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 [FEE REQUIRED]

For the fiscal year ended December 31, 1996

                                       OR

[ ]  TRANSITIONAL  REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

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:

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

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

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

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

         As of March 21, 1997, 4,189,626 shares of the Registrant's Common Stock
were  outstanding,  of  which  4,099,306  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 21,  1997,  was  $39,455,820.  (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, 1996.



<PAGE>


                                    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, 1996 exchange rates.

                                Item 1. Business

Company Overview

         Hungarian  Telephone and Cable Corp.  ("HTCC" or the "Registrant"  and,
together with its consolidated subsidiaries, the "Company") is a rapidly growing
provider of 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  embarked on a  significant
network  modernization and construction program designed to meet its substantial
demand backlog,  increase the number of basic telephone  access lines in service
and modernize existing facilities.  When fully complete,  the Company's networks
are  expected  to have the  capacity  to provide  basic  telephone  services  to
virtually  all of the  estimated  279,000  homes and 39,900  business  and other
institutional   subscribers  (including  government   institutions)  within  its
Operating Areas.

         The Company acquired its concession rights from the Hungarian  Ministry
of Transportation,  Telecommunications and Water Management (the "Ministry") for
$11.5 million and purchased the existing  telecommunications  infrastructure  in
the Operating Areas,  including  approximately  60,000 access lines, from Magyar
Tavkozlesi  Rt.  ("MATAV"),  the formerly  State-controlled  monopoly  telephone
company, for $23.2 million.  Since the acquisition of the existing networks from
MATAV by  Kelet-Nograd  Com Rt.  ("KNC") and Raba Com. Rt.  ("Raba-Com")  in the
first quarter of 1995,  the Company has incurred  capital  expenditures  through
December  31,  1996 of  approximately  $58.6  million to expand and  upgrade its
network  facilities  in  the  Operating  Areas  operated  by KNC  and  Raba-Com,
resulting  in the addition of  approximately  18,900 new access lines in service
(including pay phones) and the replacement of 3,572 manual  exchange lines.  The
Company  completed  the network  construction  program in Raba-Com in the fourth
quarter of 1996 and is  expected  to fully  complete  the  network  construction
program in KNC by the end of the second  quarter in 1997 which has  resulted  in
the  construction of significant new switching and backbone network capacity and
will result in the connection to the network of all of the  subscribers who were
on KNC's and  Raba-Com's  original  waiting  lists.  The next phase of KNC's and
Raba-Com's  network expansion  programs will consist of connecting their waiting
lists,  as well as  additional  new  subscribers,  to the networks  which should
involve lower  incremental  costs since the  networks'  backbones are already in
place.

                                      -2-

<PAGE>

         Since the  acquisition  of the  existing  network from MATAV by Papa es
Tersege Telefon  Koncesszios Rt. ("Papatel") on January 1, 1996, the Company has
incurred capital  expenditures  through December 31, 1996 of approximately $16.2
million to expand and upgrade  its  network  facilities  in the  Operating  Area
operated by Papatel, resulting in the addition of approximately 7,300 new access
lines in service (including pay phones) and the replacement of 521 manual lines.
The Company completed the network  construction program in Papatel in the fourth
quarter of 1996 which resulted in the  construction of significant new switching
and backbone network capacity and the connection to the network of substantially
all of the  subscribers  who were on Papatel's  original  waiting list. The next
phase of Papatel's  network  expansion  program will consist of  connecting  its
existing  waiting list, as well as additional  new  subscribers,  to the network
which  should  involve  lower  incremental  costs since its network  backbone is
already in place.

         Since the acquisition of the existing networks from MATAV by Hungarotel
Tavkozlesi  Rt.  ("Hungarotel")  on January 1, 1996,  the Company  entered  into
turnkey construction contracts to upgrade  the telecommunications  facilities in
the Operating  Areas operated by  Hungarotel.  These  contracts  provide for the
construction  of  significant  new  switching and backbone  network  capacity in
addition  to  the  installation  of  64,000  new  access  lines  (including  the
replacement of 6,000 manual exchange lines).  One of the construction  contracts
includes $45.0 million in contractor  financing that has been arranged through a
Hungarian commercial bank. The Company spent approximately $16.0 million through
December 31, 1996 to begin  construction  of the planned  network  modernization
program in the  Hungarotel  Operating  Area  resulting  in the addition of 7,200
access  lines in service  (including  pay phones) and the  replacement  of 6,458
manual lines.  The Company expects to complete the  construction  program in the
Hungarotel  Operating  Area by the end of 1997, at an  additional  cost of $50.5
million.  Following the completion of the construction program in the Hungarotel
Operating Area, Hungarotel will have connected its original waiting list and all
recent  additions  to its current  waiting  list to its network and added enough
capacity to connect  even more  subscribers  to its  network.  The next phase of
Hungarotel's  network  expansion  will consist of adding new  subscribers to the
network which should involve lower  incremental costs since its network backbone
is already in place.

         The Company,  through its turnkey  construction  contracts with Siemens
Telefongyar  Kft.   ("Siemens"),   Ericsson  Technika   ("Ericsson")  and  Fazis
Telecommunication  System Design and Construction Corporation ("Fazis"), has the
necessary  construction  contracts in place to complete the initial phase of its
planned  network  expansion  and  modernization  program in all of its Operating
Areas and,  through its $170 million  10-year credit  facility with Postabank es
Takarekpenztar  (the "Postabank Credit Facility"),  a Hungarian  commercial bank
("Postabank"), has the necessary capital to fund such contracts.

                                      -3-

<PAGE>

        As of December 31, 1996, the Company's  telecommunications  networks had
approximately  93,400 access lines in service (including pay phones).  Following
the completion of its initial network expansion and construction  program in all
of its  Operating  Areas,  the Company  expects to have 160,000  access lines in
place by the end of 1997 and the necessary wired  switching  capacity to service
190,000  households,  businesses and other institutions and the backbone network
capacity to service 326,000 households,  businesses and other institutions.  The
following  table sets forth  certain  information  as of December  31, 1996 with
respect to each of the Operating Companies.


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

Population.................... 69,500     154,700   68,300   420,500   713,000
Residences.................... 29,000      61,300   23,700   165,000   279,000
Businesses and other(1).......  2,900       9,800    1,200    26,000    39,900
Access lines in operation:
     Residential.............. 12,200      15,900    9,800    37,700    75,600
     Business and other(2)....  1,800       4,600    1,300    10,100    17,800
                             --------     -------  -------  --------   -------
           Total.............. 14,000      20,500   11,100    47,800    93,400
Pay phones....................     80         486      106       817     1,489
Waiting list(3):
     Prepaid..................  2,600       7,700      300    33,200    43,800
     Non-prepaid..............     --       3,100    1,700    13,900    18,700
                             --------     -------  -------    ------    --------
           Total..............  2,600      10,800    2,000    47,100    62,500
Penetration rate(4)...........   42.1        25.9     41.3      22.8      27.1
</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)  and  pay
    phones.
(3) The prepaid  waiting list includes those  individuals,  businesses and other
    potential subscribers (including government  institutions) who have paid the
    required  advance  connection  fee for telephone  service.  The  non-prepaid
    waiting  list  includes   individuals,   businesses   and  other   potential
    subscribers  (including  government   institutions)  who  have  applied  for
    telephone service but have not yet paid the requisite connection fee.
(4) Penetration  rate is defined as the number of residential  access lines
    per residences.
                                      -4-

<PAGE>

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  significantly  underdeveloped  by  MATAV,  which  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 and,  due to the  Company's  ongoing
network expansion and modernization  program,  has increased to approximately 13
access lines per 100  inhabitants as of December 31, 1996. 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.

         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.  From 1990 through 1996,  cumulative
foreign  investment in Hungary  exceeded HUF 1.338  billion ($8.1  billion) and,
during  such  period,  Hungary  attracted  some  25-28%  of  the  total  foreign
investment  in Central and Eastern  Europe.   Foreign  ventures,  including  the
Hungarian  affiliates of General Motors,  General Electric,  Suzuki, Ford, Audi,
Elf-Sanofi and others,  now account for some 40% of the country's exports to the
West.

         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  comprised of Deutsche  Telekom,  the German public
telephone  operator (a "PTO"),  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 service areas which had been chosen to exit the MATAV
system. As of December 31, 1996, 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);  and a  consortium  comprised  of Bezeq,  the Israeli  PTO,  and MATAV (3
areas).  MATAV  retained the rights to service 5 such areas.  In addition to the
fees paid to the government  which  aggregated  approximately  $80.0 million (at
historical  rates),  each of the  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  256,000 access lines
from a total of 1.2 million access lines in the MATAV system.

                                     -5-

<PAGE>

         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 500,000 to 700,000 cellular subscribers in Hungary.

         The Ministry continues to pursue industry  liberalization  efforts.  In
2002,  or  at  such  earlier  time  that  Hungary   adopts  a  more   aggressive
privatization  schedule,   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 LTOs,  including the Operating  Companies,  to
provide non-cellular local voice telephone services. In addition, other services
such as  sub-exchange  lines,  paging  and  private  lines  have been  opened to
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 15, 1997.  Share  ownership  percentages of HTCC are
based on shares of the Common Stock owned as of March 21, 1997,  without  giving
effect to  outstanding  options or  warrants;  share  ownership  percentages  in
parenthesis  are presented on a  fully-diluted  basis.  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       
          19.2%          78.0%          Management     Danmark
          (58.1)%       (40.6)%         2.2%           0.6%
                                        (1.0%)         (0.3%)

                        
                                      HTCC


Papatel               Raba-Com              KNC                   Hungarotel  
79.2%                 65.9%                 70.0%                 99.0%


Other                 Other                 Other                 Other
Stockholders:         Stockholders:         Stockholders:         Stockholders:
IFC 20.0%             Tele Danmark 20.0%    Tele Danmark 20.0%    Private 
Municipalities 0.8%   Danish Fund 4.8%      Danish Fund 4.8%      Hungarian 
                      Municipalities 9.3%   Municipalities 5.0%   Investor 1.0%
                                            Antenna Hungaria 0.2%


                                     -6-
<PAGE>

         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.

Relationships with Certain Stockholders

          The Company benefits from the extensive  telecommunications experience
and capabilities of certain of its stockholders in managing and constructing its
telecommunications  networks.  Set  forth  below  is  a  discussion  of  certain
arrangements with such stockholders.

     Citizens Utilities Company

         Citizens  Utilities Company (together with its affiliates,  "Citizens")
is a New York  Stock  Exchange  listed,  diversified  growth  company  providing
telecommunications,  natural gas distribution,  electric distribution, water and
wastewater  treatment  services to  approximately  1.64 million  customers in 22
states  in the  United  States.  Citizens  is the  seventh  largest  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  10.2 million.  Citizens also
owns Electric  Lightwave,  Inc., a competitive access provider operating in five
western  states in the  United  States.  Through a joint  venture  with  Century
Communications  Corp.,  Citizens  provides cable  television  services to 49,500
subscribers  in southern  California.  At December 31,  1996,  Citizens had $4.5
billion in assets  and $1.9  billion in  equity.  For the  twelve  months  ended
December 31, 1996,  Citizens had net income of $178.7  million on total revenues
of  $1.3   billion,   of  which  60%  were   derived   from  the   provision  of
telecommunications services.

         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")  bringing  its
ownership of the  outstanding  Common Stock as of March 21, 1997,  to 19.2%.  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").  Assuming  the  exercise  of  all  of the
outstanding  options and warrants to purchase  Common Stock as of March 21, 1997
(including the Citizens  Options),  Citizens would own 58.1% of the Common Stock
on a fully-diluted basis.

         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.  Management of the Company believes that its relationship
with Citizens will continue to benefit the Company  substantially as it proceeds
with the development and implementation of its capital expenditure and financing
plans. For a more detailed description of some of the Citizens  Agreements,  see
"Certain  Relationships  and Related  Party  Transactions."  See also  "Security
Ownership of Certain  Beneficial  Owners and Management" and Note 13 of Notes to
Consolidated Financial Statements.

                                     -7-
<PAGE>

     Tele Danmark A/S and The Investment Fund for Central and Eastern Europe

         Tele Danmark A/S (together with its affiliates,  "Tele Danmark") is the
Danish  public  telephone   operator  ("PTO").   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 more.  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, 1996, Tele Danmark had total assets of Danish Kroner
47.1 billion  (approximately  $7.9 billion) and  shareholders'  equity of Danish
Kroner 27.9 billion (approximately $4.7 billion).  During 1996, Tele Danmark had
net income of Danish Kroner 3.1 billion  (approximately $522.6 million) on total
revenues of Danish Kroner 26.2 billion (approximately $4.4 billion).

         The Investment  Fund for Central and Eastern Europe (the "Danish Fund")
is an investment fund sponsored and funded by the Danish government.  The Danish
Fund co-invests with certain Danish companies  providing  investment capital for
projects located in Central and Eastern Europe.

         In addition to its investment in HTCC,  Tele Danmark also owns 20.0% of
the  outstanding  capital stock of each of KNC and Raba-Com and has entered into
joint  venture  and  shareholders'  agreements  with HTCC with  respect  to such
ownership interests.  The Danish Fund owns 4.8% of the outstanding capital stock
of  each  of  KNC  and  Raba-Com  and is a  party  to  such  joint  venture  and
shareholders'  agreements.  In the past,  both Tele  Danmark and the Danish Fund
have provided KNC and Raba-Com with certain  financial  support.  See Note 12 of
Notes to Consolidated Financial Statements.

     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.
                                    -8-
<PAGE>

Strategy

         The Company's  primary  objective is to continue the development of its
telecommunications  networks  in  a  cost-effective  manner  utilizing  advanced
technology.  The Company has implemented the following  operating  strategies in
order to further its business objectives:

     Managed Penetration.  The Company manages the expansion and construction of
     its  telecommunications  networks and subscriber growth with the objective
     of increasing  revenues and producing  substantial  operating  cash flow as
     soon as  practicable.  Within the Operating  Areas,  the Company  initially
     directs its construction and marketing efforts at households and businesses
     and other  institutions on the Company's  waiting list and to the homes and
     businesses  surrounding such potential customers,  and then at concentrated
     population and business  districts in order to connect the greatest  number
     of customers at the least  expenditure  and in the shortest period of time.
     As  of  December  31,  1996,  there  were  approximately  62,500  potential
     customers wait-listed for service. Of these, 43,800 potential customers had
     paid significant deposits of up to HUF 30,000 ($182) (plus value added tax,
     "VAT") in the case of residential subscribers,  and up to HUF 90,000 ($546)
     (plus  VAT)  in the  case  of  business  and  other  potential  subscribers
     (including government institutions). After meeting this demand, the Company
     plans to direct its  construction  and  marketing  efforts to the remaining
     areas, based on demand, population and growth potential.

     Technologically Advanced,  Flexible Networks. In modernizing and completing
     its  telecommunications  networks,  the  Company  emphasizes  the  use  of
     advanced,  flexible network technology. To this end, in certain portions of
     the Operating Areas,  the Company is building  networks using a combination
     of fiber  optic cable and  twisted  pair  copper wire to deliver  telephone
     service to  subscribers.  In other  portions of the  Operating  Areas,  the
     Company is implementing a cost-effective wireless local loop solution. This
     solution uses a combination  of 1.8 to 1.9 GHz DECT  technology and 900 MHz
     analog  radio  technology  in  the  local  loop,  which  allows  for  rapid
     deployment and accelerated subscriber additions at a lower capital cost per
     customer connected compared to traditional  wireline customer  connections.
     Each of the  Operating  Companies has been  allocated  the necessary  radio
     frequency  spectrum  pursuant to licenses  issued by the Ministry to deploy
     such   wireless    technology.    The   Company's    wired   and   wireless
     telecommunications  networks have been designed to handle enhanced vertical
     services such as CLASS and ISDN.

     Additional Services. The Company currently only provides two types of basic
     services: (i) residential  telephone--general telephone services that allow
     customers to place and receive  telephone  calls  locally,  nationally  and
     internationally;  and (ii)  business  telecommunications--the  same general
     telephone  services that are provided to the residential  telephone  market
     plus Private Brand Exchange ("PBX"), direct, leased line and other enhanced
     services. The Company is employing a flexible network build-out in order to
     provide numerous other services including detailed billing and vertical and
     enhanced services,  up to and including ISDN. Finally,  the Company expects
     to be  able  to use the  basic  network  infrastructure  to  support  other
     telecommunications services such as wired and wireless cable television, if
     it determines  that a market  sufficient to support such services exists in
     the Operating Areas,  has the available  capital and acquires the necessary
     licenses.

