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, 1997
                                       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,                          American Stock Exchange
par value $.001 per share

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 27, 1998, 5,291,770 shares of the Registrant's Common Stock
were  outstanding,  of  which  5,237,920  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 26,  1998,  was  $45,831,800.  (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, 1997.


<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."  See also Item 14  "Exhibits,  Financial
Statement Schedules and Reports on Form 8-K, Exhibit 99.1."

                                     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, 1997 exchange rates. The Forint/U.S. Dollar middle exchange rate as
of December 31, 1997 was approximately 203.92 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 has recently  completed its significant  network  modernization  and
construction  program in all of its Operating Areas 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 266,600 homes and 38,900 business and
other institutional  subscribers (including government  institutions) within its
Operating Areas.

                                      -2-
<PAGE>

         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
Operating Companies have incurred capital expenditures through December 31, 1997
of $155  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. The completion of the Company's network
construction  program has resulted in the addition of approximately  113,700 new
access  lines in service  (including  pay phones) as of December 31, 1997 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.

         As of December 31, 1997, the Company's  telecommunications networks had
approximately  175,100  access lines in service  (including  pay phones) and the
necessary wired  switching  capacity to service,  with some  additional  capital
expenditures,  190,000  households,  businesses and other  institutions  and the
backbone fiber network  capacity to service 326,000  households,  businesses and
other institutions.

         The following  table sets forth certain  information as of December 31,
1997 with respect to each of the Operating Companies.

<TABLE>
<CAPTION>
                                              Raba-Com     KNC       Papatel       Hungarotel  Total

<S>                                            <C>         <C>         <C>        <C>         <C>
Population...............................      67,600      152,200     67,700     421,100     708,600
Residences..............................       23,700       61,800     24,100     157,000     266,600
Businesses and other(1)...............          4,300        6,800      3,200      24,600      38,900
Access lines in operation:
     Residential........................       18,500       30,400     15,200      88,900     153,000
     Business and other(2)...........           2,100        5,100      1,800      13,100      22,100
                                             --------     --------   --------   ---------    --------
           Total......................         20,600       35,500     17,000     102,000     175,100
Pay phones.............................           145          485        171       1,152       1,953
Population Penetration rate(3).....              30.5         23.3       25.1        24.2        24.7
Residential Penetration rate (4)...              78.1         49.2       63.1        56.6        57.4
Waiting List...........................           600        2,000      1,000       6,500      10,100
</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.
(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 and
1997.
<TABLE>
<S>                         <C>          <C>         <C>         <C>

                            Takeover       1995         1996       1997
                            --------       ----         ----       ----
Raba-Com                     2,500(1)      5,100      14,000     20,600
KNC                         13,000(1)     14,200      20,500     35,500
Papatel                      3,800(2)      3,800      11,100     17,000
Hungarotel                  42,100(2)     42,100      47,800    102,000
                          --------      --------    --------    -------
Total                       61,400        65,200      93,400    175,100

</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,  especially since the Hungarian telecommunications
market was historically  significantly  underdeveloped by MATAV,  which, in past
years,  did  not  make  the  investments  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 an 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 has
invested   approximately   HUF  171   billion   ($839   million)  in  its  fixed
telecommunications  network from 1994 to 1996 which  resulted in the addition of
over one million  access  lines to MATAV's  networks.  In  addition,  due to the
completion of the Company's  network  modernization  and  construction  program,
access line  penetration has increased to 25 access lines per 100 inhabitants as
of December 31, 1997. Given that the Company's, MATAV's, and the other LTOs' (as
defined below) investments in the Hungarian  telecommunications  market over the
last several years  produced a significant  increase in the overall  penetration
rate in Hungary (29% as of September 30, 1997),  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 $18 billion at the end of 1997.  Hungary's gross domestic product rose
4% in 1997,  up from a 1% increase in 1996.  GDP growth of  approximately  4% is
expected to continue in 1998.  Hungary's  exports increased 21% in 1997 from the
1996 level to $19 billion while imports totaled $21 billion,  an increase of 16%
from 1996.
                                      -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,  a consortium of 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,
1997, 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
Compagnie  Generale des Eaux (4 areas) and the Swiss and Dutch PTTs (1 area);  a
bidding group  including  United  International  Holdings (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 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 650,000 cellular subscribers in Hungary.

                                      -5-
<PAGE>

         Hungary and the  Ministry  continue to pursue  industry  liberalization
efforts.  In the fourth  quarter of 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
6.6%. The Hungarian State retained certain  shareholder  rights by retaining one
"golden  share."  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.  During the fourth
quarter of 1997, the Ministry entered into a preliminary agreement with MKM-Tel,
a newly  formed  Hungarian  company  ("MKM"),  which  preliminary  agreement  is
intended to establish a company  which will build a  telecommunications  network
throughout Hungary which could provide such services as data transmission, voice
mail and other  services  which are not subject to  exclusive  concessions  when
MKM's  network  is  functional.  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. MKM would be entitled
to submit a bid as will any other telephone operator.  The current  shareholders
of MKM include MAV (the  Hungarian  railway  company),  MOL (the  Hungarian  oil
company),  KFKI (a Hungarian information technology research firm) and Unisource
(a   Netherlands-based   telecommunications   alliance  whose  members   include
Koninklijke  PTT  Nederland  NV,  Sweden's  Telia  AB and  Swiss  Telecom).  The
Hungarian  broadcaster Antenna Hungaria also has an option to acquire a stake in
MKM. In addition,  in July 1997 the European Union  Commission  recommended that
Hungary be invited to enter into  negotiations  for  membership  in the European
Union (the "EU"). The EU has adopted numerous  directives  providing for an open
telecommunications market among its member nations. The Company believes that 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
and  affiliates as of March 27, 1998.  Share  ownership  percentages of HTCC are
based on shares of HTCC's  common stock (the "Common  Stock")  owned as of March
26, 1998, without giving effect to outstanding options or warrants.

                                      -6-
<PAGE>


Additionally,  ownership  percentages  for the  Operating  Companies do not give
effect to future  Hungarian equity  ownership  requirements.  See "-Regulation -
Hungarian Equity Ownership Requirements."


          Citizens       Public         HTCC           Tele
          17.1%          63.1%          Management     Danmark
                                        1.0%           18.8%

                                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 Hungaria 0.2% Hungarian
                                                                  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 electric  transmission and distribution,  natural
gas transmission and distribution, water distribution and wastewater treatment




                                      -7-
<PAGE>


services to  approximately  1.72 million  customers in 21 states  throughout the
United  States.  Citizens is an  independent  telecommunications  company in the
United States and holds a significant investment interest in Centennial Cellular
Corp.,  a cellular  telephone  company  serving  markets  with a  population  of
approximately  10 million.  Citizens also owns Electric  Lightwave  Inc., a CLEC
operating in five western states in the United  States.  Through a joint venture
with Century  Communications  Corp., Citizens provides cable television services
to approximately  69,500  subscribers.  At December 31, 1997,  Citizens had $4.9
billion in assets  and $1.9  billion in  equity.  For the  twelve  months  ended
December 31, 1997,  Citizens had net income of $94.1 million and $1.4 billion of
revenues before a second quarter charge to earnings and a fourth quarter gain on
sale of subsidiary stock. Telecommunications services accounted for 62% of total
revenues.

     In May 1995,  Citizens  purchased  300,000  shares of Common  Stock  from a
former  executive of the Company and has since  acquired an  additional  502,908
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 27,  1998,  to 17.1%.  In  addition,  as a
result of the Citizens Agreements,  Citizens has received options and a warrant,
with per share  exercise  prices  ranging from $12.75 to $18.00  (together,  the
"Citizens  Options").  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 at $13.00 per share with
respect to third party  issuances  prior to  September  12, 1997 and at the same
price per share as any such third party would pay per share for issuances to any
such third party after  September 12, 1997.  The Company and Citizens  presently
have a disagreement  regarding certain issues with respect to 1.9 million shares
of Common Stock subject to Citizens'  preemptive  rights to date. The Company is
currently in  discussions  with  Citizens in an attempt to resolve these issues.
Assuming the exercise of all of its outstanding rights,  options and warrants to
purchase Common Stock as of March 27, 1998  (including the Citizens  Options and
the 1.9 million shares of Common Stock subject to Citizens' preemptive rights at
issue),  Citizens would own 58.9% of the Common Stock on a fully-diluted  basis.
See Notes 1(a), 9(f) and 14 of Notes to Consolidated Financial Statements.

         Concurrently with its initial investment in HTCC, Citizens entered into
an  agreement  with  HTCC  pursuant  to  which  Citizens  provides  HTCC and the
Operating   Companies  with  certain   administrative,   financial,   technical,
construction,  marketing  and  operational  services (the  "Management  Services
Agreement") for a fee. As of December 31, 1997, the Company has accrued, but not
paid, $7.2 million pursuant to the Management  Services  Agreement.  The Company
and Citizens presently have a disagreement regarding certain issues with respect
to the Management  Services  Agreement.  The Company is currently in discussions
with Citizens in an attempt to resolve  these  issues.  Until such time as these
issues are resolved,  the Company  currently intends to withhold any payments to
Citizens with respect to the Management Services Agreement. See Notes 1(a), 9(f)
and 14 of  Notes  to  Consolidated  Financial  Statements.  For a more  detailed
description  of  some  of  the  Citizens   Agreements,   see  Item  13  "Certain
Relationships  and  Related  Party  Transactions."  See also  Item 12  "Security
Ownership of Certain Beneficial Owners and Management".

                                      -8-
<PAGE>

     Tele Danmark A/S

     Tele Danmark A/S (together with its affiliates, "Tele Danmark") is a Danish
public  telephone  company.  Tele Danmark's stock trades on the Copenhagen Stock
Exchange  and  the  New  York  Stock  Exchange.   Through  various  wholly-owned
subsidiaries,  Tele Danmark provides a variety of telecommunications services to
customers in Denmark,  including regional,  mobile, maritime and other telephone
services. In addition,  Tele Danmark provides teledata,  electronic mail, telex,
distribution  of radio and  television  programs  to local  cable  distributors,
leased lines, pay phones and other services.  In Hungary,  Tele Danmark also has
an 23.2% interest in Pannon (defined  above),  one of the two Hungarian  digital
cellular  operators.  At December  31,  1997,  Tele  Danmark had total assets of
Danish Kroner 51.557  billion  (approximately  $7.3 billion at current  exchange
rates) and shareholders'  equity of Danish Kroner 28.338 billion  (approximately
$4.0  billion at current  exchange  rates).  During  1997,  Tele Danmark had net
income of  Danish Kroner  1.539 billion  (approximately  $219 million at current
exchange rates) on  net revenues of  Danish Kroner 28.996 billion (approximately
$4.1 billion at current exchange rates).

         Tele Danmark  previously owned 20% of the outstanding  capital stock of
each of KNC and Raba-Com and had loans outstanding in the amount of $5.5 million
in the aggregate to KNC and Raba-Com.  On July 1, 1997, Tele Danmark transferred
its 20%  interest in each of KNC and  Raba-Com  to HTCC in exchange  for 420,908
shares of HTCC common stock. On September 30, 1997, Tele Danmark transferred its
interest in its loans to KNC and Raba-Com and a 4.8% interest in the outstanding
capital  stock of KNC and  Raba-Com,  which Tele Danmark had  acquired  from The
Investment Fund for Central and Eastern Europe,  to HTCC in exchange for 548,250
shares  of HTCC  common  stock.  See Note 7 of Notes to  Consolidated  Financial
Statements.

         In October  1997,  Ameritech,  Tele  Danmark and the Danish  government
announced that they had reached an agreement  pursuant to which  Ameritech would
acquire  42% of Tele  Danmark  and have the right to  nominate  one half of Tele
Danmark's  Board of  Directors,  including  the Chairman.  The  acquisition  was
consummated in January 1998.  Tele Danmark has announced that it intends to sell
its interest in Pannon in 1998 to avoid any  conflicts of interest  with respect
to Ameritech's interest (through MATAV) in Westel.

     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

     On  February 4, 1998,  the  Company  announced  that James G.  Morrison,  a
Director,  President  and Chief  Executive  Officer of the Company  would retire
effective May 1, 1998. Mr. Morrison was  instrumental in planning and overseeing
the  Company's  network  construction  program.  The Board of  Directors  of the
Company also  announced  that it had elected David A. Finley,  a Director of the
Company, as the Company's Non-Executive Chairman of the Board. In such role, Mr.
Finley  is  leading  an  Executive  Search  Committee  of the  Board  to  hire a
replacement for Mr. Morrison. The Company has also appointed Francis J. Busacca,
Jr. as its Executive Vice  President and Chief  Financial  Officer.  Mr. Busacca
assumed his duties on March 2, 1998.

                                      -9-
<PAGE>

     Lucent

         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 36 employees.  The Company
recently  entered into an agreement in principle  with Lucent  pursuant to which
the Company and Lucent will amend the  original  agreement.  Effective  April 1,
1998, the Company will be 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 of the Operating  Areas. In addition,  the Company
will be entitled to sell large call centers on a commission basis. The Company's
minimum  purchase  requirements  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 part of the renegotiated  relationship,  the
Company  agreed to  transfer  back  $400,000  of assets to Lucent and pay Lucent
$150,000.  The  Company  will  transfer 28 of its 36 assumed  employees  back to
Lucent or to a subcontractor.

