and its  subsidiaries  are involved in various  other legal
actions  arising in the ordinary  course of business.  The Company is contesting
these legal actions in addition to the suits noted above;  however,  the outcome
of individual  matters is not predictable with assurance.  Although the ultimate
resolution  of these  actions  (including  the actions  discussed  above) is not
presently  determinable,  the Company believes that any liability resulting from
the current  pending legal actions  involving the Company,  in excess of amounts
provided  therefor,  will not have a material  adverse  effect on the  Company's
consolidated financial position, results of operations or liquidity.

           Item 4. Submission of Matters to a Vote of Security Holders

         No matters were submitted to a vote of the Company's  security  holders
during the quarter ended December 31, 1998.

                                     PART II

  Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

Market Information

           The Company's Common Stock trades on the American Stock Exchange (the
"Amex")  under  the  symbol  "HTCC."  Trading  of the  Common  Stock on the Amex
commenced on December 20, 1995. From December 8, 1994 through December 19, 1995,
the Common Stock was quoted on the Nasdaq  National Market and from December 28,
1992  through  December  7,  1994 the  Common  Stock was  quoted  on the  Nasdaq
Small-Cap Market. In 1998, NASD, parent of The Nasdaq Stock Market,  merged with
the American Stock Exchange.  Subsequent to the merger,  The Nasdaq-Amex  Market
Group was created as a holding  company under which both The Nasdaq Stock Market
and the American  Stock  Exchange  function as  independent  subsidiaries,  with
separate listed companies.

         The  following  table sets  forth the high and low sale  prices for the
Common Stock as reported by the Amex for each quarter in 1997 and 1998.

                                               High              Low
Quarter Ended:

1997
March 31, 1997 . . . . . . . . . . . .       $11-3/8          $  9-1/4
June 30, 1997. . . . . . . . . . . . .        10-5/8             8-1/4
September 30, 1997 . . . . . . . . . .        12-7/8             8-3/8
December 31, 1997. . . . . . . . . . .        13-3/4             9-3/8

1998
March 31, 1998 . . . . . . . . . . . .       $11-1/8           $ 7-1/2
June 30, 1998. . . . . . . . . . . . .         8-3/4             4-7/8
September 30, 1998 . . . . . . . . . .         6-1/8             2-1/8
December 31, 1998. . . . . . . . . . .         6-5/8             3

         On March 24,  1999,  the closing sale price for the Common Stock on the
Amex was $4.5625.

Stockholders

         As of March 25, 1999, the Company had 5,395,864  shares of Common Stock
outstanding  held by 103  holders of record.  The Company  believes  that it has
approximately 1,500 beneficial owners who hold their shares in street names.

                                      -24-
<PAGE>

         The Company will furnish, without charge, on the written request of any
stockholder,  a copy of the  Company's  Annual  Report on Form 10-K for the year
ended  December  31,  1998,  including  financial  statements  filed  therewith.
Stockholders  wishing a copy may send their  request to the Company at 100 First
Stamford Place, Suite 204, Stamford, CT 06902.

Dividend Policy

         It is the present policy of the Company to retain earnings,  if any, to
finance the development and growth of its businesses.  Accordingly, the Board of
Directors does not anticipate that cash dividends will be paid until earnings of
the Company  warrant  such  dividends,  and there can be no  assurance  that the
Company can achieve such earnings or any earnings.

         At present,  HTCC's only  source of  revenues  is  payments,  including
repayment of any  intercompany  loans,  payments  under its  management  service
agreements and dividends,  if any, from the Operating  Companies.  The Operating
Companies'  ability to pay dividends or make other capital  distributions to the
Company is governed by Hungarian law, and is significantly restricted by certain
obligations of the Operating Companies.


                         Item 6. Selected Financial Data

              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
<TABLE>
<S>                              <C>                 <C>          <C>                 <C>               <C>
                                                                           Selected Financial and Operating Data
                                                                  (Dollars in Thousands, Except Per Share Amounts)
                                       1998              1997           1996            1995               1994
                                    ---------          ---------      --------        ---------           --------
For the Year
Operating revenues                 $   38,707         $   37,891       $20,910          $  4,070         $    ---
Operating income (loss)            $   (6,059)        $  (1,263)       $(20,553)        $(17,829)        $ (5,272)
                                                                                -
Net loss                           $ (50,612)         $ (36,236)       $(54,769)        $(20,024)        $ (4,597)
                                                                                -
Net loss per common share          $    (9.53)        $    (7.97)      $ (13.14)        $  (6.30)        $  (2.13)

At Year-End
Total assets                       $ 177,067          $ 186,485        $156,615         $110,387         $ 27,577
Long-term debt, excluding
current installments               $ 202,881          $ 194,537        $148,472         $ 23,467         $  2,299
Total stockholders' (deficiency)
equity                             $ (89,037)         $ (41,837)       $(23,790)        $ 15,739         $ 12,563

</TABLE>

                                      -25-
<PAGE>



Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

Introduction

         HTCC  is  engaged  primarily  in the  provision  of  telecommunications
services  through its  majority-owned  operating  subsidiaries,  KNC,  Raba-Com,
Papatel  and   Hungarotel.   The  Company   earns   substantially   all  of  its
telecommunications revenue from measured service fees, monthly line rental fees,
connection fees, public pay telephone services and ancillary services (including
charges for additional services purchased at the customer's discretion).

         During 1996 and 1997 the  Company  embarked  on a  significant  network
development  program which met its  substantial  demand  backlog,  increased the
number of basic  telephone  access  lines in  service  and  modernized  existing
facilities.  The  development  and  installation  of the  network in each of the
Company's Operating Areas required significant capital expenditures.

         The ability of the Company to generate  sufficient  revenues to satisfy
cash  requirements  and become  profitable will depend upon a number of factors,
including the Company's ability to attract  additional  customers,  revenues per
customer  and  construction  costs.  These  factors are expected to be primarily
influenced by the success of the Company's operating and marketing strategies as
well as  market  acceptance  of  telecommunications  services  in the  Company's
Operating  Areas. In addition,  the Company's  profitability  may be affected by
changes in the  Company's  regulatory  environment  and other  factors  that are
beyond the Company's control. The success of the Company's strategy is dependent
upon its ability to increase  revenues through  increased usage and the addition
of new subscribers.

         To date, the Company's  activities have involved the acquisition of the
concessions  and  telecommunications  networks  from  MATAV  and the  subsequent
design,   development  and   construction   of  the  modern   telecommunications
infrastructure  that  the  Company  now has in  service.  The  Company  paid the
Ministry $11.5 million (at historical exchange rates) for its concessions, spent
approximately  $23.2  million  (at  historical  exchange  rates) to acquire  the
existing  telecommunications assets in its Operating Areas from MATAV, and spent
$171 million  through  December 31, 1998 (at historical  exchange  rates) on the
development and  construction of its  telecommunications  infrastructure.  Since
commencing the provision of telecommunications  services in the first quarter of
1995, the Company's network construction and expansion program has added 123,600
access  lines  through  December 31, 1998 to the 61,400  access  lines  acquired
directly  from MATAV.  As a result,  the Company  had  185,000  access  lines in
operation at year end 1998.

         The Company funded its  construction  costs primarily  through the $170
million  Postabank  Credit  Facility and a $47.5  million  contractor  financing
facility.  The Company and the Hungarian contractor which granted the contractor
financing  facility have a disagreement  with respect to several issues relating
to the quality and quantity of the work done by the contractor.  During 1998 the
Company and the contractor engaged in settlement  discussions but were unable to
reach a settlement.  The Company is currently reviewing its options with respect
to this dispute. See Item 3 "Legal  Proceedings",  and Note 9(e) of Notes to the
Consolidated Financial Statements.

         The first installment of the repayment of the Postabank Credit Facility
is due on March 31,  1999.  To date,  the Company has  suffered  from  recurring
losses from  operations and has a working  capital  deficiency and a net capital
deficiency.  The Company does not presently have sufficient funds on hand to pay
the first  installment  on the Postabank  Credit  Facility.  Under the Postabank
Credit  Facility,  a failure  to pay any  installment  constitutes  an "Event of
Default".  Upon  notice to the  Company of an Event of  Default,  the Company is
entitled to the benefit of a 60 day cure period. If such Event of Default is not
cured within 60 days,  Postabank could declare all amounts outstanding under the
Postabank Credit Facility due and payable upon 60 days notice.

                                      -26-
<PAGE>

         The Company,  with assistance from its financial advisors, is currently
in  negotiations  with  Postabank  and  its  financial   advisors   regarding  a
restructuring  of the  Company's  obligations  with  the  goal of  reducing  the
Company's cash repayment  obligations so that the Company can sufficiently  fund
its working capital  requirements,  capital  expenditures and meet its financing
obligations  with cash  flows from  operations.  The  Company is also  reviewing
various other financing alternatives with several entities.  While the result of
such  negotiations  and the  availability  of  alternative  sources of financing
cannot be predicted with certainty, the Company believes that it will be able to
resolve  its  financial  issues so that it will be able to meet its  obligations
during 1999. However, there can be no assurance that the Company will be able to
resolve  these  issues  on  commercially  reasonable  terms,  or  at  all.  Such
negotiations  and/or  discussions  could result in the issuance of equity and/or
debt  securities  of the Company or one or more of the Operating  Companies.  In
addition,  the Company  relies on its ability to generate  cash from  operations
which is dependent upon the Company's  ability to attract  additional  customers
and increase  revenues per customer.  These factors are expected to be primarily
influenced by the success of the Company's operating and marketing strategies as
well as market acceptance of the Company's services.

         These factors raise  substantial  doubt about the Company's  ability to
continue  as a going  concern.  The  consolidated  financial  statements  do not
include any adjustments that might result from the outcome of this uncertainty.

         The Company  has granted  various  options to  purchase  the  Company's
Common Stock,  including those previously granted to Citizens,  and has provided
certain  preemptive  rights to Citizens and Tele Danmark.  For the term of these
options,  the  holders  will have the  opportunity  to  exercise  and dilute the
interests  of other  security  holders  or, in the case of  Citizens,  acquire a
controlling   interest  in  the  Company.   As  long  as  these  options  remain
unexercised,  the Company's  ability to obtain  additional equity capital may be
adversely affected.


                                      -27-
<PAGE>


Comparison of Year Ended December 31, 1998 to Year Ended December 31, 1997

     Net Revenues
<TABLE>
<S>                                                          <C>              <C>

                                                                      Year ended
        (dollars in millions)                                    1998            1997
        Measured service revenues                              $ 32.2          $ 26.2
        Subscription revenues                                    10.7             7.2
        Net interconnect charges                                 (9.8)         (10.2)
                                                                ------         ------
        Net measured service and subscription revenues           33.1            23.2
        Connection fees                                           2.0            12.9
        Other operating revenues, net                             3.6             1.8
                                                                ------         ------
        Telephone Service Revenues, Net                        $ 38.7          $ 37.9
                                                               =======         =======
</TABLE>

         The Company recorded a 2.1% increase in net telephone  service revenues
to $38.7 million for the year ended December 31, 1998 from $37.9 million for the
year ended December 31, 1997.

         Net measured service and subscription revenues increased 42.7% to $33.1
million for the year ended  December  31,  1998 from $23.2  million for the year
ended December 31, 1997.  Measured  service  revenues  increased  22.9% to $32.2
million in 1998 from $26.2 million in 1997 while subscription revenues increased
48.6% to $10.7  million in 1998 from $7.2  million in 1997.  These  increases in
call and  subscription  fee revenues are the result of a 35% increase in average
access  lines in service  from  approximately  132,000  lines for the year ended
December 31, 1997 to approximately 178,000 lines for the year ended December 31,
1998.  The growth in access lines is not fully  reflected in increased  measured
service  revenues  as newer  customers  require  a  period  of  maturity  before
producing revenues similar to established telephone customers.

         These  revenues  have been  offset by net  interconnect  charges  which
totaled $9.8  million for the year ended  December 31, 1998 as compared to $10.2
million  for the year ended  December  31,  1997.  As a  percentage  of call and
subscription  revenues,  net interconnect charges have declined from 31% for the
year ended December 31, 1997 to 23% for the year ended December 31, 1998, due to
a higher  proportion of local  traffic as additional  access lines are placed in
service plus a negotiated  reduction in interconnect  fees effective  January 1,
1998. Based upon recent  negotiations  with MATAV and the Hungarian  Ministry of
Telecommunications,  the Company  expects net  interconnect,  as a percentage of
call and subscription revenues, to decrease in 1999.

         Connection  fees for the year ended  December  31,  1998  totaled  $2.0
million as compared to $12.9 million for the year ended December 31, 1997.  This
decrease reflects the reduction in the number of new access lines connected from
approximately  81,700 during the year ended  December 31, 1997 to  approximately
9,900  lines  during the year ended  December  31,  1998.  Connection  fees were
expected to decline substantially during the year as the majority of wait-listed
customers have been provided with access lines.  The Company expects  connection
fees to continue to decline as no significant  backlog of wait-listed  customers
exists.

         Other operating revenues increased 100% to $3.6 million during the year
ended  December 31, 1998 compared to $1.8 million during the year ended December
31,  1997 due to  revenues  generated  from the  provision  of direct  lines and
revenues generated from Lucent PBX sales and related maintenance  services.  The
Company does not expect as large of an increase in other  operating  revenues in
1999 as was experienced in 1998.


                                      -28-
<PAGE>

     Operating and Maintenance Expenses

         Operating and maintenance expenses for the year ended December 31, 1998
decreased to $19.6 million compared to $25.0 million for the year ended December
31, 1997. On a per line basis,  operating and maintenance  expenses decreased to
approximately  $110 per average access line for the year ended December 31, 1998
from  $190  for  the  year  ended  December  31,  1997 as the  Company  achieved
productivity  improvements,  including  discontinuing the use of labor intensive
manual switchboards through the use of modern switching  technology,  as well as
increased  focus on reducing  operating  expenses.  The Company  does not expect
significant decreases in operating and maintenance expenses in 1999. However, on
a per line basis,  operating  and  maintenance  costs are expected to decline as
additional access lines are added during 1999.

     Termination of Management Services Agreement

         For the year ended  December  31, 1998,  the Company  recorded a charge
totaling  $11.1  million  representing  the  present  value of  payments  due to
Citizens  International  Management  Services  Company under a  termination  and
consulting agreement. See Note 14 of Notes to Consolidated Financial Statements.

     Depreciation and Amortization

         Depreciation  and amortization  charges  increased to $11.6 million for
the year ended  December 31, 1998 from $8.3 million for the year ended  December
31, 1997. The Company expects  depreciation and amortization  charges in 1999 to
increase in functional currency terms due to additional capital  expenditures in
its operating  subsidiaries,  however,  in U.S. Dollar terms the Company expects
depreciation  and  amortization  to remain  consistent  with 1998 amounts due to
devaluation of the operating subsidiaries' functional currency.

     Management Fees

         Management fees pursuant to management service agreements  decreased to
$2.5 million for the year ended December 31, 1998 from $5.8 million for the year
ended December 31, 1997.  This decrease was due to the termination of management
services  agreement  between the Company and Citizens  International  Management
Services Company. See Note 14 of Notes to Consolidated Financial Statements. The
Company does not have any continuing management services agreement.

     Loss from Operations

         Loss from  operations  increased  to $6.1  million  for the year  ended
December 31, 1998 compared to $1.3 million for the year ended December 31, 1997.
Excluding  the  cost  of  terminating  the  management  services  agreement  and
management  fees,  income from  operations for the years ended December 31, 1998
and  1997  would  have  been  $7.6  million  and  $4.5  million,   respectively.
Contributing to such  improvements  were higher revenues and lower operating and
maintenance  expenses during the year ended December 31, 1998 as compared to the
year ended December 31, 1997, offset by increased  depreciation and amortization
charges during the year

     Foreign Exchange Loss

         Foreign  exchange  losses  decreased to $0.2 million for the year ended
December 31, 1998 from $0.5 million for the year ended  December 31, 1997.  Such
foreign  exchange losses  resulted from the devaluation of the Hungarian  Forint
against the U.S. Dollar and the German Mark.


                                      -29-
<PAGE>

     Interest Expense

         Interest expense increased to $45.9 million for the year ended December
31, 1998 from $35.2 million for the year ended December 31, 1997.  This increase
was  attributable  to higher  average debt levels during the year ended December
31, 1998 as compared to the year ended December 31, 1997 as the Company incurred
additional   indebtedness   in  order  to  continue  the   construction  of  its
telecommunications   networks  and  repay  other  loan   obligations.   Interest
capitalized and included in the cost of construction of certain long term assets
amounted to approximately  $0.3 million during 1998 and $4.5 million in 1997. As
stated  above,  the Company is  presently in  negotiations  to  restructure  its
current debt agreements.

    Other, net

         Other,  net income amounted to $0.8 million for the year ended December
31,  1998 as  compared to $13,000 for the year ended  December  31,  1997.  This
increase  during the year ended December 31, 1998 is due to an approximate  $0.8
million  gain  realized  related to the  termination  of the  former  management
services  agreement  between the Company and Citizens  International  Management
Services Company.  Under such termination  agreement,  the Company satisfied its
obligations,  under a previous management services agreement, of $9.6 million by
issuing  100,000 shares of Common Stock valued at $513,000 and a promissory note
in the amount of $8.4 million.  See Note 14 of Notes to  Consolidated  Financial
Statements.

     Net Loss

         As a result of the factors  discussed above, the Company recorded a net
loss of $50.6 million,  or $9.53 per share, for the year ended December 31, 1998
as compared  to a net loss of $36.2  million,  or $7.97 per share,  for the year
ended December 31, 1997.

Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996

     Net Revenues
<TABLE>
<S>                                                        <C>            <C>

                                                                 Year ended
        (dollars in millions)                               1997            1996
        Measured service revenues                           $ 26.2         $ 20.5
        Subscription revenues                                  7.2            3.8
        Net interconnect charges                             (10.2)          (8.9)
                                                           -------         -------
        Net measured service and subscription revenues        23.2           15.4
        Connection fees                                       12.9            4.1
        Other operating revenues, net                          1.8            1.4
                                                           -------         -------
        Telephone Service Revenues, Net                     $ 37.9         $ 20.9
                                                           =======         =======
</TABLE>

         The  Company  recorded  an  81.3%  increase  in net  telephone  service
revenues  to $37.9  million  for the year  ended  December  31,  1997 from $20.9
million for the year ended December 31, 1996.