     Economies of Scale and Geographic Clusters.  The Company expects to achieve
     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 addition,  some of the Company's Operating Areas are contiguous,
     which is expected to facilitate  the  realization  of certain  economies of
     scale.
                                    -9-
<PAGE>

     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.   The  Company  is  also  exploring   other   potential
     opportunities in other parts of Central and Eastern Europe including Poland
     and the Czech  Republic but, to date,  the Company has no definitive  plans
     for expansion into such areas.

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 offers or intends to offer
its  subscribers  data  transmission,  telex  and  other  value-added  services,
including voice mail, call waiting, call forwarding,  three-way calling,  caller
ID and virtual private network ("VPN") services.

         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 9.0  ($.05)  per  pulse.  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 long distance 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.  Such revenue  sharing  arrangement  is 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%. This  arrangement is
mandated by the  Ministry  and is  predicated  upon the  Ministry's  estimate of
traffic patterns upon the completion of the build-out of the Operating Company's
network. The current effect of this arrangement,  while the Company continues to
upgrade and expand its  telecommunications  networks, is such that the Operating
Companies  receive  approximately  63% of total  measured  service  revenue  and
subscription  fees in the  Operating  Areas.  The Company and the other LTOs are
currently in  negotiations  with the Ministry  and MATAV  regarding  new revenue
sharing  arrangements  which  outcome is expected to be determined by the end of
the third  quarter of 1997 and which the  Company  believes  will result in more
favorable terms for the LTOs.

         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, analog or manual exchange.
                                    -10-
<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 ($182) (plus VAT)
for  residential  customers  and HUF 90,000  ($546)  (plus VAT) for business and
other institutional subscribers (including government  institutions),  which are
the maximum  allowable  fees,  pursuant to a decree of the Ministry.  Similar to
measured  service,  connection  fee caps are  adjusted  annually by the Ministry
based on the Hungarian PPI.  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,  1996,  approximately  1,700  leased  lines  were in  service.  In
addition,  as of December 31,  1996,  the Company had 1,500 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  expects  to  generate   additional   revenues  from  the  provision  of
value-added  services,  including  voice mail,  call waiting,  call  forwarding,
three-way  calling,  caller ID and VPN  services as well as through the sale and
leasing of telephone  equipment.  The Company recently entered into an agreement
with Octel  Communications  Europe,  an  international  voice-mail  vendor which
provides the potential of having a voice-mail box behind every line plus virtual
mail boxes for transient  subscribers,  waiting  subscribers and subscribers who
only want or can afford a message  service.  The  Company  anticipates  that the
voice-mail  systems  will  belong  to the  Company  at the  end of a  three-year
revenue-sharing   arrangement.  The  Company  believes  this  is  a  significant
potential for raising the average per-line  revenues,  since fewer calls will go
unanswered and additional calls will be generated to retrieve messages.

     Pricing

         Maximum  pricing levels are set by the Ministry and  historically  rate
increases have tracked  inflation,  as measured by the Hungarian  Provider Price
Index ("PPI"). In addition to the one-time connection fee (described above), the
Company charges a monthly subscription fee to digital and single-party  exchange
customers of HUF 940 ($5.70) for residential customers and HUF 1,120 ($6.80) for
business   and   other   institutional    subscribers    (including   government
institutions).  For manual exchange customers,  such fees are HUF 80 ($0.49) and
HUF 150 ($0.91).  The Company's  customers are on a one-month  billing  cycle. A
maximum of twice  annually,  the  Ministry  sets the maximum  tariffs  that LTOs
(including  MATAV)  may charge for local  calls and  subscription  fees based on
changes in the Hungarian PPI. 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,  once the Company's  modernized network is fully in
place,  the Company will be able to charge  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 begun allowing its  subscribers to pay connection  fees
on an installment basis and encourages customers to lease their telephones.  The
connection fee is paid in three equal installments,  with one-third payable upon
application, one-third payable upon installation and one-third payable within 90
days after  installation.  The Company  believes that the installment  plan will
result 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 2,300 ($13.95).  Customers can choose
to buy the phone and pay HUF 3,800 ($23.06) or lease the phone and pay a monthly
fee of between HUF 100 ($0.61) and 160 ($0.97). 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 45%, or 42,000, of the company's subscribers as
of December 31, 1996 leased their phones from the Company.

                                    -11-
<PAGE>

     Marketing Strategy

         As the exclusive  provider of basic telephone services in the Operating
Areas,  the Company's  marketing  objective is to create demand for non-cellular
local voice telephone services and attract subscribers by targeting the needs of
various market segments and providing  service and  reliability  based on modern
technology.  To this end,  the  Company  plans to  satisfy  existing  demand and
generate additional demand through effective  distribution and customer service,
as well as advertising. The Company has targeted its market segments as follows:
(i) residential customers; (ii) small businesses and professionals; (iii) medium
and large businesses;  and (iv) government  institutions.  The Company's primary
marketing efforts have been aimed 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
such as data transmission.

         The Company has focused its marketing efforts on informing customers of
available or anticipated  phone service.  The Company  intends to make effective
use  of  advertising  to  educate  Hungarian  consumers  as to the  benefits  of
telephone service and stimulate demand for the Company's services.  To date, the
Company's advertising campaign primarily has been comprised of print,  billboard
and other  cost-effective  media which has  emphasized  the  Company's  separate
identity from MATAV.

         The Company's existing workforce conducts door-to-door sales, primarily
focusing on  residential  customers  in areas where the  Company's  networks are
being  constructed  or are scheduled for  construction.  These sales efforts are
designed  to increase  customer  awareness  and  understanding  of the  services
offered  by the  Company.  Employees  receive a  commission  for each  potential
customer added to the prepaid waiting list as a result of their efforts.

         Most  of  the  Company's   subscriber   base  consists  of  residential
customers.  As of  December  31,  1996,  81%  of  subscribers  were  residential
customers and 19% were businesses and other institutional subscribers (including
government institutions).

     Customer Service

         The Company believes that providing a high level of customer service is
important  to  achieving  its  objective  of  attracting  additional  customers.
Accordingly,  the Company's  primary efforts with regard to customer service are
targeted at reducing the waiting list such that new subscribers  will be able to
receive  a phone  within a short  time of  placing  an order for  service.  This
compares to the  situation  during 1996 where the average wait for phone service
for a new addition to the waiting list was  approximately  12 months and certain
subscribers  had been  waiting for a  telephone  line for in excess of 20 years.
Following  the full  replacement  of the  manual  exchanges  which are in use by
approximately 6,000 of the Company's 93,000 subscribers as of December 31, 1996,
the Company will be able to offer all of its  customers  the  capability  to use
telephone service 24 hours a day 365 days a year.  Currently,  the systems which
are served by manual exchanges are operated under contract by the Hungarian Post
Office and are only operated from 8:00 A.M. to 4:00 P.M.  Monday  through Friday
(except holidays), except in certain larger communities where 24 hour service is
available.  The Company  also  intends to operate a full time  customer  service
center which will be staffed by operators  capable of providing call  completion
assistance,  directory  assistance and assistance in handling  billing and other
service inquiries.  Furthermore, the Company is in the process of implementing a
state of the art billing system which will allow the Company to provide detailed
bills to its existing and future customers, some for the first time. The Company
anticipates  that the 24 hour  customer  service  center  and  detailed  billing
capability will be operational in all of the Operating Areas by the end of 1997.

                                    -12-
<PAGE>

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  420,500  with an  estimated  165,000  residences  and  26,000
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.

         In order to acquire its concession  rights in the Hungarotel  Operating
Area,  the Company paid a fee in the amount of HUF 814.5 million ($5.8  million,
at December 31, 1995  exchange  rates).  In addition,  Hungarotel  spent HUF 2.1
billion ($15.4 million, at December 31, 1995 exchange rates) in order to acquire
MATAV's  existing  40,600  subscribers  and  telecommunications   network.  Upon
consummation  of the MATAV asset  purchase on December  31,  1995,  Hungarotel's
waiting list numbered  34,000.  From January 1, 1996 through  December 31, 1996,
Hungarotel  has spent  approximately  $16.0  million and has added 7,200  access
lines (including pay phones) to its network.  During the second quarter of 1996,
Hungarotel  entered  into  construction  contracts  with  Ericsson  and Fazis to
complete the  build-out of its  telecommunications  network.  As of December 31,
1996,  there were 47,100  subscribers  on  Hungarotel's  waiting  list, of which
33,200  had paid  advance  connection  fees and  13,900  had  not.  The  Company
estimates  that to complete the network  build-out of the  Hungarotel  Operating
Area will  require an  additional  $50.5  million  through the end of 1997.  The
network presently being constructed in the Hungarotel Operating Area utilizes a 
combination of conventional build and wireless local loop technology.

     KNC

         The  Company  holds a 70.0%  interest  in KNC,  and its  strategic  and
financial  partners in KNC are Tele  Danmark  with a 20% interest and the Danish
Fund  with a 4.8%  interest.  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 154,700, with
an  estimated   61,300   residences  and  9,800  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
Austrian 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.

         In order to acquire its  concession  rights in the KNC Operating  Area,
the Company  paid a fee in the amount of HUF 215.0  million  ($2.1  million,  at
November 15, 1994  exchange  rates).  In addition,  KNC spent HUF 548.5  million
($4.6  million,  at March 1, 1995  exchange  rates) in order to acquire  MATAV's
existing 13,100 subscribers and telecommunications network. Upon consummation of
the MATAV asset  purchase on February 28,  1995,  KNC's  waiting  list  numbered
11,200.   From  March  1,  1995  through   December  31,  1996,  KNC  has  spent
approximately  $28.7  million and has added 7,400  access lines  (including  pay
phones) to its network.  As of December 31, 1996, there were 10,800  subscribers
on KNC's waiting list, of which 7,700 had paid advance connection fees and 3,100
had not. The Company  estimates,  that to complete the network  build-out of the
KNC  Operating  Area will require an  additional  $8.8 million by the end of the
second quarter of 1997,  which should add 9,000  subscribers to the network.  In
addition,  KNC has entered into a  construction  contract which provides for the
connection of an additional  16,000  subscribers by December 31, 2001 which will
require an  additional  $8.7 million  after 1997.  The network  presently  being
constructed  in  the  KNC  Operating Area utilizes a combination of conventional
build and wireless local loop technology.

                                    -13-
<PAGE>

      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 48  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
68,300  with an  estimated  23,700  residences  and  1,200  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.

         In order to acquire  its  concession  rights in the  Papatel  Operating
Area,  the Company paid a fee in the amount of HUF 123.8 million ($0.9  million,
at December  31, 1995  exchange  rates).  In addition,  Papatel  spent HUF 347.0
million ($2.5 million,  at December 31, 1995 exchange rates) in order to acquire
MATAV's  existing  3,800  subscribers  and   telecommunications   network.  Upon
consummation of the MATAV asset purchase on December 31, 1995, Papatel's waiting
list numbered  7,500.  From January 1, 1996 through  December 31, 1996,  Papatel
spent  approximately  $16.2  million to complete  its network  build-out,  which
utilizes a combination of conventional  build and wireless loop technology.  The
completion  of the network has  resulted in the  addition of 7,300  access lines
(including pay phones) including substantially all of Papatel's original waiting
list. As of December 31, 1996, there were 2,000 subscribers on Papatel's waiting
list, of which 300 had paid advance  connection  fees and 1,700 had not.  During
the next phase of the development of the Papatel  network,  Papatel will connect
its  waiting  list,  as well as new  subscribers,  to its  network,  and further
develop the network to add capacity to service additional customers.

     Raba-Com

         The Company  holds a 65.9%  interest in  Raba-Com.  Its  strategic  and
financial  partners in Raba-Com  include Tele Danmark with a 20.0%  interest and
the Danish Fund with a 4.8% interest.  Municipalities in the Raba-Com  Operating
Area own the  remaining  9.3%.  The Raba-Com  Operating  Area is comprised of 59
municipalities in Vas County,  which borders Austria and Slovenia.  The Raba-Com
Operating  Area has a  population  of  approximately  69,500,  with an estimated
29,000  residences  and  2,900  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:   Lenda  (the  Hungarian  central  natural  gas
distributor):  Phillips (a Dutch-owned electronics  manufacturer);  EcoPlant (an
Austrian-owned plastics producer); and Saga (a British-owned poultry processor).

         In order to acquire its  concession  rights in the  Raba-Com  Operating
Area,  the Company paid a fee in the amount of HUF 275.0 million ($2.7  million,
at November  15, 1994  exchange  rates).  In addition,  Raba-Com  spent HUF 75.1
million ($0.7  million,  at January 1, 1995 exchange  rates) in order to acquire
MATAV's  existing  2,500  subscribers  and   telecommunications   network.  Upon
consummation of the MATAV asset purchase on January 1, 1995, Raba-Com's waiting
list numbered 2,200.  From January 1, 1995 through  December 31, 1996,  Raba-Com
spent  approximately  $29.9  million to  complete  its network  build-out  which
utilizes a conventional build. The completion of the network has resulted in the
addition  of  11,500  access  lines  (including  pay  phones)  including  all of
Raba-Com's  original  waiting  list.  As of December 31, 1996,  there were 2,600
subscribers on Raba-Com's  waiting list, all of whom had paid advance connection
fees. During the next phase of the development of the Raba-Com network, Raba-Com
will connect its waiting list, as well as new subscribers,  to its network,  and
further develop the network to add capacity to service additional customers.

                                    -14-
<PAGE>

Network Design, Construction and Performance

         The Company is  constructing  a versatile  network which is designed to
incorporate  the more modern  network  infrastructure  purchased  from MATAV and
which  will  be able  to  provide  all  the  technologically  advanced  services
currently  available  in the United  States and Western  Europe.  The  Company's
networks are designed to attain,  at minimum,  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. In addition to its network expansion requirements,
the Company will also replace certain existing  facilities  purchased from MATAV
which  utilize  manually  operated  local  battery and common  battery cord type
switchboards  while retaining  certain analog crossbar  switching  systems.  The
Company  intends to upgrade such analog crossbar  switching  systems through the
installation  of  complementary  digital  equipment which will allow such analog
systems to mimic many of the  features  available  in modern  digital  switching
systems with a minimum of  investment.  The Company plans to replace such analog
crossbar  switching  systems  with  modern  switching  systems  once its network
build-out is relatively  complete and the useful life of such analog switches is
near an end.

     Conventional Network Design.

         In developing  its network  design,  the Company has retained,  or will
retain,  certain  features of the existing  network while  implementing  service
quality  and  redundancy  objectives  on par with  Western  European  and  North
American  digital  network  standards.  Certain of the networks  constructed  or
presently  being  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 will be 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  such as ISDN and  others  may be  provided
across  the  network.  The  Company  believes  that the  flexible  design of the
conventional  networks it is constructing will allow it to readily implement new
technologies and provide enhanced or new services. The Company's switches in its
conventional  networks  will allow it to connect to  networks  operated by other
LTOs or by MATAV in order to route  calls  between  its  subscribers  and  these
networks and to route data (or similar transmissions) to any other network.

     Wireless Network Design

         In certain portions of the Operating Areas, the Company is deploying or
expects to deploy an optical  fiber and wireless  network based upon the Digital
Enhanced  Cordless  Telecommunications  ("DECT")  system  which  utilizes  radio
technology  links to an optical  fiber-based or digital  microwave fixed network
for use within a limited area.  The principal  advantage in deploying a wireless
network lies in the significant reduction in capital expenditure requirements as
compared  to  a  conventional  network  build-out.  In  addition,  use  of  DECT
technology  generally reduces the time and expense of 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 those areas in which the Company is  utilizing or plans to utilize a
wireless  network design,  the Company will deploy fiber optic cable to the node
in the same  fashion  as in a  conventional  network  build-out.  At each  newly
constructed  node,  the Company  will  construct a radio base  station  ("RBS"),
rather than switching to twisted pair copper wire distribution to the home. Each
RBS will have the capacity to provide  service to between 200 and 600 customers.
As  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 the RBS to
which it is attuned.  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 at least the same
grade of service as a conventional  telephone network. In addition, a DECT-based
network is able to provide the same services (e.g., ISDN capability,  voicemail,
call  forwarding,  call barring,  etc.) as will be available  with the Company's
conventional network.