     Year 2000 Issue

         The Company  recently  formed a committee to begin,  possibly  with the
assistance  of outside  consultants,  an  evaluation of its network and computer
systems  for Year  2000  compliance.  The Year  2000  problem  is the  result of
computer  programs being written using two digits rather than four to define the
applicable year. Any of the Company's programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations  causing disruption of
operations.

         Following the Company's  evaluation of its network and computer systems
for Year 2000  compliance,  the Company  expects to adopt a plan to mitigate the
Year 2000 Issue.  While the extent and total cost of the Year 2000 modifications
and  conversions has not yet been  determined,  the Company  presently  believes
that, with  modifications  to existing  software and converting to new software,
the Year 2000 problem  will not pose  significant  operational  problems for the
Company's  networks and systems as so modified and converted.  However,  if such
modifications  and conversions are not completed  timely,  the Year 2000 problem
may have a material impact on the operations of the Company.

Strategy

         With the completion of the construction program in all of the Operating
Areas in 1997,  the Company has met its primary  1997  objective.  In 1998,  the
primary focus of the Company is to increase  call revenues and reduce  operating
costs  while  continuing  to  add  residential  and  business  customers  to its
networks.  In an effort to accomplish this goal, the Company intends to increase
its marketing efforts,  improve  operational  efficiencies and increase customer
satisfaction by providing  superior  services at reasonable  costs to the entire
customer  base.  In short,  the  Company  intends  to  transform  itself  from a
construction driven organization to a marketing driven  operationally  efficient
organization  in 1998.  The Company has  implemented  the following  operational
strategies in order to further its business objectives.

                                      -10-
<PAGE>

     Revenue Growth

         The Company  plans to continue  its revenue  growth by  increasing  the
penetration  levels in the business and residential  sectors.  In addition,  the
Company intends to increase call revenues by using a detailed marketing plan for
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 45% of the Company's total call revenues. The Company is
also  focusing  on the  marketing  and sales of  deregulated  services  in 1998,
including managed lease lines, PBX sales and services,  ISDN, Internet,  Digifon
and Centrex Services.

     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 is in
the process of implementing its own centralized  operating and accounting system
in all of its  Operating  Areas which will be completed by the end of the second
quarter 1998. A significant increase in operational  efficiency will result 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 is expected to  facilitate  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, 1998,  the  Operating  Companies  had a total of 290
access lines per employee,  which represents an increase of more than 100 access
lines per employee over the same date in 1997.

     Marketing

         The Company is in the process of consolidating  its sales and marketing
efforts,  as  it  moves  from  being  a  construction-driven  organization  to a
marketing driven  operationally  efficient company.  The Company is training and
educating its marketing and sales force in the latest telephony technologies and
educating  customers and potential  customers on the benefits available from the
Company's  products and  services.  The Company is also  targeting its marketing
efforts  towards  its  business  customers  by  offering   "turn-key"   business
communications solutions and educating these business customers on the potential
revenue gains that can be achieved with advanced telecommunications technology.

     Strategic Acquisitions and Alliances

         The Company  intends to selectively  explore  opportunities,  which may
include the acquisition of other  concessions or the creation of strategic joint
ventures, in order to expand its telecommunications  services and the geographic
areas in Hungary in which it provides such services. In this regard, the Company
has   engaged   in   discussions    with   certain    existing   and   potential
telecommunications  providers in the Hungarian  market  regarding  such possible
acquisitions  or alliances,  although,  to date,  none of these  discussions has
resulted in any definitive plans.

                                      -11-
<PAGE>

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,  Centrex,  caller ID and audio text services in
all of its Operating Areas in 1998.

         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 10.4  ($.05) per pulse.  The  Ministry  adjusts  such fees
annually  based on a  Hungarian  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.  Through December 31, 1997, such revenue sharing  arrangement
was  intended to result in each  Operating  Company  receiving  67% of the total
measured  service  revenue  (including all the revenues  attributable  to local,
domestic long distance and  international  long distance calls) and subscription
fees within an Operating  Area,  with MATAV  receiving the  remaining  33%. As a
result of  negotiations  between  the Company and the other  non-MATAV LTOs with
the Ministry and MATAV regarding new revenue sharing arrangements,  the Ministry
issued a decree in 1998 which  regulates  the amount of revenue  the Company and
the other LTOs will receive in 1998 for domestic long distance and international
calls.  The Company  believes that the new regulation  will result in an overall
increase in the  Company's  revenue per call in 1998 for domestic  long distance
and international calls over the amount received in 1997. 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 1,104 ($5.41) for residential
customers and HUF 1,425 ($6.99) for business and other institutional subscribers
(including  government  institutions).  See "-  Regulation  - Rate  Setting  and
Revenue Sharing."

                                      -12-
<PAGE>

         Connection fees are earned when a customer is added to the network. The
Company may collect the full  connection  fee provided the customer is connected
within 30 days;  otherwise,  the  Company  may  collect  only  one-third  of the
connection fee and must connect the  subscriber  within one year. 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 ($147) (plus VAT)
for  residential  customers  and HUF 90,000  ($441)  (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,  1997,  approximately  1,151  leased  lines  were in  service.  In
addition,  as of December 31,  1997,  the Company had 1,953 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.

     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").  The  Ministry,  pursuant  to a  decree,  has  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 has 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 at an average price of HUF 2.700 ($13.24).  Customers can choose
to buy the phone and pay HUF 3,240 ($15.89) or lease the phone and pay a monthly
fee of HUF 160  ($0.78).  Although  there is no Ministry  or other  governmental
regulation  relating to lease rates,  the Company  adjusts  such rates  annually
according to the Hungarian PPI. Each phone set has an expected life of 10 years.
Approximately  58% of the Company's  subscribers  as of December 31, 1997 leased
their phones from the Company.


                                      -13-
<PAGE>

     Marketing Strategy

         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.   During  the  construction  phase  of  the  Company's
operations in 1997,  the Company  connected  substantially  all of the homes and
businesses on the Company's  waiting lists and targeted its marketing efforts at
homes surrounding  wait-listed  subscribers and on the business and professional
sectors  which  are  characterized  by low  price  sensitivity,  high  usage and
substantial  demand for value added  services.  This enabled the Company to take
advantage  of  its   construction   schedule  by  targeting  those  areas  where
construction  was  in  progress.   The  Company's   marketing  efforts  included
advertising on radio and television,  door-to-door marketing surveys,  newspaper
advertising, participation in local trade shows, direct mail, community meetings
and billboard advertising.

         With the completion of the construction program in all of the Operating
Areas,  the  Company  is now  capable  of  connecting  the  majority  of any new
customers in a relatively short period of time. In most cases connections can be
made within 30 days of the customer order. The Company anticipates  lowering the
target to seven days by the end of 1998.  During  1998,  the Company  intends to
target the  residences and  businesses  that do not yet have  telephone  service
through direct  marketing.  However,  the Company's primary marketing efforts in
1998  will be on  educating  both  business  and  residential  customers  on the
availability  and use of 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, caller ID). The Company will also emphasize ISDN and
CCS-7 (high speed data  transfer)  services which should be available by the end
of the second quarter of 1998. The Company believes that this effort will result
in a greater  understanding by its business  customers of the potential  revenue
gains that can be achieved with advanced telecommunications technology.

     Customer Service; Customer Base

         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 30 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. 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.

         Most  of  the  Company's   subscriber   base  consists  of  residential
customers.  As of  December  31,  1997,  89%  of  subscribers  were  residential
customers and 11% were business and other institutional  subscribers  (including
government institutions).

                                      -14-
<PAGE>

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 diagram below
shows the general design of the Company's conventional network.

         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.

     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 principal advantage
in  deploying a wireless  network lies in the  significant  reduction in capital
expenditure requirements as compared to a conventional copper network build-out.
In addition,  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.

                                      -15-
<PAGE>

         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
Company also utilizes a 900 MHz analog radio solution in certain portions of the
Operating Areas. Such systems differ from a DECT-based solution only in that the
transceiver  is an analog rather than a digital unit and operates on a different
frequency.

         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.

         The diagram  below shows the general  design of the  Company's  network
utilizing the DECT-based wireless local loop system.





                                      [DIAGRAM]


                                      -16-
<PAGE>


     Milestones

         The Operating  Companies'  rights to provide  non-cellular  local voice
telephone  services in the Operating Areas are governed by concession  contracts
with the Ministry (the "Concession  Contracts").  All of the Operating Companies
entered into  Concession  Contracts with the Ministry in 1994.  Each  Concession
Contract  prescribes certain build obligations  ("milestones") that require each
Operating  Company  to  install  a  specified  number  of  access  lines  within
prescribed time periods.  Hungarotel and Papatel entered into amended Concession
Contracts with the Ministry in June 1996 as a result of the Ministry's  approval
of the Company's  acquisition of Hungarotel and Papatel.  For 1997,  Hungarotel,
Papatel and Raba-Com were in full compliance with their build-out  requirements.
KNC was in  substantial  compliance  but the  Company  does not  anticipate  any
material fines.  For 1998, the Company expects to be in full compliance with the
milestones  in  each  of its  Operating  Areas.  See  "Regulation  -  Concession
Contracts - Fines".

     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  owns 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  421,100  with an  estimated  157,000  residences  and  24,600
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,
1997,  Hungarotel  had  102,000  access  lines  connected  to its  network.  The
Hungarotel  network utilizes a combination of a conventional  build, fiber optic
and wireless local loop technology.

                                      -17-
<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 152,200, with an estimated 61,800 residences and 6,800 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, 1997, KNC had 35,500 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
67,700  with an  estimated  24,100  residences  and  3,200  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, 1997,
Papatel had 17,000 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 23,700  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, 1997, Raba-Com had 20,600 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.

                                      -18-
<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. For 1997, Hungarotel, Papatel and Raba-Com were in full
compliance with their build-out requirements.  KNC was in substantial compliance
in 1997 but the Company does not  anticipate any material  fines.  For 1998, the
Company  expects to be in full  compliance  with the  milestones  in each of the
Operating Areas. 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.

                                      -19-
<PAGE>

         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, which amount
could, if levied under current restrictions,  amount to as much as approximately
1.0% of net revenues. As this tax is currently not levied, it is not possible to
predict 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.

         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.  For 1997,  Hungarotel,  Papatel and
Raba-Com were in full compliance with their build-out  requirements.  KNC was in
substantial  compliance in 1997 but the Company does not anticipate any material
fines.  For  1998,  the  Company  expects  to be in  full  compliance  with  the
milestones in each of the Operating Areas.

         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.

                                      -20-
<PAGE>

         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.  KNC and Raba-Com may not  presently be in  compliance  with the equity
ownership  requirements  expressly set forth in their Concession Contracts which
call for a shorter compliance period. 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.  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  has
publicly stated that it 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. The Company believes that it is reasonably  likely that
the Ministry will either change the Hungarian equity  ownership  requirements by
the time the Operating  Companies must meet the 10% Hungarian  equity  ownership
requirement in June 1998 or that the Ministry will grant the Operating Companies
a waiver.  In any event,  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 will 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   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
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.

                                      -21-
<PAGE>

     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  Interconnection  Fees  Related  to  Telecommunication
Services Subject to Concession, On Fees of Leased Line Services Utilized for the
Provision of Telecommunication  Services Subject to Concession and On Settlement
of Fees("1997 Tariff Decree") which regulates the Operating  Companies'  tariffs
for services  effective  January 1, 1998.  The 1997 Tariff  Decree sets separate
price caps for each category of service  through 2000,  which price caps provide
for annual rate increases based on the CPI for the prior year. Based on the 1997
Tariff Decree,  the Operating  Companies' tariffs in 1998 can be increased by up
to 18.0% from the Operating Companies' 1997 rates. The 1997 Decree also provides
for a rebalancing  formula which allows for greater increases in the charges for
subscription   fees  and  local  calls  than  in  domestic   long   distance  or
international calls.

         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
regulates the interconnection fees for 1998 and provides 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 has announced that it intends 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
has  requested  MATAV and each of the LTOs to  create a cost  based  system  for
measuring  what the actual  costs are for  interconnection  services so that the
Ministry  could factor this data into its future  regulation of  interconnection
fees.  There is however no legal obligation at the present time for the Ministry
to  introduce  a  cost-based  interconnection  fee  regime,  which is  already a
requirement for EU members. See " Competition."

                                      -22-
<PAGE>

         The Connection Fee Decree  provides for maximum  subscriber  connection
fees at HUF  90,000  ($441) for  business  customers  and HUF 30,000  ($147) 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 mobility;  (ii) establish
a radio  telecommunication  system  to be  accessed  by a  building  or group of
buildings,  with fixed  service or with DECT  mobility;  and (iii)  provide  PBX
service with fixed service or with DECT mobility.

     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%  of  all  undistributed  profits  and a  further  20% of
distributed profits.  Companies which fulfilled certain criteria became 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.  Employers are required to
pay the  state  42% (39% for  1998) of an  employee's  gross  salary as a social
security  contribution  and 4.5% of an employee's gross salary as the employer's
contribution  to  the  unemployment   fund.  The  Company's  share  of  pension,
unemployment,  social  security and health  insurance  payments are reflected in
operating and maintenance expenses.