         Net measured service and subscription revenues increased 50.7% to $23.2
million for the year ended  December  31,  1997 from $15.4  million for the year
ended December 31, 1996.  Measured  service  revenues  increased  27.8% to $26.2
million in 1997 from $20.5 million in 1996 while subscription revenues increased
89.5% to $7.2 million in 1997 from $3.8 million in 1996. These increases in call
and subscription fee revenues are the result of a 74% increase in average access
lines in service from approximately 76,000 lines for the year ended December 31,
1996 to  approximately  132,000  lines for the year ended  December 31, 1997. In
addition,  approximately 28,000 lines, representing 35% of the total increase in
access lines in 1997, were placed in service during the fourth quarter of 1997.

                                      -30-
<PAGE>


         These  revenues  have been  offset by net  interconnect  charges  which
totaled $10.2  million for the year ended  December 31, 1997 as compared to $8.9
million  for the year ended  December  31,  1996.  As a  percentage  of call and
subscription  revenues,  net interconnect charges have declined from 37% for the
year ended December 31, 1996 to 31% for the year ended December 31, 1997, due to
a higher  proportion of local  traffic as additional  access lines are placed in
service.

         Connection  fees for the year ended  December  31, 1997  totaled  $12.9
million as compared to $4.1 million for the year ended  December 31, 1996.  This
increase  reflects the  connection  of 81,700 access lines during the year ended
December 31, 1997 as compared to the  connection  of 28,200  access lines during
the year ended December 31, 1996.

         Other  operating  revenues  increased  28.6% to $1.8 million during the
year ended  December  31, 1997  compared to $1.4  million  during the year ended
December 31, 1996 due to higher  revenues  from the  provision of direct  lines,
telephone leasing, PBX and telephone sales.

     Operating and Maintenance Expenses

         Operating and maintenance expenses for the year ended December 31, 1997
increased to $25.0 million compared to $22.0 million for the year ended December
31, 1996. On a per line basis,  operating and maintenance  expenses decreased to
approximately  $190 per average access line for the year ended December 31, 1997
from  $285  for  the  year  ended  December  31,  1996 as the  Company  achieved
productivity improvements, including the decreased use of labor intensive manual
switchboards and the increased use of modern switching technology.

     Depreciation and Amortization

         Depreciation and amortization charges increased to $8.3 million for the
year ended  December 31, 1997 from $4.3 million for the year ended  December 31,
1996. This increase was due to the substantial  increase in property,  plant and
equipment  placed in  service  in 1997 as a result of the  network  construction
program.



                                      -31-
<PAGE>


     Management Fees

         Management fees pursuant to management service agreements  decreased to
$5.8 million for the year ended December 31, 1997 from $6.9 million for the year
ended December 31, 1996.  This decrease was due primarily to the  termination of
certain management agreements with Tele Danmark in August 1996.

     Asset Write-downs

         During the year ended  December 31, 1996,  the Company  recorded  asset
write-downs  totaling $2.0 million,  which represented the  decommissioning  and
write-off of redundant assets as a result of the network construction in 1996.

     Cost of Termination of Former Officers and Directors

         During the year ended December 31, 1996, the Company  recorded a charge
totaling $6.3 million representing the present value of payments due and options
granted to former  executive  officers and directors under separate  termination
and release agreements, consulting agreements and noncompetition agreements.

     Loss from Operations

         Loss from  operations  decreased  to $1.3  million  for the year  ended
December  31,  1997 from a loss from  operations  of $20.6  million for the year
ended  December  31,  1996.  Adjusted  for  asset  write-downs  and the  cost of
termination of former officers and directors,  the loss from operations  totaled
$12.3 million for the year ended  December 31, 1996.  The  decreasing  operating
loss in 1997 was  principally  due to the  additional  revenue  generated by the
network  development  program,  offset by increases in operating and maintenance
and depreciation expenses.

     Foreign Exchange Loss

         Foreign  exchange  losses  decreased to $0.5 million for the year ended
December 31, 1997 from $6.3 million for the year ended  December 31, 1996.  Such
foreign  exchange losses  resulted from the devaluation of the Hungarian  Forint
against  the U.S.  Dollar and the  German  Mark.  The  decrease  in the  foreign
exchange  loss is due to a significant  reduction in debt and other  obligations
denominated in U.S. Dollars and German Marks.

     Interest Expense

         Interest expense increased to $35.2 million for the year ended December
31, 1997 from $23.2 million for the year ended December 31, 1996.  This increase
was  attributable  to higher  average debt levels during the year ended December
31, 1997 as compared to the year ended December 31, 1996 as the Company incurred
additional  indebtedness in order to fund construction of its telecommunications
networks.  Interest  capitalized  and  included in the cost of  construction  of
certain long term assets amounted to approximately  $4.5 million during 1997 and
$2.1 million in 1996.

         Included  in  interest  expense in 1996 is $4.9  million,  the value of
consideration  provided to Citizens for  assistance in fulfilling  the Company's
obligations under the Citicorp Credit Facility (as defined herein).  See Notes 5
and 14 of Notes to Consolidated Financial Statements.


                                      -32-
<PAGE>

     Interest Income

         Interest  income  decreased to $0.7 million for the year ended December
31, 1997 from $1.5 million for the year ended  December 31, 1996.  This decrease
is due to decreased average cash balances outstanding during 1997.

     Abandonment of Financing

         During  the year  ended  1996,  the  Company  canceled  a planned  bond
offering in favor of a Hungarian Bank Credit Facility.  The costs of abandonment
of financing  were $3.0 million and included  $2.0 million in settlement of fees
and costs of the underwriter and $1.0 million for professional  fees and various
out of pocket expenses.

     Other, net

         Other,  net income decreased to $13,000 for the year ended December 31,
1997 from $1.1 million for the year ended December 31, 1996 principally due to a
decrease in non-operating income and ancillary services.

     Loss Before Extraordinary Items

         As a result of the factors discussed above, the Company recorded a loss
before  extraordinary  items of $36.2 million,  or $7.97 per share, for the year
ended December 31, 1997 compared to a loss before  extraordinary  items of $47.5
million, or $11.38 per share, for the year ended December 31, 1996.

     Extraordinary Item

         The Company did not record any extraordinary  items in 1997 as compared
to the year ended  December  31,  1996,  during  which the  Company  recorded an
extraordinary  item of $7.3  million,  $1.76 per share,  comprised of a non-cash
charge of $8.2 million  related to the  write-off of the  remaining  unamortized
deferred  financing costs pertaining to the Citizens Loan Agreements,  offset by
extraordinary income of $0.9 million relating to a gain on early retirement of a
vendor credit  facility.  See Notes 5 and 14 of Notes to Consolidated  Financial
Statements.

     Net Loss

         As a result of the factors  discussed above, the Company recorded a net
loss of $36.2 million,  or $7.97 per share, for the year ended December 31, 1997
as compared to a net loss of $54.8  million,  or $13.14 per share,  for the year
ended December 31, 1996.

Liquidity and Capital Resources

         The Company has historically funded its capital requirements  primarily
through  a  combination  of debt,  equity  and  vendor  financing.  The  ongoing
development and  installation of the network in each of the Company's  operating
areas  required  significant  capital  expenditures  ($171 million at historical
exchange rates through December 31, 1998).  The Company's  networks now have the
capacity, with some additional capital expenditures,  to provide basic telephone
services to virtually  all of the  potential  subscribers  within its  Operating
Areas.

         In 1995 the Company  entered into a financing  agreement  with Citizens
pursuant to which Citizens guaranteed a $33.2 million loan from Chemical Bank in
November  1995.  During  February  and March 1996,  the Company  borrowed  $18.2
million under a second financing agreement with Citizens.


                                      -33-
<PAGE>

         On March 29, 1996,  the Company  entered into a $75.0  million  Secured
Term Loan Credit Facility (the "Citicorp  Credit  Facility") and,  together with
HTCC  Consulting,  a related  Pledge and Security  Agreement with Citicorp North
America,  Inc.  ("Citicorp").  On April 3, 1996,  the Company used $50.8 million
from the Citicorp  Credit Facility to repay all the funds advanced or guaranteed
by  Citizens  and  Chemical  Bank.  As of such date,  all loan  agreements  with
Citizens and Chemical  Bank were  terminated.  Accordingly,  in April 1996,  the
Company  incurred a non-cash charge of approximately  $8.2 million  representing
the  remaining  unamortized  deferred  financing  costs  pertaining  to the loan
agreements with Citizens.

         In order  to meet  contractual  commitments  pursuant  to  construction
contracts  in  addition  to ongoing  operating  expenses,  the  Company  used an
additional $24.0 million from the Citicorp Credit Facility.

         On October 15, 1996,  the Company  entered into a $170 million  10-year
Multi-Currency  Credit  Facility  with  Postabank.  Proceeds  from the Postabank
Credit Facility may be drawn entirely in Hungarian  Forints and up to 20% of the
principal  may be drawn in U.S.  Dollars  through  March 31, 1999.  Drawdowns in
Hungarian Forints bear interest at a rate of 2.5% above the average of the yield
on six- and twelve-month  discounted Hungarian treasury bills while drawdowns in
U.S. Dollars bear interest at 2.5% above LIBOR. Interest for the first two years
has been  deferred at the Company's  option.  Amounts  outstanding  in Hungarian
Forints,  including  any deferred  interest,  are payable in 32 equal  quarterly
installments beginning on March 31, 1999.

         In October 1996,  the Company  borrowed the equivalent of $82.3 million
in Hungarian  Forints under the Postabank Credit Facility.  Approximately  $75.2
million of this amount was used to repay Citicorp all funds advanced pursuant to
the Citicorp  Credit  Facility,  as amended,  and $2.0 million in fees and costs
representing  settlement in connection  with the  cancellation  of the Company's
proposed private  placement of debt  securities.  The remaining $5.1 million was
used to pay management fees and reimbursable  costs owed to Citizens pursuant to
the Management  Services Agreement with Citizens.  An additional $5.6 million of
the facility was used to pay loan  origination fees and costs to Postabank under
the terms of the loan agreement, $2 million of which are being reimbursed to the
Company in equal  quarterly  installments  over a two year period,  and is being
amortized over the life of the loan facility. The remainder of the proceeds have
been used to complete construction of the Company's  telecommunication networks,
provide additional  working capital,  and refinance or repay other existing debt
obligations.  As of December 31, 1998,  the Company had borrowed the entire $170
million under the Postabank Credit Facility.

         In 1996,  the  Company's  subsidiary  Hungarotel  entered  into a $47.5
million construction contract for the construction of a telephone network with a
capacity of 40,000 lines in its Bekescsaba service area.  Financing was provided
by the contractor for the full contract amount. The financing agreement requires
repayment in 20 quarterly installments  commencing on March 31, 1998, with final
payment due December 31, 2002.  Interest is charged at a variable  rate computed
as the weighted average of the six and 12 month Hungarian National Treasury Bill
interest  rate for each  quarter  plus 2.5%.  The  Company  may  elect,  and has
elected,  to defer repayment of 20% of the total debt repayments due in 1998 and
1999.

         In 1995, the Company  applied for network  construction  subsidies from
the  Hungarian   government.   In  December  1995,   certain  of  the  Company's
applications were approved, subject to certain conditions, which resulted in the
Company being awarded subsidies  aggregating $0.9 million.  The Company received
such  subsidies  in  installments  in the  fourth  quarter of 1996 and the first
quarter of 1997. One-half of such funds were received in the form of a grant and
one-half in the form of a non-interest  bearing loan repayable over a three year
period beginning in 1997.

                                      -34-
<PAGE>

         Net cash provided by operating activities totaled $11.1 million for the
year  ended  December  31,  1998  compared  to $4.9  million  for the year ended
December 31, 1997.  For the years ended  December 31, 1998 and 1997, the Company
used $15.6 million and $73.3  million,  respectively,  in investing  activities,
which  was   primarily   used  to  fund  the   construction   of  the  Company's
telecommunications  networks.  Financing  activities  provided  net cash of $9.3
million  and $58.4  million  for the years  ended  December  31,  1998 and 1997,
respectively.

Inflation and Foreign Currency

         For the  year  ended  December  31,  1998,  inflation  in  Hungary  was
approximately  12% on an annualized  basis.  It is the stated policy goal of the
Hungarian government to keep inflation from exceeding approximately 9% in 1999.

         The  Company's  Hungarian  operations  generate  revenues in  Hungarian
Forints and incur operating and other expenses,  including capital expenditures,
predominately  in  Hungarian  Forints but also in U.S.  Dollars.  The  Company's
resulting foreign currency exposure is difficult to hedge due to the significant
costs involved and the lack of a market for such hedging.  In addition,  certain
of the  Company's  balance sheet  accounts are  expressed in foreign  currencies
other than the Hungarian Forint, the Company's functional currency. Accordingly,
when such accounts are converted into Hungarian Forints,  the Company is subject
to foreign  exchange  gains and losses which are reflected as a component of net
income  or  loss.  When the  Company  and its  subsidiaries'  Forint-denominated
accounts are translated into U.S. Dollars for financial reporting purposes,  the
Company is subject to translation adjustments,  the effect of which is reflected
as a component of stockholders' deficiency.

         While the Company has the ability to increase the prices it charges for
its services  commensurate with increases in the Hungarian  Consumer Price Index
("CPI")  pursuant to its licenses from the Hungarian  government,  it may choose
not to implement the full amount of the increase  permitted  due to  competitive
and other concerns.  In addition,  the rate of increase in the Hungarian CPI may
be less than the rate at which the Hungarian Forint devalues.  As a result,  the
Company may be unable to generate cash flows to the degree necessary to meet its
obligation in currencies other than the Hungarian Forint.

Year 2000

         In 1998 the  Company  initiated  a project  designed  to  identify  and
mitigate Year 2000 computer  deficiencies.  The Company formed a Year 2K project
team  (the  "Project  Team")  with  the  mandate  to  identify   problems,   set
methodologies  for resolution,  and budget expenses all in order to minimize the
impact of any Y2K problems from the Company's computer systems.

         The Project  Team  consists  of  employees  from  senior and  mid-level
management from various business units within the Company. The Project Team also
includes several of the Company's computer  technicians and representatives from
the systems' vendors. The Project Team has 10 permanent members from the Company
and 3 permanent  members from the switching and billing  system  vendors.  Other
vendors are  consulted  on an "as  needed"  basis.  The  Company  also formed an
oversight committee comprised of senior management to oversee the Y2K issue.

                                      -35-
<PAGE>

         The  Project  Team  is  examining  the   Company's   telecommunications
networks, IT business systems, and miscellaneous support systems.  These systems
include computers that support  telephone  services,  bill production,  customer
accounting,  plant  records,  payroll,  and a  variety  of  systems  such as air
conditioners  and building entry systems.  The project has five primary  phases:
(I)  inventory,  (II)  assessment,  (III)  remediation,  (IV)  testing  and  (V)
contingency planning and certification. Phase I is complete and consisted of the
development  of a  comprehensive  working list which  documents all software and
microprocessor  reliant  materials  used by the  Company to ensure that phase II
covers the entire  population  of  potential  Y2K issues.  Phase II consisted of
evaluating  the inventory list developed  during Phase I and  determining  which
systems need  replacement,  modification or retirement  during 1999. Phase II is
complete.  Phase III is  currently  underway  and  consists of  replacing  those
hardware and  software  components  identified  as  non-compliant  and should be
completed by the middle of the second  quarter 1999. At this time,  some systems
have already been  modified to make them Y2K  compliant  and other  systems have
been placed on retirement  schedules.  Major switching  components are scheduled
for  replacement in April,  May and June of this year.  Phase IV will consist of
testing  of  existing  and new  hardware  and  software  components  and will be
completed during the second and third quarters of this year. Phase V consists of
developing  a  written  plan for  alternative  methods  of  completing  critical
processes should failure occur at the turn of the century. Contingency plans are
being developed  currently for all systems.  Written  contingency  plans will be
provided  to the  employees  by  September.  The  Company  will begin  awareness
campaigns  to draw  employee and customer  attention to the  potential  problems
associated with Y2K by April 1, 1999.

         The Company  relies upon its  network  construction  vendors to provide
compliant  hardware and software.  The Project Team believes that  compliance of
the telephone  switching systems and the automatic message accounting  interface
with the  billing  system  present the most  significant  Y2K  exposure  for the
Company. In cooperation with  representatives  from the switch manufacturers who
are active  members of the Project  Team,  the Project Team has developed a plan
for Y2K Compliance of the switching  systems.  The switching system vendors have
provided  the Company  with  delivery  schedules  that will bring the  switching
systems  into  compliance  by  June of  this  year,  at  which  time  compliance
certificates will be issued by the vendors.  Compliance of the switching systems
by June  should  allow  sufficient  time to test  the  switching/billing  system
Automatic Message  Accounting  ("AMA") interface and allow problems to be solved
in a timely manner before the turn of the century.

                                      -36-
<PAGE>


         The  Company  relies  upon  MATAV's  telecommunication  network for all
long-distance  interconnections.  Should MATAV's telephone  switching systems be
non-Y2K  compliant,  the systems  could fail  resulting  in lost revenue for the
Company.  The  Company  is  working  directly  with  MATAV to reduce the risk of
failure.  A  member  of the  Project  Team  employed  by  one  of the  Company's
telecommunications  switching  vendors also sits on MATAV's Y2K committee and is
actively  involved  in the issue.  The  Company  believes  that no costs will be
incurred  related to this  matter.  MATAV will also  provide  the  Company  with
certification for the 2MB backbone of the Company's internal wide area network.

         The  Company's  recently  implemented  Billing and Customer Care system
(BACC)  is Y2K  compliant  according  to its  vendor,  representatives  of which
participate  on the Project Team.  During phase IV of the program,  beginning in
April, and following the upgrades of the Company's  switching systems,  the BACC
system  will be fully  tested in  cooperation  with the  vendor  to  ensure  Y2K
compliance  has been  reached.  The vendor will issue a  compliance  certificate
following successful completion of these tests.

         Various  other IT  systems  have  been  identified  to be  replaced  or
upgraded in association with the Company's efforts to become Y2K compliant.  The
Company  believes  that all such systems will have  completed  all phases of the
project  by the  end  of the  third  quarter  of  1999.  The  Company  maintains
approximately 2 million lines of computer code developed  internally  which will
be tested and modified by the end of the third quarter.