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


                                    [DIAGRAM]







     Networks in the Operating Areas

         The Company believes that the networks in the Operating Areas have been
designed to maximize the use of existing network  infrastructure and to minimize
the overall  cost of new  network  construction.  The  following  discusses  the
development of the telecommunications network in each of the Operating Areas.

         Hungarotel.  The  construction  of the Hungarotel  network began in the
third  quarter of 1996.  Within the  Hungarotel  network,  the Company has begun
utilizing  a  combination  of   conventional   build  and  wireless  local  loop
technology.  The  network  will  utilize  radio  technology  links to an optical
fiber-based  or digital  microwave  fixed network for use within a limited area.
The Company believes that using wireless local loop technology in the Hungarotel
network will result in lower  capital  expenditures  and a shorter  construction
period than a conventional build.

         As of December 31, 1996,  Hungarotel  had 30  kilometers of fiber optic
cable and  47,800  access  lines in service of which  19,700  access  lines were
serviced  by two digital  host  exchanges  which  support  four  remote  digital
exchanges,  23,800  access  lines  which  were  serviced  by three  analog  host
exchanges which support 19 remote analog  exchanges and 4,300 access lines which
were serviced by two manual exchanges (i.e., an operator must place all calls as
the  telephones  connected  to the manual  exchanges  have no keyboard or rotary
dial). There are approximately 817 pay phones within Hungarotel.

                                    -16-
<PAGE>

         The remaining  build-out plan for the Hungarotel  network calls for the
addition  of 570  kilometers  of  fiber  optic  cable,  several  remote  digital
exchanges and digital and analog  wireless local loop  technology.  While all of
the existing manual exchanges will be replaced by the new digital exchanges, the
Company will retain the existing analog  exchanges in order to maximize  certain
tax and other benefits.  The analog exchanges have received software upgrades to
ensure  that they can  provide  the same level of  service,  including  detailed
billing, call waiting, etc., as the digital exchanges.

         Papatel.  The  construction  of the Papatel  network  reconvened in the
second  quarter of 1996,  after the  termination of  construction  in 1995 under
Papatel's prior owners, and was completed in the fourth quarter 1996. Similar to
Hungarotel,  the Company is utilizing a combination  of  conventional  build and
wireless local loop technology within Papatel.

         As of December  31,  1996,  Papatel had 209  kilometers  of fiber optic
cable,  and 11,100 access lines in place which were serviced by one digital host
exchange which supports 16 remote digital exchanges. There are approximately 160
pay phones within Papatel.

         KNC. The  construction  of the KNC network  began in the summer of 1995
and is expected to be completed in the second  quarter of 1997.  Within KNC, the
Company,  similar to  Hungarotel  and  Papatel,  is utilizing a  combination  of
conventional build and wireless local loop technology.  The conventional network
design is based on digital  host and  remotes  with fiber optic rings and copper
feeder and distribution.

         As of December 31, 1996,  KNC had 183  kilometers  of fiber optic cable
and 20,500  access lines in place of which 10,600  access lines were serviced by
one digital host exchange  which  supports 22 remote  digital  exchanges,  9,300
access lines were serviced by eight analog exchanges, and 600 access lines which
were serviced by one manual  exchange.  There are  approximately  486 pay phones
within KNC.

         The remaining build-out plan for the KNC network calls for the addition
of 100 kilometers of fiber optic cable,  several  remote  digital  exchanges and
digital and analog  wireless local loop  technology.  All of the existing manual
exchanges will be replaced by the new digital host exchange,  however the analog
exchanges will remain.  The analog  exchanges  have received a software  upgrade
such that they will be capable of providing the same level of service, including
detailed billing and call waiting as the digital host exchange.

          Raba-Com. The construction of the Raba-Com network began in the summer
of 1995 and was  completed  in the  fourth  quarter  of  1996.  The  Company  is
utilizing a conventional build.

          As of December 31, 1996, Raba-Com had 169 kilometers of fiber optic
cable and 14,000  access lines in place which were  serviced by one digital host
exchange which supports 19 remote digital exchanges.  There are approximately 80
pay phones within Raba-Com.

     Network Construction Costs

         Construction  of the Company's  telecommunications  networks is capital
intensive,  requiring  substantial  investment  for  "network  costs"  including
construction  (trenching  and laying  underground  ducts),  telephony  plant and
network  electronics,   subscriber  electronics,  switching  offices,  land  and
buildings,  computers  and  capitalization  of  pre-operating  costs and  labor.
Construction costs for each of the Operating  Companies will vary depending upon
housing density,  geographical  terrain and the types of underground  conditions
encountered.  In an effort to minimize  the costs of network  construction,  the
Operating  Companies have entered into turnkey contracts with Siemens,  Ericsson
and/or  Fazis,  as described  below.  See "- Network  Design,  Construction  and
Performance -  Networks  in  the  Operating  Areas,"  and  Note  8  of  Notes to
Consolidated  Financial  Statements.  While construction pursuant to the turnkey
contracts will be remunerated on a fixed price basis,  these  contracts  contain
various  incentive and escalation  features which may result in the  requirement
for greater or lesser  capital  expenditures  in order to complete the Company's
network build-out. See also "- Management's Discussion and Analysis of Financial
Condition and Results of Operation - Liquidity and Capital Resources."

                                    -17-
<PAGE>

         To fund its  construction  costs,  the  Company  entered  into  several
agreements  with  Citizens  during  1995 and  1996  pursuant  to which  Citizens
assisted in  providing  $79.2  million of financial  support to the Company.  On
March 29,  1996,  the Company  entered  into a $75.0  million  Secured Term Loan
Credit Facility (the "CNA Credit  Facility")  with Citicorp North America,  Inc.
("CNA"). The Company used the funds from the CNA Credit Facility to, among other
things, repay all the funds advanced or guaranteed by Citizens. The Company then
engaged Citicorp Securities,  Inc. ("CSI") to serve as lead underwriters for the
placement  of  debt  securities  of the  Company.  The  Company  terminated  the
negotiations  of such debt  securities  placement  when it entered into the $170
million  Postabank  Credit  Facility  which enabled the Company to repay the CNA
Credit Facility and fund the remaining  construction costs for the initial phase
of  its  network  expansion  program  in  all of  its  Operating  Areas.  See "-
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operation  - Liquidity  and Capital  Resources,"  "- Certain  Relationships  and
Related  Party  Transactions."  and Notes 6 and 13 of  Notes to  Consolidated
Financial Statements.

         Hungarotel.  Hungarotel has entered into turnkey construction contracts
with Fazis and Ericsson.  The contracts  between Fazis and Hungarotel are for an
aggregate of $51.4 million through December 1997, of which $9.1 million had been
paid as of December 31, 1996.  The contract  between  Ericsson and Hungarotel is
for $15.1  million  through May 1997,  of which $6.9 million had been paid as of
December 31, 1996.  

         Papatel.  The Papatel  build-out of the network was  completed by Fazis
and Ericsson through turnkey construction contracts.  The contract between Fazis
and Papatel was for $13.2 million  through  December 1996, all of which had been
paid as of December 31, 1996. The contract  between Papatel and Ericsson was for
$3.0 million  through  December  1996, all of which had been paid as of December
31, 1996. 

         KNC. KNC has entered into turnkey  construction  contracts with Siemens
and Fazis.  The contractual  arrangements  between Siemens and KNC are for $41.3
million  through  December  1996,  of which  $22.8  million  had been paid as of
December 31, 1996.  Siemens credited $1.7 million to the contract  balance.  The
contract  between  Fazis and KNC is for $1.8 million  payable  through the first
quarter of 1997 of which $1.1 million had been paid as of December 31, 1996. KNC
also paid $3.1 million to a Hungarian engineering firm. 

         Raba-Com.  The  build-out  of the  Raba-Com  network was  completed  by
Siemens through a turnkey construction  contract for $27.3 million, all of which
had  been  paid  as of  December  31,  1996.  Raba-Com  also  paid  a  Hungarian
engineering  firm $2.6  million.  

         Pursuant to the requirements of the network construction contracts, the
Company expects to have approximately 160,000 access lines in service (including
the  replacement of 4,879 manual exchange lines) by the end of 1997. The Company
believes  that, in order to install  these access lines,  it will have built out
the wired switching capacity to service 190,000 households, businesses and other
institutions and the backbone  network  capacity to service 326,000  households,
businesses  and other  institutions.  The access lines  required to be installed
pursuant to the construction contracts were intended to meet demand estimates as
in effect at the time of negotiation of such  contracts.  The Company  currently
expects  demand to exceed  the access  lines  provided  for in the  construction
contracts.  To add  additional  access  lines will  require  additional  capital
expenditures which will be partially offset by the payment of connection fees by
potential  subscribers.  Since the switching  capacity and the backbone networks
will be substantially in place in all of its Operating Areas by the end of 1997,
the Company expects that the incremental costs to connect additional subscribers
will be substantially lower than the capital expenditures to date.

                                    -18-
<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.  Since the Company has
exhibited  substantial  progress to date in the  construction of its networks in
the  Operating  Areas and the Company has  communicated  the reasons for certain
delays in its  construction  to the Ministry,  the Company does not believe that
any material fines will be forthcoming  for 1996. For 1997, the Company  expects
to be in full compliance with the milestones in each of its Operating Areas. See
"-  Regulation  -  Concession  Contracts  - Fines."  Once fully  completed,  the
Company's  networks are expected to have the capacity to provide basic telephone
services to virtually all of the estimated 279,000 homes and 39,900 business and
other potential subscribers (including government institutions) in the Operating
Areas.

     Network Administration

         The Company maintains a network administration center in each Operating
Area which is capable of monitoring  switching  centers and all critical network
operational   parameters  in  each  Operating  Area.  As  digital  features  are
introduced into their  respective  networks,  network  technicians will have the
ability to monitor  the  networks  and  evaluate  and  respond to any  technical
difficulties  in real  time.  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.

Regulation

         In November  1992,  the  Hungarian  Parliament  enacted  the  Hungarian
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  long distance  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.

                                    -19-
<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.  To date, the
Company has reduced its workforce in its Operating Companies by approximately 84
employees since the assumption of employees from MATAV through normal  attrition
and early retirement agreements.

         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
incorporates  build-out  milestones  requiring  a 15.5%  per year  increases  in
installed  access lines. In addition,  as of January 1, 1997, in the case of KNC
and Raba-Com,  and by January 1, 1998,  in the case of  Hungarotel  and Papatel,
each Operating Company must be able to meet 90% of its wait-listed demand within
six months and 98% of such  demand  within  one year.  The  failure to meet such
build-out  milestones may result in the imposition of fines or in the shortening
of the eight year exclusivity period provided by the Concession  Contracts.  The
Company believes that it will comply with these construction  requirements.  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 (Salgotarjan) 0.1%; Raba-Com (Sarvar) 1.5%;  Hungarotel
(Bekescsaba)  2.3%;  Hungarotel  (Oroshaza) 0.3%; and Papatel (Papa) 2.3%. These
amounts are paid annually, in arrears.

         Social and  Educational  Contributions.  In addition  to the  royalties
described above,  Concession  Contracts may also call for social and educational
contributions  based on revenues of the Operating  Company,  excluding  VAT. The
Concession  Contracts for KNC and Raba-Com  require them to contribute  1.5% and
1.0% of such revenues,  respectively, to support social and educational projects
in their Operating Areas. The Concession  Contracts for Hungarotel require it to
pay an amount equal to 10 times the local occupational  excise tax, 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.

                                    -20-
<PAGE>

         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.  Hungarotel  and  Papatel did not
comply with their respective  build-out  requirements  until June 1996, at which
time each entered into an amended  Concession  Contract with the Ministry  which
included revised milestone requirements.  For 1996, Raba-Com and Papatel were in
compliance with their build-out requirements but KNC and Hungarotel were not. As
a result of the Company's  substantial  progress to date with respect to network
construction in all of its Operating  Areas,  communicating  the reasons for any
construction  delays to the Ministry and in light of the Ministry  entering into
amended Concession  Contracts with Hungarotel and Papatel,  the Company believes
that it is unlikely that any material  fines will be imposed for 1996. For 1997,
the Company expects to be in full compliance with its build-out  requirements in
all of its Operating Areas.  However, in the event that fines are imposed by the
Ministry,  such fines would be assessed  based on a maximum of HUF 500.0 million
(approximately  $3.0  million)  in the  case of KNC  and  Raba-Com,  reduced  in
proportion  to the amount of required  construction  that has been  completed in
their 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 interpre-
tation 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.

                                    -21-
<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.  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, compliance with the Hungarian ownership requirements is
presently  expected to 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.

                                    -22-
<PAGE>

     Rate-Setting

         Rates for  telephone  service in Hungary,  including  connection  fees,
local,  domestic and  international  long  distance  rates,  are set by Ministry
decree.  Annual increases are permitted according to a formula tied to increases
in the Hungarian  PPI. The increase in the Hungarian PPI  represents the maximum
amount by which such rates may be increased;  however, actual rate increases may
be less. For the year ended December 31, 1996, the increase in the Hungarian PPI
was approximately 21.8%; however, in the fourth quarter of 1995 the Ministry set
the maximum tariff increase for 1996 at 24.0% effective  January 1, 1996,  after
taking  into  account a  pre-approved  interim  increase of  approximately  3.5%
effective  July 1, 1995.  In the fourth  quarter of 1996,  the  Ministry set the
maximum tariff increase for 1997 at 23.3%.

     Revenue Sharing

         The Ministry is responsible for determining the sharing arrangement for
long  distance  revenues.  Such  arrangement  is  intended  to result in the LTO
receiving  67% of total  measured  service  revenue  for  local,  domestic  long
distance and international long distance calls and subscription fees, with MATAV
receiving  33%.  The current  effect of this  arrangement,  owing in part to the
networks being in the construction  phase, is such that the Operating  Companies
receive  approximately  63% of total measured  service revenue and  subscription
fees.  The Company and the other LTOs are  currently  in  negotiations  with the
Ministry and MATAV regarding new revenue sharing  arrangements  which outcome is
expected  to be  determined  by the end of the  third  quarter  of 1997  and the
Company  believes  will  result  in  more  favorable  terms  for the  LTOs.  See
"- Operations - Services - Measured Services."

     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.

         The Operating  Companies'  radio frequency  licenses do not provide for
expiration;  however, such licenses may be terminated if the frequencies granted
are not utilized by the Operating  Companies  within one year of the granting of
the license, or by March 1997. The Company's  construction  program provided for
the  implementation of some of the DECT-based  portions of the networks by March
15, 1997 so such licenses cannot be terminated.

     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  23.0% of
distributed profits (20.0% for 1997). 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(i) 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.

                                    -23-
<PAGE>

         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 42.5% (39.0% for 1997) 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.

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) 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,  although the
Company  is  aware  of   discussions   among  certain   existing  and  potential
telecommunications  providers regarding the possible formation of joint ventures
or other  alliances  with  respect to such  entry.  The  Company  does not enjoy
exclusivity  rights in respect of the  provision of other  services such as data
transmission or value-added  services such as voicemail and call waiting. In the
event a 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 (as is  presently
permitted),   such   competitor   could,   assuming   it   obtains   the  proper
authorizations,  directly  compete with the Company in the  Operating  Area with
respect to such services.

          The Company also faces competition from the three Hungarian cellular 
providers - Westel 900 GSM Mobil Tavkozlesi  ("Westel 900"), Westel Radiotelefon
Kft.  ("Westel")  and Pannon - who are able to  provide  consumers  with  mobile
telephones  rather than fixed  telephones  (including the  telephones  which the
Company  will  install 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.  Of the cellular  operators,  only Westel 900
and Westel presently offer cellular  telephone  services in all of the Company's
Operating  Areas.  Pannon  offers  cellular  telephone  services  in  all of the
Company's Operating Areas other than a small portion of the Hungarotel Operating
Area.  The airtime and monthly fees charged by the cellular  operators  are much
greater than the fees for comparable services charged by the Company.
         
         In 2002, the exclusivity  period for non-cellular  local voice services
by the Operating  Companies will end as will MATAV's exclusivity with respect to
the provision of domestic and  international  long distance  services.  Prior to
such time,  the Company may consider  adopting  plans to compete in the domestic
and  international  long distance sector,  which may include joint ventures with
other Hungarian or international entities.