                                      -23-
<PAGE>

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.
During the fourth  quarter of 1997,  the  Ministry  entered  into a  preliminary
agreement  with  MKM-Tel,  a  newly  formed  Hungarian  company  ("MKM"),  which
preliminary  agreement  is  intended to  establish a company  which will build a
telecommunications  network throughout Hungary which could provide such services
as data  transmission,  voice mail and other  services  which are not subject to
exclusive  concessions  when  MKM's  network  is  functional.   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.  MKM-Tel  would be  entitled  to  submit a bid as will any  other
telephone operator.  The current  shareholders of MKM include MAV (the Hungarian
railway company), MOL (the Hungarian oil company), KFKI (a Hungarian information
technology research firm) and Unisource (a Netherlands-based  telecommunications
alliance whose members  include  Koninklijke PTT Nederland NV, Sweden's Telia AB
and Swiss  Telecom).  The  Hungarian  broadcaster  Antenna  Hungaria also has an
option to acquire a stake in MKM. In addition,  in July 1997 the European  Union
Commission  recommended  that Hungary be invited to enter into  negotiations for
membership  in the  European  Union  (the  "EU").  The EU has  adopted  numerous
directives  providing  for an open  telecommunications  market  among its member
nations.  The  Company  believes  that 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.
In  the  event  MKM  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.

         The Company also 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  (including the  telephones  which the
Company has  installed as a result of its  decision to use  wireless  local loop
technology in certain parts of its Operating Areas). Westel 900 and Westel, both
joint ventures  between 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.  The airtime and monthly fees charged by the
cellular operators are more than the fees for comparable services charged by the
Company.

                                      -24-
<PAGE>

Employees

         The Company had a total of  approximately  686 employees,  including 17
expatriates,  at December 31, 1997. The Company hired  approximately 700 persons
in connection with the assets acquired from MATAV for its five Operating  Areas.
The Company completed the collective bargaining agreements with its former MATAV
employees in 1997 which are  effective  through  1998.  The Company has recently
entered  into wage  negotiations  with its  unions.  The Company  considers  its
relations with its employees to be satisfactory.

                               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 and anticipated needs for the foreseeable future.

         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. The aggregate  monthly
rent for the leased space is $10,900.

                            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 ($1.3 million).

         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. The plaintiff has not filed
an appeal.  Should,  however,  the Plaintiff  file an appeal and prevail on such
appeal,  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.

         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.

                                      -25-
<PAGE>

           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, 1997.

                                     PART II

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

Market Information

           The Company's  Common Stock is traded 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.

         The  following  table sets  forth the high and low sale  prices for the
Common Stock as reported by the Amex for each quarter in 1996 and 1997.

<TABLE>
<CAPTION>
                                           High              Low
Quarter Ended:

<S>                                        <C>             <C>

1996
March 31, 1996 . . . . . . . . . . .       $16-1/4         $10-5/8
June 30, 1996. . . . . . . . . . . . .     16               11-3/4
September 30, 1996 . . . . . . . . .       13-7/8            9-3/8
December 31, 1996. . . . . . . . . .       13                8-1/2

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

</TABLE>

         On March 26,  1998,  the closing sale price for the Common Stock on the
Amex was $8-3/4.

Stockholders

         As of March 27, 1998, the Company had 5,291,770  shares of Common Stock
outstanding  held by 103  holders of record.  The Company  believes  that it has
approximately 1,900 beneficial owners who hold their shares in street names.

         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,  1997,  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.

                                      -26-
<PAGE>

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
<TABLE>
<CAPTION>
                       HUNGARIAN TELEPHONE AND CABLE CORP.
                                AND SUBSIDIARIES
                      Selected Financial and Operating Data
                (Dollars in Thousands, Except Per Share Amounts)
<S>                          <C>            <C>          <C>         <C>        <C>
                                  1997        1996          1995        1994        1993
                                  ----        ----          ----        ----        ----
For the Year
Operating revenues            $   37,891    $20,910      $  4,070    $    ---    $    ---
Operating income (loss)       $  (1,263)    $(20,553)    $(17,829)   $ (5,272)   $ (1,400)
Net loss                      $ (36,236)    $(54,769)    $(20,024)   $ (4,597)   $ (1,400)
Net loss per common share     $   (7.97)    $ (13.14)    $  (6.30)   $  (2.13)   $   (.80)

At Year-End
Total assets                  $ 186,485     $156,615     $110,387    $ 27,577    $  6,894
Long-term debt, excluding
current installments          $ 194,537     $148,472     $ 23,467    $  2,299    $    ---
Total stockholders' (deficit) $ (41,837)    $(23,790)    $ 15,739    $ 12,563    $  3,958
equity
</TABLE>


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

Introduction

         HTCC was  organized  on March  23,  1992  and was a  development  stage
enterprise  through March 31, 1995. The Company is now engaged  primarily in the
provision   of   telecommunications    services   through   its   majority-owned
subsidiaries,  Raba-Com, KNC, Papatel and Hungarotel.  During 1996 and 1997, the
Company embarked on a significant  network  development program designed to meet
its substantial  demand backlog,  increase the number of basic telephone  access
lines in service and modernize existing facilities. Since commencing operations,
the  Company's  network  upgrade  and  expansion  program  has  resulted  in the
modernization   of   facilities   acquired   from  MATAV  and  the  addition  of
approximately  113,700  access  lines  through  December  31, 1997 to the 61,400
access lines purchased from MATAV.  As a result,  the Company had 175,100 access
lines in operation at year end 1997.

                                      -27-
<PAGE>

         From 1994 to 1996,  the Company  devoted a  substantial  portion of its
efforts to obtaining concession rights,  negotiating acquisitions,  raising debt
and equity financing, assembling a management team and commencing operations. As
a result,  the Company  recognized no revenue until 1995 and incurred  aggregate
net losses of approximately $117.2 million through December 31, 1997.

         Since the quarter  ended  March 31,  1995,  the  Company  has  provided
telecommunications  services in the  Raba-Com  and KNC  Operating  Areas.  As of
January 1, 1996, the Company commenced providing  telecommunications services in
the Papatel and Hungarotel  Operating Areas. The development and installation of
the network in each of the Company's  Operating  Areas has required  significant
capital  expenditures.  These expenditures,  together with associated  operating
expenses,  have resulted in substantial cash requirements  until a customer base
large  enough  to  provide  sufficient  revenues  and  operating  cash  flow  is
established.  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 the addition of new subscribers while limiting churn.
Since March 31, 1995, the Company's  network  construction and expansion program
has added 113,700  access lines  through  December 31, 1997 to the 61,400 access
lines  acquired  directly  from MATAV.  During this same period,  churn has been
negligible, primarily due to the Company's exclusivity rights and the demand for
services evidenced by the number of wait-listed subscribers.

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

<TABLE>

     Net Revenues
                                                              Year ended
        <S>                                             <C>           <C>
        (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.


                                      -28-
<PAGE>

         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. 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. 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.

         These  revenues  have been  offset by net  interconnect  charges  which
totalled  $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 Company's ongoing network  construction  which resulted in
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.  As the majority of  wait-listed  customers  have been  provided  with
access lines,  connection  fees will decline  substantially.  This  reduction in
connection  fee revenues is expected to be partially  offset by increases in net
measured  service  and  subscription  revenues  resulting  from 1997 access line
connections.

         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.

                                      -29-
<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. See "- Liquidity
and Capital  Resources,"  and Notes 1(a),  9(f) and 14 of Notes to  Consolidated
Financial Statements.

     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  continue  the   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.

                                      -30-
<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  cancelled  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 for the year ended December 31, 1997
compared  to a loss  before  extraordinary  items of $47.5  million 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  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 for the year ended  December 31, 1997 as compared to a net
loss of $54.8 million for the year ended December 31, 1996.


                                      -31-
<PAGE>


Comparison  of Year Ended  December  31,  1996 to Year Ended  December  31, 1995

<TABLE>

     Net Revenues
                                                                          Year ended
               <S>                                               <C>            <C>
               (dollars in millions)                                1996        1995
               Measured service revenues                          $ 20.5         $ 3.8
               Subscription revenues                                 3.8           0.7
               Net interconnect charges                             (8.9)         (1.7)
                                                                 --------      -------
               Net measured service and subscription revenues       15.4           2.8
               Connection fees                                       4.1           1.0
               Other operating revenues                              1.4           0.3
                                                                 -------       -------
               Telephone Service Revenues, Net                    $ 20.9         $ 4.1
                                                                 =======       =======
</TABLE>

         The Company  recorded an increase in net telephone  service revenues to
$20.9  million for the year ended  December  31, 1996 from $4.1  million for the
year ended December 31, 1995.

         Net  measured  service and  subscription  revenues  increased  to $15.4
million  for the year ended  December  31,  1996 from $2.8  million for the year
ended December 31, 1995. Measured service revenues increased to $20.5 million in
1996 from $3.8  million in 1995 while  subscription  revenues  increased to $3.8
million  in 1996  from  $0.7  million  in  1995.  These  increases  in call  and
subscription fee revenues were the result of an increase in average access lines
in service from approximately  14,000 lines for the year ended December 31, 1995
to  approximately  76,000  lines  for the year  ended  December  31,  1996.  The
principal  reason for this  significant  increase  in lines was the  addition of
approximately  44,000  lines in the  Hungarotel  and  Papatel  areas  which were
acquired from MATAV on December 31, 1995.

         These  revenues were offset by net  interconnect  charges which totaled
$8.9  million for the year ended  December  31, 1996 as compared to $1.7 million
for the year ended  December 31, 1995. As a percentage of call and  subscription
revenues, net interconnect charges declined slightly from 38% for the year ended
December 31, 1995 to 37% for the year ended December 31, 1996.

         Connection  fees for the year ended  December  31,  1996  totaled  $4.1
million as compared to $1.0 million for the year ended  December 31, 1996.  This
increase reflects the Company's network  construction  program which resulted in
the connection of 28,200 access lines during the year ended December 31, 1996 as
compared to the connection of 3,800  subscribers  during the year ended December
31, 1995.

         The Company  recorded other operating  revenues of $1.4 million for the
year ended  December  31, 1996 as compared to other  operating  revenues of $0.3
million for the year ended December 31, 1995. This increase reflects  additional
revenues  from the provision of direct  lines,  telephone  leasing and telephone
sales.

                                      -32-
<PAGE>

     Operating and Maintenance Expenses

         Operating and maintenance expenses for the year ended December 31, 1996
increased  $7.1  million to $22.0  million as compared to $14.9  million for the
year ended December 31, 1995. The $14.9 million of operating  expenses  incurred
in the year ended  December 31, 1995 included  non-cash  charges  totalling $6.4
million  relating to deferred  stock  compensation.  Included in  operating  and
maintenance  expenses for the year ended  December  31, 1996 was deferred  stock
compensation of $0.4.  Operating and maintenance expenses adjusted to remove the
effect of the  deferred  stock  compensation  totalled  $21.6  million  and $8.5
million  for the  years  ended  December  31,  1996 and 1995,  respectively,  an
increase of $13.1  million,  or 154%.  The  increase in adjusted  operating  and
maintenance  expenses  resulted  primarily  from the  inclusion of operating and
maintenance  expenses of Hungarotel and Papatel.  On a per line basis,  adjusted
operating and maintenance  expenses  decreased to approximately $285 per average
access  line for the year ended  December  31, 1996 from $620 for the year ended
December 31, 1995 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 $4.3 million for the
year ended  December 31, 1996 from $2.2 million for the year ended  December 31,
1995.  This  increase  was due to the  increase  in plant  and  access  lines in
operation during the year ended December 31, 1996.

     Management Fees

         Management fees pursuant to management service agreements  increased to
$6.9 million for the year ended December 31, 1996 from $4.2 million for the year
ended December 31, 1995. The increase is primarily due to a full year of monthly
management  fees due to Citizens  which  commenced  July 1, 1995,  offset by the
expiration in the third  quarter of 1996 of the  management  services  agreement
between  the  Company  and Tele  Danmark.  See  Notes  13(c)  and 14 of Notes to
Consolidated  Financial  Statements,  "- Liquidity and Capital  Resources,"  and
Notes 1(a), 9(f) and 14 of Notes to Consolidated Financial Statements.

     Asset Write-downs

         Asset write-downs increased to $2.0 million for the year ended December
31, 1996 from $0.6 million for the year ended December 31, 1995. This was due to
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

         For the year ended December 31, 1996, the Company  recorded a charge of
$6.3 million  representing the present value of payments due and options granted
to  former  officers  and  directors  under  separate  termination  and  release
agreements,  consulting agreements and noncompetition agreements. See Note 13(a)
of Notes to Consolidated Financial Statement.

     Loss from Operations

         Loss from  operations  increased  to $20.6  million  for the year ended
December 31, 1996 from $17.8 million for the year ended  December 31, 1995.  The
operating loss for the year ended December 31, 1996 was  principally  due to the
costs of termination of certain former officers and directors as noted above and
to the additional  expenses incurred by the Company to expand management project
oversight,  engineering  design and systems  needed to achieve rapid line growth
and  revenue  increases,  and provide  for the  introduction  and control of new
services.

                                      -33-
<PAGE>

     Foreign Exchange Losses

         Foreign  exchange  losses  increased to $6.3 million for the year ended
December 31, 1996 from $4.1 million for the year ended  December 31, 1995.  Such
foreign  exchange losses  resulted from the devaluation of the Hungarian  Forint
against the U.S. Dollar and the German Mark. The Company incurred debt and other
obligations  which were denominated in U.S. Dollars and German Marks in order to
commence the  construction of its  telecommunication  networks.  During the year
ended December 31, 1996, the Hungarian  Forint devalued  against the U.S. Dollar
and the German  Mark by 18.4% and 9.0%,  respectively,  as compared to 26.0% and
36.3% during the year ended December 31, 1995. The increase in foreign  exchange
loss was  primarily  attributable  to the  repayment in 1996 of U.S.  Dollar and
German Mark  denominated  intercompany  loans  resulting  in a realized  foreign
exchange  loss in the operating  subsidiaries.  The loss was offset by a reduced
devaluation of the Hungarian  Forint during 1996 as well as the repayment of the
German Mark denominated vendor credit facility. Since the substantial portion of
the  liabilities  within the  operating  companies  are now  denominated  in the
Hungarian   Forint,   the  Company's  foreign  currency  losses  have  decreased
significantly.