         The Company  currently  estimates  that the total costs of  remediation
will be approximately $785,000, which includes the replacement and/or upgrade of
certain  equipment.  $630,000  of such cost will  allow the  Company  to provide
additional services in addition to bringing the Company into Y2K compliance.  At
this time,  no material  costs have been  incurred  for  remediation  of the Y2K
problem.  It is expected that most costs will be incurred  during the second and
third quarters of 1999.  Management  cannot provide assurance that the result of
the project or that the remediation costs will not be materially  different from
estimates.  Accordingly,  contingency  plans are  currently  being  developed to
address high-risk systems.  The contingency plans are expected to be in place by
the third quarter of 1999.

         The Company is dependent  on network  switch  manufacturers  to provide
compliant  hardware and software in a timely  manner.  Within IT, the Company is
dependent  on  the  development  of  software  by  external  experts,   and  the
availability of critical resources with the requisite skill sets. At worst case,
failure by the Company or by certain of its vendors to remediate Y2K  compliance
issues  could  result  in  disruption  of  the  Company's  operations,  possibly
impacting its  telecommunication  network and the Company's  ability to bill and
collect revenues.  However, management believes that this worst case scenario is
unlikely, and that its efforts to mitigate Y2K issues will be successful.

Prospective Accounting Pronouncements

         In June 1998,  Statement of Financial  Account Standards No. 133 ("SFAS
133"),  "Accounting  for Derivative  Instruments  and Hedging  Activities",  was
issued.  SFAS 133 established  accounting and reporting standards for derivative
instruments and for hedging  activities.  SFAS requires that an entity recognize
all derivatives as either assets or liabilities and measure those instruments at
fair  value.  SFAS 133 is  effective  for all fiscal  quarters  of fiscal  years
beginning  after June 15,  1999.  SFAS 133 cannot be  applied  retroactively  to
financial  statements of prior periods. At the current time the Company does not
utilize  derivative  instruments  and  accordingly  it is  anticipated  that the
adoption  of  SFAS  133  will  not  have a  material  impact  on  the  Company's
consolidated financial position and results of operations.

         The American Institute of Certified Public Accountants issued Statement
of Position No. 98-1 (SOP 98-1)  "Accounting for the Costs of Computer  Software
Developed or Obtained for Internal Use," and Statement of Position No. 98-5 (SOP
98-5) "Reporting on the Costs of Start-Up Activities" in 1998. SOP 98-1 requires
that  certain  costs  related to the  development  or purchase  of  internal-use
software be  capitalized  and amortized  over the  estimated  useful life of the
software.  SOP 98-5 requires costs of start-up activities and organization costs
to be expensed as incurred. The Company is required to adopt both new statements
in the first quarter of 1999.  The adoption of these  statements is not expected
to have a material effect on the Company's consolidated financial statements.

Market Risk Exposure


                                      -37-
<PAGE>

            The Company is exposed to various types of risk in the normal course
of its  business,  including  the  impact  of  foreign  currency  exchange  rate
fluctuations  and interest  rate  changes.  Company  operations,  including  all
revenues and  approximately  75% of operational costs are Hungarian Forint based
and are  therefore  subject to exchange rate  variability  between the Hungarian
Forint and U.S.  Dollar.  This  variability  is  mitigated  by several  factors,
including  the Hungarian  National Bank policy to peg the Hungarian  Forint to a
currency  basket and the  telecommunications  pricing  law. The  "crawling  peg"
policy of the National Bank of Hungary  maintains a scheduled daily  devaluation
of the Hungarian  Forint through a currency  basket  consisting of 70% Euros and
30% U.S.  Dollars.  The Hungarian Forint is allowed to trade within 2.25% of the
mid-point of this trading band. As of Mid-March  1999, the Hungarian  government
devaluation policy is 0.6% per month, totaling  approximately 7.4% for the year.
The  telecommunications  pricing law allows  prices to increase by the  Consumer
Price Index (CPI)  adjusted for an  efficiency  factor of up to 2%. Thus, to the
extent that adjusted CPI follows  devaluation,  revenues are somewhat  insulated
from exchange rate risk.

         The debt  obligations  of the  Company  are  primarily  denominated  in
Hungarian Forint.  The interest rate on the Hungarian Forint debt obligations is
based on the  weighted  average of the  Hungarian  National  Bank 6 month and 12
month  Treasury  Bill  rates.  Over the  medium to long  term,  these  rates are
expected to follow  inflation  and  devaluation  trends and the Company does not
currently  believe  it has any  material  interest  rate risk on any of its debt
obligations.  If a 1% change in  interest  rates  were to occur,  the  Company's
interest expense would increase or decrease by approximately $2.25 million based
upon the Company's current debt level. However, should the Company refinance its
debt  obligations in a currency other than the Hungarian  Forint,  exchange rate
risk could increase.

               Item 8. Financial Statements and Supplementary Data

         Reference  is  made to the  Consolidated  Financial  Statements  of the
Company, beginning with the index thereto on page F-1.

 Item 9. Changes  In  and  Disagreements  With  Accountants  on  Accounting  and
         Financial Disclosure

         During the three fiscal years ended  December 31, 1998, the Company was
not  involved  in  any  disagreement  with  its  independent   certified  public
accountants  on  accounting  principles  or practices or on financial  statement
disclosure.

                                    PART III

           Item 10. Directors and Executive Officers of the Registrant

         There is  incorporated  in this Item 10 by  reference  the  information
appearing  under the captions  "Election of Directors - Nominees for  Director,"
"Executive  Officers  Who Are Not  Directors"  and "- Section  16(a)  Beneficial
Ownership Reporting  Compliance" in the Company's definitive proxy statement for
the 1999 Annual Meeting of Stockholders, a copy of which will be filed not later
than 120 days after the close of the fiscal year.

                         Item 11. Executive Compensation

         There is  incorporated  in this Item 11 by  reference  the  information
appearing under the caption "Election of Directors" in the Company's  definitive
proxy  statement for the 1999 Annual  Meeting of  Stockholders,  a copy of which
will be filed not later than 120 days after the close of the fiscal year.

     Item 12. Security Ownership of Certain Beneficial Owners and Management

         There is  incorporated  in this Item 12 by  reference  the  information
appearing  under  the  captions  "Introduction  -  Stock  Ownership  of  Certain
Beneficial  Owners," "- Stock Ownership of Management,"  and "- Potential Change
in  Control,"  and  "Election  of  Directors  - Nominees  for  Director"  in the
Company's   definitive   proxy   statement  for  the  1999  Annual   Meeting  of
Stockholders,  a copy of which  will be filed not later  than 120 days after the
close of the fiscal year.


                                      -38-
<PAGE>

                Item 13. Certain Relationships And Related Transactions

         There is  incorporated  in this Item 13 by  reference  the  information
appearing under the caption  "Election of Directors - Certain  Relationships and
Related Party Transactions," and "- Indebtedness of Management" in the Company's
definitive proxy statement for the 1999 Annual Meeting of  Stockholders,  a copy
of which  will be filed not later  than 120 days  after the close of the  fiscal
year.


                                     PART IV

    Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

         (a)(1)   List of Financial Statements

                  Reference  is made to the  index on page F-1 for a list of all
         financial statements filed as part of this Form 10-K.

         (a)(2)   List of Financial Statement Schedules

                  Reference  is made to the  index on page F-1 for a list of all
         financial statement schedules filed as part of this Form 10-K.


                                      -39-
<PAGE>


         (a)(3)   List of Exhibits

 Exhibit
 Number                                 Description

 2                Plan of acquisition, reorganization, arrangement, liquidation
                  or succession (None)

 3(i)             Certificate of  Incorporation  of the Registrant,  as amended,
                  filed  as  Exhibit  4.1  to  the   Registrant's   Registration
                  Statement on Form S-8 filed on June 24, 1997 and  incorporated
                  herein by reference

 3(ii)            By-laws of the Registrant, as amended, filed as Exhibit 4.2 to
                  the Registrant's  Registration  Statement on Form S-8 filed on
                  June 24, 1997 and incorporated herein by reference

 4                Specimen  Common  Stock  Certificate,  filed  as  Exhibit 4(a)
                  to the Registrant's Registration Statement  on Form SB-2 filed
                  on October 20, 1992

 9                Voting trust agreement  (None)

10                Material contracts:

10.1              Concession Agreement dated May 10, 1994 between the Ministry
                  of Transportation, Telecommunications and Water Management of
                  the Republic of Hungary and Raba-Com Rt., filed as Exhibit
                  10(y)(y) to the Registrant's Current Report on Form 8-K for
                  February 28, 1994 and incorporated herein by reference

10.2              Concession  Agreement  dated May 10, 1994 between the Ministry
                  of Transportation,  Telecommunications and Water Management of
                  the  Republic of Hungary and  Kelet-Nograd  Com Rt.,  filed as
                  Exhibit  10(z)(z) to the  Registrant's  Current Report on Form
                  8-K for February 28, 1994 and incorporated herein by reference

10.3              English   translation  of  Amended  and  Restated   Concession
                  Contract  between Papa es Tersege Telefon  Koncesszios Rt. and
                  the Hungarian Ministry for Transportation,  Telecommunications
                  and  Water  Management  dated  as of June 3,  1996,  filed  as
                  Exhibit  10.78 to the  Registrant's  Quarterly  Report on Form
                  10-Q for the  quarter  ended  June 30,  1996 and  incorporated
                  herein by reference

10.4              English   translation  of  Amended  and  Restated   Concession
                  Contract between  Hungarotel  Tavkozlesi Rt. and the Hungarian
                  Ministry  for  Transportation,  Telecommunications  and  Water
                  Management  dated  as of June 3,  1996  (Oroshaza),  filed  as
                  Exhibit  10.79 to the  Registrant's  Quarterly  Report on Form
                  10-Q for the  quarter  ended  June 30,  1996 and  incorporated
                  herein by reference

10.5              English   translation  of  Amended  and  Restated   Concession
                  Contract between  Hungarotel  Tavkozlesi Rt. and the Hungarian
                  Ministry  for  Transportation,  Telecommunications  and  Water
                  Management  dated as of June 3,  1996  (Bekescsaba),  filed as
                  Exhibit  10.80 to the  Registrant's  Quarterly  Report on Form
                  10-Q for the  quarter  ended  June 30,  1996 and  incorporated
                  herein by reference

10.6              English  translation of Construction  Contract between Papa es
                  Tersege Telefon  Koncesszios Rt. and Fazis  Telecommunications
                  System Design and Construction Corporation dated May 10, 1996,
                  filed as Exhibit 10.74 to the Registrant's Quarterly Report on
                  Form 10-Q for the quarter ended June 30, 1996 and incorporated
                  herein by reference


                                      -40-
<PAGE>



 Exhibit
 Number                                 Description

10.7              English   translation   of   Construction   Contract   between
                  Hungarotel Tavkozlesi  Rt.  and  Ericsson  Kft. dated  May 17,
                  1996. (as amended), filed as Exhibit 10.75 to the Registrant's
                  Quarterly Report on Form 10-Q for the quarter ended September
                  30, 1996 and incorporated herein by reference

10.8              English  translation of Construction  Contract between Papa es
                  Tersege  Telefon  Koncesszios  Rt. and Ericsson Kft. dated May
                  31, 1996, filed as Exhibit 10.76 to the Registrant's Quarterly
                  Report on Form 10-Q for the  quarter  ended June 30,  1996 and
                  incorporated herein by reference

10.9              English   translation   of   Construction   Contract   between
                  Hungarotel Tavkozlesi Rt. and Fazis Telecommunications  System
                  Design and Construction Corporation dated June 28, 1996, filed
                  as Exhibit 10.77 to the Registrant's  Quarterly Report on Form
                  10-Q for the  quarter  ended  June 30,  1996 and  incorporated
                  herein by reference

10.10             Non-Employee  Director  Stock Option Plan dated as of February
                  6, 1997, filed  as Exhibit 10.91 to the Registrant's Form 10-K
                  for the fiscal year  ending December 31, 1996 and incorporated
                  herein by reference

10.11             1992  Incentive  Stock  Option  Plan  of  the  Registrant,  as
                  amended,  filed  as  Exhibit  4.3 to the Registrant's Form S-8
                  filed on June 24, 1997 and incorporated herein by reference

10.12             Employment  Agreement  dated  December 4, 1998   between   the
                  Registrant and Ole Bertram.

10.13             Termination  and  Release  Agreement dated as of July 26, 1996
                  between the Registrant and  Robert  Genova,  filed  as Exhibit
                  10.62  to the Registrant's Current Report on Form 8-K for July
                  26, 1996 and incorporated herein by reference

10.14             Consulting  Agreement  dated  as  of July 26, 1996 between the
                  Registrant and Robert Genova,  filed  as  Exhibit 10.63 to the
                  Registrant's Current Report on  Form  8-K  for  July  26, 1996
                  and incorporated herein by reference

10.15             Noncompetition Agreement dated as of July 26, 1996 between the
                  Registrant and Robert Genova,  filed  as  Exhibit 10.64 to the
                  Registrant's  Current  Report  on  Form  8-K for July 26, 1996
                  and incorporated herein by reference

10.16             Irrevocable  Proxy  dated  July 26,  1996  executed  by Robert
                  Genova appointing Hungarian Telephone  and  Cable Corp. as his
                  proxy, filed  as  Exhibit  10.65  to  the Registrant's Current
                  Report on Form  8-K for July 26, 1996  and incorporated herein
                  by reference

10.17             Termination and  Release  Agreement  dated as of July 26, 1996
                  between the  Registrant  and  Frank R. Cohen, filed as Exhibit
                  10.66 to the Registrant's Current  Report on Form 8-K for July
                  26, 1996 and incorporated herein by reference

10.18             Consulting  Agreement  dated  as  of July 26, 1996 between the
                  Registrant and Frank R.  Cohen,  filed as Exhibit 10.67 to the
                  Registrant's  Current  Report  on  Form  8-K for July 26, 1996
                  and incorporated herein by reference

                                      -41-
<PAGE>

 Exhibit
 Number                                 Description

10.19             Noncompetition Agreement dated as of July 26, 1996 between the
                  Registrant and Frank R. Cohen,  filed  as Exhibit 10.68 to the
                  Registrant's  Current  Report  on  Form  8-K for July 26, 1996
                  and incorporated herein by reference

10.20             Irrevocable  Proxy  dated July 26,  1996  executed by Frank R.
                  Cohen  appointing  Hungarian  Telephone and Cable Corp. as his
                  proxy,  filed as  Exhibit  10.69 to the  Registrant's  Current
                  Report on Form 8-K for July 26, 1996 and  incorporated  herein
                  by reference

10.21             Termination  and  Release  Agreement dated as of July 26, 1996
                  between the  Registrant  and  Donald  K. Roberton,  filed  as
                  Exhibit 10.70 to  the  Registrant's Current Report on Form 8-K
                  for July 26, 1996 and incorporated herein by reference

10.22             Consulting  Agreement dated  as of July 26, 1996  between  the
                  Registrant and  Donald  K. Roberton, filed as Exhibit 10.71 to
                  the Registrant's  Current Report  on  Form  8-K  for  July 26,
                  1996 and incorporated herein by reference

10.23             Noncompetition Agreement dated as of July 26, 1996 between the
                  Registrant and Donald K. Roberton, filed  as Exhibit 10.72 to
                  the Registrant's Current Report on Form 8-K for July 26, 1996
                  and incorporated herein by reference

10.24             Irrevocable  Proxy dated July 26,  1996  executed by Donald K.
                  Roberton appointing Hungarian Telephone and Cable Corp. as his
                  proxy,  filed as  Exhibit  10.73 to the  Registrant's  Current
                  Report on Form 8-K for July 26, 1996 and  incorporated  herein
                  by reference

10.25             Stock Purchase Agreement dated as of July 1, 1997 between the
                  Registrant and Tele Danmark A/S, filed as Exhibit 10.96 to the
                  Registrant's Current Report  on Form  8-K for July 1, 1997 and
                  incorporated herein by reference

10.26             Stock  Purchase  Agreement  dated  as  of  September  30, 1997
                  between the Registrant  and  Tele Danmark A/S filed as Exhibit
                  10.97  to  the  Registrant's  Current  Report  on Form 8-K for
                  September 30, 1997 and incorporated herein by reference

10.27             Exchange Agreement dated as of September 30, 1997  between the
                  Registrant and Tele Danmark A/S, filed as Exhibit 10.98 to the
                  Registrant's Current Report on Form 8-K for September 30, 1997
                  and incorporated herein by reference

10.28             Multi-Currency Credit Facility among Postabank Rt., as Lender,
                  the Registrant, as Guarantor, HTCC Consulting Rt.,  Hungarotel
                  Tavkozlesi Rt.,  Kelet-Nograd  Com  Rt.  and  Papa  es Tersege
                  Telefon Koncesszios Rt. and Raba Com Rt., as Borrowers entered
                  into as of October 15, 1996, filed  as  Exhibit  10.84  to the
                  Registrant's Current Report on  Form  8-K for October 15, 1996
                  and incorporated herein by reference

10.29             Form of  Loan  Agreement  entered  into as of October 15, 1996
                  among Postabank Rt., as Lender,  the Registrant, as Guarantor,
                  and  each  of  certain subsidiaries,  as Borrowers,  filed  as
                  Exhibit 10.85 to the  Registrant's  Current Report on Form 8-K
                  for October 15, 1996 and incorporated herein by reference


                                      -42-
<PAGE>



 Exhibit
 Number                                   Description

10.30             Form of  Mortgage  and  Pledge  Agreement  Securing  Bank Loan
                  entered into as of October 15, 1996 between  Postabank Rt. and
                  each of certain  subsidiaries,  filed as Exhibit  10.86 to the
                  Registrant's  Current  Report on Form 8-K for October 15, 1996
                  and incorporated herein by reference

10.31             Form of Security Agreement entered into as of October 15, 1996
                  among  Postabank Rt., as the secured  party,  ABN AMRO Rt., as
                  the Escrow Agent,  and the Registrant and HTCC Consulting Rt.,
                  as the pledgors,  filed as Exhibit  10.87 to the  Registrant's
                  Current   Report  on  Form  8-K  for   October  15,  1996  and
                  incorporated herein by reference

10.32             Registration  Agreement,  dated  May  31,  1995,  between  the
                  Registrant and  CU  CapitalCorp., filed as Exhibit 10(f)(f) to
                  the Registrant's  Current  Report on Form 8-K for May 31, 1995
                  and incorporated herein by reference

10.33             Replacement and Termination  Agreement,  dated as of September
                  30, 1998, between the  Registrant  and  Citizens International
                  Management  Services  Company  and  CU CapitalCorp. filed   as
                  Exhibit 10.69 to the  Registrant's  Current Report on Form 8-K
                  for September 30, 1998 and incorporated herein by reference

10.34             Form of Promissory Note dated September 30, 1998 issued by the
                  Registrant  payable  to  Citizens   International   Management
                  Services  Company filed as Exhibit  10.70 to the  Registrant's
                  Current  Report  on  Form  8-K  for  September  30,  1998  and
                  incorporated herein by reference

10.35             Amended, Restated  and  Consolidated  Stock  Option  Agreement
                  dated  as of September 30, 1998, between the Registrant and CU
                  CapitalCorp.  filed  as  Exhibit  10.71  to  the  Registrant's
                  Current  Report  on  Form  8-K  for  September  30,  1998  and
                  incorporated herein by reference

11                Statement re computation of per share earnings  (not required)

12                Statement re computation of ratios  (not required)

13                Annual report to security holders  (not required)

16                Letter re change in certifying accountant  (not required)

18                Letter re change in accounting principles  (None)

21                Subsidiaries  of  the  Registrant,  filed as Exhibit 21 to the
                  Registrant's Form 10-K for the fiscal year ending December 31,
                  1997 and incorporated herein by reference

22                Published  report regarding   matters  submitted  to  vote  of
                  security holders  (not required)

23                Consents of experts and counsel  (not required)

24                Power of Attorney  (not required)

27.1              Financial Data Schedule

                                      -43-
<PAGE>


         (b)      Reports on Form 8-K

         None.