Employees

         The Company had a total of  approximately  713 employees,  including 24
expatriates,  at December 31, 1996. 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 on non-salary issues in the first quarter of 1997 and expects to enter
into  collective  bargaining  agreements with such employees on salary issues by
the end of the second quarter of 1997. The Company  considers its relations with
its employees to be satisfactory.

                                    -24-
<PAGE>

                               Item 2. Properties

         The  Company  leases  1,157  square  feet of office  space at 100 First
Stamford Place,  Stamford,  CT at a monthly rental of $1,977.  The lease expires
March 31,  1998.  The Company owns 4,500 square feet 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 next two years.

         In addition, each Operating Company owns or leases the following office
or customer  service space in its respective  Operating Area: KNC owns or leases
52,000 square feet of total space; Raba-Com owns or leases 14,500 square feet of
total space;  Hungarotel  owns or leases 74,150 square feet of total space;  and
Papatel owns 18,900 square feet of total space.  The aggregate  monthly rent for
the leased space is $6,900.


                            Item 3. Legal Proceedings

         Hungarotel is a defendant in a lawsuit  brought in Hungary that alleges
breach of contract. The plaintiff is seeking payment of outstanding invoices and
alleged damages totaling  approximately  HUF 270.0 million  (approximately  $1.6
million).  The next  hearing is expected to be scheduled  for the third  quarter
1997. The Company  believes it has  meritorious  defenses to this claim and does
not believe there will be any material  adverse  effect from the outcome of this
lawsuit.

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

         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 suit noted above; however, the outcome of
individual  matters is not  predictable  with  assurance.  Although the ultimate
resolution  of these  actions  (including  the  action  discussed  above) is not
presently  determinable,  the Company believes that any liability resulting from
the current  pending legal actions  involving the Company,  in excess of amounts
provided  therefor,  will not have a material  adverse  effect on the  Company's
consolidated financial position, results of operations or liquidity.


           Item 4. Submission Of Matters To A Vote Of Security Holders

         No matters were submitted to a vote of the Company's  security  holders
during the quarter ended December 31, 1996.

                                    -25-
<PAGE>

                                     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  (during the period from  December 20, 1995
through December 31, 1996), or the high and low sale prices for the Common Stock
as reported by the Nasdaq  National  Market  (during the period from  January 1,
1995 through December 19, 1995).

                                            High              Low
Quarter Ended:

1995
March 31, 1995 . . . . . . . . . . .         $14              $ 9-3/4
June 30, 1995. . . . . . . . . . . .          15               10-1/8
September 30, 1995 . . . . . . . . .          19               12-1/4
December 31, 1995. . . . . . . . . .          16-3/4            9-1/4

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

         On March 21,  1997,  the closing sale price for the Common Stock on the
Amex was $9-5/8.

Shareholders

         As of March 21, 1997, the Company had 4,189,626  shares of Common Stock
outstanding held by 121 shareholders of record. The Company believes that it has
approximately 1,930 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,  1996,  including  financial  statements  filed  therewith.
Stockholders  wishing a copy may send their  request to the Company at 100 First
Stamford Place, Suite 204, Stamford, CT 06902.

Dividend Policy

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

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

                                    -26-
<PAGE>

                         Item 6. Selected Financial Data

                       HUNGARIAN TELEPHONE AND CABLE CORP.
                                AND SUBSIDIARIES
                      Selected Financial and Operating Data
                (Dollars in Thousands, Except Per Share Amounts)
                                                     For the Year
                                         1996       1995       1994       1993
                                       --------   ---------  --------  ---------
                                                                               
Operating revenues ................... $ 20,910   $  4,070   $  --    $    --

Operating loss ....................... $(20,553)  $(17,829)  $(5,272) $  (1,400)
                                                                      ---------
Net loss ............................. $(54,769)  $(20,024)  $(4,597) $  (1,400)
                                                                      ---------
Net loss per common share ............ $ (13.14)  $  (6.30)  $ (2.13) $    (.80)

At Year-End

Total assets ......................... $156,615   $110,387   $27,577  $   6,894

Long-term debt, excluding current 
installments and minority interests .. $148,472   $ 23,467   $ 2,299  $    --

Total stockholders' (deficit) equity . $(23,790)  $ 15,739   $12,563  $   3,958

                                    -27-
<PAGE>

              Item 7. Management's Discussion And Analysis Of
               Financial Condition And Results Of Operations
             

    Introduction

         The Company 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.  The  Company  has
    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  acquiring the
    operations  comprising  Raba-Com and KNC, the Company's  network upgrade and
    expansion program has resulted in the  modernization of facilities  acquired
    from MATAV and the addition of  approximately  18,900  access lines  through
    December  31, 1996 to the 15,500  access lines  purchased  from MATAV in the
    first  quarter of 1995.  During  1996,  the  Company  continued  its network
    modernization and construction efforts in Raba-Com and KNC, while commencing
    such efforts in Papatel and Hungarotel  which had a combined total of 58,900
    access  lines at December  31,  1996.  The Company  installed  approximately
    29,600 access lines in all of its concession  areas during 1996 and had over
    93,400 access lines in operation at year end 1996.

         Through 1994 to 1996, the Company devoted a substantial  portion of its
    efforts to obtaining concession rights,  negotiating  acquisitions,  raising
    debt and  equity  financing,  assembling  its  current  management  team and
    commencing operations.  As a result, the Company recognized no revenue until
    1995 and  incurred  aggregate  net  losses of  approximately  $81.0  million
    through December 31, 1996.

         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
    requires significant capital expenditures. These expenditures, together with
    associated  operating expenses,  will continue to result 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 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  approximately  33,400  access  lines  through
    December 31, 1996 to the 60,000 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
    waitlisted subscribers base.


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

       Net Revenues

         The company  recorded net telephone  service  revenues of $20.9 million
    for the year ended December 31, 1996 as compared to revenues of $4.1 million
    for the year ended December 31, 1995, an increase of $16.8 million.

                                    -28-
<PAGE>

         Measured service revenues increased $16.7 million from $3.8 million for
    the year  ended  December  31,  1995 to  $20.5  million  for the year  ended
    December  31,  1996.  These  revenues  have been offset by net  interconnect
    charges which  totalled $8.9 million for the year ended December 31, 1996 as
    compared to $1.7 million for the year ended  December 31, 1995,  an increase
    of $7.2  million.  This  increase in net  measured  service  revenues is the
    result of an increase in average  access  lines in service from 13,841 lines
    for the year  ended  December  31,  1995 to 75,864  lines for the year ended
    December 31, 1996.  The principal  reason for this  significant  increase in
    lines was the addition of 44,400 lines in the  Hungarotel  and Papatel areas
    which were  acquired  from MATAV on  December  31,  1995.  Measured  service
    revenues  were also higher due to an  increase in the call tariff  rates for
    the year ended  December 31, 1996 as compared to the year ended December 31,
    1995.

         The Company  recognized  $7.9 million of revenues from  connection  and
    monthly  subscription  fees  during the year ended  December  31,  1996,  as
    compared to $1.6 million for the year ended December 31, 1995. The principal
    reasons for this increase  relate to  subscription  fees from Hungarotel and
    Papatel,  which were not owned by the Company in the prior  period,  and the
    Company's ongoing network construction program in all of the Operating Areas
    which  resulted in the  connection of 29,645  subscribers  in the year ended
    December 31, 1996 as compared to the connection of 3,834  subscribers in the
    year ended  December 31, 1995.  Subscription  fees also  increased  due to a
    34.1%  increase in monthly  Hungarian  Forint  subscription  rates which was
    favorable in relation to the devaluation of the Hungarian  Forint versus the
    U.S. Dollar.

         Other  operating  revenues  increased to $1.4 million in the year ended
    December 31, 1996 as compared to $303  thousand for the year ended  December
    31, 1995. This increase reflects  additional  revenues from the provision of
    direct lines, telephone leasing and telephone sales.


       Operating and Maintenance Expenses

         Operating and maintenance expenses for the year ended December 31, 1996
    increased  $7.1  million,  or 48%,  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 $383  thousand.  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, however, 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 $2.1 million 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
    lines in operation,  including an additional 62,023 average lines in service
    during the year ended  December 31, 1996.  As the Company  proceeds with its
    capital expenditure programs and adds additional access lines in each of the
    Operating  Areas,  depreciation  and  amortization  expenses are expected to
    increase.

                                    -29-
<PAGE>

       Management Fees

         Management  fees pursuant to management  service  agreements  increased
    $2.7 million 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, this was offset by the expiration in the third quarter of 1996
    of the management  services  agreement between the Company and Tele Danmark.
    See Note 13 of Notes to Consolidated Financial Statements.

       Asset Write-downs

         Asset  write-downs  increased  from  $0.6  million  for the year  ended
    December 31, 1995 to $2.0 million for the year ended December 31, 1996. 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 12(a) of Notes to Consolidated Financial Statements.

       Loss from Operations

         Loss from  operations  increased  $2.8 million 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.


       Foreign Exchange Losses

         Foreign  exchange  losses  increased $2.2 million from $4.1 million for
    the year ended December 31, 1995 to $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 Company
    has  incurred  debt and  other  obligations  which are  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.  It is the policy of the National
    Bank of Hungary to  continue  to devalue  the  Hungarian  Forint in order to
    ensure its  relative  competitiveness.  The  National  Bank of  Hungary  has
    announced  that it will  manage  the  devaluation  of the  Hungarian  Forint
    against a basket of major  currencies  at a 1.2% rate per  month.  Since the
    substantial  portion of the liabilities  within the operating  companies are
    now  denominated  in the  Hungarian  Forint,  the  Company  expects to incur
    reduced foreign currency losses in the future.

       Interest Expense

         Interest expense  increased $21.5 million 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.

         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 13 of Notes to Consolidated Financial Statements.

                                    -30-
<PAGE>

       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.

       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 at 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 13 of Notes to
    Consolidated Financial Statements.

       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.

    Comparison of Year Ended December 31, 1995 to Year Ended December 31, 1994

       Net Revenue

         Measured  service  revenue  increased  from  zero  for the  year  ended
    December  31, 1994 to $3.8  million for the year ended  December  31,  1995,
    which was  partially  offset by net  interconnect  charges of $1.7  million.
    Measured  service  revenue  increased  as the  Company  commenced  providing
    services  in the  Raba-Com  Operating  Area in  January  1995 and in the KNC
    Operating  Area in  March  1995.  At the time of the  acquisitions  of these
    Operating  Areas,  Raba-Com  and  KNC  had  2,500  and  13,100  subscribers,
    respectively.

         The Company  recognized  approximately $1.6 million in subscription and
    connection revenues for the year ended December 31, 1995 compared to no such
    revenue in 1994.  The increase  was due to the  Company's  acquisition  from
    MATAV  of the  Raba-Com  Operating  Area  on  January  1,  1995  and the KNC
    Operating Area on March 1, 1995.

         Other revenue  increased from zero for the year ended December 31, 1994
    to $0.3  million  for the year ended  December  31,  1995.  Other  telephone
    services  revenues were primarily derived from the provision of direct lines
    and telephone sales and leasing.

         As a result,  the Company recorded net revenue of $4.1 million in 1995,
    whereas  the  Company  generated  no  revenue  in  1994  as it was  still  a
    development stage enterprise.

                                    -31-
<PAGE>

       Operating and Maintenance Expenses

         Operating and  maintenance  expenses  increased $12.0 million from $2.9
    million  in 1994 to $14.9  million  in 1995.  The  largest  portion  of this
    increase,  aggregating  $6.4  million,  was  non-cash  compensation  expense
    incurred as a result of a reduction in exercise  price and  acceleration  of
    vesting of stock options  previously  granted to certain former officers and
    directors of the  Company.  The  remainder  of the  increase  was  primarily
    attributable  to an  increase  in salary and wages  expense  as the  Company
    increased  its  supervisory  staff  pursuant to its plan to  accelerate  the
    build-out  of its  networks  and to an increase in legal fees as a result of
    work on the  acquisitions  of Papatel and  Hungarotel.  On a per line basis,
    operating and  maintenance  expenses  averaged  $620  (exclusive of non-cash
    compensation) for the year ended December 31, 1995.

       Depreciation and Amortization

         Depreciation and amortization  charges increased $1.8 million from $0.4
    million  in 1994  to  $2.2  million  in  1995.  The  increase  was  entirely
    attributable to commencement of the Company's operations in the Raba-Com and
    KNC Operating Areas.

       Management Fees

         Management  fees  increased  $3.4  million from $0.8 million in 1994 to
    $4.2 million in 1995. Such fees represent  contractual  amounts paid to Tele
    Danmark and Citizens in respect of assistance  provided by both Tele Danmark
    and  Citizens  pursuant  to various  agreements,  including  the  Management
    Services  Agreement.  Of this amount, Tele Danmark received $1.8 million for
    services  provided with respect to Raba-Com and KNC while Citizens  received
    $2.4 million,  including  reimbursable costs, for providing the Company with
    significant financial services and other assistance.

       Asset Writedowns

         Asset  writedowns  decreased  from  $1.2  million  for the  year  ended
    December 31, 1994 to $0.6 million for the year ended  December 31, 1995, due
    to the  writedown  in the  carrying  value  of  the  Company's  nonoperating
    subsidiaries  and  investments in 1994 and a further  writedown to recognize
    realizable value in 1995.

       Loss from Operations

         Loss from operations  increased $12.6 million from $5.2 million in 1994
    to $17.8  million in 1995.  The  principal  reasons for the increase in loss
    from operations included the increases in non-cash  compensation expense and
    depreciation and amortization charges described above.

       Foreign Exchange Losses

         Foreign  exchange  losses  increased  $3.7 million from $0.4 million in
    1994 to $4.1 million in 1995. Such foreign exchange losses resulted from the
    devaluation of the Hungarian  Forint  against those  currencies in which the
    Company has  incurred  debt and other  obligations  as it acquired  existing
    access  lines  and  commenced  the  construction  of  its  telecommunication
    networks. During 1995, the Hungarian Forint devalued 26.0% against the U.S.
    Dollar.

       Interest Expense

         Interest  expense  increased  $1.5 million from $0.2 million in 1994 to
    $1.7 million in 1995. The increase in interest  expense is  attributable  to
    higher  average  debt  levels  in 1995 as  compared  to 1994 as the  Company
    incurred  indebtedness  in order to  acquire  existing  access  lines and to
    commence the construction of its  telecommunication  network and provide for
    working capital and other requirements.

       Interest Income

         Interest  income  increased  $0.4  million to $1.0 million for the year
    ended  December 31, 1995 from $0.6  million for the year ended  December 31,
    1994 primarily due to higher average cash balances in 1995.

                                    -32-
<PAGE>

       Other Income (Expense), Net

         Other  income  (expense),  net,  decreased  by $0.5  million  from $0.2
    million for the year ended  December 31, 1994 to ($0.3) million for the year
    ended  December  31,  1995  and  consisted  primarily  of  nonoperating  and
    ancillary expenses.

       Net Loss

         As a result of the factors  discussed  above,  net loss increased $15.4
    million to $20.0  million  for the year ended  December  31,  1995 from $4.6
    million for the year ended December 31, 1994.

    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  Credit  Facility  to repay  all the  funds  advanced  or
    guaranteed  by  Citizens  and  Chemical  Bank.  As of such  date,  all  loan
    agreements with Citizens and Chemical Bank were terminated.  Accordingly, in
    April 1996, the Company  incurred a non-cash  charge of  approximately  $8.2
    million  representing  the remaining  unamortized  deferred  financing costs
    pertaining to the loan agreements with Citizens.

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

         On October 15, 1996,  the company and its  subsidiaries  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 may be 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.

         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,  the
    Company and HTCC Consulting  entered into a Security  Agreement whereby they
    pledged,  subject to certain consents,  their respective ownership interests
    in each subsidiary as collateral.

                                    -33-
<PAGE>

         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 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 will be  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 will be
    used to complete  construction of its  telecommunication  networks,  provide
    additional  working  capital,  and  refinance or repay other  existing  debt
    obligations.  As of December  31,  1996 the Company had  borrowed a total of
    $116 million under the Postabank Credit Facility.

         As a result of entering into the Postabank Credit Facility, the Company
    terminated  all loan  agreements  with Citicorp in addition to the Company's
    proposed private placement of debt securities.