     Interest Expense

         Interest expense increased to $23.2 million for the year ended December
31, 1996 from $1.7 million for the year ended  December 31, 1995.  This increase
was  attributable  to higher  average debt levels in the year ended December 31,
1996 as compared  to the year ended  December  31, 1995 as the Company  incurred
indebtedness  in order to continue the  construction  of its  telecommunications
networks.  These interest  expenses were offset by capitalized  interest of $2.1
million in 1996 and $0.5 million in 1995.

     Included in interest  expense 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 Statement.

     Interest Income

         Interest  income  increased  $0.5  million to $1.5 million for the year
ended  December 31, 1996 from $1.0 million for the year ended  December 31, 1995
primarily due to higher available cash reserves for short term investment.

     Abandonment of Financing

         During 1996 the Company cancelled 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  increased  from net  charges of $0.3  million for the year
ended  December  31,  1995 to net  income  of $1.1  million  for the year  ended
December  31,  1996  principally  due  to  non-operating  income  and  ancillary
services.

                                      -34-
<PAGE>

   Loss Before Extraordinary Items

         As a result of the factors discussed above, for the year ended December
31,  1996,  the  Company  recorded a loss  before  extraordinary  items of $47.5
million  compared  to a loss of $20.0  million for the year ended  December  31,
1995.

   Extraordinary Item

         For  the  year  ended  December  31,  1996,  the  Company  recorded  an
extraordinary  item of $7.3  million  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  in  part  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
Statement.

   Net Loss

         As a result of the factors  discussed above the Company  recorded a net
loss of $54.8 million for the year ended  December 31, 1996 as compared to a net
loss of $20.0 million for the year ended December 31, 1995.

Liquidity and Capital Resources

         The Company was  considered a development  stage company  through March
31, 1995. It 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 requires
significant capital expenditures.  These expenditures,  together with associated
operating expenses,  will continue to result in substantial cash requirements at
least until a customer  base large  enough to provide  sufficient  revenues  and
operating cash flow is established.

         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.

         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.

                                      -35-
<PAGE>

         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.  Amounts  outstanding in U.S. Dollars
are payable in equal quarterly installments through December 31, 2002.

         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 which will
be amortized over the life of the loan  facility.  The remainder of the proceeds
have  been  and  will  be  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, 1997, the Company had
borrowed a total of $154 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  has been
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,  resulting 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 will be 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.

         Net cash provided by operating  activities totaled $4.9 million for the
year ended  December 31, 1997 compared to net cash used by operating  activities
of $35.8  million  for the year  ended  December  31,  1996.  For the year ended
December 31, 1997, the Company used $73.3 million in investing activities, which
was primarily used to fund the construction of the Company's  telecommunications
networks,  compared to $56.4 million in investing  activities for the year ended
December 31, 1996.  Financing  activities provided net cash of $58.4 million and
$89.2 million for the years ended December 31, 1997 and 1996, respectively.

                                      -36-
<PAGE>

         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 has  suffered
from recurring losses from operations and has a working capital deficiency and a
net capital deficiency. The Company is dependent on its ability to generate cash
from  operations,  raise capital in the form of debt or equity,  or refinance or
otherwise  resolve its  existing  obligations,  including  those  related to the
Management  Services  Agreement  with  Citizens.  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 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.

         Through December 31, 1997, the Company was in the construction phase of
its  development.  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 $155 million (at historical  exchange
rates) to complete  its network  modernization  and  construction  program.  The
Company anticipates that with the construction phase of its network complete, it
will  spend  approximately  $16  million  in 1998 and $7  million  after 1998 to
complete the network expansion so that the Company will be able to provide basic
telephone services to all of the estimated 266,600 homes and 38,900 business and
other institutional  subscribers (including government  institutions) within its
Operating Areas.

         With the construction  phase of its development  complete,  the Company
intends  to  transform  itself  from a  construction  driven  organization  to a
marketing driven operationally  efficient organization in 1998. To that end, the
Company recently hired Francis J. Busacca,  Jr. as its Chief Financial  Officer.
In addition,  James G. Morrison,  HTCC's President and Chief Executive  Officer,
who was instrumental in overseeing the Company's network construction program is
retiring  effective May 1, 1998. David A. Finley, the Chairman of the Company is
leading  an  Executive  Search  Committee  of the Board in its  search for a new
President and Chief Executive Officer.

         The  Company  and  Citizens  presently  have a  disagreement  regarding
certain issues with respect to the Management  Services Agreement with Citizens.
As of December 31, 1997, the Company has accrued as a current liability, but not
paid, $7.2 million pursuant to the Management  Services  Agreement.  The Company
currently  intends to withhold  any  payments to  Citizens  with  respect to the
Management Services Agreement until such time as these issues are resolved.  The
Company is currently in discussions with Citizens in an attempt to resolve these
issues.  The Company and Citizens  also have a  disagreement  regarding  certain
issues with respect to 1.9 million  shares of Common Stock  subject to Citizens'
preemptive  rights to date. The Company is also  currently in  discussions  with
Citizens in an attempt to resolve these issues.

                                      -37-
<PAGE>

         The Company  believes it will be able to meet its  obligations  as they
become  due during  1998,  provided  it is not  required  to settle the  accrued
liability to Citizens in cash, however, there can be no assurance that this will
be the case. Additionally, funding for the Company's future capital requirements
to repay  existing  debt  obligations  after 1998 may require the sale of equity
and/or debt of the Company or one or more of the Operating Companies.  There can
be no  assurance  that such  financing  will be  available  to the Company  when
needed,  on commercially  reasonable  terms, or at all. The Company is, however,
reviewing  its options with respect to  refinancing  its existing  credit and/or
vendor  facilities.  The  Company  is also  reviewing  various  other  financing
alternatives with its financial advisors.

         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  warrants  and options to purchase the
Company's Common Stock,  including those previously granted to Citizens, and has
provided certain  preemptive rights to Citizens.  For the term of these warrants
and 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  warrants  and options
remain   unexercised,   and   dependent   upon  the  outcome  of  the  Company's
disagreements  with Citizens,  the Company's ability to obtain additional equity
capital may be adversely affected.

Inflation and Foreign Currency

         For the  year  ended  December  31,  1997,  inflation  in  Hungary  was
approximately  18.6% on an annualized basis. It is the stated policy goal of the
Hungarian government to keep inflation from exceeding approximately 15% in 1998.

         The  Company's  Hungarian  operations  generate  revenues in  Hungarian
Forints and incur operating and other expenses,  including capital expenditures,
in Hungarian  Forints,  U.S.  Dollars and German Deutsche  Marks.  The Company's
resulting  foreign  currency  exposure  cannot be practically  hedged 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 in a component of stockholders' deficit.

         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

         The Company  recently  formed a committee to begin,  possibly  with the
assistance  of outside  consultants,  an  evaluation of its network and computer
systems  for Year  2000  compliance.  The Year  2000  problem  is the  result of
computer  programs being written using two digits rather than four to define the
applicable year. Any of the Company's programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations  causing disruption of
operations.

                                      -38-
<PAGE>

         Following the Company's  evaluation of its network and computer systems
for Year 2000  compliance,  the Company  expects to adopt a plan to mitigate the
Year 2000 Issue.  While the extent and total cost of the Year 2000 modifications
and  conversions has not yet been  determined,  the Company  presently  believes
that, with  modifications  to existing  software and converting to new software,
the Year 2000 problem  will not pose  significant  operational  problems for the
Company's  networks and systems as so modified and converted.  However,  if such
modifications  and conversions are not completed  timely,  the Year 2000 problem
may have a material impact on the operations of the Company.

Prospective Accounting Pronouncements

         Statement  of  Financial  Accounting  Standards  No. 130 ("SFAS  130"),
"Reporting   Comprehensive   Income,"  and  Statement  of  Financial  Accounting
Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and
Related  Information," were issued in June 1997. SFAS 130 establishes  standards
for reporting and display of  comprehensive  income and its components in a full
set of general purpose financial  statements.  This statement  requires that all
items  that  are  required  to  be  recognized  under  accounting  standards  as
components  of  comprehensive  income,  such as  foreign  currency  fluctuations
currently reported in stockholder's equity, be reported in a financial statement
that is displayed with the same prominence as other financial  statements.  SFAS
131 establishes  standards for the way public companies report information about
operating  segments  in annual  financial  statements  and  requires  that these
companies  report  selected  information  about  operating  segments  in interim
financial  reports issued to  shareholders.  It also  establishes  standards for
related  disclosures  about  products and services,  geographic  areas and major
customers.  The  Company is required  to adopt both new  standards  in the first
quarter of 1998.

               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, 1997, 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 1998 Annual Meeting of Stockholders, a copy of which will be filed not later
than 120 days after the close of the fiscal year.

                                      -39-
<PAGE>

                         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 1998 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  1998  Annual   Meeting  of
Stockholders,  a copy of which  will be filed not later  than 120 days after the
close of the fiscal year.

             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 1998 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.


                                      -40-
<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    Instruments  defining the rights of security holders,  including indentures
     (None)

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 Basic Contract for Takeover of Public  Telephone  Service in the Bekescsaba
     and Oroshaza Primary Regions dated December 30, 1995 between Hungarotel and
     MATAV, filed as Exhibit  10(c)(c)(c) to the Registrant's  Current Report on
     Form 8-K for December 30, 1995 and incorporated herein by reference

                                      -41-
<PAGE>

 Exhibit
 Number                            Description


10.7 Transfer  Agreement for the Transfer of Assets relating to the Local Public
     Telephone  Service in the  Bekescsaba  and Oroshaza  Primary  Regions dated
     December  30,  1995  between   Hungarotel  and  MATAV,   filed  as  Exhibit
     10(d)(d)(d) to the Registrant's Current Report on Form 8-K for December 30,
     1995 and incorporated herein by reference

10.8 Agreement on the Continuous  Employment of MATAV Employees providing public
     telephone  service in the  Bekescsaba  and Oroshaza  Primary  Regions dated
     December  30,  1995  between   Hungarotel  and  MATAV,   filed  as  Exhibit
     10(e)(e)(e) to the Registrant's Current Report on Form 8-K for December 30,
     1995 and incorporated herein by reference

10.9 Agreement  on the Taking  Over of Public  Telecommunication  Service in the
     Bekescsaba  and Oroshaza  Primary  Regions dated  December 30, 1995 between
     Hungarotel  and MATAV,  filed as Exhibit  10(f)(f)(f)  to the  Registrant's
     Current Report on Form 8-K for December 30, 1995 and incorporated herein by
     reference

10.10 Agreement on  the  Regulation  of  Rights  and  Obligations  from  Pending
     Contracts  concerning  the Public  Telephone  Service in the Bekescsaba and
     Oroshaza  Primary  Regions dated  December 30, 1995 between  Hungarotel and
     MATAV, filed as Exhibit  10(g)(g)(g) to the Registrant's  Current Report on
     Form 8-K for December 30, 1995 and incorporated herein by reference

10.11 Network Agreement  dated  December 30, 1995 between  Hungarotel and MATAV,
     filed as Exhibit 10(h)(h)(h) to the Registrant's Current Report on Form 8-K
     for December 30, 1995 and incorporated herein by reference

10.12 Basic Contract  for Taking  Over of Public  Telephone  Service in the Papa
     Primary Region dated December 30, 1995 between Papatel and MATAV,  filed as
     Exhibit  10(l)(l)(l)  to the  Registrant's  Current  Report on Form 8-K for
     December 30, 1995 and incorporated herein by reference

10.13 Transfer Agreement for the Transfer of Assets relating to the Local Public
     Telephone  Services in the Papa  Primary  Region  dated  December  30, 1995
     between Papatel and MATAV, filed as Exhibit 10(m)(m)(m) to the Registrant's
     Current Report on Form 8-K for December 30, 1995 and incorporated herein by
     reference

10.14 Agreement on the Continuous Employment of MATAV Employees providing public
     telephone  service in the Papa  Primary  Region  dated  December  30,  1995
     between Papatel and MATAV, filed as Exhibit 10(n)(n)(n) to the Registrant's
     Current Report on Form 8-K for December 30, 1995 and incorporated herein by
     reference

10.15 Agreement on the Taking Over of Public  Telecommunication  Services in the
     Papa  Primary  Region dated  December  30, 1995 between  Papatel and MATAV,
     filed as Exhibit 10(o)(o)(o) to the Registrant's Current Report on Form 8-K
     for December 30, 1995 and incorporated herein by reference



                                      -42-
<PAGE>


 Exhibit
 Number                           Description

10.16 Agreement on  the  Regulation  of  Rights  and  Obligations  from  Pending
     Contracts  concerning  the Public  Telephone  Service  in the Papa  Primary
     Region dated December 30, 1995 between Papatel and MATAV,  filed as Exhibit
     10(p)(p)(p) to the Registrant's Current Report on Form 8-K for December 30,
     1995 and incorporated herein by reference