                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 29, 1999.

                                   HUNGARIAN TELEPHONE AND CABLE CORP.
                                   (Registrant)


                                   By /s/ Ole Bertram
                                          Ole Bertram
                                          President and Chief Executive Officer,
                                          Director

         Pursuant to the  requirements of the Securities  Exchange of 1934, this
Report  has been  signed  below by the  following  persons  and on behalf of the
Registrant and in the capacities indicated as of March 29, 1999.

Signature/Name                                   Title


/s/Francis J. Busacca, Jr.    Executive Vice President - Chief Financial Officer
Francis J. Busacca, Jr.       (Principal Financial Officer)


/s/William T. McGann          Treasurer and Controller
William T. McGann             (Chief Accounting Officer)


/s/David A. Finley            Director, Chairman of the Board
David A. Finley


/s/Daryl A. Ferguson          Director
Daryl A. Ferguson


/s/Torben V. Holm             Director
Torben V. Holm



                                      -44-
<PAGE>


Signature/Name                         Title



/s/John B. Ryan               Director
John B. Ryan


                              Director
Finn Schkolnik


/s/James H. Season            Director
James H. Season


/s/William E. Starkey         Director
William E. Starkey


/s/Leonard Tow                Director
Leonard Tow


                                      -45-
<PAGE>

              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES

                   Index to Consolidated Financial Statements

The following information is included on the pages indicated:

Consolidated Financial Statements:                                    Page

     Independent Auditor's Report                                     F-2
     Consolidated Balance Sheets                                      F-3
     Consolidated Statements of Operations and Comprehensive Loss     F-4
     Consolidated Statements of Stockholders' (Deficiency)            F-5
     Consolidated Statements of Cash Flows                            F-6
     Notes to Consolidated Financial Statements                       F-7 - F-32

Financial Statements Schedules:

     All  financial  statement schedules are omitted as the required information
is not applicable or the  information is presented in the consolidated financial
statements or related notes.








                                      F-1
<PAGE>

                          Independent Auditors' Report

The Board of Directors and Stockholders
Hungarian Telephone and Cable Corp.

We have  audited  the  accompanying  consolidated  balance  sheets of  Hungarian
Telephone and Cable Corp. and subsidiaries as of December 31, 1998 and 1997, and
the related  consolidated  statements  of  operations  and  comprehensive  loss,
stockholders'  deficit  and cash  flows for each of the years in the  three-year
period ended December 31, 1998. These consolidated  financial statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Hungarian Telephone
and Cable  Corp.  and  subsidiaries  as of December  31, 1998 and 1997,  and the
results  of their  operations  and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 1 to the
consolidated  financial  statements,  the Company has suffered  recurring losses
from operations,  has a net capital deficiency and a working capital deficiency,
and does not presently  have  sufficient  funds on hand to meet its current debt
service  obligations.  These factors raise substantial doubt about the Company's
ability to continue as a going  concern.  Management's  plans in regard to these
matters are described in Note 1. The  consolidated  financial  statements do not
include any adjustments that might result from the outcome of this uncertainty.

                                                                        KPMG LLP
New York, New York
March 24, 1999


                                      F-2
<PAGE>


              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                           Consolidated Balance Sheets
                           December 31, 1998 and 1997
                        (In thousands, except share data)

<TABLE>

<S>                                                         <C>                 <C>
                                    Assets                          1998            1997
                                    ------                          ----            ----

Current assets:
    Cash                                                      $     8,489           4,031
    Restricted cash                                                    64             536
    Accounts receivable, net of allowance
       of $962 in 1998 and $540 in 1997                             6,703           9,437
    VAT receivable, net                                                 -           2,641
    Inventories                                                     1,111           1,231
    Prepayments and other current assets                              187           2,146
                                                                ---------       ---------

       Total current assets                                        16,554          20,022
Property, plant and equipment, net                                136,489         138,885
Goodwill, net of accumulated amortization
    of $1,303 in 1998 and $1,011 in 1997                           10,000          11,299
Other intangibles, net of accumulated amortization
    of $1,238 in 1998 and $670 in 1997                              5,592           6,168
Other assets                                                        8,432          10,111
                                                                ---------       ---------
Total assets                                                  $   177,067         186,485
                                                                  =======        ========

                   Liabilities and Stockholders' Deficiency
Current liabilities:
    Current installments of long-term debt                     $    31,804           7,489
    Accounts payable                                                2,061           7,996
    Accruals                                                        3,552           4,364
    Other current liabilities                                         932           1,040
    Due to related parties                                          1,011           7,932
                                                                ---------       ---------
       Total current liabilities                                   39,360          28,821
Long-term debt, excluding current installments                     202,881         194,537
Due to related parties                                             22,372           3,476
Deferred credits and other liabilities                              1,491           1,488
                                                                ---------       ---------
Total liabilities                                                 266,104         228,322
                                                                ---------       ---------
Stockholders' deficiency:
    Common stock, $.001 par value.  Authorized
       25,000,000 shares; issued 5,395,864
       in 1998 and 5,235,370 in 1997                                    5               5
    Additional paid-in capital                                     71,467          70,772
    Accumulated deficit                                          (167,809)       (117,197)
    Accumulated other comprehensive income                          7,300           4,964
    Deferred compensation                                               -            (381)
                                                                ---------       ---------
       Total stockholders' deficiency                             (89,037)        (41,837)
                                                                ---------       ---------
Total liabilities and stockholders' deficiency                $   177,067         186,485
                                                                =========       =========
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-3

<PAGE>



              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
       Consolidated Statements of Operations and Comprehensive Loss
                  Years ended December 31, 1998, 1997 and 1996
                 (In thousands, except share and per share data)


<TABLE>
<S>                                                <C>                <C>                <C>
                                                          1998               1997              1996
                                                          ----               ----              ----
Telephone services revenues, net                    $     38,707           37,891            20,910
                                                     -----------       ----------        ----------

Operating expenses:
    Operating and maintenance expenses                    19,575           25,044            22,011
    Depreciation and amortization                         11,560            8,349             4,270
    Management fees                                        2,500            5,761             6,917
    Termination of management
       services agreement                                 11,131                -                 -
    Termination of former officers and directors               -                -             6,260
    Asset write-downs                                          -                -             2,005
                                                     -----------       ----------        ----------

    Total Operating Expenses                              44,766           39,154            41,463
                                                     -----------       ----------        ----------

Loss from operations                                      (6,059)          (1,263)          (20,553)

Other income (expenses):
    Foreign exchange losses                                 (230)            (517)           (6,278)
    Interest expense                                     (45,856)         (35,159)          (23,240)
    Interest income                                          686              690             1,488
    Costs of abandoned financing                               -                -            (2,985)
    Other, net                                               847               13             1,123
                                                     -----------       ----------        ----------

Loss before minority interest                            (50,612)         (36,236)          (50,445)

Minority interest                                              -                -             2,994
                                                     -----------       ----------        ----------

Loss before extraordinary item                           (50,612)         (36,236)          (47,451)

Extraordinary item, net                                        -                -            (7,318)
                                                     -----------       ----------        -----------

Net loss                                            $    (50,612)         (36,236)          (54,769)

Comprehensive income                                       2,336            6,458               887
                                                     -----------       ----------        ----------

Comprehensive loss                                  $    (48,276)         (29,778)          (53,882)
                                                    =============      ===========       ===========


Loss per common share - basic:

    Before extraordinary item                       $     (9.53)           (7.97)           (11.38)

    Extraordinary item                              $          -                -            (1.76)
                                                     -----------       ----------        ----------

    Net loss                                        $     (9.53)           (7.97)           (13.14)
                                                     ===========       ==========        ==========

Weighted average number of
Common shares outstanding - basic and diluted          5,309,985       4,546,163         4,169,532
                                                     ===========       =========         =========

</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>



              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
               Consolidated Statements of Stockholders' Deficiency
                  Years ended December 31, 1998, 1997 and 1996
                        (In thousands, except share data)

<TABLE>

<S>                                    <C>            <C>    <C>        <C>        <C>           <C>          <C>

                                                                                     Accumulated
                                                             Additional                Other                   Total
                                                     Common    Paid-in  Accumulated Comprehensive Deferred     Stockholders'
                                          Shares      Stock    Capital     Deficit     Income     Compensation Deficiency
--------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1995           4,015,039      $  4     45,358   (26,192)     (2,381)    (1,050)     $ 15,739
Common stock issuance                     250,000                3,219                                          3,219
Exercise of options and warrants            8,016                   81                                             81
Cancellation of shares                   (101,429)              (1,775)                                        (1,775)
Options granted in connection
with termination agreement                                        1,125                                          1,125
Options issued and extended as
consideration for financial support                             11,218                                         11,218
Shares issued as compensation               8,000                  101                                            101
Earned compensation                                                                               384             384
Foreign currency translation adjustment                                                887                        887
Net loss                                                                 (54,769)                             (54,769)
--------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996           4,179,626      $  4     59,327   (80,961)   (1,494)      (666)       $(23,790)
Exercise of options and warrants           81,586                  635                                            635
Shares issued as compensation               5,000                   52                                             52
Options issued to officers                                          70                                             70
Shares issued to Tele Danmark A/S         969,158         1     10,688                                         10,689
Earned compensation                                                                               285             285
Foreign currency translation adjustment                                              6,458                      6,458
Net loss                                                                 (36,236)                             (36,236)
--------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997           5,235,370      $  5     70,772  (117,197)    4,964       (381)       $(41,837)
Earned compensation                                                                               125             125
Cancellation of shares                    (25,000)                (256)                           256               -
Exercise of options and warrants           56,400                  224                                            224
Shares issued as compensation              10,625                   93                                             93
Shares issued to Citizens                 100,000                  513                                            513
Shares issued as contingent consideration
  relating to former acquisitions          18,469                    -                                              -
Options granted in connection with
  termination agreement                                            121                                            121
Net loss                                                                 (50,612)                             (50,612)
Foreign currency translation adjustment                                              2,336                      2,336
--------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998           5,395,864      $  5     71,467  (167,809)    7,300          -        $(89,037)
--------------------------------------------------------------------------------------------------------------------------

</TABLE>

See accompanying notes to consolidated financial statements.


                                      F-5
<PAGE>



              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                  Years ended December 31, 1998, 1997 and 1996
                                 (In thousands)

<TABLE>

<S>                                                      <C>                <C>           C>

                                                                  1998           1997          1996
                                                                  ----           ----          ----

Net cash provided by (used in) operating activities       $     11,118          4,937       (35,841)
                                                             ---------       --------     ---------

Cash flows from investing activities:

     Acquisition and construction of
         telecommunications networks                           (16,451)       (83,055)      (49,086)
     Decrease (increase) in construction deposits                  520          9,780        (7,466)
     Other                                                         301              -           136
                                                             ---------       --------     ---------
         Net cash used in investing activities                 (15,630)       (73,275)      (56,416)
                                                             ----------      --------     ---------
Cash flows from financing activities:

     Borrowings under long-term debt agreement                  16,099         72,064       132,307
     Proceeds from short-term loans                                  -              -       108,729
     Proceeds from exercise of options and warrants                224            635            81
     Repayment of long-term debt                                (7,048)       (14,326)       (9,026)
     Repayment of short-term loans                                   -              -      (142,607)
     Repayment of notes payable                                      -              -          (300)
                                                             ---------       --------     ----------
         Net cash provided by financing activities               9,275         58,373        89,184
                                                             ---------       --------     ---------
Effect of foreign exchange rate changes on cash                   (305)        (1,880)        2,757
                                                             ----------      ---------    ---------

Net increase (decrease) in cash                                  4,458        (11,845)         (316)

Cash at beginning of year                                        4,031         15,876        16,192
                                                             ---------       --------     ---------
Cash at end of year                                       $      8,489          4,031        15,876
                                                             =========       ========     =========

</TABLE>



See accompanying notes to consolidated financial statements.

                                      F-6




<PAGE>

              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 1998, 1997 and 1996

(1)    Summary of Significant Accounting Policies

       (a)    Description of Business

              Hungarian  Telephone and Cable Corp.  was  organized on March 23,
              1992 to own and manage  telecommunications companies  in  Hungary.
              Four  subsidiaries  of  the  Company  are  presently  engaged  in
              the  ownership, construction and operation of public switched
              telephone service.

              The Company, through two of its subsidiaries, commenced operations
              in  two   concession   regions  in  1995  and  through  two  other
              subsidiaries,  commenced operations in three additional concession
              areas effective January 1, 1996. Accordingly,  the Company devoted
              substantially  all of its efforts  through 1994 and a considerable
              portion  of  1995  to  obtaining  concession  rights,  negotiating
              acquisitions,  raising  capital in the form of debt and equity and
              preparing  to  commence  operations.  As  a  result,  the  Company
              recognized no revenues until 1995.

              Since 1995 and into 1998, the Company's  activities  have involved
              the acquisition of the concessions and telecommunications networks
              from MATAV and the subsequent design, development and construction
              of the modern  telecommunications  infrastructure that the Company
              now has in service.  The Company paid the Ministry  $11.5  million
              (at  historical   exchange  rates)  for  its  concessions,   spent
              approximately  $23.2  million (at  historical  exchange  rates) to
              acquire the existing  telecommunications  assets in its  Operating
              Areas from MATAV, and spent $171 million through December 31, 1998
              (at historical exchange rates) on the development and construction
              of its telecommunications infrastructure. The Company funded these
              costs and working capital needs primarily through the $170 million
              Postabank Credit Facility and a $47.5 million contractor financing
              facility.  The Company and the Hungarian  contractor which granted
              the contractor financing facility have a disagreement with respect
              to several issues relating to the quality and quantity of the work
              done by the contractor. During 1998 the Company and the contractor
              engaged  in  settlement  discussions  but were  unable  to reach a
              settlement.  The Company is currently  reviewing  its options with
              respect to this dispute.  The Company made the required  principal
              and interest  payments  under the  contractor  financing  facility
              during 1998. See Note 9(e).

              The first  installment  of the repayment of the  Postabank  Credit
              Facility  is due on March  31,  1999.  To date,  the  Company  has
              suffered from recurring  losses from  operations and has a working
              capital deficiency and a net capital deficiency.  The Company does
              not  presently  have  sufficient  funds  on hand to pay the  first
              installment on the Postabank Credit Facility.  Under the Postabank
              Credit Facility,  a failure to pay any installment  constitutes an
              "Event of  Default".  Upon  notice to the  Company  of an Event of
              Default,  the  Company is entitled to the benefit of a 60 day cure
              period.  If such  Event of  Default  is not cured  within 60 days,
              Postabank  could  declare  all  amounts   outstanding   under  the
              Postabank Credit Facility due and payable upon 60 days notice.

              The Company,  with  assistance  from its  financial  advisors,  is
              currently  in  negotiations   with  Postabank  and  its  financial
              advisors  regarding a restructuring  of the Company's  obligations
              with the goal of reducing the Company's cash repayment obligations
              so that the Company  can  sufficiently  fund  its working  capital
              requirements, capital expenditures and meet its financing


                                      F-7
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 1998, 1997 and 1996


              obligations  with cash flows from operations.  The Company is also
              reviewing  various  other  financing   alternatives  with  several
              entities.   While  the  result  of  such   negotiations   and  the
              availability  of  alternative   sources  of  financing  cannot  be
              predicted  with  certainty,  the Company  believes that it will be
              able to resolve  its  financial  issues so that it will be able to
              meet  its  obligations  during  1999.  However,  there  can  be no
              assurance that the Company will be able to resolve these issues on
              commercially reasonable terms, or at all. Such negotiations and/or
              discussions  could  result in the  issuance of equity  and/or debt
              securities  of  the  Company  or  one or  more  of  the  Operating
              Companies.  In  addition,  the  Company  relies on its  ability to
              generate  cash  from  operations   which  is  dependent  upon  the
              Company's ability to attract additional customers and revenues per
              customer. These factors are expected to be primarily influenced by
              the success of the Company's operating and marketing strategies as
              well as market acceptance of the Company's services.

              These factors raise  substantial doubt about the Company's ability
              to  continue  as  a  going  concern.  The  consolidated  financial
              statements do not include any  adjustments  that might result from
              the outcome of this uncertainty.

              The Company has granted  various options to purchase the Company's
              Common Stock,  including those previously granted to Citizens, and
              has  provided  certain  preemptive  rights  to  Citizens  and Tele
              Danmark.  For the term of these options, the holders will have the
              opportunity to exercise and dilute the interests of other security
              holders  or,  in the  case  of  Citizens,  acquire  a  controlling
              interest  in  the  Company.   As  long  as  these  options  remain
              unexercised,  the Company's  ability to obtain  additional  equity
              capital may be adversely affected.