         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
    will be provided by the contractor for $45.0 million of the contract amount.
    The  financing  agreement  requires  repayment in 20 quarterly  installments
    commencing  on March 31,  1998,  with final  payment due  December 31, 2002.
    Interest will be 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%. Interest payments may be deferred until December 31,
    1997.

         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 has
    received approximately $0.7 million of 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 used in operating  activities  increased to $35.8  million for
    the year ended December 31, 1996 compared to $0.5 million for the year ended
    December 31, 1995.  For the year ended  December 31, 1996,  the Company used
    $56.4  million  in  investing  activities,   which  was  used  to  fund  the
    construction of the Company's telecommunications networks, compared to $53.2
    million in  investing  activities  for the year  ended  December  31,  1995.
    Financing  activities  provided net cash of $89.2  million and $64.3 million
    for the years ended December 31, 1996 and 1995, respectively.

         The Company  anticipates  that the capital  expenditures  necessary  to
    complete the  modernization  and  construction  of its networks will require
    approximately  $59.3 million  through the end of 1997 and an additional $8.7
    million  after 1997.  Although the company  expects that  proceeds  from the
    Postabank Credit Facility,  together with vendor financing, other borrowings
    and  internally  generated  funds  will be  sufficient  to meet its  capital
    requirements  under  existing  construction  contracts  and working  capital
    needs,  funding for the Company's  future  capital  requirements  to finance
    possible  acquisitions or other start-up  businesses may include the sale of
    equity or debt of HTCC 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.

                                    -34-
<PAGE>

         In order to meet its financial  obligations incurred in connection with
    the acquisition and construction of its  telecommunications  networks and to
    meet ongoing  operational  requirements  and working  capital  needs,  it is
    necessary for the Company to increase its operating cash flows.  The Company
    believes  that there will be  sufficient  customers in its  operating  areas
    willing  and  able to pay for  telecommunications  services.  The  Company's
    ability to generate  revenues  sufficient  to meet its  long-term  financing
    obligations and operating and other expenses will be dependent  primarily on
    the Company's ability to meet the  telecommunications  needs of its existing
    and  potential  subscribers.  There can be no assurance  that the  Company's
    operations  will  achieve  sufficient  cash flows  necessary  to service its
    long-term financing obligations,  or that the Company will be able to obtain
    new financing  arrangements or raise new equity on  commercially  reasonable
    terms adequate to meet its operational needs and payment obligations.

    Inflation and Foreign Currency

         For the  year  ended  December  31,  1996,  inflation  in  Hungary  was
    approximately  23.6% on an annualized basis. It is the stated policy goal of
    the Hungarian government to keep inflation from exceeding  approximately 20%
    for the year.

         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 are reflected in a component
    of stockholders' equity.

         While the Company has the ability to increase the prices it charges for
    its services  commensurate  with  increases in the Hungarian  Producer Price
    Index ("PPI") 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  PPI 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.


                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.

                                    -35-
<PAGE>

         Item 9. Changes In And  Disagreements  With  Accountants  On 
                       Accounting And Financial Disclosure

         Effective July 1, 1995, the Board of Directors of the Company  selected
KPMG Peat  Marwick LLP as its new  independent  auditor.  BDO  Seidman,  LLP had
served as the Company's  independent  auditor until that time.  The Company made
the change  because KPMG Peat Marwick LLP has an auditing  staff in the Republic
of Hungary,  while BDO Seidman,  LLP does not. The Company  believes that such a
local  auditing  presence in Hungary  will serve the Company  better  during its
anticipated  growth  period.  The Board of  Directors  approved  the decision to
change  public  accountants  based on the  reasons  stated  above.  The Board of
Directors did not dismiss BDO Seidman,  LLP, nor did BDO Seidman,  LLP resign or
decline  to serve if  reappointed.  None of BDO  Seidman,  LLP's  reports on the
financial  statements for any year contained an adverse opinion or disclaimer of
opinion,  or was  qualified  or  modified  as to  uncertainty,  audit  scope  or
accounting  principle.  There were no disagreements with BDO Seidman, LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure in connection  with the audits of the Company at any
time.


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

                         Item 11. Executive Compensation

         There is  incorporated  in this Item 11 by  reference  the  information
appearing under the caption "Election of Directors" in the Company's  definitive
proxy  statement for the 1997 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 1997 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 Party 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 1997 Annual Meeting of  Stockholders,  a copy
of which  will be filed not later  than 120 days  after the close of the  fiscal
year.

                                    -36-
<PAGE>

                                     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.

         (a)(3)   List of Exhibits
                                                              Reference to
                                                              Prior Filing
Exhibit                                                       or Exhibit Number 
Number                     Description                        Attached Hereto
               
 2      Plan of acquisition, reorganization, arrangement,
        liquidation or succession                                          None
 3(i)   Certificate of Incorporation of the Registrant, 
        filed March 23, 1992                                               (1)
 3(ii)  By-laws of the Registrant                                          (1)
 4      Instruments defining the rights of security holders, 
        including indentures                                               None
 9      Voting trust agreement                                             None
10      Material contracts:
10.1    Employment Agreement between the Registrant and Frank R. Cohen     (1)
10.2    1992 Incentive Stock Option Plan of the Registrant                 (2)
10.3    Decision by the Ministry of Transportation, Telecommunications
        and Water Management of the Republic of Hungary to the 
        application for the establishment of a telecommunications 
        network and service provision and the English translation 
        of the same                                                        (1)
10.4    Subscription Agreement between the Registrant and private 
        placement investors containing registration rights                 (1)
10.5    Sharing Agreement with Hungarian Teleconstruct Corp. 
        relating to 90 West Street Office space                            (3)
10.6    Form of Concession Agreement                                       (4)
10.7    Concession Agreement for Raba-Com Rt.                              (5)
10.8    Concession Agreement for Kelet-Nograd Com Rt.                      (5)
10.9    Joint Venture and Management Agreements with Telecom Denmark A/S
        as to Raba-Com Rt.                                                 (6)
10.10   Joint Venture and Management Agreements with Telecom Denmark A/S
        as to Kelet-Nograd Com Rt.                                         (6)
10.11   Settlement Agreement between Bell Canada International, Inc. and
        the Registrant                                                     (6)
10.12   Equipment supply contracts between Siemens Telefungyar Kft. and
        Raba-Com and Kelet-Nograd Com Rt.                                  (6)
10.13   Summary of the terms of Raba-Com Rt. agreement to acquire
        telephone lines from Matav                                         (7)
10.14   Summary of the terms of Kelet-Nograd Com Rt. agreement to acquire
        telephone lines from Matav                                         (7)
10.15   Turnkey construction contracts between Siemens and Raba-Com Rt.
        and Kelet-Nograd Com Rt.                                           (7)
10.16   Master Agreement, dated May 31, 1995, between the Registrant and
        CU CapitalCorp.                                                    (8)
10.17   Warrant, dated May 31, 1995, granted by the Registrant to
        CU CapitalCorp.                                                    (8)
10.18   Stock Option Agreement, dated May 31, 1995, between the Registrant
        and CU CapitalCorp.                                                (8)
10.19   Registration Agreement, dated May 31, 1995, between the Registrant
        and CU CapitalCorp.                                                (8)
10.20   Management Services Agreement, dated May 31, 1995, between the
        Registrant and Citizens International Management Services Company  (8)
10.21   Stock Purchase Agreement, dated as of August 31, 1995, between the
        Registrant, Alcatel Austria AG, US Telecom East, Inc., and Central
        Euro Telekom, Inc.                                                 (9)


                                    -37-
<PAGE>
                                                              Reference to
                                                              Prior Filing
Exhibit                                                       or Exhibit Number 
Number                     Description                        Attached Hereto
                                            
                                                                        
10.22   Agreement to Amend and Restate, dated September 28, 1995, between
        the Registrant and CU CapitalCorp.                                 (10)
10.23   Second Stock Option Agreement, dated September 28, 1995, between
        the Registrant and CU CapitalCorp.                                 (10)
10.24   First Amendment to Management Services Agreement, dated September
        28, 1995, between the Registrant and Citizens International
        Management Services Company                                        (10)
10.25   Second Agreement to Amend and Restate, dated October 30, 1995,
        between the Registrant and CU CapitalCorp.                         (11)
10.26   Amended and Restated Loan Agreement, dated October 30, 1995,
        between the Registrant and CU CapitalCorp. (which includes the 
        form of the Amended and Restated Promissory Note as Exhibit I 
        thereto)                                                           (11)
10.27   Second Amended and Restated Pledge Agreement, dated October 30, 
        1995, between the Registrant and CU CapitalCorp.                   (11)
10.28   Employment Agreement dated November 29, 1994 between the 
        Registrant and Robert Genova                                       (12)
10.29   Employment Agreement dated November 29, 1994 between the 
        Registrant and Frank R. Cohen                                      (12)
10.30   Concession Agreement dated May 10, 1994 between the Ministry of
        Transportation, Telecommunications and Water Management of the
        Republic of Hungary and Raba-Com Rt.                               (13)
10.31   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.                       (13)
10.32   Loan Agreement between the Registrant and Chemical Bank dated
        November 28, 1995, as amended                                      (14)
10.33   Guaranty of CU CapitalCorp. dated as of December 1, 1995 in favor
        of Chemical Bank with respect to the Loan Agreement dated November
        28, 1995, as amended                                               (14)
10.34   Basic Contract for Takeover of Public Telephone Service in the
        Bekescsaba and Oroshaza Primary Region dated December 30, 1995
        between Hungarotel and Matav                                       (14)
10.35   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                                                              (14)
10.36   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                                               (14)
10.37   Agreement on the Taking Over of Public Telecommunication Services
        in Bekescsaba and Oroshaza Primary Region dated December 30, 
        1995 between Hungarotel and Matav                                  (14)
10.38   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                                  (14)
10.39   Network Agreement dated December 30, 1995 between Hungarotel and
        Matav                                                              (14)
10.40   Agreement to Enter Into a Security Agreement between the 
        Registrant and Matav dated December 30, 1995                       (14)

                                    -38-
<PAGE>

                                                              Reference to
                                                              Prior Filing
Exhibit                                                       or Exhibit Number 
Number                     Description                        Attached Hereto
   
10.41   Guaranty of the Registrant dated December 30, 1995 in favor 
        of Matav with respect to Hungarotel                                (14)
10.42   Declaration of Matav with respect to Hungarotel                    (14)
10.43   Basic Contract for Taking Over of Public Telephone Services in
        the Papa Primary Region dated December 30, 1995 between Papatel 
        and Matav                                                          (14)
10.44   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                        (14)
10.45   Agreement on the Continuous Employment of Matav Employees 
        providing Public Telephone Services in the Papa Primary Region 
        dated December 30, 1995 between Papatel and Matav                  (14)
10.46   Agreement on the Taking Over of Public Telecommunication Services
        in the Papa Primary Region dated December 30, 1995 between 
        Papatel and Matav                                                  (14)
10.47   Agreement on the Regulation of Rights and Obligations from 
        Pending Contracts concerning the Public Telephone Services 
        in the Papa Primary Region dated December 30, 1995 between 
        Papatel and Matav                                                  (14)
10.48   Network Agreement dated December 30, 1995 between Papatel and 
        Matav                                                              (14)
10.49   Security Agreement between the Registrant, Matav, ABN AMRO Bank
        Rt. and Papatel, in favor of Matav                                 (14)
10.50   Guaranty of the Registrant dated December 30, 1995 in favor of
        Matav with respect to Papatel                                      (14)
10.51   Third Agreement to Amend and Restate, dated February 26, 1996, 
        between the Registrant and CUCC                                    (15)
10.52   Second Loan Agreement, dated February 26, 1996, between the 
        Registrant and CUCC (including form of the Second Promissory 
        Note as Exhibit I thereto)                                         (15)
10.53   First Amendment to the Second Amended and Restated Pledge
        Agreement, dated February 26, 1996, between the Registrant 
        and CUCC                                                           (15)
10.54   First Amendment to the Amended and Restated Loan Agreement, 
        dated February 26, 1996, between the Registrant and CUCC           (15)
10.55   Second Amendment to the Management Services Agreement, dated
        February 26, 1996, between the Registrant and CIMS                 (15)
10.56   Employment Agreement dated September 12, 1995 between the 
        Registrant and Robert Genova                                       (18)
10.57   Employment Agreement dated September 12, 1995 between the 
        Registrant and Frank R. Cohen                                      (18)
10.58   Employment Agreement dated December 14, 1995 between the 
        Registrant and James G. Morrison                                   (18)
10.59   Employment Agreement dated December 14, 1995 between the
        Registrant and Andrew E. Nicholson                                 (18)
10.60   Secured Term Loan Credit Facility between the Registrant and 
        Citicorp North America, Inc. et al. Dated as of March 29, 1996     (19)
10.61   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                              (19)
10.62   Termination and Release Agreement dated as of July 26, 1996 
        between the Registrant and Robert Genova                           (20)

                                    -39-
<PAGE>

                                                              Reference to
                                                              Prior Filing
Exhibit                                                       or Exhibit Number 
Number                     Description                        Attached Hereto
               
10.63   Consulting Agreement dated as of July 26, 1996 between the 
        Registrant and Robert Genova                                       (20)
10.64   Noncompetition Agreement dated as of July 26, 1996 between the
        Registrant and Robert Genova                                       (20)
10.65   Irrevocable Proxy dated July 26, 1996 executed by Robert Genova 
        appointing Hungarian Telephone and Cable Corp. as his proxy        (20)
10.66   Termination and Release Agreement dated as of July 26, 1996 
        between the Registrant and Frank R. Cohen                          (20)
10.67   Consulting Agreement dated as of July 26, 1996 between the 
        Registrant and Frank R. Cohen                                      (20)
10.68   Noncompetition Agreement dated as of July 26, 1996 between 
        the Registrant and Frank R. Cohen                                  (20)
10.69   Irrevocable Proxy dated July 26, 1996 executed by Frank R. Cohen
        appointing Hungarian Telephone and Cable Corp. as his proxy        (20)
10.70   Termination and Release Agreement dated as of July 26, 1996 
        between the Registrant and Donald K. Roberton                      (20)
10.71   Consulting Agreement dated as of July 26, 1996 between the 
        Registrant and Donald K. Roberton                                  (20)
10.72   Noncompetition Agreement dated as of July 26, 1996 between 
        the Registrant and Donald K. Roberton                              (20)
10.73   Irrevocable Proxy dated July 26, 1996 executed by Donald K. 
        Roberton appointing Hungarian Telephone and Cable Corp. as his 
        proxy                                                              (20)
10.74   English translation of Construction Contract between Papa es 
        Tersege Telefon Koncesszios Rt. and Fazis Telecommunications 
        System Design and Construction Corporation dated May 10, 1996      (21)
10.75   English translation of Construction Contract between Hungarotel
        Tavkozlesi Rt. and Ericsson Kft. dated May 17, 1996. (as amended)  (24)
10.76   English translation of Construction Contract between Papa es Tersege
        Telefon Koncesszios Rt. and Ericsson Kft. dated May 31, 1996       (21)
10.77   English translation of Construction Contract between Hungarotel 
        Tavkozlesi Rt. and Fazis Telecommunications System Design and 
        Construction Corporation dated June 28, 1996                       (21)
10.78   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                                (21)
10.79   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)                                         (21)
10.80   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)                                       (21)
10.81   Amended and Restated Employment Agreement dated as of October 17, 
        1996 between the Registrant and James G. Morrison                  (22)
10.82   Amended and Restated Employment Agreement dated as of October 17,
        1996 between the Registrant and Andrew E. Nicholson                (22)

                                    -40-
<PAGE>


                                                              Reference to
                                                              Prior Filing
Exhibit                                                       or Exhibit Number 
Number                     Description                        Attached Hereto
               