10.17 Network Agreement dated December 30, 1995 between Papatel and MATAV, filed
     as Exhibit  10(q)(q)(q) to the Registrant's  Current Report on Form 8-K for
     December 30, 1995 and incorporated herein by reference

10.18 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

10.19 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

10.20 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

10.21 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

10.22 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

10.23 1992 Incentive Stock Option Plan of the Registrant,  as amended,  filed as
     Exhibit 4.3 to the Registrant's Registration Statement on Form S-8 filed on
     June 24, 1997 and incorporated herein by reference

10.24 Stock Option Agreement  between the Registrant and James G. Morrison dated
     as of March 13, 1997, filed as Exhibit 10.93 to the Registrant's  Form 10-K
     for the fiscal year ending  December  31, 1996 and  incorporated  herein by
     reference

10.25 Stock Option  Agreement  between the  Registrant  and Andrew E.  Nicholson
     dated as of March 13, 1997, filed as Exhibit 10.94 to the Registrant's Form
     10-K for the fiscal year ending December 31, 1996 and  incorporated  herein
     by reference

10.26 Stock Option Agreement  between the  Registrant and Daniel R. Vaughn dated
     as of March 13, 1997, filed as Exhibit 10.95 to Registrant's  Form 10-K for
     the  fiscal  year  ending  December  31,  1996 and  incorporated  herein by
     reference
                                      -43-
<PAGE>

 Exhibit
 Number                            Description

10.27 Employment Agreement  dated  September 12, 1995 between the Registrant and
     Robert  Genova,  filed  as  Exhibit  4.5 to the  Registrant's  Registration
     Statement  on Form S-8 filed on June 24,  1997 and  incorporated  herein by
     reference

10.28 Employment Agreement  dated  September 12, 1995 between the Registrant and
     Frank R.  Cohen,  filed as  Exhibit  4.6 to the  Registrant's  Registration
     Statement  on Form S-8 filed on June 24,  1997 and  incorporated  herein by
     reference

10.29 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

10.30 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

10.31 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

10.32 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

10.33 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

10.34 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

10.35 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

10.36 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

10.37 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

10.38 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

                                      -44-
<PAGE>



 Exhibit
 Number                           Description

10.39 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

10.40 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

10.41 Amended and  Restated  Employment  Agreement  dated as of October 17, 1996
     between the Registrant and James G. Morrison, filed as Exhibit 10.81 to the
     Registrant's  Registration  Statement on Form S-8 filed on October 18, 1996
     and incorporated herein by reference

10.42 Amended and  Restated  Employment  Agreement  dated as of October 17, 1996
     between the Registrant and Andrew E.  Nicholson,  filed as Exhibit 10.82 to
     the  Registrant's  Registration  Statement on Form S-8 filed on October 18,
     1996 and incorporated herein by reference

10.43 Amended and  Restated  Employment  Agreement  dated as of October 17, 1996
     between the Registrant and Daniel R. Vaughn,  filed as Exhibit 10.83 to the
     Registrant's  Registration  Statement on Form S-8 filed on October 18, 1996
     and incorporated herein by reference

10.44 Amended  and  Restated  Employment  Agreement  Between the  Registrant and
     Richard P. Halka dated as of January 9, 1997, filed as Exhibit 10.92 to the
     Registrant's  Form 10-K for the fiscal  year ending  December  31, 1996 and
     incorporated herein by reference

10.45 Stock Purchase  Agreement,  dated  as of  August  31,  1995,  between  the
     Registrant,  Alcatel  Austria AG, US Telecom East,  Inc.,  and Central Euro
     Telekom, Inc., filed as Exhibit 10(o)(o) to the Registrant's Current Report
     on Form 8-K for August 31, 1995 and incorporated herein by reference

10.46 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

10.47 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

10.48 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

10.49 Secured Term Loan Credit  Facility  between the  Registrant  and  Citicorp
     North  America,  Inc. et al. dated as of March 29,  1996,  filed as Exhibit
     10.60 to the  Registrant's  Quarterly  Report on Form 10-Q for the  quarter
     ended March 31, 1996 and incorporated herein by reference


                                      -45-
<PAGE>


 Exhibit
 Number                            Description

10.50 Pledge and  Security  Agreement  dated as of March 29,  1996  between  the
     Registrant,  HTCC  Consulting  Rt., and Citicorp North America,  Inc. et al
     dated as of March 29,  1996,  filed as  Exhibit  10.61 to the  Registrant's
     Quarterly  Report on Form 10-Q for the  quarter  ended  March 31,  1996 and
     incorporated herein by reference

10.51 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

10.52 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

10.53 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

10.54 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

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

10.56 Agreement to Amend and Restate,  dated  September  28,  1995,  between the
     Registrant  and  CU   CapitalCorp.,   filed  as  Exhibit  10(p)(p)  to  the
     Registrant's  Current  Report  on  Form  8-K for  September  28,  1995  and
     incorporated herein by reference

10.57 Second Agreement to Amend and Restate, dated October 30, 1995, between the
     Registrant  and  CU   CapitalCorp.,   filed  as  Exhibit  10(t)(t)  to  the
     Registrant's   Current  Report  on  Form  8-K  for  October  30,  1995  and
     incorporated herein by reference

10.58 Third Agreement to Amend and Restate, dated February 26, 1996, between the
     Registrant  and  CU  CapitalCorp.,  filed  as  Exhibit  10(t)(t)(t)  to the
     Registrant's  Current  Report  on  Form  8-K  for  February  26,  1996  and
     incorporated herein by reference

10.59 Management Services Agreement,  dated May 31, 1995, between the Registrant
     and Citizens  International  Management Services Company,  filed as Exhibit
     10(g)(g) to the  Registrant's  Current  Report on Form 8-K for May 31, 1995
     and incorporated herein by reference

10.60 First Amendment to  Management  Services  Agreement,  dated  September 28,
     1995, between the Registrant and Citizens International Management Services
     Company,  filed as Exhibit 10(s)(s) to the  Registrant's  Current Report on
     Form 8-K for September 28, 1995 and incorporated herein by reference

                                      -46-
<PAGE>


 Exhibit
 Number                           Description

10.61 Second Amendment to the Management Services Agreement,  dated February 26,
     1996, between the Registrant and Citizens International Management Services
     Company, filed as Exhibit 10(x)(x)(x) to the Registrant's Current Report on
     Form 8-K for February 26, 1996 and incorporated herein by reference

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

10.63 First Amendment to Stock Option  Agreement  between the  Registrant and CU
     CapitalCorp.  dated as of October 18, 1996,  filed as Exhibit  10.89 to the
     Registrant's   Current  Report  on  Form  8-K  for  October  15,  1996  and
     incorporated herein by reference

10.64 Second Stock Option  Agreement,  dated  September  28,  1995,  between the
     Registrant  and  CU   CapitalCorp.,   filed  as  Exhibit  10(r)(r)  to  the
     Registrant's  Current  Report  on  Form  8-K for  September  28,  1995  and
     incorporated herein by reference

10.65 Third Stock Option between the  Registrant and CU CapitalCorp  dated as of
     October 18, 1996, filed as Exhibit 10.90 to the Registrant's Current Report
     on Form 8-K for October 15, 1996 and incorporated herein by reference

10.66 Warrant, dated May 31, 1995, granted by the Registrant to CU CapitalCorp.,
     filed as Exhibit  10(c)(c) to the  Registrant's  Current Report on Form 8-K
     for May 31, 1995 and incorporated herein by reference

10.67 First Amendment  to Warrant  between the  Registrant  and CU  CapitalCorp.
     dated as of October  18,1996,  filed as Exhibit  10.88 to the  Registrant's
     Current Report on Form 8-K for October 15, 1996 and incorporated  herein by
     reference

10.68 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

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,  filed as  Exhibit 1 to the
     Registrant's  Current Report on Form 8-K for June 16, 1995 and incorporated
     herein by reference

18   Letter re change in accounting principles (None)

21   Subsidiaries of the Registrant

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

                                      -47-
<PAGE>

 Exhibit
 Number                           Description

23   Consents of experts and counsel (not required)

24   Power of Attorney (not required)

27.1 Financial Data Schedule

99.1 Cautionary  Statements  Regarding  "Safe Harbor"  Provisions of the Private
     Securities  Litigation  Reform Act of 1995,  filed as  Exhibit  99.6 to the
     Registrant's  Quarterly Report on Form 10-Q for the quarter ended March 31,
     1997 and incorporated herein by reference.

         (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 26, 1998.

                            HUNGARIAN TELEPHONE AND CABLE CORP.
                            (Registrant)


                            By  /s/Francis J. Busacca, Jr.
                            Francis J. Busacca, Jr.
                            Chief Financial Officer/Principal Accounting Officer

         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 26, 1998.

Signature/Name                Title


/s/James G. Morrison          President and Chief Executive Officer
James G. Morrison             Director (Principal Executive Officer)


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


                                      -48-
<PAGE>



/s/Ole Bertram                Director
Ole Bertram


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


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


/s/Finn Schkolnik             Director
Finn Schkolnik


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


                              Director
Ronald E. Spears


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


                              Director
Leonard Tow

                                      -49-
<PAGE>


                       HUNGARIAN TELEPHONE AND CABLE CORP.

                   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                        F-4
         Consolidated Statements of Stockholders' (Deficit) Equity    F-5
         Consolidated Statements of Cash Flows                        F-6
         Notes to Consolidated Financial Statements           F-7 to F-31

Financial Statement 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, 1997 and 1996, and
the related  consolidated  statements of operations,  stockholders'  deficit and
cash flows for each of the years in the  three-year  period  ended  December 31,
1997. 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, 1997 and 1996,  and the
results  of their  operations  and their cash flows for each of the years in the
three-year period ended December 31, 1997, 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 may not be able to satisfy its current  obligations  as they come due unless
restructured.  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 also  described  in note 1. The  consolidated  financial  statements  do not
include any adjustments that might result from the outcome of this uncertainty.

                                   KPMG PEAT MARWICK LLP


 New York, New York
 March 26, 1998

                                      F-2
<PAGE>



              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                           Consolidated Balance Sheets
                           December 31, 1997 and 1996
                        (In thousands, except share data)
<TABLE>

                              Assets                         1997           1996
<S>                                                   <C>                <C>

Current assets:
    Cash                                              $     4,031        15,876
    Restricted cash                                           536         6,092
    Accounts receivable, net of allowance
       of $540 in 1997 and $123 in 1996                     9,437         4,575
    VAT receivable, net                                     2,641         5,377
    Inventories                                             1,231           682
    Prepayments and other current assets                    2,146         1,346
                                                            -----         -----

       Total current assets                                20,022        33,948

Property, plant and equipment, net                        138,885        82,012
Goodwill, net of accumulated amortization
    of $1,011 in 1997 and $631 in 1996                     11,299         9,245
Other intangibles, net of accumulated amortization
    of $670 in 1997 and $547 in 1996                        6,168         8,129
Other assets                                                9,533        11,497
Construction deposits                                         578        11,784
                                                           ------        ------

Total assets                                          $   186,485       156,615
                                                      ===========       =======

                     Liabilities and Stockholders' Deficit

Current liabilities:
    Current installments of long-term debt            $     7,489           120
    Accounts payable                                        7,996        17,777
    Advance subscriber payments                               351         3,202
    Due to related parties                                  7,932         2,934
    Accruals                                                4,364         1,748
    Other current liabilities                                 689         1,952
                                                              ---         -----

       Total current liabilities                           28,821        27,733

Long-term debt, excluding current installments             194,537       148,472
Due to related parties                                      3,476         4,200
Deferred revenue                                            1,488
                                                            -----         -----

Total liabilities                                         228,322       180,405
                                                          =======       =======

Stockholders' deficit:
    Common stock, $.001 par value.  Authorized
       25,000,000 shares; issued 5,235,370 shares
       in 1997 and 4,179,626 in 1996                            5             4
    Additional paid-in capital                             70,772        59,327
    Accumulated deficit                                  (117,197)      (80,961)
    Foreign currency translation adjustment                 4,964        (1,494)
    Deferred compensation                                    (381)         (666)
                                                             ----          ----

       Total stockholders' deficit                        (41,837)      (23,790)
                                                          -------        -------

Total liabilities and stockholders' deficit           $   186,485        156,615
                                                      ===========        =======

</TABLE>

See accompanying notes to consolidated financial statements.  The Company ceased
to be a development stage company on April 1, 1995.