       (b)    Principles of Consolidation and the Use of Estimates

              The  consolidated   financial  statements  include  the  financial
              statements  of the Company and its  majority  owned  subsidiaries;
              Kelet-Nograd  Com  Rt.,  ("KNC"),   Raba-Com  Rt.,   ("Raba-Com"),
              Hungarotel Tavkozlesi Rt. ("Hungarotel"),  Papa es Tersege Telefon
              Koncesszios   Rt.   ("Papatel"),   HTCC   Consulting   Rt.  ("HTCC
              Consulting")   and   Pilistav  Rt.   ("Pilistav").   All  material
              intercompany  balances  and  transactions  have  been  eliminated.
              Investments  in affiliates  representing  less than 50% ownership,
              and in which the  Company  exercises  significant  influence,  are
              accounted for using the equity method.

              The consolidated  financial  statements are prepared in accordance
              with U.S. generally accepted accounting principles (U.S. GAAP). In
              preparing  financial  statements  in  conformity  with U.S.  GAAP,
              management  is required to make  estimates  and  assumptions  that
              affect  reported   amounts  of  assets  and  liabilities  and  the
              disclosure of contingent assets and liabilities at the date of the
              financial statements and revenue and expenses during the reporting
              period. Actual results could differ from those estimates.

       (c)    Revenue Recognition

              Telephone  service  revenues  are  recognized  when earned and are
              primarily  derived  from  usage of the  Company's  local  exchange
              networks and facilities or under revenue  sharing  agreements with
              the former state controlled  monopoly  telephone  company which is
              MATAV, the international  and national long distance  interconnect
              service provider.

                                      F-8
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 1998, 1997 and 1996


              Advance  subscriber  payments  represent  advance  connection fees
              received from telephone  subscribers  and are recognized as income
              when the subscriber is connected to the telephone network. Advance
              fees  received  are  required  to be repaid  with  interest if the
              subscriber is not connected to the local telephone network.

        (d)   Foreign Currency Translation

              The statutory accounts of the Company's consolidated  subsidiaries
              and affiliates are maintained in accordance with local  accounting
              regulations and are stated in local  currencies.  Local statements
              are adjusted to U.S. GAAP and then translated into U.S. dollars in
              accordance  with Statement of Financial  Accounting  Standards No.
              52, "Accounting for Foreign Currency Translation" ("SFAS 52").

              Since commencement of revenue generating  activities,  the Company
              has used the Hungarian  Forint ("HUF") as the functional  currency
              for  its  majority  owned  Hungarian  subsidiaries.   Accordingly,
              foreign  currency assets and liabilities are translated  using the
              exchange  rates in effect at the balance  sheet  date.  Results of
              operations  are generally  translated  using the average  exchange
              rates prevailing throughout the year. The effects of exchange rate
              fluctuations   on   translating   foreign   currency   assets  and
              liabilities  into U.S.  dollars are  accumulated  as part of other
              comprehensive  income in  stockholders'  equity.  Foreign exchange
              fluctuations  related to  intercompany  balances  are  included in
              equity if such balances are intended to be long-term in nature. At
              the time the Company settles such balances,  the resulting gain or
              loss is reflected  in the  consolidated  statement of  operations.
              Gains and losses from foreign  currency  transactions are included
              in net loss in the period in which they occur.

       (e)    Cash Equivalents

              For the purposes of the consolidated statements of cash flows, the
              Company  considers  all highly liquid debt  instruments  purchased
              with a maturity of three months or less to be cash equivalents.

       (f)    Inventories

              Inventories  consist  primarily of telephones for resale and spare
              parts and are stated at the lower of cost or market.

       (g)    Property, Plant and Equipment

              Property,  plant and equipment are stated at cost. Depreciation is
              computed using the straight-line  method over the estimated useful
              lives of the respective assets.

       (h)    Intangible Assets

              Intangible  assets are comprised of  concession  fees paid and the
              excess of cost over net assets  acquired.  The concession fees are
              being  amortized  over the  25-year  concession  period  using the
              straight-line  method.  Excess of cost over net assets acquired is
              also amortized over 25 years using the straight-line method.

                                      F-9
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 1998, 1997 and 1996


        (i)   Stock Based Compensation

              The Company accounts for its stock option plans in accordance with
              Statement of Financial Accounting Standards ("SFAS") No. 123 which
              allows  entities to continue to apply the provisions of Accounting
              Principles  Board ("APB") Opinion No. 25 and provide pro forma net
              income and pro forma earnings per share  disclosures  for employee
              stock  option  grants  made in 1995  and  future  years  as if the
              fair-value-based  method,  as  defined in SFAS No.  123,  had been
              applied.  The Company has elected to apply the  provisions  of APB
              Opinion No. 25 and provide  the pro forma  disclosure  required by
              SFAS No. 123. See Note 11.

       (j)    Income Taxes

              Deferred tax assets and liabilities,  net of appropriate valuation
              allowances,   are  recognized  for  the  future  tax  consequences
              attributable  to  differences   between  the  financial  statement
              carrying  amounts of  existing  assets and  liabilities  and their
              respective   tax  bases  and   operating   loss  and  tax   credit
              carry-forwards.  Deferred tax assets and liabilities,  if any, are
              measured  using  enacted  tax rates  expected  to apply to taxable
              income  in the  years in which  those  temporary  differences  are
              expected to be  recovered  or settled.  The effect on deferred tax
              assets and  liabilities  of a change in tax rates is recognized in
              income in the period that includes the enactment date.

              The Company's  Hungarian  operating  subsidiaries  are 100% exempt
              from  Hungarian  income tax for a period of five  years  beginning
              from January 1, 1994 and 60% exempt for the subsequent  five years
              as  long  as  (1)   capitalization   stays  above  50,000,000  HUF
              (approximately  $231,000 at December 31, 1998 exchange rates), (2)
              foreign ownership exceeds 30% of the registered  capital,  and (3)
              more than 50% of the revenue earned arises from  telecommunication
              services.

       (k)    Net Loss Per Share

              Basic earnings per share ("EPS") is computed by dividing income or
              loss  attributable to common  stockholders by the weighted average
              number of common shares  outstanding  for the period.  Diluted EPS
              reflects the potential dilution from the exercise or conversion of
              securities into common stock.

              Net  loss  and  weighted  average  shares   outstanding  used  for
              computing diluted loss per common share were the same as that used
              for  computing  basic loss per common  share for each of the years
              ended December 31, 1998, 1997 and 1996.

              The Company had potentially  dilutive common stock  equivalents of
              7,474,915,  7,200,859 and  5,627,775 for the years ended  December
              31, 1998, 1997 and 1996, respectively,  which were not included in
              the  computation of diluted net loss per common share because they
              were antidilutive for the periods presented.

       (l)    Impairment of Long-Lived Assets and Long-Lived Assets to Be
              Disposed Of

              Long-lived  assets  and  certain   identifiable   intangibles  are
              reviewed   for   impairment   whenever   events  or   changes   in
              circumstances  indicate  that the carrying  amount of an asset may
              not be recoverable.  Recoverability  of assets to be held and used
              is measured by a comparison of the carrying  amount of an asset to
              future net cash flows  expected to be generated  by the asset.  If
              such assets are  considered to be impaired,  the  impairment to be
              recognized is measured by the amount by which the carrying  amount
              of the assets  exceed the fair value of the  assets.  Assets to be
              disposed of are  reported at the lower of the  carrying  amount or
              fair value less costs to sell.


                                      F-10
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 1998, 1997 and 1996


       (m)    Reclassifications

              Certain  amounts  from  1997 and 1996 have  been  reclassified  to
              conform with the 1998 presentation.


(2)    Acquisitions

       On August 31, 1995, the Company acquired 45.12% of the outstanding Common
       Stock and voting  rights to an additional  6% of the  outstanding  Common
       Stock of Papatel and 65% of the outstanding Common Stock and the right to
       acquire a further 20% of Hungarotel  from Alcatel  Austria AG, US Telecom
       East, Inc. and Central Euro TeleKom,  Inc.  ("CET") for 571,429 shares of
       its Common Stock  (subject to reduction  based upon certain  post-closing
       purchase price adjustments).  The value of the Common Stock issued in the
       exchange was $10,000,000,  however,  pending  resolution of the potential
       post-closing  adjustments,   the  Common  Stock  was  not  delivered.  In
       September 1995, the Company entered into agreements with MATAV to acquire
       25.01% of the  outstanding  Common  Stock of Papatel  for  $925,000,  and
       Microsystem  Telecom Rt. and V.P. Consulting Kft. to acquire 9.19% of the
       Common  Stock and  dividend  rights to another 6% of the Common  Stock of
       Papatel for a purchase price of $300,000.  These acquisitions resulted in
       a total purchase  price of  $11,225,000  for 79.24% of Papatel and 65% of
       Hungarotel.

       On March 13, 1996,  the Company  acquired the remaining 35% of Hungarotel
       for $330,000 in cash and adjusted  the minority  interest and  intangible
       assets acquired.

       On May 21, 1996, the Company and CET entered into a Settlement  Agreement
       whereby the number of shares to be issued to CET in  connection  with the
       acquisitions  of  Hungarotel  and Papatel was reduced  based upon certain
       post-closing  purchase  price  adjustments.  Pursuant  to the  Settlement
       Agreement,  the number of shares was reduced by 101,429. The reduction in
       purchase price of approximately $1.8 million was reflected as a reduction
       of  goodwill  and a  reduction  of Common  Stock and  additional  paid-in
       capital.  Additionally,  in May 1996,  Papatel  entered into a settlement
       agreement with a contractor for pre-acquisition  claims for approximately
       $0.7 million more than the amount  recorded at  acquisition.  The Company
       recorded this excess as an increase in goodwill.

       Contingent consideration for the acquisition of Hungarotel and Papatel in
       the form of  Common  Stock was  payable  in the  event  that the  average
       trading  price for the  Company's  Common  Stock  during the twenty  (20)
       trading days preceding August 31, 1998 was less than $17.50 per share. On
       August 31,  1998,  the  Company  issued an  additional  18,469  shares as
       contingent consideration under the terms of the acquisition agreement.

 (3)   Cash and Restricted Cash

       (a)    Concentration

              At December 31, 1998, cash of $8,173,000 ($317,000  denominated in
              U.S.  dollars and the  equivalent  of  $7,856,000  denominated  in
              Hungarian  Forints)  was on  deposit  with  banks in  Hungary.  In
              addition,  cash of  $316,000  denominated  in U.S.  dollars was on
              deposit with two major banks in the United States.

                                      F-11

<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 1998, 1997 and 1996


       (b)    Restriction

              At December 31, 1998,  $22,000 of cash denominated in U.S. dollars
              was  deposited  in escrow  accounts  under  terms of  construction
              contracts. In addition, $42,000 was restricted pursuant to certain
              arrangements with other parties.


 (4)   Property, Plant and Equipment

       The components of property,  plant and equipment at December 31, 1998 and
1997 are as follows:
<TABLE>

<S>                                       <C>                  <C>             <C>
                                                 1998              1997         Estimated Useful Lives
                                 (in thousands)

           Land and Buildings             $       7,402           5,629            25 to 50 years
           Telecommunications equipment         141,752         133,183            7 to 25 years
           Other equipment                        5,891           3,237               5 years
           Construction in progress                 700           6,241
                                                --------        --------
                                                155,745         148,290

           Less: accumulated depreciation       (19,256)         (9,405)
                                                --------        --------
                                          $     136,489         138,885
                                                ========        ========
</TABLE>


       Interest  capitalized and included in the cost of construction of certain
       long-term assets amounted to approximately  $310,000 in 1998,  $4,504,000
       in 1997 and $2,076,000 in 1996.

 (5)   Short-Term Loans

       There were no short-term loans outstanding at December 31, 1998 and 1997.

       In 1995,  the  Company  entered  into a financing  agreement  (the "First
       Citizens Loan Agreement") (see note 13) in which an affiliate of Citizens
       Utilities  Company  (Citizens  Utilities  Company and its  affiliates are
       hereinafter  referred to as  "Citizens")  provided a guaranty to Chemical
       Bank that  permitted  the  Company  to borrow up to $33.2  million at the
       bank's prime rate of interest + 2% through July 25, 1997. At December 31,
       1995, the Company had borrowed $30.7 million under the financing.  During
       February  and  March of 1996,  the  Company  borrowed  from  Citizens  an
       additional $18.2 million under a second financial agreement with Citizens
       (the "Second  Citizens Loan  Agreement"  together with the First Citizens
       Loan Agreement, the "Citizens Loan Agreements") (see Note 14).

       At  December  31,  1995,  the Company had a  short-term  loan  payable to
       ABN-AMRO for DM 2,250,000 (approximately  $1,603,000 at December 31, 1995
       exchange  rates) which bore  interest at DM LIBOR + .625%.  This loan was
       repaid in March 1996.

       At  December  31,  1995,  the  Company had  short-term  loans  payable to
       TeleDanmark A/S which bore interest at DM and U.S. dollar LIBOR + 3%. The
       loans were repaid in January 1996.

                                      F-12
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 1998, 1997 and 1996


       On March 29, 1996, the Company  entered into a $75.0 million Secured Term
       Loan  Credit  Facility  ("Credit   Facility")  and,  together  with  HTCC
       Consulting,  a related Pledge and Security  Agreement with Citicorp North
       America, Inc. ("Citicorp"). This facility permitted the Company to borrow
       funds  through  December 31, 1996 at interest  rates ranging from 3.5% to
       6.5% above LIBOR or  Citicorp's  announced  based rate,  at the Company's
       option. In April, 1996, the Company used the Credit Facility to repay all
       the funds  advanced or  guaranteed  by Citizens and Chemical  Bank and to
       meet  contractual  commitments  pursuant to  construction  contracts  and
       operating  expenses  and  recorded  an  extraordinary  loss on the  early
       extinguishment of the debt of approximately  $8.2 million  representing a
       non-cash  charge  relating to the write off of the remaining  unamortized
       deferred  financing  costs  included in other  assets  pertaining  to the
       Citizens Loan Agreements.

       In  October  1996,  utilizing  funds  provided  by the  Postabank  Credit
       Facility  (see Note 6), the Company paid Citicorp all funds owed pursuant
       to the Credit Facility,  as amended,  plus $2.0 million in fees and costs
       representing  settlement  in  connection  with  the  cancellation  of the
       Company's  proposed  bond  offering  for  which  Citicorp  was  to act as
       underwriter (see Note 6).

(6)    Long-term Debt

       Long-term debt at December 31, 1998 and 1997 consists of the following:
<TABLE>
     <S>                                                                        <C>          <C>

                                                                                   1998        1997
                                                                                    (in thousands)
       Loan payable including  deferred  interest, interest at the National Bank
           of  Hungary  weighted  average  Treasury  Bill + 2.5% (19% and 22% at
           December  31, 1998 and 1997,  respectively),  payable in 32 quarterly
           installments beginning March 31, 1999 with final payment due December
           21, 2006; HUF 42,863,437,000 and HUF 31,736,164,000 outstanding at
           December 31, 1998 and 1997, respectively.                             197,984        155,630

       Construction  loan including deferred interest, interest at the  National
           Bank of Hungary  average Treasury  Bill + 2.5%  (19% and 22% at
           December  31,  1998 and 1997, respectively) payable in 20 quarterly
           installments beginning March 31, 1998 with final payment due December
           31, 2002; HUF  7,926,002,000 and HUF 9,421,554,000 outstanding at
           December 31, 1998 and 1997, respectively.                              36,610         46,202

       Loan payable, without interest due in equal annual installments
           over three years                                                           91            194
                                                                              ------------   ------------

       Total long-term debt                                                  $   234,685        202,026

       Less current installments                                                  31,804          7,489
                                                                              ------------   ------------

       Long-term debt, excluding current installments                        $   202,881        194,537
                                                                              ============   ============

</TABLE>

       The  aggregate   maturities  of  long-term  debt  based  on  U.S.  dollar
       equivalents  at  December  31,  1998  exchange  rates  for  each  of  the
       subsequent  five  years  are  as  follows:   1999,   $31,804,000;   2000,
       $34,612,000; 2001, $34,612,000; 2002, $34,667,000; 2003, $24,748,000; and
       thereafter $74,242,000. The carrying value of long-term debt approximates
       its fair value at December 31, 1998.

                                      F-13
<PAGE>

              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 1998, 1997 and 1996


       On October 15, 1996, the Company and its subsidiaries entered into a $170
       million  10-year   Multi-Currency   Credit  Facility  with  Postabank  es
       Takarekpenztar ("Postabank"), a Hungarian commercial bank (the "Postabank
       Credit  Facility").  Concurrently  upon entering into the loan  agreement
       with  Postabank,  the Company  terminated  its planned bond  offering and
       recorded a charge of $2,985,000 representing all related costs.

       Under the terms of the Postabank Credit Facility,  drawdowns in Hungarian
       Forints bear interest at a rate of 2.5% above the weighted average of the
       yield on six- and twelve-month  discounted Hungarian treasury bills while
       drawdowns  in U.S.  dollars bear  interest at 2.5% above LIBOR.  Interest
       payments for the first two years were deferred at the  Company's  option.
       Amounts   outstanding  in  Hungarian  Forints,   including  any  deferred
       interest, will be payable in 32 equal quarterly installments beginning on
       March  31,  1999.  As  discussed  in Note 1,  the  Company  does not have
       sufficient  funds to meet the required  repayments on March 31, 1999. See
       Note 1 for management's plans in this regard.

       Concurrently with the Postabank Credit Facility,  each subsidiary entered
       into a Mortgage and Pledge  Agreement  pursuant to which each  subsidiary
       granted a security  interest to Postabank in all assets acquired or to be
       acquired with the funds provided by the loan. In addition,  HTCC and HTCC
       Consulting  entered  into a  Security  Agreement  whereby  each  pledged,
       subject to certain consents, their respective ownership interests in each
       subsidiary as collateral.

