Securities and Exchange Commission
                              Washington, DC 20549

                                    FORM 10-K

[X]     ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934 For the fiscal year ended December 31, 2000
                                       OR
[  ]    TRANSITIONAL  REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES
        EXCHANGE  ACT OF 1934 For the transition period from _______ to ________

                         Commission File Number 1-11484

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

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

                       32 Center Street, Darien, CT 06820
               (Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code: (203) 656-3882

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

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

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

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

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

         As of March 28,  2001,  12,103,180  shares of the  Registrant's  Common
Stock were  outstanding,  of which 12,095,467 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 27,  2001,  was  $89,506,456.  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, 2000.


<PAGE>


            Cautionary Statement Regarding Forward-Looking Statements

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

                                     PART I

         In this Form  10-K,  all  references  to "$" or "U.S.  dollars"  are to
United States dollars,  all references to "EUR" or "euros" are to the euro which
is the currency of the European  Monetary Union,  and all references to "HUF" or
"forints" are to Hungarian forints.  Certain amounts stated in euros and 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 euro or 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, 2000 exchange  rates.  The  forint/U.S.
dollar  middle  exchange rate as of December 31, 2000 was  approximately  284.73
forints per U.S. dollar.

                                Item 1. Business
Company Overview

         Hungarian  Telephone and Cable Corp.  ("HTCC" or the "Registrant"  and,
together with its  consolidated  subsidiaries,  the  "Company")  provides  basic
telephone services in five defined regions within the Republic of Hungary (each,
an "Operating  Area" and together,  the "Operating  Areas")  pursuant to 25-year
telecommunications  concessions  granted  by  the  Hungarian  government.  HTCC,
through its four  majority-owned  Hungarian  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 acquired its concession rights from the Hungarian  Ministry
of Transportation,  Telecommunications and Water Management (the "TTW Ministry")
for $11.5  million (at  historical  exchange  rates) and  purchased the existing
telecommunications    infrastructure   in   the   Operating   Areas,   including
approximately  61,400 access lines, from Magyar  Tavkozlesi Rt.  ("Matav"),  the
formerly  State-controlled  monopoly  telephone  company,  for $23.2 million (at
historical  exchange  rates).  Kelet-Nograd  Com Rt.  ("KNC") and Raba Com.  Rt.
("Raba-Com"),   two  of  the   Operating   Companies,   acquired   the  existing
telecommunications  assets  in their  respective  Operating  Areas in the  first
quarter of 1995, while Papa es Tersege Telefon  Koncesszios Rt.  ("Papatel") and
Hungarotel  Tavkozlesi Rt.  ("Hungarotel"),  the other two Operating  Companies,
acquired the existing  telecommunications  assets in their respective  Operating
Areas on January 1, 1996. Since the acquisition of such existing  networks,  the


                                      -2-
<PAGE>

Operating Companies have incurred capital expenditures through December 31, 2000
of $190  million (at  historical  exchange  rates) to expand and  upgrade  their
network   facilities   which  has  resulted  in  the   completion  of  a  modern
telecommunications  network in each of the Operating  Areas.  As of December 31,
2000, the Company's telecommunications networks had approximately 206,900 access
lines in service,  an  addition of  approximately  145,500  access  lines to the
61,400  access lines  acquired from Matav.  The Company's  networks now have the
capacity,  with some normal additional  capital  expenditures,  to provide basic
telephone  services to virtually all of the  estimated  283,300 homes and 38,400
business and other institutional subscribers (including government institutions)
within its Operating Areas.

         The  Company  completed  its  network  modernization  and  construction
program in each of its Operating  Areas primarily  through turnkey  construction
contracts with Siemens,  Ericsson and Fazis Telecommunication  System Design and
Construction  Corporation.  The build-out was primarily  financed through a $170
million credit facility with Postabank es Takarekpenztar, a Hungarian commercial
bank  ("Postabank"),  which  was  subsequently  refinanced  and a $47.5  million
contractor  financing  facility.  See "- Revision of Capital  Structure," Item 3
"Legal  Proceedings," Item 7 "Management's  Discussion and Analysis of Financial
Condition  and Results of  Operations - Liquidity  and Capital  Resources,"  and
Notes 4, 5 and 8(d) of Notes to Consolidated Financial Statements.

         The following  table sets forth certain  information as of December 31,
2000 with respect to each of the Operating Companies.