                                                                   
10.83   Amended and Restated Employment Agreement dated as of 
        October 17, 1996 between the Registrant and Daniel R. Vaughn       (22)
10.84   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                                                (23)
10.85   Form of Loan Agreement entered into as of October 15, 1996 among
        Postabank Rt., as Lender, the Registrant, as Guarantor, and each
        Subsidiary, as Borrower                                            (23)
10.86   Form of Mortgage and Pledge Agreement Securing Bank Loan 
        entered into as of October 15, 1996 between Postabank Rt. and 
        each Subsidiary                                                    (23)
10.87   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                                                           (23)
10.88   First Amendment to Warrant between the Registrant and CU
        CapitalCorp. dated as of October 18,1996                           (23)
10.89   First Amendment to Stock Option Agreement between the Registrant
        and CU CapitalCorp. dated as of October 18, 1996                   (23)
10.90   Third Stock Option between the Registrant and CU CapitalCorp
        dated as of October 18, 1996                                       (23)
10.91   Non-Employee Director Stock Option Plan dated as of February 6,
        1997                                                              10.91
10.92   Amended and Restated Employment Agreement Between the Registrant
        and Richard P. Halka dated as of January 9, 1997                  10.92
10.93   Stock Option Agreement Between the Registrant and James G.
        Morrison dated as of March 13, 1997                               10.93
10.94   Stock Option Agreement Between the Registrant and Andrew E.
        Nicholson dated as of March 13, 1997                              10.94
10.95   Stock Option Agreement Between the Registrant and Daniel R.
        Vaughn dated as of March 13, 1997                                 10.95
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                          (16)
18      Letter re change in accounting principles                          None
21      Subsidiaries of the Registrant                                     (21)
22      Published report regarding matters submitted to vote of security
        holders                                                    Not required
23      Consents of experts and counsel                            Not required
23.1    Consent of KPMG Peat Marwick LLP, certified public accountants     23.1
23.2    Consent of BDO Seidman, LLP, certified public accountants          23.2
24      Power of Attorney                                          Not required
27.1    Financial Data Schedule                                            27.1
28      Information from reports furnished to state insurance 
        regulatory authorities                                     Not required
99.1    Press Release issued by the Registrant on May 15, 1995              (8)
99.2    Press Release issued by the Registrant on August 3, 1995            (9)
99.3    Press Release issued by the Registrant on September 5, 1995        (17)
99.4    Press Release dated July 29, 1996                                  (20)
99.5    Press Release dated October 16, 1996                               (23)
------------

                                    -41-
<PAGE>

(1) Incorporated herein by reference to the Registrant's  Registration Statement
on Form SB-2 dated October 20, 1992, as amended (Registration No. 33-53582-NY as
amended).  
(2)  Incorporated  herein by  reference  to the  Registrant's  definitive  proxy
statement  on  Schedule  14A for the  Annual  Meeting  of  Stockholders  held on
September 14, 1994.
(3) Incorporated herein by reference to the Registrant's  Current Report on Form
8-K for May 4, 1994. 
(4) Incorporated herein by reference to the Registrant's  Current Report on Form
8-K for February 17, 1994.
(5)  Incorporated  herein by reference to the  Registrant's  Form 10-KSB for the
year ended December 31, 1993.
(6) Incorporated herein by reference to the Registrant's  Registration Statement
on Form SB-2 dated October 27, 1994, as amended (Registration No. 33-80676). 
(7)  Incorporated  herein by reference to the  Registrant's  Form 10-KSB for the
year ended December 31, 1994.
(8) Incorporated herein by reference to the Registrant's  Current Report on Form
8-K for May 31, 1995.
(9) Incorporated herein by reference to the Registrant's  Current Report on Form
8-K for August 31, 1995.
(10) Incorporated herein by reference to the Registrant's Current Report on Form
8-K for September 28, 1995.
(11) Incorporated herein by reference to the Registrant's Current Report on Form
8-K for October 30, 1995.
(12)  Incorporated  herein by reference to the Registrant's  Form 10-QSB for the
quarter ended June 30, 1995.
(13) Incorporated herein by reference to the Registrant's Current Report on Form
8-K for February 28, 1994.
(14) Incorporated herein by reference to the Registrant's Current Report on Form
8-K for December 30, 1995.
(15) Incorporated herein by reference to the Registrant's Current Report on Form
8-K for February 26, 1996.
(16) Incorporated herein by reference to the Registrant's Current Report on Form
8-K for June 16, 1995.
(17) Incorporated herein by reference to the Registrant's Current Report on Form
8-K for October 30, 1995.
(18) Incorporated herein by reference to the Registrant's Form 10-K for the year
ended December 31, 1995.
(19)  Incorporated  herein by  reference to the  Registrant's  Form 10-Q for the
quarter ended March 31, 1996.
(20) Incorporated herein by reference to the Registrant's Current Report on Form
8-K for July 26, 1996.
(21)  Incorporated  herein by  reference to the  Registrant's  Form 10-Q for the
quarter ended June 30, 1996.
(22)  Incorporated  herein by  reference to the  Registrant's  Form S-8 filed on
October 18, 1996.
(23) Incorporated herein by reference to the Registrant's Current Report on Form
8-K for October 15, 1996.
(24)  Incorporated  herein by  reference to the  Registrant's  Form 10-Q for the
quarter ended September 30, 1996.
  
         (b)      Reports on Form 8-K

         On October 24, 1996, the Registrant  filed a Current Report on Form 8-K
for the  event on  October  15,  1996.  On such  date,  the  Registrant  and its
subsidiaries entered into a $170 million 10-year  Multi-Currency Credit Facility
with Postabank Rt., a Hungarian  commercial bank. In connection with such credit
facility,  the Registrant  also entered into certain  agreements with CU Capital
Corp., a Delaware corporation ("CUCC") and a wholly-owned subsidiary of Citizens
Utilities Company pursuant to which the Registrant,  in consideration of certain
financial  support  provided by CUCC,  (i)  extended to  September  12, 2000 the
exercise  period of a Warrant  and  certain  stock  options  held by CUCC,  (ii)
granted CUCC the option to purchase an additional 875,850 shares of Common Stock
at an exercise price of $12.75 and (iii) paid CUCC $750,000.

                                    -42-
<PAGE>

                                  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 27, 1997.

                                  HUNGARIAN TELEPHONE AND CABLE CORP.
                                  (Registrant)


                                  By /s/Richard P. Halka
                                     Richard P. Halka
                                     (Controller/Duly Authorized Representative)

         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 27, 1997.

Signature/Name                         Title


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


/s/ Richard P. Halka                   Controller (Principal Accounting Officer)
Richard P. Halka


/s/ Andrew E. Nicholson                Senior Vice President - Finance
Andrew E. Nicholson                    (Principal Financial Officer)


/s/ David A. Finley                    Director
David A. Finley


/s/ Warren B. French, Jr.              Director
Warren B. French, Jr.


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


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


/s/ Ronald E. Spears                   Director
Ronald E. Spears


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


                                    -43-
<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 Auditors' Reports................F-2 to F-3        
         Consolidated Balance Sheets..................F-4        
         Consolidated Statements of Operations........F-5        
         Consolidated Statements of Stockholders' 
           (Deficit) Equity...........................F-6        
         Consolidated Statements of Cash Flows........F-7        
         Notes to Consolidated Financial Statements...F-8 to F-27     


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, 1996 and 1995, and
the related  consolidated  statements  of  operations,  stockholders'  (deficit)
equity and cash flows for the years then ended.  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, 1996 and 1995,  and the
results  of their  operations  and their  cash flows for the years then ended in
conformity with generally accepted accounting principles.


                                                       KPMG PEAT MARWICK LLP



New York, New York
March 21, 1997                                         

                                     F-2
<PAGE>


 
             Report of Independent  Certified Public Accountants


Board of Directors 
Hungarian Telephone  and  Cable  Corp.  

We  have  audited  the  accompanying   consolidated  statements  of  operations,
stockholders'  equity, and cash flows of Hungarian Telephone and Cable Corp. and
subsidiaries  for the year ended December 31, 1994.  These financial  statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on these 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the results of operations and cash flows of
Hungarian Telephone and Cable Corp. and subsidiaries for the year ended December
31, 1994, in conformity with generally accepted accounting principles.


BDO Seidman, LLP


New York, New York

March 27, 1997


                                     F-3
<PAGE>


          HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                      Consolidated Balance Sheets
                      December  31, 1996 and 1995
                   (In thousands, except share data)
<TABLE>
<CAPTION>


    Assets                                         1996              1995
    ------                                         -----             ----
<S>                                               <C>              <C>    

Current assets:                               
    Cash and cash equivalents                 $    15,876            16,192
    Restricted cash                                 6,092             1,757
    Accounts receivable, net of allowance
       of $123 in 1996, and $0 in 1995              4,575             1,399
    VAT receivable, net                             5,377             4,432
    Prepayments and other current assets            2,028             1,729
                                                ---------         ---------

       Total current assets                        33,948            25,509

Net property, plant and equipment                  82,012            54,222
Goodwill and intangibles, net of accumulated
    amortization of $1,178 in 1996 and $485
    in 1995                                        17,374            19,768
Other assets                                       11,497             6,570
Construction deposits                              11,784             4,318
                                                ---------         ---------
Total assets                                  $   156,615           110,387
                                                 ========          ========

    Liabilities and Stockholders'
    (Deficit) Equity

Current liabilities:
    Current instalments of long-term debt     $       120             9,699
    Short term loans                                                 33,982
    Accounts payable                               17,777             8,835
    Advance subscriber payments                     3,202
    Due to related parties                          2,934             3,075
    Accruals                                        1,748             5,564
    Other current liabilities                       1,952             2,253
                                                ---------         ---------
       Total current liabilities                   27,733            63,408

Long-term debt, excluding current instalments     148,472            23,467
Advance subscriber payments, long-term                                2,136
Due to related parties                              4,200
                                                ---------
       Total liabilities                          180,405            89,011
                                                ---------         ---------
Commitments and contingencies
Minority interest                                                     5,637
                                                 --------          --------
Stockholders' (deficit) equity:

    Common stock, $.001 par value.  Authorized
       25,000,000 shares; issued 4,179,626
       shares in 1996 and 4,015,039 shares 
       in 1995                                          4                 4
    Additional paid-in capital                     59,327            45,358
    Accumulated deficit                           (80,961)          (26,192)
    Foreign currency translation adjustment        (1,494)           (2,381)
    Deferred compensation                            (666)           (1,050)
                                                ----------        ----------
       Total stockholders' (deficit) equity       (23,790)           15,739
                                                ----------        ---------
Total liabilities and stockholders
 (deficit) equity                             $   156,615           110,387
                                                =========         =========
</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 Operations
                  Years ended December 31, 1996, 1995 and 1994
                 (In thousands, except share and per share data)

<TABLE>
<CAPTION>

                                              1996           1995        1994
                                              ----           ----        ----
<S>                                          <C>        <C>         <C>    

TELEPHONE SERVICES REVENUES, NET        $     20,910        4,070
                                         -----------   ----------   ---------

Operating expenses:
    Operating and maintenance expenses        22,011       14,948       2,863
    Depreciation and amortization              4,270        2,211         413
    Management fees                            6,917        4,178         753
    Asset write-downs                          2,005          562       1,243
    Termination of former officers and 
     directors                                 6,260
                                             -------       ------      ------

    Total Operating Expenses                  41,463       21,899       5,272
                                         -----------   ----------  ----------

LOSS FROM OPERATIONS                         (20,553)     (17,829)     (5,272)


Other income (expenses):
    Foreign exchange losses                   (6,278)      (4,090)       (373)
    Interest expense                         (23,240)      (1,672)       (211)
    Interest income                            1,488          981         585
    Cost of abandoned financing               (2,985)
    Other, net                                 1,123         (252)        180
                                             -------       -------     -------

LOSS BEFORE MINORITY INTEREST                (50,445)     (22,862)     (5,091)

MINORITY INTEREST                              2,994        2,838         494
                                         -----------   ----------  ----------

LOSS BEFORE EXTRAORDINARY ITEM               (47,451)     (20,024)     (4,597)

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

NET LOSS                                $    (54,769)     (20,024)     (4,597)
                                         ===========   ==========  ==========


LOSS PER SHARE OF COMMON STOCK

    BEFORE EXTRAORDINARY ITEM           $    (11.38)       (6.30)      (2.13)

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

    NET LOSS                            $    (13.14)       (6.30)      (2.13)
                                         ===========   ==========  ==========

WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING                  4,169,532    3,177,801   2,159,508
                                         ===========   ==========  ==========
</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 Stockholders' (Deficit) Equity
                            Years ended December 31, 1996, 1995 and 1994
                                 (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 January 1, 1994             1,288,000      $  1      5,603    (1,571)      (75)         0      $  3,958
Common stock issuances,
    643,991 shares for cash               643,991         1      7,821                                        7,822
    307,692 shares for cash               307,692                3,000                                        3,000
Options granted as compensation                                  2,196                         (2,196)            0

Earned compensation                                                                               324           324

Issuance of warrants in connection
with claim settlement                                              100                                          100

Transfer of carrying value of shares of
stock subject to mandatory redemption
upon expiration of redemption period      465,000         1      1,143                                        1,144

Company's share of the excess of
proceeds over book value of subsidiaries
shares purchased by Telecom Denmark                                737                                          737

Foreign currency translation adjustment                                                (37)                     (37)
Net loss                                                                  (4,597)      112                   (4,485)
----------------------------------------------------------------------------------------------------------------------
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)
----------------------------------------------------------------------------------------------------------------------
</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
                      Consolidated Statements of Cash Flows
                  Years ended December 31, 1996, 1995 and 1994
                                 (In thousands)

<TABLE>   
<CAPTION>

                                                       1996      1995      1994
                                                       ----      ----      ----
<S>                                               <C>            <C>     <C>    

Net cash used in operating activities            $  (35,841)     (466)   (4,188)
                                                  ---------   --------  --------

Cash flows from investing activities:

     Acquisition and construction of
         telecommunications networks                (49,086)  (41,921)   (8,655)
     Increase in construction deposits               (7,466)   (4,313)
     Acquisition of concession rights                          (7,119)   (4,186)
     Cash received from sale of 
         subsidiaries stock                                     1,464
     Acquisition of interests in
         subsidiaries                                  (330)   (1,293)
     Proceeds from sale of assets                       336
     Proceeds from issuance of stock by
         subsidiaries to outside investors                                6,370
     Redemption of U.S. Treasury bills                                    1,497
     Sale (acquisition) of interests in 
         affiliates                                     130                (434)
                                                  ---------  --------   -------
         Net cash used in investing activities      (56,416)  (53,182)   (5,408)
                                                  ---------  --------   -------
Cash flows from financing activities:

     Borrowings under long-term debt                132,307    31,694     2,442
     Proceeds from short-term loans                 108,729    31,956
     Proceeds from exercise of options 
         and warrants                                    81     2,296    10,822
     Repayment of long-term debt                     (9,026)   (1,582)
     Repayment short-term loans                    (142,607)
     Deferred offering costs paid                                 (37)
     Repayment of notes payable                        (300)
                                                  ---------  --------   -------
        Net cash provided by financing activities    89,184    64,327    13,264
                                                  ---------  --------   -------
Effect of foreign exchange rate changes on cash       2,757    (1,453)     (106)
                                                  ---------  --------   -------

Net increase (decrease) in cash and cash 
     equivalents                                       (316)    9,226     3,562

Cash and cash equivalents at beginning of year       16,192     6,966     3,404
                                                  ---------  --------   -------
Cash and cash equivalents at end of year         $   15,876    16,192     6,966
                                                  =========  ========   =======
</TABLE>
See accompanying notes to consolidated financial statements.  The Company ceased
to be a development stage company on April 1, 1995.

                                     F-7
<PAGE>

               HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 1996, 1995 and 1994

(1)    Summary of Significant Accounting Policies

       (a)    Description of Business

              Hungarian Telephone and Cable Corp. was organized on March 23,
              1992 to own and manage telecommunications companies in Hungary.
              Four subsidiaries of the Company are presently engaged in the
              ownership, construction and operation of public switched telephone
              service.  Hungarian  Telephone and Cable Corp. and subsidiaries
              ("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 its  efforts in 1995 to  obtaining  concession  rights,
              negotiating acquisitions,  raising capital in the form of debt and
              equity,  attracting and creating its current  management  team and
              preparing  to  commence  operations.  As  a  result,  the  Company
              recognized no revenues until 1995.

              In 1996,  significant  activities  were devoted to negotiating and
              managing   construction   contracts  in  its   concession   areas.
              Considerable  efforts were also spent raising  capital in the form
              of  long-term  debt in order to finance  construction  and working
              capital.  As a result, the Company has incurred losses through the
              end of 1996.

       (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),  Borzsony  Com and  Telebud  (CI)  Ltd.  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  (GAAP). In
              preparing financial statements in conformity with 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").