       In October 1996,  pursuant to the Postabank Credit Facility,  the Company
       borrowed  the   equivalent  of  $82.3   million  in  Hungarian   Forints.
       Approximately $75.2 million of this amount was used to repay Citicorp all
       funds  advanced  pursuant to the Credit  Facility,  as amended,  and $2.0
       million  was  paid  to  Citicorp  for  fees  representing  settlement  in
       connection with the cancellation of the Company's proposed bond offering.
       The  remaining  $5.1  million  was  used  to  pay  management   fees  and
       reimbursable  costs owed to Citizens pursuant to the Management  Services
       Agreement  (see Note 14). An additional  $5.6 million of the facility was
       used to pay loan  origination fees and costs to Postabank under the terms
       of the loan agreement,  $2 million of which was reimbursed to the Company
       in equal  quarterly  installments  over a two year  period,  and which is
       being amortized over the life of the loan facility. At December 31, 1998,
       the remaining  unamortized deferred financing costs have been included in
       other  assets.  Additionally,  certain costs were incurred as a result of
       Citizens' financial support (see Note 14).

       In 1997, proceeds from the loan were used to continue construction of the
       Company's   telecommunications   networks,   provide  additional  working
       capital,  and  refinance  or repay  other  existing  debt.  In 1998,  the
       remaining  proceeds  of the loan were used to fund the  expansion  of the
       Company's telecommunications networks and repay other existing debt.

       In the first quarter of 1997, the Company repaid amounts payable to MATAV
       and the Danish  Fund under  long-term  agreements  with  proceeds  of the
       Postabank Credit Facility.

                                      F-14
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 1998, 1997 and 1996


       In 1996,  Hungarotel entered into a $47.5 million  construction  contract
       for the  construction  of a  telephone  network in one of its  concession
       areas. Financing for the full amount was provided by the contractor.  The
       financing  agreement  requires  repayment of principal and interest in 20
       quarterly installments  commencing March 31, 1998, with final payment due
       December 31, 2002. Interest is charged at a variable rate computed as the
       weighted average of the six and 12 month Hungarian National Treasury Bill
       interest  rate  for  each  quarter  plus  2.5%.  According  to  the  loan
       agreement,  the Company may elect to defer  repayment of 20% of the total
       debt  repayments  due in 1998 and 1999.  The Company has elected this 20%
       deferral  option for 1998.  Security  pursuant to the loan represents all
       assets  acquired with the funds provided by the loan. The Company and the
       contractor have a disagreement with respect to several issues relating to
       the quality and quantity of the work done by the contractor.  During 1998
       the Company and the contractor engaged in settlement discussions but were
       unable to reach a  settlement.  The Company is  currently  reviewing  its
       options  with  respect to this  dispute.  The Company  made the  required
       principal and interest payments under the contractor  financing  facility
       during 1998. See Note 9(e).

       In 1995, the Company was awarded subsidies from the Ministry  aggregating
       HUF  118,720,000  (approximately  $850,000 at December 31, 1995  exchange
       rates). The required conditions were satisfied in 1996 and the funds were
       received  one-half  in the form of a grant and  one-half in the form of a
       non-interest bearing loan repayable over a three year period.

(7) Transactions with Tele Danmark A/S

       On July 1, 1997, the Company  entered into an agreement with Tele Danmark
       A/S ("TDI")  pursuant to which TDI agreed to exchange its 20% interest in
       each of two operating  subsidiaries  for 420,908  shares of the Company's
       common  stock.  The  value  of  shares  on  the  date  of  issue  totaled
       $3,630,000.  Under the agreement, TDI was granted the preemptive right to
       maintain its equity  ownership  percentage  in addition to giving TDI the
       right,  if  TDI  acquired  the  4.8%  stake  in  each  of  the  operating
       subsidiaries  owned by the Danish Fund for  Central  and  Eastern  Europe
       ("Danish Fund"), to sell such shares to the Company on similar terms.

       On September 30, 1997, TDI exercised its right and agreed to exchange the
       4.8% interest in each of two operating  subsidiaries  purchased  from the
       Danish Fund for 101,018 shares of the Company's  common stock.  The value
       of shares on the date of issue totalled $1,301,000.

       The total value of shares issued relating to these two  transactions  has
       been  recorded  as an  increase  to  goodwill  and to  Common  Stock  and
       additional paid-in capital.

       On  September  30,  1997,  the Company and TDI entered  into an agreement
       whereby  TDI agreed to  exchange  loans and  accrued  interest  totalling
       $5,534,000  to two  operating  subsidiaries  for  447,232  shares  of the
       Company's common stock.

       As a result of these  transactions,  TDI's share ownership in the Company
       is 18.4% of the shares outstanding at December 31, 1998.

(8)    Income Taxes

       The  statutory  U.S.  Federal tax rate for the years ended  December  31,
       1998,  1997 and 1996 was 35%.  For  Hungarian  income tax  purposes,  the
       concession companies are entitled to a 100% reduction in income taxes for
       the five year period  ending  December  31, 1998 and a 60%  reduction  in
       income  taxes for the  subsequent  five year period  ending  December 31,
       2003.  The effective  tax rate was zero for the years ended  December 31,
       1998, 1997 and 1996 due to the Company incurring net operating losses for
       which no tax benefit was recorded.

                                      F-15
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 1998, 1997 and 1996


       For U.S.  Federal  income  tax  purposes,  the  Company  has  unused  net
       operating  loss  carryforwards  at  December  31,  1998 of  approximately
       $17,090,000  which  expire  in  2007,  $142,000;  2008,  $422,000;  2009,
       $950,000; 2010, $6,507,000; 2011, $6,328,000; 2012, $1,906,000; and 2018,
       $835,000.  The availability of the loss carryforwards to offset income in
       future years may also be  restricted  as a result of an ownership  change
       which may occur as a result of future sales of the Company's Common Stock
       and other events.

       For Hungarian corporate income tax purposes,  the Hungarian  subsidiaries
       have unused net  operating  loss  carryforwards  at December 31, 1998, at
       current  exchange rates, of  approximately  $88,864,000.  Of this amount,
       $17,951,000 may be carried forward  indefinitely  while $1,613,000 may be
       carried forward until 2000, $9,051,000 until 2001, $28,968,000 until 2002
       and $31,281,000 until 2003.

       The tax effect of  temporary  differences  that give rise to  significant
       portions of deferred tax assets are as follows:

<TABLE>
<S>                                                        <C>                     <C>
                                                                       December 31
                                                                   ---------------------
                                                                 1998                 1997
                                                                 ----                 ----
                                                                      ($ thousand)

              Net operating loss carryforwards              $   5,982                5,696
              Write down of assets                                418                  418
              Stock compensation                                1,467                1,310
              Citizen's options                                 2,205                1,991
              Termination benefits                              1,169                1,592
              Citizen's termination agreement                   3,896                    -
              Management fees                                   3,236                2,361
              Interest expense                                    918                  620
              Other                                               674                  966
                                                             --------             --------
              Total gross deferred tax assets                  19,965               14,954
              Less valuation allowance                        (19,965)             (14,954)
                                                             --------             --------
              Net deferred tax assets                       $       0                    0
                                                             ========             ========
</TABLE>

       In  assessing  the  realizability  of  deferred  tax  assets,  management
       considers  whether it is more likely than not that some portion or all of
       the deferred tax assets will not be realized. The ultimate realization of
       deferred tax assets is dependent  upon the  generation of future  taxable
       income  during the periods in which those  temporary  differences  become
       deductible.  Management considers projected future taxable income and tax
       planning in making these assessments. During 1998 and 1997, the valuation
       allowance increased by $5,011,000 and $2,864,000, respectively.

(9)    Commitments and Contingencies

       (a)    Concession Agreements

              Certain  subsidiaries of the Company have been awarded  concession
              rights   by   the    Hungarian    Ministry   of    Transportation,
              Telecommunications  and Water  Management  ("the Ministry") to own
              and operate  local  public  telephone  networks in five regions of
              Hungary.  Each of the  concession  agreements are for a term of 25
              years and provide for an eight-year exclusivity period.

                                      F-16
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 1998, 1997 and 1996


              Agreements   providing   concession   rights  in  two  regions  to
              Hungarotel  and one region to Papatel  were  entered into prior to
              their  acquisition  by the  Company and were  renegotiated  by the
              Company.  The renegotiated  concession  agreements provided for an
              initial payment to the Ministry of HUF 938,250,000  (approximately
              $6.7 at  December  31,  1995  exchange  rates)  which  was paid in
              November 1995, and for annual  concession fees based upon 2.3% and
              0.3% of net telephone service revenues for the regions operated by
              Hungarotel  and 2.3% of net  telephone  service  revenues  for the
              region operated by Papatel.

              In 1994, the Ministry awarded concession rights to own and operate
              local  public  telephone   networks  to  KNC  and  Raba-Com  under
              agreements  which  provide for annual  concession  fees based upon
              0.1%  and  1.5% of net  telephone  service  revenues  for  regions
              operated by KNC and Raba-Com, respectively.

              The concession  agreements  provide for,  among other things,  the
              subsidiaries to provide  telephone  service to specific numbers of
              customers  by specified  dates or be subject to possible  monetary
              penalties and possibly reduction in the period of exclusivity.  As
              of December 31, 1998, the Company  believes it has fulfilled these
              service  requirements  in their  concession  areas in all material
              respects, and has not provided for any potential liability.

              The activities of the subsidiaries which own concession rights are
              regulated  by the  Ministry  and by the terms of their  respective
              concession  agreements.  The Ministry  regulates the construction,
              operation and sale of local telephone exchanges and has been given
              the authority to regulate the industry.  This  authority  includes
              approving  local,  long  distance  and  international  rates,  the
              sharing of revenues  between  concession  companies and MATAV, the
              equipment  that  can be  used  in the  public  switched  telephone
              network and requiring local companies to meet specified  standards
              as to growth and services.

              The  Ministry  has  stipulated  in the  Concession  Contracts  for
              Hungarotel and Papatel,  as amended in June 1996, that each of the
              Operating   Companies  must  meet  certain   Hungarian   ownership
              requirements  so  that  by the end of the  seventh  year of  their
              Concession  Contracts Hungarian ownership must consist of 25% plus
              one share of the relevant Operating  Company.  For the first three
              months after assuming  operations of an Operating Area from MATAV,
              no Hungarian  ownership was required.  For the  seven-year  period
              following the date or amendment of a Concession  Contract,  as the
              case may be, Hungarian ownership must be at least 10%, except that
              during such period,  such ownership may be reduced to as low as 1%
              for a period of up to two years.  During such  seven-year  period,
              while the  Hungarian  ownership  block is  required to be at least
              10%,  such block must have  voting  power of at least 25% plus one
              share, thus providing  Hungarian owners the right to block certain
              transactions  which,  under  Hungarian  corporate  law,  require a
              supermajority  (75%) of stockholders voting on the matter, such as
              mergers  and  consolidations,   increases  in  share  capital  and
              winding-up.

              For these  purposes,  Hungarian  ownership  of shares means shares
              owned by Hungarian  citizens.  Shares owned by a  corporation  are
              considered  Hungarian  owned only in  proportion  to the Hungarian
              ownership of such  corporation.  The LTOs can also fulfill the 25%
              plus one share  Hungarian  ownership  requirement  by listing such
              shares on the Budapest Stock Exchange.

                                      F-17
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 1998, 1997 and 1996


               The equity ownership  requirements and exceptions described above
               are contained in the June 1996 amended  Concession  Contracts for
               Hungarotel  and  Papatel.   The  equity  ownership   requirements
               expressly set forth in KNC's and Raba-Com's  Concession Contracts
               call  for a  strict  25%  plus  one  share  Hungarian  ownership.
               However,  the  Ministry  has stated,  pursuant to a letter  dated
               September  18, 1996,  that it intends  that all of the  Operating
               Companies  be treated  equally  with  respect  to such  ownership
               requirements which requirements KNC and Raba-Com are currently in
               compliance.

               Each of the Operating Companies, other than Papatel, is currently
               in compliance  with the 1% ownership  requirement but not the 10%
               ownership  requirement which was supposed to be effective in June
               1998.  Papatel's Concession Contract permits an initial Hungarian
               ownership  level of its current 0.8%. If the Hungarian  ownership
               does not meet the  required  levels,  the LTO is required to give
               notice to the Ministry, which may then require the LTO to rectify
               the  situation  within three months,  or a shorter  period if the
               Ministry  considers  that there has been a delay in the  required
               notification.  The Ministry is currently  reviewing the Hungarian
               equity ownership requirements.  In the case of one other LTO, the
               Ministry  has  granted  a  waiver  on the  10%  ownership  issue.
               Presently,  the  Ministry has  indicated  that it is not going to
               enforce  at  this  time  the  10%  Hungarian   equity   ownership
               requirement.  In the event that the  Ministry  decides to enforce
               the  existing  Hungarian  ownership  requirements  or adopts  new
               Hungarian  equity  ownership   requirements,   the  Company  will
               formulate   plans  to  meet  the   Hungarian   equity   ownership
               requirements.  Failure to do so, or  failure  to comply  with the
               greater than 25% Hungarian  ownership  requirement  at the end of
               the  seven-year  period might be considered a serious breach of a
               Concession  Contract,  giving the Ministry the right, among other
               things,  to terminate the  Concession  Contract.  There can be no
               assurance that the Company will be able to increase the Hungarian
               ownership in the  Operating  Companies in a manner  sufficient to
               comply with such requirements in the future.

               The  Hungarian  ownership  requirements  would  effectively  give
               minority  Hungarian  stockholders in the Operating  Companies the
               ability to block  certain  corporate  transactions  requiring the
               approval of 75% of stockholders  voting on the matter,  including
               mergers  and  consolidations,  increases  in  share  capital  and
               winding-up.   In  addition,   unless  the   Hungarian   ownership
               requirements are formally  changed,  compliance would result in a
               reduction in the Company's ownership in the Operating  Companies,
               and, consequently, the Company's share of income, if any, or loss
               of the Operating Companies may be reduced proportionately.

       (b)    Construction Commitments

              KNC has a continuing  contract  which  provides for the  continued
              construction of a local telephone  network and the addition of new
              subscribers   in  its   service   area.   This   contract   totals
              approximately  $18.3 million,  $5.0 million of which remains to be
              spent.

       (c)    Settlement of Claim

              In  connection  with the  settlement  of a claim  relating  to the
              termination   of  a   management   agreement   with  an  unrelated
              corporation to operate certain  concessions,  the Company issued a
              promissory  note for $300,000  which was repaid in 1996 and 25,000
              five-year  assignable  warrants with an estimated  market value of
              $100,000,  entitling  the holder to purchase  25,000 shares of the
              Company's Common Stock at $20 per share.  These warrants expire in
              September 1999. The corporation also has a "put option" to require
              the  Company to purchase  the  warrants  from the  proceeds of any
              public offering of the Company's  securities at an aggregate price
              of $300,000.
                                      F-18
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 1998, 1997 and 1996


       (d)    Leases

              The Company  leases office  facilities  in Stamford,  Connecticut,
              which require  minimum  annual rentals of  approximately  $30,000.
              During a portion  of 1996,  the  Company  also  leased  offices in
              Budapest,    Hungary   from    Hungarian    Teleconstruct    Corp.
              ("Teleconstruct"),  a company whose officers and directors consist
              of certain former  officers and directors of the Company (see note
              13(b)).  Certain operating subsidiaries also rent office space and
              other  facilities.  Rent expense for the years ended  December 31,
              1998,   1997  and  1996,   including   rental   amounts   paid  to
              Teleconstruct,  was $199,000,  $160,000,  $221,000,  respectively.
              Lease obligations for the subsequent five years are as follows:
              1999, $30,000; and 2000, $7,500.

       (e)    Legal Proceedings

              Hungarotel  is a defendant  in a lawsuit  brought in Hungary  that
              alleges  breach of contract.  The plaintiff is seeking  payment of
              outstanding  invoices and alleged damages  totaling  approximately
              HUF 270 million  (approximately  $1,250,000  at December  31, 1998
              exchange rates). The Company believes it has meritorious  defenses
              to the  claim  and does not  believe  there  will be any  material
              adverse effect from the outcome of this proceeding.

              Raba-Com  is a  defendant  in a  lawsuit  seeking  refund  of  the
              connection  fee  paid by a  residential  customer  due to delay in
              providing   telephone  service.   Management  believes  there  are
              meritorious defenses to the claim and expects to prevail.  Should,
              however,  the  legal  proceedings  result  in a final  unfavorable
              outcome,  the Company  could be subject to  additional  claims for
              refunds of connection fees received.

              HTCC Consulting,  Papatel and KNC are involved in several disputes
              with the Hungarian  taxing  authorities  (the "APEH")  pursuant to
              which  the  APEH   alleges   Consulting   owes  HUF  105   million
              (approximately   $485,000),    Papatel   owes   HUF   26   million
              (approximately  $120,000 at December 31, 1998 exchange  rates) and
              KNC owes HUF 26 million  (approximately  $122,000 at December  31,
              1998 exchange rates) for various reasons.  The Operating Companies
              believe that the APEH claims are without merit and are  vigorously
              defending themselves against such claims.

              During  1996  and  1997,   the  Company   entered   into   several
              construction  contracts with a Hungarian  contractor which totaled
              $59.0  million  in the  aggregate,  $47.5  million  of  which  was
              financed by a contractor financing facility.  To date, the balance
              on the contractor financing facility is $36.6 million. The Company
              and the  contractor  have a  disagreement  with respect to several
              issues  relating to the  quality and  quantity of the work done by
              the contractor. The Company has rejected invoices of approximately
              HUF 700 million  (approximately  $3.2 million at December 31, 1998
              exchange rates). The Company has claims against the contractor for
              substantially   more  than  the  amount  being   demanded  by  the
              contractor.  During 1998 the Company and the contractor engaged in
              settlement  discussions  in order to resolve these issues but were
              unable to reach a settlement. The Company is reviewing its options
              with  respect to such  dispute.  At this time the  outcome of such
              dispute cannot be predicted with certainty.  The Company  believes
              that  it will  prevail  on the  merits  such  that it will  not be
              responsible  for the full  payment  on the  aggregate  contractual
              amount.  There  can,  however,  be no  assurances  as to the final
              outcome or course of action of such dispute.

                                      F-19
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 1998, 1997 and 1996


              The Company and its  subsidiaries  are  involved in various  other
              claims  and  legal  actions  arising  in the  ordinary  course  of
              business.  In the opinion of management,  the ultimate disposition
              of these  matters will not have a material  adverse  effect on the
              Company's consolidated  financial position,  results of operations
              or liquidity.