                                      F-3
<PAGE>




              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                      Consolidated Statements of Operations
                  Years ended December 31, 1997, 1996 and 1995
                 (In thousands, except share and per share data)
<TABLE>
<S>                                                  <C>                  <C>             <C>
                                                            1997           1996           1995
TELEPHONE SERVICES REVENUES, NET                     $     37,891         20,910           4,070
                                                     ------------         ------           -----

Operating expenses:
    Operating and maintenance expenses                     25,044         22,011          14,948
    Depreciation and amortization                           8,349          4,270           2,211
    Management fees                                         5,761          6,917           4,178
    Asset write-downs                                                      2,005             562
    Termination of former officers and directors                           6,260
                                                           ------         ------          ------

    Total Operating Expenses                               39,154         41,463          21,899
                                                           ------         ------          ------

LOSS FROM OPERATIONS                                       (1,263)       (20,553)        (17,829)

Other income (expenses):
    Foreign exchange losses                                  (517)        (6,278)         (4,090)
    Interest expense                                      (35,159)       (23,240)         (1,672)
    Interest income                                           690          1,488             981
    Cost of abandoned financing                                           (2,985)
    Other, net                                                 13          1,123            (252)
                                                            -----          -----            ----

LOSS BEFORE MINORITY INTEREST                             (36,236)       (50,445)        (22,862)

MINORITY INTEREST                                                          2,994           2,838
                                                           ------         ------           -----

LOSS BEFORE EXTRAORDINARY ITEM                            (36,236)       (47,451)        (20,024)

EXTRAORDINARY ITEM, NET                                                   (7,318)
                                                           ------         ------          ------

NET LOSS                                             $    (36,236)       (54,769)        (20,024)
                                                     ============        =======         =======

NET LOSS PER COMMON SHARE - BASIC:

    BEFORE EXTRAORDINARY ITEM                        $     (7.97)         (11.38)          (6.30)

    EXTRAORDINARY ITEM                               $                     (1.76)
                                                          ------          ------           ------

    NET LOSS                                         $     (7.97)         (13.14)          (6.30)
                                                     ===========          ======           =====

WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING                               4,546,163      4,169,532       3,177,801


</TABLE>

See accompanying notes to consolidated financial statements.  The Company ceased
to be a development stage company on April 1, 1995.

                                      F-4
<PAGE>




              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
     Consolidated  Statements  of  Stockholders'  (Deficit)  Equity Years
                  ended December 31, 1997, 1996 and 1995
                        (In thousands, except share data)
<TABLE>
<CAPTION>
                                                                                    Foreign
                                                             Additional             Currency                 Total
                                                     Common    Paid-in  Accumulated Translation  Deferred    Stockholders
                                          Shares      Stock    Capital     Deficit  Adjustment  Compensation Equity
--------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>            <C>    <C>        <C>         <C>       <C>          <C>

Balances at December 31, 1994           2,704,683      $  3     20,600    (6,168)        0     (1,872)     $ 12,563
Exercise of warrants                       55,025                  284                                          284
Private placement costs                                            (37)                                         (37)
Common stock issuances                    252,908                3,476                                        3,476
Options issued as consideration
for financial support                                            3,481                                        3,481
Exercise of options                       328,494                2,012                                        2,012
Compensation related to stock options                            4,493                          1,872         6,365
Common stock granted to employees         102,500                1,050                         (1,050)            0
Common stock issued for acquisitions      571,429         1      9,999                                       10,000
Foreign currency translation adjustment                                             (2,381)                  (2,381)
Net loss                                                                 (20,024)                           (20,024)
--------------------------------------------------------------------------------------------------------------------------
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)
</TABLE>

See accompanying notes to consolidated financial statements.  The Company ceased
to be a development stage company on April 1, 1995.

                                      F-5
<PAGE>




              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                  Years ended December 31, 1997, 1996 and 1995
                                 (In thousands)
<TABLE>
                                                                  1997          1996          1995
<S>                                                         <C>            <C>            <C>
Net cash provided by (used in) operating activities       $      4,937       (35,841)         (466)
                                                          ------------       -------          ----

Cash flows from investing activities:

     Acquisition and construction of
         telecommunications networks                           (83,055)      (49,086)      (41,921)
     Decrease (increase) in construction deposits                9,780        (7,466)       (4,313)
     Acquisition of concession rights                                                       (7,119)
     Cash received from sale of subsidiaries stock                                           1,464
     Acquisition of interests in subsidiaries                                   (330)       (1,293)
     Proceeds from sale of assets                                                336
     Sale (acquisition) of interests in affiliates                               130
                                                               -------        ------        ------

         Net cash used in investing activities                 (73,275)      (56,416)      (53,182)
                                                               -------       -------       -------

Cash flows from financing activities:

     Borrowings under long-term debt                            72,064       132,307        31,694
     Proceeds from short-term loans                                          108,729        31,956
     Proceeds from exercise of options and warrants                635            81         2,296
     Repayment of long-term debt                               (14,326)       (9,026)       (1,582)
     Repayment of short-term loans                                          (142,607)
     Other                                                                      (300)          (37)
                                                                ------        ------        ------

         Net cash provided by financing activities              58,373        89,184        64,327
                                                                ------        ------        ------

Effect of foreign exchange rate changes on cash                 (1,880)        2,757        (1,453)
                                                                ------         -----        ------

Net (decrease) increase in cash                                (11,845)         (316)        9,226

Cash at beginning of year                                       15,876        16,192         6,966
                                                                ------        ------         -----

Cash at end of year                                       $      4,031        15,876        16,192
                                                          ============        ======        ======

</TABLE>


See accompanying notes to consolidated financial statements.  The Company ceased
to be a development stage company on April 1, 1995.


                                      F-6
<PAGE>

              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 1997, 1996 and 1995

(1)    Description of Business and Summary of Significant Accounting Policies

       (a)    Description of Business and Liquidity

              Hungarian  Telephone  and Cable Corp.  ("HTCC")  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.  HTCC  and  its  subsidiaries  (together,  the
              "Company") was in the development stage through March 31, 1995.

              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,
              attracting  and  creating  its  management  team and  preparing to
              commence  operations.  As a  result,  the  Company  recognized  no
              revenues until 1995.

              The Company and Citizens (as hereinafter defined) presently have a
              disagreement   regarding   certain  issues  with  respect  to  the
              Management  Services  Agreement with Citizens.  As of December 31,
              1997,  the  Company has  accrued as a current  liability,  but not
              paid, $7.2 million pursuant to the Management  Services Agreement.
              The Company currently intends to withhold any payments to Citizens
              with respect to the Management  Services Agreement until such time
              as  these  issues  are  resolved.  The  Company  is  currently  in
              discussions  with  Citizens in an attempt to resolve these issues.
              The  Company  and  Citizens  also  have a  disagreement  regarding
              certain  issues with respect to 1.9 million shares of Common Stock
              subject to  Citizens'  preemptive  rights to date.  The Company is
              also  currently  in  discussions  with  Citizens  in an attempt to
              resolve these issues.

              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 has  suffered  from  recurring  losses from
              operations and has a working capital  deficiency and a net capital
              deficiency.  The Company is  dependent  on its ability to generate
              cash from operations, raise capital in the form of debt or equity,
              or  refinance  or  otherwise  resolve  its  existing  obligations,
              including those related to the Management  Services Agreement with
              Citizens.  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 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.

              Through  December  31, 1997,  the Company was in the  construction
              phase of its  development.  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 $155 million (at historical  exchange
              rates) to complete  its  network  modernization  and  construction
              program.

                                      F-7
<PAGE>

              With the  construction  phase  of its  development  complete,  the
              Company  intends to transform  itself from a  construction  driven
              organization  to  a  marketing  driven   operationally   efficient
              organization in 1998.

              The Company  believes it will be able to meet its  obligations  as
              they become due during 1998, provided it is not required to settle
              the accrued liability to Citizens in cash,  however,  there can be
              no assurance that this will be the case. Additionally, funding for
              the Company's  future capital  requirements to repay existing debt
              obligations  after 1998 may require the sale of equity and/or debt
              of the Company or one or more of the  Operating  Companies.  There
              can be no assurance  that such  financing will be available to the
              Company when needed, on commercially  reasonable terms, or at all.
              The Company is,  however,  reviewing  its options  with respect to
              refinancing  its existing  credit  and/or vendor  facilities.  The
              Company is also  reviewing  various other  financing  alternatives
              with its financial advisors.

              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.

       (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"),  Pilistav  Rt.  ("Pilistav"),  and Telebud (CI) Ltd.
              (KNC,  Raba-Com,  Hungarotel  and  Papatel  are each  individually
              referred  to  as  an  "Operating  Company",   and  together,   the
              "Operating  Companies").  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)    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").

                                      F-8
<PAGE>

              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 the
              foreign currency translation  adjustment 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.

       (d)    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.

       (e)    Inventories

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

       (f)    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.

       (g)    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.

       (h)    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,  Magyar
              Tavkozlesi  Rt.  ("MATAV"),  the  international  and national long
              distance interconnect service provider.

              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.

                                      F-9
<PAGE>

       (i)    Stock Based Compensation

              Prior to January  1, 1996,  the  Company  accounted  for its stock
              option  plan in  accordance  with  the  provisions  of  Accounting
              Principles  Board ("APB")  Opinion No. 25,  "Accounting  for Stock
              Issued  to  Employees",  and  related  interpretations.  As  such,
              compensation  expense  would be recorded on the date of grant only
              if the current market price of the  underlying  stock exceeded the
              exercise  price.  On January 1, 1996, the Company adopted SFAS No.
              123,  "Accounting  for  Stock-Based  Compensation",  which permits
              entities to recognize as expense over the vesting  period the fair
              value  of  all   stock-based   awards   on  the  date  of   grant.
              Alternatively,  SFAS No. 123 also  allows  entities to continue to
              apply the  provisions  of 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  defined  in SFAS  No.  123 had been
              applied.  The  Company  has  elected  to  continue  to  apply  the
              provisions  of APB  Opinion  No.  25 and  provide  the  pro  forma
              disclosure provisions of SFAS No. 123.

              Deferred compensation represents the value of Common Stock granted
              to employees and is being  amortized  over the vesting  periods of
              the related awards.

       (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  $245,000 at December 31, 1997 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

              The Company  adopted the  provisions  of  Statement  of  Financial
              Accounting  Standards No. 128,  "Earnings Per Share" ("SFAS 128"),
              for year-end 1997. SFAS 128, which  supersedes APB Opinion No. 15,
              "Earnings  Per  Share"  was  issued  in  February  1997.  SFAS 128
              requires dual presentation of basic and diluted earnings per share
              ("EPS")  for  complex  capital  structures  on  the  face  of  the
              statement of operations.  Basic EPS is computed by dividing income
              or  loss  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. Per share amounts for 1996 and 1995 have been retroactively
              restated  to give effect to SFAS 128 and were not  different  from
              EPS measured under APB No. 15.

              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, 1997, 1996 and 1995.

                                      F-10
<PAGE>

              The Company had potentially  dilutive common stock  equivalents of
              7,200,859,  5,627,775 and  4,516,597 for the years ended  December
              31, 1997, 1996 and 1995, 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

               The Company  adopted the provisions of SFAS No. 121,  "Accounting
               for the Impairment of Long-Lived Assets and for Long-Lived Assets
               to Be Disposed Of" on January 1, 1996.  This  Statement  requires
               that long-lived  assets and certain  identifiable  intangibles be
               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
               undiscounted  future 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  anticipated  selling  costs.
               Adoption of this  statement has not had a material  impact on the
               Company's   financial   position,   results  of  operations,   or
               liquidity.

(2)    Acquisitions

       On January 1, 1995, subject to Concession Agreements (see note 9(a)), the
       Company acquired certain operating plant and equipment from MATAV related
       to the  concession  area to which  Raba-Com has the rights.  The purchase
       price for the  Raba-Com  concession  area  assets was  approximately  HUF
       75,131,000 (approximately $665,000 at January 1, 1995 exchange rates).

       On February 28, 1995, subject to the Concession  Agreements,  the Company
       acquired certain  operating plant and equipment from MATAV related to the
       concession  area to which KNC has the rights.  The purchase price for the
       KNC  concession  area  assets  was HUF  548,450,000  (approximately  $4.6
       million at February 28, 1995 exchange rates).

       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. As a result,  the Company has adjusted the minority
       interest and intangible assets acquired.

                                      F-11
<PAGE>

       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
       acquisition  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 is 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 is less than  $17.50 per share.  The  maximum
       number of additional shares issuable is currently 18,469.

       The  acquisition  of the Common Stock of Hungarotel  and Papatel has been
       accounted for using the purchase method of accounting,  and, accordingly,
       the adjusted  purchase price has been  allocated to the assets  purchased
       and the  liabilities  assumed  based upon the fair  values at the date of
       acquisition.

       The net purchase price for the acquisitions of Hungarotel and Papatel, as
       adjusted, was allocated as follows:
                                                          (in thousands)
              Property, plant and equipment               $      5,046
              Other assets                                       2,766
              Intangible assets                                  7,260
              Liabilities                                       (3,807)
              Minority interests                                  (754)
                                                                  ----
                       Purchase price                     $     10,511
                                                          ============

       On December 31, 1995, the Company  acquired  certain  operating plant and
       equipment from MATAV related to the concession  areas to which Hungarotel
       and Papatel have the rights.  The purchase  price for the  Hungarotel and
       Papatel concession area assets was HUF 2.5 billion  (approximately  $17.9
       million at December 31, 1995 exchange rates). At the date of acquisition,
       pending  final  allocation,  the total  purchase  price was  reflected as
       property, plant and equipment.

       During the fourth  quarter of 1996,  the  Company  finalized  the network
       design and  construction  schedule for the Hungarotel  Operating Area and
       completed its assessment of the fair value of assets  acquired from MATAV
       on December 31, 1995. The final allocation of the purchase price resulted
       in a  decrease  in  property,  plant and  equipment  and an  increase  in
       goodwill associated with the purchase of HUF 642.7 million (approximately
       $3.9 million at December 31, 1996 exchange rates).

(3)    Cash and Restricted Cash

       (a)    Concentration

              At December 31, 1997, cash of $3,848,000 ($379,000  denominated in
              U.S.  dollars and the  equivalent  of  $3,469,000  denominated  in
              Hungarian  Forints)  was on  deposit  with  banks in  Hungary.  In
              addition,  cash of  $183,000  denominated  in U.S.  dollars was on
              deposit with two major money center banks in the United States.