              During the period in which the  Company  was a  development  stage
              enterprise,  the Company  used the U.S.  dollar as the  functional
              currency   for   its   majority-owned    Hungarian   subsidiaries.
              Accordingly,  monetary  assets and  liabilities  of the  Hungarian
              subsidiaries  were  translated  at year-end  exchange  rates while
              non-monetary  assets and liabilities were translated at historical
              rates.  Income and expense accounts were translated at the average
              rates in effect  during  the  year.  Translation  adjustments  and
              transaction  gains or losses were  reflected  in the  consolidated
              statement of operations.

                                     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.  The Company also
              used the HUF as the functional currency for measuring the accounts
              of Elso  Hazai  Tavkozlesi  Rt.  ("Elso")  in  which  it had a 30%
              interest  until  April 19,  1996.  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)    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.

       (f)    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.

       (g)    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.

       (h)    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.

                                     F-9
<PAGE>

              Deferred  compensation  related to stock  options  represents  the
              excess of the market price of the Company's  Common Stock over the
              exercise  price of Common  Stock  options  granted  at the date of
              grant and is  amortized  over the  vesting  period of the  related
              options.  Deferred compensation related to stock grants represents
              the  value of  Common  Stock  granted  to  employees  and is being
              amortized over the vesting period of the related award.

       (i)    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  $303,000 at December 31, 1996 exchange rates), (2)
              foreign ownership exceeds 30% of the registered  capital,  and (3)
              more than 50% of the revenue earned arises from  telecommunication
              services.

       (j)    Loss Per Share of Common Stock

              Loss per share is computed by  dividing  net loss by the  weighted
              average number of common and common equivalent shares  outstanding
              during the year.  Common equivalent shares include shares issuable
              upon the assumed  exercise  of stock  options  using the  treasury
              stock  method when  dilutive.  Computations  of common  equivalent
              shares are based upon average  prices  during each  period.  Fully
              diluted  loss per  share is not  presented  since  the  effect  is
              anti-dilutive.

       (k)    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  did not have a material  impact on the  Company's
              financial position, results of operations, or liquidity.

       (l)    Reclassifications

              Certain 1995 and 1994 amounts have been reclassified to conform to
              the 1996 presentation.


                                     F-10
<PAGE>

(2)    Acquisitions

       On January 1, 1995, subject to Concession Agreements (see note 8(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.

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

       Contingent  consideration  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 27,703.

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

                                     F-11
<PAGE>

       The net purchase price for the acquisitions,  as adjusted,  was allocated
as follows:

<TABLE>
               <S>                                <C>    
                                                 (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
                                                      ========
</TABLE>

       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 Cash Equivalents and Restricted Cash

       (a)    Concentration

              At December 31, 1996 cash of $128,000  denominated in U.S. dollars
              was on deposit  with two major  money  center  banks in the United
              States.  In addition,  $15,748,000  ($685,000  denominated in U.S.
              dollars,  the equivalent of  $15,048,000  denominated in Hungarian
              Forints  and the  equivalent  of $15,000  denominated  in Deutsche
              Marks) was on deposit with banks in Hungary.

       (b)    Restriction

              At December 31, 1996, approximately $1,486,000 of cash denominated
              in Hungarian  Forints was  restricted  under  concession  contract
              fulfilment  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, 1996,  approximately  $4,606,000  of
              cash  denominated in U.S. dollars was deposited in escrow accounts
              under terms of construction contracts. Such amounts are to be used
              to pay for  construction  costs and as of March 21, 1997,  most of
              these funds have been applied to contractor  invoices  included in
              accounts payable at December 31, 1996.

                                     F-12
<PAGE>

(4)    Property, Plant and Equipment

       The components of property,  plant and equipment at December 31, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
                                                                  Estimated
                                            1996        1995     Useful Lives
                                 (in thousands)
     <S>                                     <C>       <C>       <C>

        Land and Buildings                  $   4,835    2,046   25 to 50 years
        Telecommunications equipment           63,990    8,673   7 to 10 years
        Other equipment                         2,390    1,561       5 years
        Construction in progress               14,467   43,073
                                               ------   ------
                                               85,682   55,353

        Less: accumulated depreciation         (3,670)  (1,131)
                                               ------   ------
                                            $  82,012   54,222
                                            =========   ======
</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.

       Capitalized  interest  included  in the cost of  construction  of certain
       long-term  assets  amounted  to  approximately  $2,076,000  in  1996  and
       $503,000 in 1995. No interest was capitalized in 1994.

                                     F-13
<PAGE>


(5)    Short-Term Loans

       There were no short-term loans  outstanding at December 31, 1996.  Short-
term loans at December 31, 1995 consist of the following:

                                                      December 31,
                                                         1995
                                                    (in thousands)

                  Bank loan - Chemical                 $   30,674
                  Bank loan - ABN-AMRO                      1,603
                  Loan payable to TDI:
                     DM 1,727,000                           1,225
                     U.S. dollar loan                         480
                                                       ----------
                  Short-term loans                     $   33,982
                                                       ==========


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

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

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

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

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

                                     F-14
<PAGE>


(6)    Long-term Debt
<TABLE>
     <S>                                                                                  <C>            <C>

       Long-term debt at December 31, 1996 and 1995 consists of the following:
                                                                                           1996             1995
                                                                                                (in thousands)

       Loan payable, maximum HUF equivalent of $170 million USD, interest
           at the National Bank of Hungary weighted average Treasury Bill + 2.5%
           (26% at December 31, 1996), payable in 32 quarterly instalments
           beginning March 31, 1999 with final payment due December 21, 2006.
           HUF 19,136,275,000 outstanding at December 31, 1996.                     $    116,104

       Construction loan, maximum HUF equivalent of $45 million, interest at the
           National Bank of Hungary average Treasury Bill + 2.5% (26% at
           December 31, 1996) payable in 20 quarterly instalments
           beginning March 31, 1998 with final payment due December 31, 2002;
           HUF 1,565,450,000 outstanding at December 31, 1996.                             9,498

       Payable to  MATAV,  interest  at the  National  Bank  of  Hungary  90 day
           Treasury  Bill rate + 2% (24% and 32% at December  31, 1996 and 1995,
           respectively, payable quarterly, with final payment due September 30,
           1998; HUF 1,492,357,000 and HUF 2,491,511,000 outstanding at
           December 31, 1996 and 1995, respectively.                                       9,054           17,864

       Loan payable, imputed interest at LIBOR + 2.5% p.a., payable semiannually
           through December 31, 2001; $2,388,000 and DM 7,774,000
           outstanding at December 31, 1996.                                               7,387

       Loanpayable,  imputed interest at LIBOR + 2% p.a.,  payable in semiannual
           instalments, with final payment due December 31, 1999; $1,499,000 and
           DM 5,429,000 outstanding at December 31, 1996 and $1,813,000 and
           DM 6,405,000 outstanding at December 31, 1995.                                  4,986            6,296

       Payable to  MATAV,  interest  at the  National  Bank  of  Hungary  90 day
           Treasury  Bill rate + 2% (24% and 32% at December  31, 1996 and 1995,
           respectively)  payable quarterly,  with final payment due January 10,
           1998; HUF 198,212,000 and HUF 345,758,000 outstanding
           at December 31, 1996 and 1995, respectively.                                    1,203            2,479

       Loan payable, without interest due in equal annual instalments
           over three years                                                                  360

       First mortgage loan payable,  interest at DM-LIBOR + 1% with  semi-annual
           instalments  of DM 666,000  (approximately  $466,000 at December  31,
           1995 exchange  rates) plus interest,  with final payment due December
           31, 2002; secured by property, plant and equipment; DM 9,350,000
           outstanding at December 31, in 1995.                                                             6,527

                                                                                         -------          -------     
       Total long-term debt                                                         $    148,592           33,166

       Less current instalments                                                              120            9,699
                                                                                         -------           ------
       Long-term debt, excluding current instalments                                $    148,472           23,467
                                                                                         =======           ======

</TABLE>

                                     F-15
<PAGE>

       The  aggregate   maturities  of  long-term  debt  based  on  U.S.  dollar
       equivalents  at  December  31, 1996  exchange  rates for each of the five
       years  subsequent  to December 31, 1996 are as follows:  1997,  $120,000;
       1998,  $2,020,000;  1999,  $18,617,000;   2000,  $18,497,000;  and  2001,
       $24,454,000.  The carrying value of long-term debt  approximates its fair
       value at December 31, 1996.

       On October 15, 1996, the Company and its subsidiaries entered into a $170
       million  10-year   Multi-Currency   Credit  Facility  with  Postabank  es
       Takarekpenztar ("Postabank"), a Hungarian commercial bank (the "Postabank
       Credit  Facility").  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.  Amounts  outstanding in U.S.  dollars will be payable in
       equal quarterly instalments through December 31, 2002.

       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,  the Company
       and HTCC  Consulting  entered  into a  Security  Agreement  whereby  each
       pledged,   subject  to  certain  consents,   their  respective  ownership
       interests in each subsidiary as collateral.

       In October 1996,  pursuant to the Postabank Credit Facility,  the Company
       borrowed  the   equivalent  of  $82.3   million  in  Hungarian   Forints.
       Approximately $75.2 million of this amount was used to repay Citicorp all
       funds  advanced  pursuant to the Credit  Facility,  as amended,  and $2.0
       million  was  paid  to  Citicorp  for  fees  representing  settlement  in
       connection with the cancellation of the Company's proposed bond offering.
       The  remaining  $5.1  million  was  used  to  pay  management   fees  and
       reimbursable  costs owed to Citizens pursuant to the Management  Services
       Agreement  (see note 13). 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  will be  reimbursed  to the
       Company in equal quarterly  instalments over a two year period, and which
       will be  amortized  over the life of the loan  facility.  At December 31,
       1996,  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 13).

       The  remainder of the proceeds will be used to complete  construction  of
       the Company's  telecommunications  networks,  provide  additional working
       capital,  and refinance or repay other existing debt. Current instalments
       due under existing agreements for certain long-term obligations have been
       classified  as long-term  since the Company has the ability and intent to
       refinance  these  obligations on a long-term  basis. In January 1997, the
       Company repaid amounts payable to MATAV under  long-term  agreements with
       proceeds of the Postabank Credit Facility.

       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 up to $45 million  will be provided by the  contractor.
       The financing  agreement requires  repayment in 20 quarterly  instalments
       commencing  March 31,  1998,  with final  payment due  December 31, 2002.
       Interest  will be 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%.  Interest payments may be deferred until
       December 31, 1997.

       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.

                                     F-16
<PAGE>

(7)    Income Taxes

       The  statutory  U.S.  Federal tax rate for the years ended  December  31,
       1996,  1995 and 1994 was  35%.  The  effective  tax rate was zero for the
       years ended  December 31, 1996 and 1995 due to the Company  incurring net
       operating losses for which no tax benefit was recorded.

       For U.S.  Federal  income  tax  purposes,  the  Company  has  unused  net
       operating  loss  carryforwards  at  December  31,  1996 of  approximately
       $20,824,000  which  expire  in  2007,  $142,000;  2008,  $422,000;  2009,
       $950,000;  2010, $6,507,000;  and 2011, $12,803,000.  The availability of
       the net operating loss carryforwards to offset income in future years may
       be  restricted  as a result of an  ownership  change which may occur as a
       result of future sales of Company Stock and other events.

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

<TABLE>
<CAPTION>
                                                            December 31
                                                         1996        1995
                                                           ($ thousand)
<S>                                                  <C>         <C>    

              Net operating loss carryforwards      $   7,288       2,106
              Write down of assets                        418         418
              Stock compensation                        1,358       2,239
              Termination benefits                      2,087
              Other                                       903         197
                                                      -------     -------
              Total gross deferred tax assets          12,054       4,960
              Less valuation allowance                (12,054)     (4,960)
                                                      -------      ------
              Net deferred tax assets               $       0           0
                                                    =========    ========
</TABLE>

       In  assessing  the  realizability  of  deferred  tax  assets,  management
       considers  whether it is more likely than not that some portion or all of
       the deferred tax assets will not be realized. The ultimate realization of
       deferred tax assets is dependent  upon the  generation of future  taxable
       income  during the periods in which those  temporary  differences  become
       deductible.  Management considers projected future taxable income and tax
       planning in making these assessments. During 1996 and 1995, the valuation
       allowance increased by $7,094,000 and $3,789,000, respectively.

(8)    Commitments and Contingencies

       (a)    Concession Agreements

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

              Agreements   providing   concession   rights  in  two  regions  to
              Hungarotel and one region to Papatel which 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 revenues of the regions  operated by  Hungarotel  and 2.3%
              for the regions 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 provided for initial  payments of  approximately
              $2.1  million and $2.7  million and annual  concession  fees based
              upon  0.1% and  1.5% for  regions  operated  by KNC and  Raba-Com,
              respectively.

                                     F-17
<PAGE>

              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 of up to HUF  500,000,000  (approximately  $3 million at
              December 31, 1996  exchange  rates) and possibly  reduction in the
              period of exclusivity. As of December 31, 1996, KNC and Hungarotel
              did not fulfill these  service  requirements  in their  concession
              areas.  The Company has  communicated  the reasons for the service
              delays  experienced  by KNC and  Hungarotel  to the  Ministry  and
              believes it has demonstrated accelerating progress towards meeting
              minimum  service  requirements.  Based  on  its  discussions,  the
              Company believes the possibility of penalties being imposed by the
              Ministry  is  remote  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.

       (b)    Construction Commitments

              KNC entered into contracts which provide for the construction of a
              local  telephone  network  in its  service  area.  The  contracts,
              including  subsequent  renegotiations,  total  approximately $46.2
              million. Construction is expected to be substantially completed in
              the second quarter of 1997.

              Raba-Com  entered into  contracts  totaling  $29.9  million  which
              provided for the construction of a local telephone  network in its
              service area. By December 31, 1996, construction of the network in
              Raba-Com was substantially complete.

              Papatel  entered  into  contracts  totaling  $16.2  million  which
              provided for the construction of a local telephone  network in its
              service area. By December 31, 1996, construction of the network in
              Papatel was substantially complete.

              Hungarotel  entered into  contracts  totaling  $66.5 million which
              provide  for  construction  of  telephone  networks in its service
              areas.  Construction is expected to be substantially  completed in
              the second quarter of 1997.

       (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. 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.  The  $400,000
              settlement  was charged to operations  for the year ended December
              31,  1994,  and is  included in "Other,  net" in the  accompanying
              Statement of Operations.

       (d)    Leases

              The Company  leases office  facilities  in Stamford,  Connecticut,
              which require  minimum  annual rentals of  approximately  $24,000.
              During a  portion  of 1996 and all of 1995 and 1994,  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  12(b)).  Rent  expense for the years ended
              December 31, 1996, 1995 and 1994, including rental amounts paid to
              Teleconstruct, was $94,500, $30,100 and $78,000, respectively.

                                     F-18
<PAGE>

       (e)    Legal Proceedings

              Hungarotel  is a defendant  in a lawsuit  brought in Hungary  that
              alleges  breach of contract.  The plaintiff is seeking  payment of
              outstanding  invoices and alleged damages  totaling  approximately
              HUF 270.0 million (approximately $1.6 million at December 31, 1996
              exchange rates). The Company believes it has meritorious  defenses
              to the  claim  and does not  believe  there  will be any  material
              adverse effect from the outcome of this proceeding.

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

              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.

(9)    Common Stock

       In August  1992,  the Company  sold  465,000  shares of Common Stock in a
       private  placement  at  $3.00  per  share,  receiving  $1,142,907  in net
       proceeds after direct costs of $252,093.  In connection  with the private
       placement, the Company issued warrants to the placement agent to purchase
       46,500 shares of Common Stock at an exercise price of $3.60 per share.

       In  connection  with a public  offering  in  December  1992,  the Company
       granted  warrants  entitling  the  underwriters  to purchase up to 33,500
       shares of Common Stock during the four-year period commencing on December
       26, 1992 at an exercise price of $10.15.

       In May and December  1994, the Company sold 643,991 and 307,692 shares of
       Common Stock to foreign investors outside of the United States in private
       placements  at $14.00  and $9.75 per share,  receiving  net  proceeds  of
       approximately $7,690,000 and $3,000,000, respectively.

       In connection  with the May 1994 private  placement,  the Company granted
       the placement agent warrants to purchase an aggregate of 61,950 shares of
       Common  Stock at an  exercise  price of $21.00 per share over a period of
       five years ending May 4, 1999. In August 1994,  the exercise price of the
       warrants was repriced at $14.00 per share.  The holders of the  placement
       agent  warrants have been granted  certain rights to require the Company,
       at the  Company's  expense,  to register the warrants and the  underlying
       shares under the Securities Act of 1933.