       (f)    Agreements with Lucent Technologies

              In October 1997, the Company entered into an agreement with Lucent
              Technologies to become the exclusive distributor of Lucent PBX and
              Key System  products in  Hungary.  As part of the  agreement,  the
              Company  purchased  fixed assets and inventory  valued at $470,000
              and agreed to purchase commitments starting at $6 million for each
              of the next three years. The agreement provided for the imposition
              of  penalties  of up to $500,000  annually for failure to meet the
              purchase requirements.  The Company also assumed the employment of
              36  employees.  During  the first  quarter  of 1998,  the  Company
              amended the  original  agreement  with  Lucent.  Under the amended
              agreement,  the Company is the  exclusive  supplier of PBX and Key
              System  products  in  its  Operating  Areas  while  retaining  the
              non-exclusive  rights to service other Hungarian customers outside
              its Operating Areas. In addition,  the Company will be entitled to
              sell  large call  centers on a  commission  basis.  The  Company's
              minimum  purchase  commitments  have been  reduced  to $2  million
              annually with potential penalties reduced to a maximum of $200,000
              annually for failure to meet the purchase requirements.  As a part
              of the amended agreement, the Company transferred back $400,000 of
              assets to Lucent and paid  $150,000 to Lucent.  In  addition,  the
              Company transferred to a third party  subcontractor,  28 of the 36
              employees  originally  assumed.  The  Company  has  had  continued
              discussions  with Lucent in order to reduce its potential  penalty
              exposure.  Based upon discussions  between Lucent and the Company,
              the Company believes that the maximum  potential  penalty for 1998
              is  approximately  $24,000 and this will be settled during 1999 in
              the form of marketing and sales promotions expenses.

       (g)    Social and Educational Contributions

              Hungarotel's  Concession  Contracts  require  Hungarotel to pay an
              amount  equal to 10 times the local  occupational  excise tax. The
              applicability and enforceability of such obligation is not certain
              at this  time.  Therefore,  it is not  possible  to  predict  with
              certainty  the effect,  if any,  such  provision  will have on the
              Company.  The Company has not accrued any  amounts related to such
              tax.

                                      F-20
<PAGE>

       (h)    Subsidiary Capital Requirements

              In July 1998, Hungary adopted a law requiring corrective action by
              certain  Hungarian  companies  which have  negative net equity for
              more than two years.  Each of the  Operating  Companies  currently
              have negative net equity.  The effective date of the applicability
              of the law to the Operating Companies is not certain at this time.
              As part of the Company's restructuring negotiations (see Note 1(a)
              above),  the Company is reviewing  its options with respect to the
              capital  structure of each of the Operating  Companies.  While the
              Company believes that each of the Operating Companies will be able
              to  comply  with  the law if and  when it  affects  the  Operating
              Companies,  there can be no assurance that the Operating Companies
              will be able to comply with such law.

 (10)  Common Stock

       In  connection  with a 1992 private  placement  and public  offering,  in
       addition to a 1994  private  placement,  the Company  issued  warrants to
       purchase  141,950  shares of Common Stock at prices ranging from $3.60 to
       $14.00 per share.  During  1996,  warrants  to purchase  3,016  shares of
       Common  Stock at $10.15 were  exercised.  Proceeds  from the  exercise of
       these warrants totaled $31,000 in 1996. During 1998, warrants to purchase
       4,650 shares of Common Stock at $3.60 were  exercised.  Proceeds from the
       exercise of these warrants totaled $17,000 in 1998.

       During 1996,  options to purchase 5,000 shares of Common Stock at $10 per
       share  were  exercised.  Proceeds  from the  exercise  of  these  options
       amounted to $50,000.  During 1998, a former officer  exercised options to
       purchase 51,750 shares of Common Stock at $4.00 per share.  Proceeds from
       the exercise of these options totaled $207,000.

       During 1997,  options to purchase 70,000 shares of Common Stock at prices
       ranging  from $7.00 to $10.00 per share and  warrants to purchase  11,586
       shares of Common Stock at $10.15 per share were exercised.  Proceeds from
       the  exercise of these  options and  warrants  amounted to  approximately
       $635,000.  In  addition,  the  company  issued  options to purchase up to
       70,000 shares of Common Stock at below market prices to three officers as
       compensation,  resulting  in a $70,000  increase  to  additional  paid-in
       capital.

                                      F-21
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 1998, 1997 and 1996


       During the third  quarter  of 1997,  the  Company  entered  into  various
       agreements  with TDI  pursuant  to  which  TDI  agreed  to  exchange  its
       ownership  interest  and  outstanding  loans  in  each  of two  operating
       subsidiaries for a total of 969,158 shares of the Company's Common Stock.
       The value of shares on the dates of issue totaled  $10,689,000  which was
       recorded as an increase to Common Stock and additional  paid-in  capital.
       As a result of these  transactions,  TDI's share ownership in the Company
       amounts  to  18.4%  of  shares  presently  outstanding.  TDI was  granted
       preemptive rights to maintain its ownership percentage (see Note 7).

       During the third  quarter  of 1998,  the  Company  entered  into  certain
       agreements with certain  wholly-owned  subsidiaries of Citizens Utilities
       Company (Citizens  Utilities Company and its subsidiaries are hereinafter
       referred to as  "Citizens")  pursuant  to which the  Company  settled its
       disagreements  with Citizens regarding certain issues with respect to (i)
       2.1 million  shares of the  Company's  common stock  subject to Citizens'
       accrued  preemptive  rights and (ii) the  Company's  management  services
       agreement  with  Citizens  dated  as of May  31,  1995  as  amended  (the
       "Management  Services  Agreement").  As  part  of the  settlement  of the
       Management  Services Agreement with Citizens,  the Company issued 100,000
       shares of  Common  Stock.  The  value of the  shares on the date of issue
       totaled  $513,000  which was  recorded as an increase to Common Stock and
       additional paid-in capital. As a result of this transaction, Citizens has
       increased its share ownership in the Company to 18.6% of shares presently
       outstanding (see Note 14).

       During  1998,  the  Company  issued  18,469  shares  of  Common  Stock as
       contingent  consideration  related to the  acquisition  of Hungarotel and
       Papatel (see Note 2).

       The Company has  reserved  7,474,915  shares as of December  31, 1998 for
       issuance under stock option plans and agreements and warrants.

 (11)  Stock Based Compensation

       Stock Option Plans

       The Company  adopted a stock option plan (the "Plan") in April 1992 which
       provided for the issuance of an aggregate of 90,000 stock  options  which
       was increased to 250,000 at the 1994 Annual Meeting of  Stockholders.  In
       1996, the  stockholders of the Company approved an increase in the number
       of shares available under the plan from 250,000 to 750,000.  In 1998, the
       stockholders of the Company  approved an increase in the number of shares
       available  under  the plan from  750,000  to  1,000,000.  Under the Plan,
       incentive and non-qualified options may be granted to officers, directors
       and consultants to the Company.  The plan is administered by the Board of
       Directors,   which   may   designate   a   committee   to   fulfill   its
       responsibilities.  Options  granted under the Plan are exercisable for up
       to 10 years from the date of grant.  As of  December  31,  1998,  676,000
       options  provided for by the Plan had been issued,  of which 167,500 were
       exercised and 508,500 remained outstanding.

       In  1997,  the  Company   adopted  a  director  stock  option  plan  (the
       "Directors'  Plan")  which  provides  for the issuance of an aggregate of
       250,000 stock  options.  Options  granted under the  Directors'  Plan are
       exercisable for up to 10 years from the date of grant. As of December 31,
       1998, 65,000 options provided for by the Directors' Plan had been issued,
       of which 5,000 were exercised and 60,000 remained outstanding.

                                      F-22
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 1998, 1997 and 1996


       The Company  applies APB  Opinion No. 25 and related  interpretations  in
       accounting  for stock  options  issued under the Plan and the  Directors'
       Plan.  Had the Company  determined  compensation  cost for options issued
       under the plans  based on the fair value at the grant date  according  to
       SFAS No. 123, the  Company's  net pro forma income and Earnings Per Share
       would have been as follows:

<TABLE>
             <S>                                                <C>          <C>            <C>
                                                                     1998         1997       1996
                                                                             (in thousands)

              Net Loss                       As reported         ($50,612)    ($36,236)      ($54,769)
                                               Pro forma         ($51,065)    ($36,468)      ($54,982)

              Earnings Per Share             As reported           ($9.53)      ($7.97)      ($13.14)
                                               Pro forma           ($9.62)      ($8.02)      ($13.19)
</TABLE>

       For purposes of the pro forma  calculation under SFAS 123, the fair value
       of each option  grant has been  estimated  on the date of grant using the
       Black Scholes option-pricing model with the following assumptions:  (1) a
       risk free rate of 5.58% in 1998,  6.56% in 1997 and 5.4% in 1996,  (2) an
       expected life of 6 years for 1998, 7 years for 1997 and 6 years for 1996,
       and (3)  volatility of  approximately  84% for 1998, 33% for 1997 and 53%
       for 1996.

       Pro forma net loss reflects  only options  granted since January 1, 1995.
       Therefore,  the full impact of  calculating  compensation  cost for stock
       under SFAS 123 is not reflected in the pro forma net loss amounts because
       compensation  cost is  reflected  over the  options'  vesting  period and
       compensation  cost for  options  granted  prior to January 1, 1995 is not
       considered.

       The following is a summary of stock options and warrants, including those
       issued under the Plan and  Directors'  Plan referred to above,  and other
       agreements  which were  granted,  exercised  and  cancelled for the three
       years ended December 31, 1998:

<TABLE>

                 <S>                               <C>                 <C>
                                                      Outstanding         Option/Warrant Price
                                                   Options/Warrants            Per Share
                -------------------------------------------------------- -----------------------
                       December 31, 1995                  518,492             $3.60-$20.00
                       Granted                            200,000                $14.00
                       Exercised                          (8,016)            $10.00-$10.15
                       Cancelled                          (5,000)                $14.00
                -------------------------------------------------------- -----------------------
                       December 31, 1996                  705,476             $3.60-$20.00
                       Granted                            140,000             $8.75-$11.69
                       Exercised                         (81,586)             $7.00-$10.15
                       Cancelled                          (5,793)                $10.15
                -------------------------------------------------------- -----------------------
                       December 31, 1997                  758,097             $3.60-$20.00
                       Granted                            151,000             $5.81-$8.00
                       Exercised                         (56,400)             $3.60-$4.00
                       Cancelled                                -                  -
                -------------------------------------------------------- -----------------------
                       December 31, 1998                  852,697             $4.00-$20.00
                -------------------------------------------------------- -----------------------
</TABLE>
                                      F-23

<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 1998, 1997 and 1996


       The  following  table  summarizes  information  about  shares  subject to
       outstanding  options  and  warrants  as of  December  31, 1998 which were
       issued to current or former employees,  directors or consultants pursuant
       to the Plan, Directors' Plan, employment or other agreements.

<TABLE>
         <S>                    <C>                <C>                <C>            <C>              <C>
                          Options/Warrants Outstanding                                Options/Warrants Exercisable
                                                                          Weighted-
                                                       Weighted-           Average                          Weighted-
               Number              Range of        Average Exercise    Remaining Life       Number           Average
            Outstanding         Exercise Prices          Price            in Years        Exercisable    Exercise Price

                 218,247         $4.00-$6.78               $4.26             5.97              197,747        $4.00
                 250,000         $8.00-$9.44               $8.50             4.60              230,000        $8.54
                  97,500        $11.69-$12.25             $12.16             1.50               97,500       $12.16
                 261,950            $14.00                $14.00             2.05              261,950       $14.00
                  25,000            $20.00                $20.00             0.75               25,000       $20.00
                  ------                                                                        ------
                 852,697         $4.00-$20.00              $9.86             3.70              812,197        $9.98
                 =======                                                                       =======


</TABLE>

       Stock Grants

       During the second  quarter of 1998,  the Company  issued 10,625 shares of
       Common  Stock to two  former  officers  as  compensation.  An  amount  of
       $93,000,  representing  the fair market value of the stock on the date of
       grant,  has been recorded as  compensation  expense and as an increase in
       Common Stock and additional paid-in-capital.

       In March 1997,  the Company  issued 5,000  shares to a former  officer as
       compensation. An amount of $51,875, representing the fair market value of
       the stock on the date of grant, has been recorded as compensation expense
       and as an increase in Common Stock and additional paid-in-capital.

       In October  1996,  the Board of  Directors  of the  Company  amended  and
       restated employment  agreements with three executive officers. As part of
       these agreements, in March 1997, based on performance in 1996, options to
       purchase  70,000  shares  of stock  at an  exercise  price of $8.75  were
       granted which became effective April 1, 1997.

       In October 1996, the Company  issued 8,000 shares to three  executives as
       compensation.  An amount of $101,000,  representing the fair market value
       of the stock on the date of grant,  was recorded as compensation  expense
       and as an increase in Common Stock and additional paid-in-capital.

       In December  1995,  the Company  entered into  employment  agreement with
       three executives which provided for, among other things,  the granting of
       a total of 102,500  shares of Common Stock.  The Common Stock grants vest
       over a four year period from the effective date of each  agreement.  As a
       result of these  employment  agreements,  in 1995 the Company recorded an
       increase in additional paid-in-capital of $1,050,000, and a corresponding
       increase  in  deferred  compensation  which is being  amortized  over the
       vesting  period.  During 1998, the Company  canceled 25,000 shares of the
       total  102,500  shares  granted  in  December  1995.  As a result  of the
       cancellation,   the   Company   recorded   a   decrease   in   additional
       paid-in-capital  of $256,000,  and a  corresponding  decrease in deferred
       compensation.

                                      F-24
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 1998, 1997 and 1996


 (12)  Reconciliation of Net Income to Net Cash Used in Operating Activities

       The  reconciliation  of net  loss  to net  cash  provided  by  (used  in)
       operating activities for the years ended December 31, 1998, 1997 and 1996
       follows:

<TABLE>
      <S>                                                  <C>              <C>              <C>
                                                                    1998          1997          1996
                                                                             (in thousands)
       Net loss                                              $   (50,612)      (36,236)      (54,769)
       Adjustments to reconcile net income to
           net cash provided by operating activities:
              Depreciation and amortization of
                     property, plant and equipment                10,598         7,445         3,477
              Amortization of intangibles                            962           904           793
              Asset write-downs                                       45           162         2,005
              Non-cash compensation                                  339           407           485
              Unrealized foreign currency loss                       353           209         1,084
              Extraordinary items                                      -             -         7,318
              Termination charges                                 11,131             -         6,260
              Other (income)/expense                                (787)          224             -
              Minority interest                                        -             -        (2,994)
              Unpaid interest                                     36,494        34,963         6,279
           Changes in operating assets and liabilities
              net of effects of
              acquisitions:
              Accounts receivable                                  2,199        (6,273)       (3,663)
              Restricted cash                                        444         4,797        (4,974)
              VAT receivable                                       2,503         1,864        (1,757)
              Other assets                                         1,461        (3,938)       (4,910)
              Accounts payable and accruals                       (6,156)       (3,955)       10,955
              Due to related parties                               2,144         4,364        (1,430)
                                                                 -------       -------       --------
       Net cash provided by (used in) operating activities   $    11,118         4,937       (35,841)
                                                                 =======       =======       =======

       Cash paid during the year for:
              Interest                                       $     9,362           196        16,961
                                                                 =======       =======       =======
</TABLE>


       Summary of non-cash transactions (figures in dollars):

       During 1998 the Company:

                     Issued  100,000  shares  of Common Stock valued at $513,000
                     and a  promissory  note in the  amount of $8.4  million  to
                     Citizens in  settlement of $9.6 million of accrued fees and
                     expenses due and payable to Citizens  under the  terminated
                     management  services  agreement.

                     Issued 10,625 shares of Common  Stock  as  compensation  to
                     two  former  executive officers valued at $93,000.

                     Cancelled 25,000  restricted shares  to a former  executive
                     pursuant  to a  retirement agreement.  

                     Issued  2,110,896  options to purchase Common  Stock valued
                     at $121,000 in settlement of Citizens' accrued   preemptive
                     rights.

                                      F-25
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 1998, 1997 and 1996


       During 1997 the Company:
                     
                     Issued    969,158   shares  of  Common   Stock  valued   at
                     $10,689,000  to TDI in exchange for  interests and loans in
                     two operating subsidiaries. - 
                     
                     Issued 5,000 shares of Common Stock to a former officer and
                     options to purchase  70,000 shares of Common Stock to three
                     officers at exercise prices below market as compensation.

       During 1996 the Company:

                     Issued    250,000    shares   of  Common  Stock  valued  at
                     $3,219,000 and also issued 875,850 options and modified the
                     terms of other  options to purchase  Common Stock valued at
                     $11,219,000 in consideration  for certain financial support
                     from  Citizens.  

                     Retired    101,429    shares   of  Common  Stock  valued at
                     $1,775,000,  not   yet   delivered   as  a  purchase  price
                     adjustment  related to acquisitions.  

                     Issued 8,000 shares   as  compensation  to three  executive
                     officers  valued  at $101,000.


(13)   Related Parties

       Transactions entered into with certain related parties are as follows:

       (a)    Transactions with former officers and directors

              On July 26, 1996, the Company entered into Termination and Release
              Agreements,  Consulting Agreements and Non-competition  Agreements
              with its former Chairman and Chief Executive Officer,  former Vice
              Chairman and former Chief Financial Officer, Treasurer,  Secretary
              and Director.  Pursuant to these agreements, the Company agreed to
              make  payments  for  severance,  consulting  fees and  non-compete
              agreements   amounting  to  $7.25   million,   in  equal   monthly
              installments  over a 72 month period  commencing  August 31, 1996,
              and also issued options to purchase 200,000 shares of Common Stock
              at an exercise price of $14.00 per share.  These  commitments  are
              supported by letters of credit.  The Company  recorded a charge of
              approximately  $6.3 million in 1996 and made payments  aggregating
              approximately  $1,208,000  in 1998 and 1997 and  $503,000  in 1996
              related to these agreements.

              In 1996, the Company paid legal fees to the former Chief Financial
              Officer, Treasurer, Secretary and Director of approximately
              $146,000.