                                      F-12
<PAGE>

       (b)    Restriction

              At December 31, 1997,  $490,000 of cash  denominated  in Hungarian
              Forints  was  restricted  under  concession  contract  fulfillment
              guarantees  with  restrictions  to be removed upon the  successful
              attainment of certain  operational  requirements  as prescribed in
              the  concession  agreements.  The  Company  intends to satisfy the
              operational  requirements within one year and therefore the amount
              is shown as a current asset.

              In addition,  at December 31, 1997, $23,000 of cash denominated in
              U.S.  dollars  was  deposited  in escrow  accounts  under terms of
              construction  contracts  and  $23,000 was  restricted  pursuant to
              certain arrangements with other parties.

(4)    Property, Plant and Equipment

       The components of property,  plant and equipment at December 31, 1997 and
1996 are as follows:

<TABLE>

                                                 1997           1996     Estimated Useful Lives
                                                    (in thousands)
          <S>                                   <C>           <C>       <C>

           Land and Buildings               $     5,629         4,835    25 to 50 years
           Telecommunications equipment         133,183        63,990    7 to 25 years
           Other equipment                        3,237         2,390    5 years
           Construction in progress               6,241        14,467
                                                  -----        ------
                                                148,290        85,682
           Less: accumulated depreciation        (9,405)       (3,670)
                                                 ------        ------
                                            $   138,885        82,012
                                                =======        ======
</TABLE>

       During the fourth  quarter of 1996,  the Company wrote off network assets
       with a net book value of approximately  $1.3 million which were taken out
       of service as a result of changes to the network design and configuration
       in certain operating areas.

       Interest  capitalized and included in the cost of construction of certain
       long-term  assets  amounted  to  approximately  $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, 1997 and 1996.

       In 1995,  the  Company  entered  into  financing  agreements  (the  "1995
       Citizens Loan Agreement") (see note 14) pursuant to 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  facility.
       During February and March of 1996, the Company  borrowed from Citizens an
       additional $18.2 million under a second financial agreement with Citizens
       (the "1996 Citizens Loan Agreement"  together with the 1995 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.

                                      F-13
<PAGE>

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

       On March 29, 1996, the Company  entered into a $75.0 million Secured Term
       Loan Credit Facility ("Citicorp 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 Citicorp 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 Citicorp 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.

                                      F-14
<PAGE>


(6)    Long-term Debt
<TABLE>
       Long-term debt at December 31, 1997 and 1996 consists of the following:            1997          1996


<CAPTION>
     <S>                                                                                <C>            <C>
                                                                                            (in thousands)
       Loan payable, maximum HUF equivalent of $170 million USD, interest at the
           National Bank of Hungary  weighted  average Treasury Bill Rate + 2.5%
           (22% and 26% at December 31, 1997 and 1996, respectively), payable in
           32 quarterly installments beginning March 31, 1999 with final payment
           due December 21, 2006; HUF 31,736,164,000 and HUF 19,136,275,000
           outstanding at December 31, 1997 and 1996, respectively.                      155,630        116,104

       Construction loan,  maximum HUF equivalent of $47.5 million,  interest at
           the National Bank of Hungary  average  Treasury Bill Rate + 2.5% (22%
           and 26% at December  31, 1997 and 1996,  respectively)  payable in 20
           quarterly  installments  beginning  March 31, 1998 with final payment
           due  December  31,  2002;  HUF  9,421,554,000  and HUF  1,565,450,000
           outstanding at
           December 31, 1997 and 1996, respectively.                                      46,202          9,498

       Payable to  MATAV,  interest  at the  National  Bank  of  Hungary  90 day
           Treasury Bill rate + 2% (24% at December 31, 1996); HUF 1,492,357,000
           outstanding at December 31, 1996; repaid in full in 1997.                                      9,054

       Loan payable, imputed interest at LIBOR + 2.5%; $2,388,000 and DM 7,774,000
           outstanding at December 31, 1996; repaid in full in 1997.                                      7,387

       Loan payable, imputed interest at LIBOR + 2%; $1,499,000 and DM 5,429,000
           outstanding at December 31, 1996; repaid in full in 1997
           in exchange for shares of Common Stock (see Note 7).                                           4,986

       Payable to  MATAV,  interest  at the  National  Bank  of  Hungary  90 day
           Treasury Bill rate + 2% (24% at December 31, 1996); HUF 198,212,000
           outstanding at December 31, 1996; repaid in full in 1997.                                      1,203

       Loan payable, without interest due in equal annual installments
           over three years                                                                  194            360
                                                                                          ------         ------

       Total long-term debt                                                          $   202,026        148,592

       Less current installments                                                           7,489            120
                                                                                          ------         ------

       Long-term debt, excluding current installments                                $   194,537        148,472
                                                                                         =======        =======

       The  aggregate   maturities  of  long-term  debt  based  on  U.S.  dollar
       equivalents  at  December  31,  1997  exchange  rates  for  each  of  the
       subsequent   five  years  are  as  follows:   1998,   $7,489,000;   1999,
       $33,545,000; 2000, $34,064,000; 2001, $34,064,000; and 2002, $34,064,000.
       The  carrying  value of  long-term  debt  approximates  its fair value at
       December 31, 1997.

</TABLE>

                                      F-15
<PAGE>


       On October 15, 1996,  the Company  entered  into a $170  million  10-year
       Multi-Currency   Credit   Facility  with   Postabank  es   Takarekpenztar
       ("Postabank"),   a  Hungarian  commercial  bank  (the  "Postabank  Credit
       Facility").  Proceeds  from the loan may be drawn  entirely in  Hungarian
       Forints  or up to 20% of the  principal  may be  drawn  in  U.S.  dollars
       through  March  31,  1999.  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 may be 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. Any amounts  outstanding in U.S.  dollars will be payable
       in 16 equal quarterly installments beginning on March 31, 1999.

       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 Citicorp 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 is being  reimbursed  to the
       Company in equal quarterly installments over a two year period, and which
       are being  amortized over the life of the loan facility.  At December 31,
       1997,  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.  The  remaining
       proceeds  will be used in 1998 to complete the expansion of the Company's
       telecommunications networks and repay other existing debt.

       At December 31, 1996, current  installments due under existing agreements
       for certain long-term  obligations were classified as long-term since the
       Company had the ability and intent to refinance  these  obligations  on a
       long-term basis. 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-16
<PAGE>

       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 is being 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, and has elected to, defer repayment
       of 20% of the  total  debt  repayments  due in 1998  and  1999.  Security
       pursuant  to the loan  represents  all  assets  acquired  with the  funds
       provided by the loan.

       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 ("TD")  pursuant to which TD agreed to exchange  its 20%  interest in
       each of two of  HTCC's  Operating  Companies  for  420,908  shares of the
       Company's common stock. The value of shares on the date of issue totalled
       $3,630,000.  Under the agreement,  TD was granted the preemptive right to
       maintain  its equity  ownership  percentage  in addition to giving TD the
       right,   if  TD  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, TD exercised its right and agreed to exchange the
       4.8%  interest  in  each of two of  HTCC's  Operating  Companies  that TD
       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 TD entered  into an  agreement
       whereby  TD  agreed to  exchange  loans and  accrued  interest  totalling
       $5,534,000 to two of HTCC's Operating Companies for 447,232 shares of the
       Company's common stock.

       As a result of these  transactions,  TD has increased its share ownership
       in the Company to 18.8% of shares presently outstanding.

(8)    Income Taxes

       The  statutory  U.S.  Federal tax rate for the years ended  December  31,
       1997,  1996 and 1995 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,
       1997 and 1996 due to the Company incurring net operating losses for which
       no tax benefit was recorded.

                                      F-17
<PAGE>

       For U.S.  Federal  income  tax  purposes,  the  Company  has  unused  net
       operating  loss  carryforwards  at  December  31,  1997 of  approximately
       $16,275,000  which  expire  in  2007,  $142,000;  2008,  $422,000;  2009,
       $950,000; 2010, $6,507,000;  2011, $6,328,000;  and 2012, $1,926,000. The
       availability of loss  carryforwards  to offset income in future years may
       also be restricted as a result of an ownership change which may occur, or
       may have occurred,  as a result of past and 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, 1997 at
       current  exchange  rates of  approximately  $54,113,000.  Of this amount,
       $30,673,000 may be carried forward  indefinitely  while $7,080,000 may be
       carried forward until 2001 and $16,360,000 until 2002.

       The tax effect of  temporary  differences  that give rise to  significant
       portions of deferred tax assets are as follows:
                                                                   December 31
                                                                1997        1996
                                                                   ($ thousand)

              Net operating loss carryforwards       $   5,696        5,022
              Write down of assets                         418          418
              Stock compensation                         1,310        1,323
              Citizen's options                          1,991        1,777
              Termination benefits                       1,592        2,015
              Management fees                            2,361          369
              Interest expense                             620          421
              Other                                        966          745
                                                       -------      -------
              Total gross deferred tax assets           14,954       12,090
              Less valuation allowance                 (14,954)     (12,090)
                                                       -------      -------
              Net deferred tax assets                $       0            0
                                                     =========     ========

       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 1997 and 1996, the valuation
       allowance increased by $2,864,000 and $7,130,000, respectively.

(9)    Commitments and Contingencies

       (a)    Concession Agreements

              The Operating Companies 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-18
<PAGE>

              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, 1997, 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 concession  agreements  require that each  concession  company
              meet specified  Hungarian  ownership  requirements  so that by the
              seventh year Hungarian  ownership in each concession  company must
              consist  of 25% plus one  share.  During  the seven  year  period,
              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  the seven  year  period in which 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
              such as mergers and consolidations, increases in share capital and
              winding-up.  At present,  each of the  concession  companies is in
              compliance with stipulated ownership requirements.

              The Ministry has  publicly  stated that it is currently  reviewing
              the Hungarian ownership equity ownership requirements. In the case
              of one  other  unrelated  concession  company,  the  Ministry  has
              granted a waiver on the 10% ownership  issue. The Company believes
              that it is reasonably  likely that the Ministry will either change
              the  Hungarian  equity  ownership  requirements  by the  time  the
              Operating  Companies must meet the 10% requirement in June 1998 or
              that the Ministry will grant the Operating  Companies a waiver. In
              any event,  the Company will formulate plans to meet the Hungarian
              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 will 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.

                                      F-19
<PAGE>


       (b)    Construction Commitments

              KNC has entered into  contracts  which  provide for the  continued
              construction of a local telephone  network and the addition of new
              subscribers   in  its  service   area.   These   contracts   total
              approximately  $18.5 million,  $9.4 million of which remains to be
              spent.

              Hungarotel has entered into contracts totaling approximately $27.3
              million which provide for the  continued  construction  of a local
              telephone  network and the addition of new  subscribers in its two
              service areas.  Of  this total, approximately $8.0 million 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.

       (d)    Leases

              The Company  leases office  facilities  in Stamford,  Connecticut,
              which require  minimum  annual rentals of  approximately  $30,000.
              During a portion of 1996 and all of 1995,  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  Companies  also rent office space and
              other  facilities.  Rent expense for the years ended  December 31,
              1997,   1996  and  1995,   including   rental   amounts   paid  to
              Teleconstruct,  was  $160,000,  $221,000,  $30,100,  respectively.
              Lease  obligations  for the subsequent  five years are as follows:
              1998, $30,000; 1999, $30,000; and 2000, $7,500.

       (e)    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 ($1.3 million).

               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. The plaintiff has not filed an
               appeal. Should, however, the Plaintiff file an appeal and prevail
               on such appeal, 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.

               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-20
<PAGE>


        (f)    Issues With Citizens Utilities Company

               As of December 31, 1997,  the Company has accrued,  but not paid,
               $7.2 million pursuant to the Management  Services  Agreement with
               Citizens.  The Company and Citizens presently have a disagreement
               regarding certain issues with respect to the Management  Services
               Agreement.  The Company is currently in discussions with Citizens
               in an attempt to resolve these  issues.  Until such time as these
               issues are resolved,  the Company  currently  intends to withhold
               any payments to Citizens with respect to the Management  Services
               Agreement.  The Company  and  Citizens  also have a  disagreement
               regarding  certain  issues with respect to 1.9 million  shares of
               Common Stock subject to Citizens'  preemptive rights to date. The
               Company is currently in  discussions  with Citizens in an attempt
               to resolve these issues.

       (g)    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  36  employees.  The  Company  recently  entered  into an
               agreement in principle with Lucent  pursuant to which the Company
               and Lucent will amend the original agreement.  Effective April 1,
               1998,  the Company will be 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
               of the Operating Areas. In addition, the Company will be entitled
               to sell large call centers on a commission  basis.  The Company's
               minimum  purchase  requirements  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 part of the renegotiated  relationship,  the Company agreed to
               transfer  back  $400,000  of  assets  to  Lucent  and pay  Lucent
               $150,000.  The  Company  will  transfer  28  of  its  36  assumed
               employees back to Lucent or to a subcontractor.  As a result, the
               Company  has  recorded  a charge of  $600,000  for the year ended
               December 31, 1997.

(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 1995, the Company issued 55,025 shares of Common
       Stock upon the exercise of such warrants at prices  ranging from $3.60 to
       $10.15 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 $284,000 in 1995 and $31,000 in 1996.