       During the year ended December 31, 1995, the Company issued 54,955 shares
       of Common Stock upon the exercise of placement agent warrants to purchase
       such  shares  at  prices  ranging  from  $3.60 to $10.15  per  share.  In
       addition,  a former officer  exercised options to purchase 230,994 shares
       of Common Stock at $4.00 per share,  20,000 shares at $7.00 per share and
       77,500  shares at $12.25 per share.  These  transactions  resulted in net
       increases  in Common  Stock and  additional  paid-in  capital of $300 and
       $2,296,000, respectively.

       During 1996,  options to purchase 5,000 shares of Common Stock at $10 per
       share and  warrants to purchase  3,016  shares of Common  Stock at $10.15
       were exercised.  Proceeds from the exercise of these options and warrants
       amounted to approximately $81,000.

       The Company has reserved 5,627,775 shares for issuance under stock option
       plans and agreements and warrants.

                                     F-19
<PAGE>

(10)   Stock Based Compensation

       Stock Option Plans

       The Company  adopted a stock option plan (the "Plan") in April 1992 which
       provided for the issuance of an aggregate of 90,000 stock  options  which
       was increased to 250,000 at the 1994 Annual Meeting of  Stockholders.  On
       May 9, 1996, the  stockholders of the Company approved an increase in the
       number of shares available under the plan from 250,000 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,  1996,  465,000
       options  provided for by the Plan had been issued,  of which 102,500 were
       exercised and 347,500 remained outstanding.

       The Company  applies APB  Opinion No. 25 and related  interpretations  in
       accounting  for stock  options  issued  under the Plan.  Accordingly,  no
       compensation  cost has been recognized in the financial  statements.  Had
       the Company  determined  compensation  cost for options  issued under the
       Plan 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>
<CAPTION>
                                                        1996        1995
                                                        (in thousands)
               <S>                                     <C>       <C>

              Net income            As reported       ($54,769)   ($20,024)
                                      Pro forma        (54,982)    (20,237)

              Earnings Per Share    As reported       ($13.14)    ($6.30)
                                      Pro forma        (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 5.4% in 1996 and 7.39% in 1995, (2) an expected life of
       6  years  for  1996  and  5  years  for  1995,   and  (3)  volatility  of
       approximately 53% for both 1996 and 1995.

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


                                     F-20
<PAGE>
<TABLE>
<CAPTION>

  --------------------------------------------------------------------------
                                    Outstanding             Option Price
                                      Options                Per Share
  --------------------------------------------------------------------------
          <S>                           <C>             <C>

      December 31, 1993                  94,000             $7.00-$10.25
        Granted                         499,991             $4.00-$14.00
  --------------------------------------------------------------------------
        December 31, 1994               593,991             $7.00-$14.00
        Granted                         170,000            $12.25-$14.00
        Exercised                     (328,494)             $4.00-$12.25
        Cancelled                      (29,000)            $10.00-$10.25
  --------------------------------------------------------------------------
        December 31, 1995               406,497             $4.00-$14.00
        Granted                         200,000                $14.00
        Exercised                       (5,000)                $10.00
        Cancelled                       (5,000)                $14.00
  --------------------------------------------------------------------------
        December 31, 1996               596,497             $4.00-$14.00
  --------------------------------------------------------------------------
</TABLE>

       The  following  table  summarizes information  about  shares  subject  to
       outstanding options as of December 31, 1996 which were issued  to current
       or  former  employees  or  directors  pursuant  to the Plan or employment
       agreements.
<TABLE>
<CAPTION>
                                    Options Outstanding               Options Exercisable
                                                    Weighted-
                                                    Average                      Weighted-
 Number         Range of         Weighted-Average   Remaining      Number        Average
 Outstanding    Exercise Prices  Exercise Price     Life in Years  Exercisable   Exercise Price
<C>             <C>           <C>                 <C>            <C>            <C>

  248,997           4.00          4.00              7.6           248,997         4.00
   60,000           7.00          7.00              1.0            60,000         7.00
    5,000          10.00         10.00              5.9             5,000        10.00
   82,500          12.25         12.25              3.1            82,500        12.25
  200,000          14.00         14.00              4.6           200,000        14.00
  -------                                                         -------
  596,497   4.00 - 14.00          8.85              5.3           596,497         8.85
  =======                                                         =======

</TABLE>
       Stock Grants

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

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

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

                                     F-21
<PAGE>
(11)   Reconciliation of Net Income to Net Cash Used in Operating Activities

       The  reconciliation of net loss to net cash used in operating  activities
       for the years ended December 31, 1996, 1995 and 1994 follows:

                                                     1996      1995      1994
                                                             (in thousands)

 Net loss                                         $ (54,769) (20,024)  (4,597)
 Adjustments to reconcile net income to
     net cash provided by operating activities:
        Depreciation and amortization of
               property, plant and equipment          3,477    1,043      413
        Amortization of intangibles                     793    1,168        -
        Asset write-downs                             2,005      562    1,243
        Equity in net loss of affiliates                         248       71
        Non-cash compensation                           485    6,365      324
        Unrealized foreign currency loss              1,084      602      373
        Extraordinary items                           7,318
        Termination benefits                          6,260
        Claim settlement                                          --      400
        Gain on sale of subsidiaries' stock                       --     (580)
        Minority interest                            (2,994)  (2,838)    (494)
        Unpaid interest                               6,279       40        -
     Changes in operating assets and liabilities 
        net of effects of acquisitions:
        Increase in accounts receivable              (3,663)  (1,399)       -
        Decrease (increase) in restricted cash       (4,974)   2,065   (3,822)
        Increase in VAT receivable                   (1,757)  (3,305)  (1,127)
        Decrease (increase) in other assets          (5,976)     825       35
        Increase in accounts payable                 10,955   12,311    1,613
        Increase (decrease) advance payments          1,066     (312)   1,067
        Decrease (increase) in due to related
                parties                              (1,430)   2,183      893
                                                     ------    -----      ---
 Net cash used in operating activities            $ (35,841)    (466)  (4,188)
                                                  =========     ====   ======
 Cash paid during the year for:
        Interest                                  $  16,961    1,672      211
                                                  =========    =====      ===

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

       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.

       During 1994:
                     The Company issued a $300,000 note payable and warrants to
                     purchase Common Stock valued at $100,000 in settlement of a
                     claim.

     
                                     F-22
<PAGE>

                     A minority  stockholder of a subsidiary  contributed  real
                     estate with an estimated fair value of $372,000 in exchange
                     for additional shares of stock.

(12)   Related Parties

       Transactions entered into with certain related parties are as follows:

       (a)    Transactions with former officers and directors

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

              The Company has  recorded a charge of  approximately  $6.3 million
              and  made  payments  aggregating  approximately  $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 the Chairman,  President and
              Chief Executive  Officer and its former Chief  Financial  Officer,
              Treasurer, Secretary and Director for one year and made all of the
              options  contained  in  such  employment  agreements   immediately
              vesting  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,  1995 and 1994, the Company paid legal fees to the former
              Chief  Financial  Officer,  Treasurer,  Secretary  and Director of
              approximately $146,000, $158,000 and $80,000, 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 15) in
              1996,  the Company  purchased  the premises used as offices by the
              Company and a  residental  apartment  in  Budapest,  Hungary  from
              Teleconstruct  in  two  separate  transactions  for  an  aggregate
              purchase price of $643,000.

        (c)    Agreements with TeleDanmark A/S

              On June 16,  1994,  the  Company  entered  into joint  venture and
              shareholder  agreements with  TeleDanmark A/S ("TDI")  pursuant to
              which,  among other  things,  TDI: (1)  acquired 20%  interests in
              RabaCom and KNC by purchasing  shares directly from such companies
              (TDI paid approximately $6,600,000 for such shares), (2) purchased
              25,000  shares of the  Company's  Common  Stock for  approximately
              $400,000   and  (3)  entered  into  an  agreement  to  manage  the
              operations of RabaCom and KNC areas through 1999.  The  management
              agreements  entered  into  among the  parties  required  aggregate
              minimum annual  payments of fees in addition to  reimbursement  of
              certain expenses. Amounts paid to TDI in 1996, 1995 and 1994 under
              the  management  agreements  amounted to  approximately  $976,000,
              $1,778,000 and $1,443,000, respectively. The management agreements
              with TDI were terminated in August 1996.

                                     F-23
<PAGE>

         (d)   Transactions with Citizens Utilities Company

              Transactions  with Citizens  including  those under the Management
              Service Agreements are discussed in Footnote 13.

       Amounts payable to related parties as of December 31, 1996 and 1995, were
       as follows:

<TABLE>
                                                         1996            1995
          <S>                                          <C>           <C>

        Payable to former officers and directors   $   4,839,000    $
        Due to Citizens                                1,491,000       2,566,000
        Due to TDI                                       770,000         480,000
        Due to Teleconstruct                              34,000          29,000
                                                          ------          ------
                                                   $   7,134,000    $  3,075,000
                                                   =============    ============
</TABLE>


(13)   Agreements with Citizens

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

       The  Citizens  Agreements,  as  amended,  resulted in and 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 3,392,591  (as  adjusted for items  described  below)
              additional  shares  of Common  Stock of the  Company  at  exercise
              prices  ranging  from $13 to $18 per share under the Stock  Option
              Agreement  and  Warrant,  as amended  (the  "Citizens  Options and
              Warrant"). The Citizens Options and Warrant were originally due to
              expire at various  dates from May 31, 1997 to September  12, 2000.
              Expiration  dates of the warrant and certain options were extended
              as   discussed   below.   All  of  the   options  are  subject  to
              anti-dilution provisions which result in adjustments to the number
              and price per share of the options.

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

                                     F-24
<PAGE>

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

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

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

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

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

              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  and will  continue  through
              December 31, 2007.  All services  rendered by Citizens are subject
              to the  oversight,  supervision  and approval of the Company.  The
              management  fee  payable  to  Citizens  is  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,

                                     F-25
<PAGE>
              based upon a three-month  market price  average.  Management  fees
              payable to  Citizens  during  1996  amounted  to  $3,639,600  plus
              reimbursable costs of $1,862,232, while in 1995 such fees amounted
              to $900,000 plus reimbursable  costs of $1,490,511.  Cash payments
              made  to  Citizens  in  1996  for  management   services   totaled
              $5,865,000.

              The  right  for   Citizens  to  receive  an  option  to   purchase
              additional  shares of Common  Stock,  if the  Company  issues,  in
              connection with any public or private  offering,  shares of Common
              Stock,  other stock of the Company or any  securities  convertible
              into, or exchangeable or exercisable for shares of Common Stock or
              other stock of the Company  prior to September  12,  1997,  on the
              same terms and 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.

              In connection  with the Postabank Credit Facility (see note 6), on
              October 18, 1996, the Company entered into certain agreements with
              Citizens  in  consideration  for,  among other  things,  Citizens'
              support  in  fulfilling  all  terms  under  the  Citicorp   Credit
              Facility,  as  amended,  and in  obtaining  the  Postabank  Credit
              Facility. Under such agreements,  the Company agreed to (i) extend
              to  September  12,  2000 the  exercise  periods  of a warrant  and
              certain stock options to purchase  approximately  2,516,741 shares
              of Common Stock (as  adjusted),  (ii) grant Citizens the option to
              purchase  an  additional  875,850  shares  of  Common  Stock at an
              exercise price of $12.75  exercisable  through September 12, 2000,
              and  (iii)  pay  Citizens  $750,000  in  cash.  The  cost  of this
              consideration  to the Company  representing  the  increase in fair
              value of the  options  previously  granted,  the fair value of the
              newly  granted  options  and the cash  payment  amounted to $11.97
              million.  The fair value of the options was  determined  using the
              Black Scholes option pricing model.  The Company has reflected the
              portion of the cost related to the financial support in fulfilling
              the terms of the Citicorp  Credit  Facility,  $5.7  million,  as a
              current  period  charge.  The  remaining  $6.27  million  has been
              capitalized  in other assets with other  direct costs  incurred in
              obtaining the Postabank Credit Facility and will be amortized over
              the term of the related debt.

       Additionally,  the Citizens Agreements provided for the pledge of certain
       assets of the Company as security,  including its ownership  interests in
       its  subsidiaries.  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,  on December 31, 1996  Citizens held 19.2% of the Company's
       outstanding  Common Stock and 4,894,596  options and warrants to purchase
       Common Stock. Citizens ownership of the Company's outstanding shares on a
       fully diluted basis is approximately 58.1% at December 31, 1996.


(14)   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 1996.




                                     F-26                                      
<PAGE>

(15)   Investment in Pilistav

       The Company initially  acquired an 82% ownership  interest in Pilistav in
       1992.  During  1993,  as a result of a  recapitalization  and  additional
       investment  in Pilistav,  the  Company's  interest was reduced to 75.25%.
       During 1994,  Teleconstruct  invested $930,000 in Pilistav increasing its
       investment  to 68%. At December  31,  1994,  the  Company  accounted  for
       Pilistav  using the equity  method and the  investment  in  Pilistav  was
       carried at $300,000,  which  appoximated  the equity in fair value of the
       underlying   net   assets.   In  March   1995,   the   Company   acquired
       Teleconstruct's  ownership  interest in Pilistav for $919,000 raising its
       ownership  interest to 94%.  The Company  reconsolidated  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.  During  1994,  as a  result  of  Pilistav  not  receiving  a
       concession  to  provide  telephone  service,  approximately  $500,000  of

       planning  and design  costs were  charged  to  operations.  In the second
       quarter of 1995,  subsequent  to the  Company  acquiring  Teleconstruct's
       interest in Pilistav, an additional writedown of $562,000 was recorded to
       reduce  the net  assets  of  Pilistav  to the  estimated  fair  value  of
       approximately  $75,000.  In March 1996,  the  Company  sold the assets of
       Pilistav to MATAV for approximately $220,000.


(16)   Investment in Affiliate

       At December 31, 1996,  the Company's  investment  in affiliate  consisted
       principally  of a 49% interest in Central  Europe  Consult  ("CEC").  The
       majority stockholder in CEC is Teleconstruct.

       In April,  1996,  the Company sold its 30%  interest in Elso.  Elso has a
       concession to operate a local telephone  exchange  network in a suburb of
       Budapest,  Hungary, and is serving approximately 1,000 lines. At December
       31, 1994,  the Company wrote down the carrying value of its investment in
       Elso by $700,000 to its net realizable value of $271,000. At December 31,
       1995  and  1994,  the  investment  in Elso was  carried  at  $82,000  and
       $271,000,  respectively,  which approximated the equity in the fair value
       of the underlying net assets of Elso at those dates. In 1996, the Company
       sold its  investment in Elso for $130,000 in cash,  recognizing a gain of
       $48,000.

       The Company's  share of losses of affiliates of $0,  $248,000 and $71,000
       for  1996,  1995  and  1994,  respectively,  has been  included  in other
       expenses in the consolidated statements of operations.


(17)   Gain on Sale of Subsidiaries' Stock

       On November 16, 1994,  the Company  reduced its interest in KNC and Raba-
       Com by  selling  4.8%  interest  in the two  subsidiaries  to the  Danish
       Investment  Fund for Central and Eastern  Europe (the "Danish  Fund") for
       $1,464,155,  representing 150% of par value, for a gain of $580,173 which
       is included in "Other, net" in the accompanying consolidated statement of
       operations.

                                     F-27
<PAGE>

                       HUNGARIAN TELEPHONE AND CABLE CORP.

                               Index to Exhibits
           
Exhibit
No.                    Description

10.91   Non-Employee Director Stock Option Plan dated as of February 6, 1997

10.92   Amended and Restated Employment Agreement Between the Registrant and 
        Richard P. Halka dated as of January 9, 1997                  

10.93   Stock Option Agreement Between the Registrant and James G. Morrison 
        dated as of March 13, 1997                               

10.94   Stock Option Agreement Between the Registrant and Andrew E. Nicholson 
        dated as of March 13, 1997                              

10.95   Stock Option Agreement Between the Registrant and Daniel R. Vaughn dated
        as of March 13, 1997                                      

23.1    Consent of KPMG Peat Marwick LLP, certified public accountants     

23.2    Consent of BDO Seidman, LLP, certified public accountants          

27.1    Financial Data Schedule