        (b)   Transactions with Teleconstruct

              In 1996, the Company purchased the premises used as offices by the
              Company and a  residential  apartment  in  Budapest,  Hungary from
              Teleconstruct  in  two  separate  transactions  for  an  aggregate
              purchase price of $643,000.

        (c)   Agreements with TDI

              Amounts paid to TDI in 1996 under previously  existing  management
              services  agreements  amounted  to  approximately   $976,000.  The
              management  services agreements with TDI were terminated in August
              1996.

                                      F-26
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 1998, 1997 and 1996


        (d)   Transactions with Citizens Utilities Company

              Transactions  with Citizens  including  those under the Management
              Service Agreements are discussed in Footnote 14.

       Amounts payable to related parties as of December 31, 1998 and 1997, were
as follows:
<TABLE>
        <S>                                           <C>              <C>
                                                            1998              1997
                                                            ----              ----
         Payable to former officers and directors     $   3,476,000   $     4,199,000
         Due to Citizens                                 19,873,000         7,175,000
         Due to Teleconstruct                                34,000            34,000
                                                        -----------        ----------
                                                      $  23,383,000   $    11,408,000
                                                         ==========        ==========
</TABLE>

(14)   Agreements with Citizens

       During 1995,  the Company and certain  subsidiaries  of Citizens  entered
       into a Master Agreement,  a Loan Agreement and related Promissory Note, a
       Warrant to Purchase  Shares of Common Stock to Citizens (the Warrant),  a
       Stock Pledge Agreement,  a Stock Option Agreement and second Stock Option
       Agreement,  a Registration  Agreement and a Management Services Agreement
       (the "Citizens Agreements"). Simultaneously, Citizens entered into voting
       agreements  with three  affiliates  of the  Company and  consummated  the
       purchase of 300,000  shares of Common  Stock of the Company from the then
       President,  Chief  Executive  Officer  and Chief  Financial  Officer  and
       Director of the Company.  Certain of these  agreements were  subsequently
       amended  in  connection  with  Citizens  providing  additional  financial
       support  to  the   Company  and   expanding   its   management   services
       responsibilities  as a result of the Company's  acquisition of additional
       concession companies.

       The  Citizens  Agreements,  as amended,  resulted in and provided for the
       following:

              The nomination by Citizens of one  representative to the Company's
              board of directors (out of a minimum of six directors) for as long
              as Citizens  owns at least  300,000  shares of Common Stock of the
              Company.

              Citizen's  receipt  of  options  and  a  warrant  to  purchase  an
              aggregate of 3,635,472  (as  adjusted for items  described  below)
              additional  shares  of Common  Stock of the  Company  at  exercise
              prices  ranging  from $13 to $18 per share under the Stock  Option
              Agreement  and  Warrant,  as amended  (the  "Citizens  Options and
              Warrant"). The Citizens Options and Warrant were originally due to
              expire at various  dates from May 31, 1997 to September  12, 2000.
              Expiration  dates of the warrant and certain options were extended
              as   discussed   below.   All  of  the  options  were  subject  to
              anti-dilution provisions.

              Financial support under the Citizens Loan Agreements,  as amended,
              to the Company by Citizens  through advances or the arrangement of
              advances through  Chemical Bank of  approximately  $31 million and
              guarantees  by Citibank of $16 million  totaling $47 million as of
              December 31, 1995. Chemical Bank provided such advances based upon
              a  guarantee   provided  by  Citizens  on  the  Company's  behalf.
              Consideration  for Citizens  commitment  to provide the  financial
              support in excess of the  approximately  $5.2 million  provided in
              the First Citizens Loan  Agreement  included the grant to Citizens
              of an additional  five year option to purchase  626,155  shares of
              Common  Stock and its  subsequent  repricing,  and the issuance of
              250,000  shares  of  Common  Stock to  Citizens.  The cost of this
              consideration  to the Company,  representing the fair value of the
              newly granted options and the subsequent  repricing,  and the fair
              value of the Common Stock amounted to  $6,917,000.  The fair value
              of the options  granted and  repriced  were  determined  using the
              Black Scholes option pricing model.

                                      F-27

<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 1998, 1997 and 1996


              The First Citizens Loan  Agreement  provided for certain events of
              default  and  remedies.  Advances  under the Loan  Agreement  bore
              interest  at a  variable  rate  equal to the  prime  rate plus 2%,
              payable quarterly in cash. To the extent the interest rate payable
              by the Company to Chemical was less than the  applicable  interest
              rate under the First  Citizens  Loan  Agreement,  the  Company was
              required  to  pay  to   Citizens   the   difference,   as  partial
              consideration  for Citizens  making its  guaranty.  The  Company's
              option to repay  advances  and  interest in Common Stock under the
              terms  of  the  First   Citizens  Loan  Agreement  was  waived  in
              connection  with Citizen's  commitment in February 1996 to provide
              additional financial support to the Company as described below.

              The  maturity  date of the loan was July 25,  1997;  however,  the
              First  Citizens  Loan  Agreement  provided  that in the  event the
              Company  issues  or sells  for  cash,  pursuant  to any  public or
              private  offering,  any shares of its capital  stock (or any other
              securities or any obligations convertible into or exchangeable for
              Common  Stock) or  receives  a bank loan or any  bridge  financing
              related  to  such  offering,  then  the  Company  must  repay  the
              outstanding  principal  and accrued but unpaid  interest from such
              net offering proceeds or related  financing,  subject to the prior
              repayment of any such advances made through third party lenders.

              On February 26, 1996, the Company and Citizens entered into, among
              other agreements,  the Second Citizens Loan Agreement  pursuant to
              which Citizens  agreed to lend the Company up to an additional $46
              million (the "Additional Citizens Financial  Support"),  including
              (i) an  advance  of up to $16  million  to enable  the  Company to
              satisfy  its  obligations  to  Citibank,   if  Citibank's  payment
              obligations  to MATAV arose  pursuant  to its payment  guaranty to
              secure  Hungarotel's asset purchase and (ii) advances of up to $30
              million,  composed  of up  to  $20  million  for  certain  limited
              purposes  and  up  to  $10  million   reserved   for   anticipated
              obligations  under  construction   contracts  to  be  approved  by
              Citizens.

              Citizens  commitment  to provide  the loan  advances  of up to $16
              million in connection with the Hungarotel  asset purchase  expired
              on the earlier of June 28, 1996 or the  termination  of Citibank's
              payment guaranty. Citizens commitment to provide the loan advances
              in  connection  with  the  remaining  $30  million  of  Additional
              Citizens  Financial Support expired on June 28, 1996, with respect
              to  the  $20  million   reserved  for  other   limited   purposes.
              Consideration  for Citizen's  commitment to provide the Additional
              Citizens  Financial Support included the issuance of an additional
              250,000 shares of Common Stock. The cost of this  consideration to
              the  Company  representing  the  fair  value of the  Common  Stock
              amounted to $3,219,000.

              Total  consideration  to  Citizens  related to these  transactions
              amounted to $10,136,000 and was capitalized as deferred  financing
              fees.  As  discussed  in  note  5,  all  amounts   outstanding  in
              connection  with  the  Citizens  Loan  Agreements  and  additional
              Citizens'  financial  support  were  repaid in April  1996 and any
              remaining  unamortized deferred financing costs pertaining to such
              agreements were expensed and reflected as an extraordinary loss.

                                      F-28
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 1998, 1997 and 1996


              Certain corporate, financial, technical,  construction,  marketing
              and  operational  services  were to be provided by Citizens to the
              Company under the terms of the Management Services Agreement. Such
              services  commenced  on July 1, 1995 and were to continue  through
              December 31, 2007. All services  rendered by Citizens were subject
              to the  oversight,  supervision  and approval of the Company.  The
              management  fee  payable  to  Citizens  was the  greater  of 5% of
              Adjusted  Gross  Revenues,  as defined,  or a fixed amount ranging
              from  $100,000  to  $395,800  per month  from  July  1995  through
              December  31,  1996,   and  $416,600  per  month  for  each  month
              commencing  January 1997 for the remainder of the term, subject to
              adjustment for inflation.  The monthly management fees during 1995
              and 1996 were  payable  in cash or,  with  Citizen's  consent,  in
              shares of Common  Stock of the Company  equal in value to the fee,
              based upon a three-month  market price  average.  Management  fees
              payable to Citizens during 1998 amounted to $2,500,000,  1997 fees
              amounted to $5,000,000 plus reimbursable costs of $691,000,  while
              in 1996 such fees amounted to $3,640,000 plus  reimbursable  costs
              of  $1,862,000.  Cash  payments  made  to  Citizens  in  1996  for
              management services totaled $5,865,000.

              The right for  Citizens  to purchase  additional  shares of Common
              Stock,  if the Company  issues,  in connection  with any public or
              private  offering,  shares of  Common  Stock,  other  stock of the
              Company or any securities  convertible  into, or  exchangeable  or
              exercisable  for  shares  of  Common  Stock or other  stock of the
              Company at the  applicable  offering price the number of shares as
              is  necessary  to  maintain  Citizens'  then  existing  percentage
              ownership on a fully diluted basis.

              In connection with the Postabank  Credit Facility (see note 6), on
              October 18, 1996, the Company entered into certain agreements with
              Citizens  in  consideration  for,  among other  things,  Citizens'
              support  in  fulfilling  all  terms  under  the  Citicorp   Credit
              Facility,  as  amended,  and in  obtaining  the  Postabank  Credit
              Facility. Under such agreements,  the Company agreed to (i) extend
              to  September  12,  2000 the  exercise  periods  of a warrant  and
              certain stock options to purchase  approximately  2,139,801 shares
              of Common Stock (as  adjusted),  (ii) grant Citizens the option to
              purchase  an  additional  875,850  shares  of  Common  Stock at an
              exercise price of $12.75  exercisable  through September 12, 2000,
              and  (iii)  pay  Citizens  $750,000  in  cash.  The  cost  of this
              consideration  to the Company  representing  the  increase in fair
              value of the  options  previously  granted,  the fair value of the
              newly  granted  options  and the cash  payment  amounted to $11.97
              million.  The fair value of the options was  determined  using the
              Black Scholes option pricing model.  The Company has reflected the
              portion of the cost related to the financial support in fulfilling
              the terms of the Citicorp  Credit  Facility,  $5.7  million,  as a
              current  period charge in 1996.  The  remaining  $6.27 million has
              been  capitalized in other assets with other direct costs incurred
              in obtaining the Postabank  Credit Facility and is being amortized
              over the term of the related debt.

              On September 30, 1998, the Company entered into certain agreements
              with  certain  wholly-owned  subsidiaries  of  Citizens  Utilities
              Company  (Citizens  Utilities  Company  and its  subsidiaries  are
              hereinafter  referred  to as  "Citizens")  pursuant  to which  the
              Company  settled  disagreements  with Citizens  regarding  certain
              issues  with  respect to (i) 2.1 million  shares of the  Company's
              common stock subject to Citizens'  accrued  preemptive  rights and
              (ii) the Company's  management  services  agreement  with Citizens
              dated as of May 31,  1995,  as amended (the  "Management  Services
              Agreement").

                                      F-29
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 1998, 1997 and 1996


              Such  agreements   provided  for,  among  other  things,  (i)  the
              termination  of the  Master  Agreement  dated  as of May 31,  1995
              between the Company and Citizens; (ii) the issuance by the Company
              to Citizens of 100,000 shares of the Company's  common stock and a
              promissory note in the principal amount of $8,374,498 (the "Note")
              in  settlement  of $9.6 million  accrued fees and expenses due and
              payable to Citizens under the Management Services Agreement; (iii)
              the  termination  of  the  Management  Services  Agreement;   (iv)
              payments by the Company to  Citizens  in the  aggregate  amount of
              $21,000,000 payable in 28 quarterly installments from 2004 through
              and  including  2010  in  part  as  consideration   for  Citizens'
              agreement to terminate the  Management  Services  Agreement and in
              part  as  consideration  for  certain  consulting  services  to be
              provided  by  Citizens  to  the  Company  from  2004  through  and
              including  2010;  (v) the  grant by the  Company  to  Citizens  of
              certain preemptive rights in connection with any public or private
              issuances by the Company of shares of its common stock to purchase
              within  30 days for cash such  number  of shares of the  Company's
              common  stock  sufficient  to  maintain  Citizens'  then  existing
              percentage  ownership  interest of the Company's common stock on a
              fully diluted basis;  and (vi) the right of one Citizens  designee
              to  the  Company's  Board  of  Directors  to  be  renominated  for
              reelection  to the  Company's  Board of  Directors  for so long as
              Citizens  owns at least  300,000  shares of the  Company's  common
              stock.

              The  principal  on the  promissory  note  is  payable  in  full on
              September 15, 2004 and bears  interest at a varying rate per annum
              which is 2-1/2%  per  annum  above the  one-year  LIBOR  rate with
              monthly  adjustments in such varying rate.  Accrued interest shall
              be payable annually.

              The Company has recorded a charge  totaling  $11.1 million in 1998
              representing the present value of the $21 million aggregate amount
              payable to Citizens beginning in 2004 in part as consideration for
              Citizens' agreement to terminate the Management Services Agreement
              and in part as consideration for certain consulting services to be
              provided  by  Citizens  to  the  Company  from  2004  through  and
              including 2010.

              The agreements include an Amended, Restated and Consolidated Stock
              Option Agreement (the "Restated Stock Option Agreement")  pursuant
              to which the  Company  granted  Citizens  an  option  to  purchase
              2,110,896  shares  of the  Company's  common  stock  at a price of
              $13.00  per  share  with an  expiration  date  of July 1,  1999 in
              settlement of Citizens' accrued  preemptive  rights.  The Restated
              Stock Option agreement also acknowledged Citizens existing options
              to date to  purchase  an  aggregate  of  4,511,322  shares  of the
              Company's  common stock at exercise  prices ranging from $12.75 to
              $18.00 per share with an  expiration  date of September  12, 2000.
              The cost of this  consideration  to the Company  representing  the
              fair value of the newly granted options in settlement of Citizen's
              accrued preemptive rights amounted to $121,000.  The fair value of
              the newly granted  options was determined  using the Black Scholes
              option  pricing  model.  The Company has reflected  this cost as a
              current period charge in 1998.

       Additionally,  the  Company  is  also  obligated  to  bear  the  cost  of
       registering  shares it has issued to Citizens,  including shares issuable
       under the Citizens  Options.  As a result of the above  transactions,  on
       December 31, 1998 Citizens held 18.6% of the Company's outstanding Common
       Stock and 6,622,218 options to purchase Common Stock.  Citizens ownership
       of  the  Company's  outstanding  shares  on  a  fully  diluted  basis  is
       approximately 59.2% at December 31, 1998.


                                      F-30
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 1998, 1997 and 1996



(15)   Employee Benefit Plan

       Effective December 1996, the Company established a 401(k) salary deferral
       plan (the "401(k) Plan") on behalf of its U.S. employees. The 401(k) Plan
       is  a  qualified  defined  contribution  plan  and  allows  participating
       employees  to defer up to 15% of their  compensation,  subject to certain
       limitations.  Under the 401(k) Plan,  the Company has the  discretion  to
       match contributions made by the employee. No matching  contributions were
       made by the Company in 1998, 1997 or 1996.


(16)   Segment Disclosures

       The  Company  operates  in  a  single  industry  segment,  communications
       services.  The Company's operations involve developing and constructing a
       modern telecommunications infrastructure in order to provide a full range
       of the Company's  products and services in its five  concession  areas in
       Hungary.  While the Company's chief operating decision maker monitors the
       revenue  streams of the various  products and  services,  operations  are
       managed and financial  performance is evaluated  based on the delivery of
       multiple services to customers over an integrated network.  Substantially
       all of the  Company's  assets  are  located  in  Hungary  and  all of its
       revenues are generated in Hungary.

       Products and Services

       The  Company   groups  its  products  and  services  into  the  following
       categories:

       Telephone  Services - local dial tone and switched  products and services
       that  provide  incoming  and  outgoing  calls  over the  public  switched
       network.  This category  includes  reciprocal  compensation  revenues and
       expenses (i.e. interconnect).

       Network  Services -  point-to-point  dedicated  services  that  provide a
       private  transmission  channel for the Company's customers' exclusive use
       between  two  or  more  locations,   both  in  local  and  long  distance
       applications.

       Other  Service  and  Product  Revenues - PBX  hardware  sales and service
       revenues, as well as miscellaneous other telephony service revenues.

       The revenues generated by these products and services for the years ended
       December 31 were as follows:


               ($ in thousands)            1998            1997          1996
                                           ----            ----          ----

             Telephone services           $35,969        $36,738       $19,826
             Network services               1,402            797           625
             Other service and product
               revenues                     1,336            356           459
                                           ------         ------        ------
                                          $38,707        $37,891       $20,910
                                          =======        =======       =======

       Included in telephone  services are connection fee revenues  amounting to
       $1,958,000,  $12,925,000  and $4,107,000 for the years ended December 31,
       1998, 1997 and 1996, respectively.

                                      F-31
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 1998, 1997 and 1996




       Major Customers

       For the  years  ended  December  31,  1998,  1997 and  1996,  none of the
       Company's  customers  accounted for more than 10% of the Company's  total
       revenue.


(17)   Quarterly Financial Data (unaudited)



                                          ($ in thousands)
                                                                       Net loss
                                    Revenue           Net Loss         Per share
                       1998
             First quarter           9,372            (11,700)           (2.22)
             Second quarter          9,718            (10,955)           (2.07)
             Third quarter           9,412            (19,073)           (3.61)
             Fourth quarter         10,205             (8,884)           (1.65)

                       1997
             First quarter           7,924             (6,948)           (1.66)
             Second quarter          9,297             (8,183)           (1.95)
             Third quarter           9,669             (9,050)           (1.96)
             Fourth quarter         11,001            (12,055)           (2.33)


       The net loss  for the  third  quarter  of 1997  was  restated  in 1997 to
       reflect a decrease in  capitalized  interest of $1.65 million as a result
       of  revisions  to  estimated  completion  dates of  construction  work in
       process amounts outstanding during the period.





                                      F-32
<PAGE>

                      HUNGARIAN TELEPHONE AND CABLE CORP.

                               Index to Exhibits


Exhibit No.    Description

10.12          Employment Agreement dated as of December 4, 1998, by and between
               Hungarian Telephone and Cable Corp. and Ole Bertram

27.1           Financial Data Schedule