                                      F-21
<PAGE>

       In 1995, a former officer exercised options to purchase 328,494 shares of
       Common Stock at prices  ranging from $4.00 to $12.25 per share.  Proceeds
       from the  exercise of these  options  totaled  $2,012,000.  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 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  granted  options to purchase up to
       70,000 shares of Common Stock at below market prices to three officers as
       compensation,  resulting  in  compensation  expense  of  $70,000  and  an
       increase to additional paid-in capital.

       During the third  quarter  of 1997,  the  Company  entered  into  various
       agreements  with TD pursuant to which TD agreed to exchange its ownership
       interest and outstanding  loans in each of two Operating  Companies 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,  TD has increased its share ownership in the Company
       to 18.8% of shares presently outstanding (see note 7).

       The Company has reserved 7,200,859 shares 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 750,000.  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,  1997,  545,000  options  provided for by the Plan had
       been  issued,  of which  167,500  were  exercised  and  377,500  remained
       outstanding.

       In  1997,  the  Company  adopted  a  directors  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,
       1997, 50,000 options provided for by the Directors' Plan had been issued,
       of which 5,000 were exercised,  5,000 were cancelled and reverted back to
       the Directors' Plan, and 40,000 remained outstanding.

       The Company  applies APB  Opinion No. 25 and related  interpretations  in
       accounting  for stock  options  issued under the Plan and the  Directors'
       Plan.  Accordingly,  no  compensation  cost  has been  recognized  in the
       financial  statements  for options issued with an exercise price equal to
       or greater  than the fair market value of the stock at the date of grant.
       Had the Company determined compensation cost for options issued under the


                                      F-22
<PAGE>


       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>

                                                         1997        1996         1995
                                                                 (in thousands)
          <S>                                          <C>       <C>            <C>

              Net loss                As reported    ($36,236)   ($54,769)      ($20,024)
                                        Pro forma    ($36,468)    (54,982)       (20,237)

              Earnings Per Share      As reported      ($7.97)    ($13.14)       ($6.30)
                                        Pro forma      ($8.02)     (13.19)        (6.37)
</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 6.56% in 1997,  5.4% in 1996 and 7.39% in 1995,  (2) an
       expected life of 7 years for 1997, 6 years for 1996 and 5 years for 1995,
       and (3)  volatility of  approximately  33% for 1997 and 53% for both 1996
       and 1995.

       Pro forma net loss reflects only options  granted  during 1995,  1996 and
       1997.  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,  issued to
       officers,  directors,  and  consultants,  exercised and cancelled for the
       three years ended December 31, 1997:

       -------------------------- ------------------------ --------------------
                                        Outstanding         Option/Warrant Price
                                     Options/Warrants            Per Share
       -------------------------- --------------------- -----------------------
         December 31, 1994                  760,941          $3.60-$20.00
         Granted                            170,000         $12.25-$14.00
         Exercised                        (383,449)          $3.60-$12.25
         Cancelled                         (29,000)         $10.00-$10.25
       -------------------------- --------------------- -----------------------
         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
       -------------------------- --------------------- -----------------------


                                      F-23
<PAGE>



       The  following  table  summarizes  information  about  shares  subject to
       outstanding  options  and  warrants  as of  December  31, 1997 which were
       issued to current or former employees,  directors or consultants pursuant
       to the Plan, Directors' Plan, employment or other agreements.

<TABLE>

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

                 253,647         $3.60-$4.00            $3.99             6.58          253,647        $3.99
                 120,000         $8.75-$9.44            $9.04             5.06          120,000        $9.04
                  97,500        $11.69-$12.25          $12.16             2.52           97,500       $12.16
                 261,950            $14.00             $14.00             3.06          261,950       $14.00
                  25,000            $20.00             $20.00             1.80           25,000       $20.00
                 -------                                                                 ------       ------

                 758,097         $3.60-$20.00           $9.10             4.44          758,097        $9.10
                 =======                                                                =======
</TABLE>

       Stock Grants

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

       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
       to these three executive officers which  became effective April 1, 1997.

       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.


                                      F-24
<PAGE>


(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, 1997, 1996 and 1995
       follows:
<TABLE>

                                                                    1997          1996          1995
                                                                              (in thousands)
     <S>                                                       <C>             <C>             <C>

       Net loss                                               $   (36,236)      (54,769)      (20,024)
       Adjustments to reconcile net loss to
           net cash provided by operating activities:
              Depreciation and amortization                         8,349         4,270         2,211
              Asset write-downs                                                   2,005           562
              Equity in net loss of affiliates                                                    248
              Non-cash compensation                                   407           485         6,365
              Unrealized foreign currency loss                        209         1,084           602
              Extraordinary items                                                 7,318
              Termination benefits                                                6,260
              Other expense                                           386
              Minority interest                                                  (2,994)       (2,838)
              Deferred Payment of interest                         34,963         6,279            40
           Changes  in  operating  assets  and  liabilities
              net of  effects  of
              acquisitions:
              Accounts receivable                                  (6,273)       (3,663)       (1,399)
              Restricted cash                                       4,797        (4,974)        2,065
              VAT receivable                                        1,864        (1,757)       (3,305)
              Other assets                                         (1,087)       (5,976)          825
              Accounts payable and accruals                        (3,955)       10,955        12,311
              Advanced subscriber payments                         (2,851)        1,066          (312)
              Due to related parties                                4,364        (1,430)        2,183
                                                                  -------        ------        ------

       Net cash provided by (used in) operating activities    $     4,937       (35,841)         (466)
                                                              ===========       =======          ====

       Cash paid during the year for:
              Interest                                        $       196        16,961         1,672
                                                              ===========        ======         =====
</TABLE>

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

       During 1997 the Company:

                     Issued   969,158   shares  of   Common   Stock   valued  at
                     $10,689,000  to TD 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.

                                      F-25
<PAGE>

       During 1995 the Company:

                     Issued   571,429   shares  of   Common   Stock   valued  at
                     $10,000,000 subject to adjustment, for acquisitions.

                     Issued  250,000 shares of Common Stock valued at $3,436,000
                     and 626,155  options to  purchase  Common  Stock  valued at
                     $3,481,000 in consideration  for certain  financial support
                     from Citizens.

                     Issued   2,908  shares  of  Common  Stock  as   payment  of
                     approximately  $40,000  of  interest  to  Citizens.

                     Issued  102,500  restricted   shares  to  certain  officers
                     pursuant to their employment agreements.

(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-competition
              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
              to  the  former  Vice-Chairman  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 1997 and
              $503,000 in 1996 related to these agreements.

              On  September  12, 1995 the Board of  Directors of the Company had
              extended  the  employment   contracts  of  its  former   Chairman,
              President  and  Chief  Executive  Officer  and  its  former  Chief
              Financial Officer, Treasurer,  Secretary and Director for one year
              and  vested  all of  the  options  contained  in  such  employment
              agreements immediately instead of over the term of such employment
              contracts.  Stock compensation expense for the year ended December
              31, 1995  (including a charge for the entire amount related to the
              accelerated  vesting of options of the Company's prior  president,
              chief   executive  and  chief  financial   officer)   amounted  to
              $6,365,000.

              In 1996 and 1995,  the Company paid legal fees to the former Chief
              Financial   Officer,   Treasurer,   Secretary   and   Director  of
              approximately  $146,000 and  $158,000,  respectively.  Included in
              other  assets  at  December  31,  1996 is  $250,000  plus  accrued
              interest due from the former Vice Chairman for funds advanced on a
              personal mortgage which was repaid in February 1997.

       (b)    Transactions with Teleconstruct

              In addition to  transactions  related to Pilistav (see note 16) 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.

                                      F-26
<PAGE>

        (c)   Agreements with TD

              Amounts  paid to TD in 1996 and  1995  under  previously  existing
              management services agreements amounted to approximately  $976,000
              and $1,778,000,  respectively.  The management services agreements
              with TD were terminated in August 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, 1997 and 1996, were
as follows:

<TABLE>

                                                                  1997               1996
             <S>                                             <C>              <C>
              Payable to former officers and directors      $   4,199,000    $   4,839,000
              Due to Citizens                                   7,175,000        1,491,000
              Due to TD                                                            770,000
              Due to Teleconstruct                                 34,000           34,000
                                                                 --------         --------
                                                            $  11,408,000    $   7,134,000
                                                            =============    =============
</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 (the "First Stock Option
       Agreement")  and second Stock Option  Agreement (the "Second Stock Option
       Agreement"), a Registration Agreement and a Management Services Agreement
       (altogether, 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.

       The  Citizens  Agreements,  as  amended,  resulted in and provide 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 3,638,832  (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 First  Stock
              Option  Agreement  and  the  Second  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 of the options  were  extended as
              discussed  below.  All of the  options  are  subject to  customary
              anti-dilution provisions which result in adjustments to the number
              and price per share of the options.

                                      F-27
<PAGE>

              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 initial $5.2 million provided in the 1995
              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.

              The  1995  Citizens  Loan  Agreement  provided  for certain events
              of default and remedies.  Advances  under the 1995 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 1995  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 1995 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 1995
              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 1996 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.

                                      F-28
<PAGE>
              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.

              Certain  corporate, financial, technical, construction,  marketing
              and  operational  services  are to be  provided by Citizens to the
              Company under the terms of the Management Services Agreement. Such
              services  commenced  on July 1,  1995  with a  12-year  term.  The
              Management  Services Agreement  currently provides for a fee equal
              to 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  1997  amounted  to
              $5,000,000 plus reimbursable costs of $691,000,  in 1996 such fees
              amounted to  $3,640,000  plus  reimbursable  costs of  $1,862,000,
              while in 1995 such fees  amounted  to $900,000  plus  reimbursable
              costs of  $1,491,000.  Cash  payments made to Citizens in 1996 for
              management services totaled  $5,865,000.  As of December 31, 1997,
              the Company has accrued,  but not paid,  $7.2 million  pursuant to
              the Management  Services Agreement with Citizens.  The Company and
              Citizens  presently have a disagreement  regarding  certain issues
              with respect to the Management Services Agreement.  The Company is
              currently in  discussions  with  Citizens in an attempt to resolve
              these issues.  Until such time as these issues are  resolved,  the
              Company  currently  intends to withhold  any  payments to Citizens
              with respect to the Management Services Agreement.

              The  right  for   Citizens  to  receive  an  option  to   purchase
              additional  shares  of  Common  Stock,  if the  Company  issues in
              certain  circumstances,  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  prior to
              September 12, 1997,  on the same terms  applicable to the original
              two-year option granted under the Citizens Options and Warrant, to
              purchase  the number or amount of shares  sufficient  to  maintain
              Citizens'  then existing  percentage  ownership on a fully diluted
              basis.  If the issuance  occurs after September 12, 1997, then the
              Company  must  grant   Citizens  the  right  to  purchase  at  the
              applicable  offering price the number of shares as is necessary to
              maintain Citizens' then existing  percentage  ownership on a fully
              diluted  basis.   The  Company  and  Citizens   currently  have  a
              disagreement  regarding certain issues with respect to 1.9 million
              shares of Common Stock subject to Citizens'  preemptive  rights to
              date. The Company is currently in discussions  with Citizens in an
              attempt to resolve these issues.

                                      F-29
<PAGE>

              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 HTCC  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  2,142,041 shares
              of Common Stock (as presently  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.

              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 and Warrant.  As a result of
              the  above  transactions  and  certain  open market  purchases  by
              Citizens,  on  December  31,  1997  Citizens  held  17.3%  of  the
              Company's  outstanding  Common  Stock and  4,514,682  options  and
              warrants  to purchase  Common  Stock.  In addition to such options
              and  warrant,  the Company and Citizens are currently in a dispute
              with  respect  to  Citizens  preemptive  rights as to 1.9  million
              shares of  Common  Stock.  Citizens'  ownership  of the  Company's
              outstanding  shares on a fully diluted basis (including its shares
              of Common  Stock,  options,  warrant and preemptive rights subject
              to dispute) is approximately 58.9% at December 31, 1997.

(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 1997 and 1996.

(16)   Investment in Pilistav

       In  March  1995,  the  Company  acquired  Teleconstruct's  68%  ownership
       interest in Pilistav for $919,000, raising its ownership interest to 94%.
       The Company has consolidated the accounts of Pilistav from April 1, 1995.

       Pilistav  had  applied for but did not  receive a  concession  to own and
       operate  a  local  telephone  network  in  Hungary  and  as  such  had no
       operations.  In the second  quarter of 1995,  subsequent  to the  Company
       acquiring  Teleconstruct's  interest in Pilistav, a writedown of $562,000
       was recorded to reduce the net assets of Pilistav to their estimated fair
       value of  approximately  $75,000.  In March 1996,  the  Company  sold the
       assets of Pilistav to MATAV for approximately $220,000.


                                      F-30
<PAGE>


(17)   Quarterly Financial Data (unaudited)
<TABLE>


                                                  ($ in thousands)
            <S>                         <C>            <C>           <C>
                                         Revenue        Net Loss     Net loss
                                                                     Per share
                          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)

                          1996
             First quarter              $ 5,159        $ (5,768)    $ (1.41)
             Second quarter               4,534         (15,623)      (3.70)
             Third quarter                5,034         (13,105)      (3.14)
             Fourth quarter               6,183         (20,273)      (4.86)
</TABLE>

       The net loss for the third quarter of 1997 has been restated 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-31
<PAGE>

                      HUNGARIAN TELEPHONE AND CABLE CORP.

                               Index to Exhibits

Exhibit No.    Description

   21          Subsidiaries of the Registrant