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

Population........................      63,900   149,000     63,200     391,700     667,800
Residences........................      25,900    66,400     24,100     166,900     283,300
Businesses and other(1)...........       3,300     8,300      3,800      23,000      38,400
Access lines in operation:
     Residential..................      20,000    41,200     17,800     100,300     179,300
     Business and other(2)........       2,700     6,500      2,400      16,000      27,600
                                      --------  --------   --------   ---------    --------
           Total..................      22,700    47,700     20,200     116,300     206,900
Pay phones........................         167       480        202       1,073       1,922
Population Penetration rate(3)....        35.5      32.0       32.0        29.7        31.0
Residential Penetration rate (4)..        77.2      62.0       73.9        60.1        63.3
--------
</TABLE>

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

                                      -3-
<PAGE>


       The following  table sets forth the number of access lines served by each
of the Operating  Companies at takeover from Matav and at the end of 1995, 1996,
1997, 1998, 1999 and 2000.
<TABLE>
<S>               <C>             <C>         <C>        <C>       <C>          <C>         <C>

                      Takeover        1995      1996        1997       1998        1999      2000
                      --------        ----      ----        ----       ----        ----      ----

Raba-Com               2,500(1)      5,100      14,000     20,600     21,400       22,300     22,700
KNC                   13,000(1)     14,200      20,500     35,500     40,000       46,300     47,700
Papatel                3,800(2)      3,800      11,100     17,000     18,300       19,600     20,200
Hungarotel            42,100(2)     42,100      47,800    102,000    105,300      112,300    116,300
                 -----------     ---------    --------   --------   --------     --------    -------
     Total            61,400        65,200      93,400    175,100    185,000      200,500    206,900

</TABLE>

(1)  1st Quarter 1995
(2)  Year-End 1995


The Republic of Hungary

         Hungary is located in Central  Europe  bordering on Austria,  Slovenia,
Croatia,  Yugoslavia,  Romania, Ukraine and Slovakia. Six West European capitals
are within a one-hour  flight.  Its total area is  approximately  93,030  square
kilometers.  It has 10 million  inhabitants,  approximately  1.8 million of whom
reside in Hungary's capital, Budapest.

         For nearly 40 years,  Hungary was under  central  state  control with a
one-party government and a centrally planned economy. Democracy was restored and
the  foundations  of a market  economy were built  between  1988 and 1990.  Free
elections were held in 1990. Today, Hungary has a parliamentary democracy with a
single-chamber  National  Assembly.  As a result of a large scale  privatization
effort, private enterprise has become the basis of the Hungarian economy.

         Today,  Hungary is  considered  the most  developed  country in Central
Europe.  Since 1989,  foreign  direct  investment has been  approximately  $19.9
billion. Foreign direct investment was approximately $1.95 billion in 2000. On a
per  capita  basis,  Hungary  has  been  one of  the  largest  Central  European
recipients  of  foreign  direct  investment  since  the  transition  to a market
economy.  Hungary has received (on a per capita basis) nearly twice the level of
foreign  direct  investment  of  Poland  and about the same as that of the Czech
Republic.

         Since  1995,  the  Hungarian  government  has  embarked  on an economic
stabilization  effort  aimed at putting  the  economy on a  sustainable  path of
low-inflationary growth. Hungary has experienced the following annual GDP growth
rates since the initiation of that effort:  1.7% in 1995;  1.3% in 1996; 3.5% in
1997; 5% in 1998;  4.9% in 1999;  and 5.3% in 2000.  The  unemployment  rate has
gradually  decreased from 11.1% in 1995 to 6.4% in 2000. The Hungarian inflation
rate  has  been  steadily  decreasing  as well  as  evidenced  by the  following
declining annual  inflation rates:  28.2% in 1995; 23.6% in 1996; 18.2% in 1997;
14.5% in 1998; 10.0% in 1999; and 9.8% in 2000.

         Hungary's  application  for membership in the European Union ("EU") was
accepted in 1998.  Hungary is now in the process of negotiating the terms of its
accession  into the EU.  Hungary  is not  expected  to become a member of the EU
until  2003  at  the  earliest.   Hungary  joined  the  North  Atlantic   Treaty
Organization in 1999. Hungary is also a member of the World Trade Organization.

                                      -4-
<PAGE>


Overview of Hungarian Telecommunications Industry

    Early State of Hungarian Telecommunications Industry

        In 1989, the Hungarian state-owned Post, Telegraph and Telephone ("PTT")
was divided into three separate companies:  the Hungarian  Broadcasting  Company
("Antenna Hungaria"),  the Hungarian Post Office ("Magyar Posta") and Matav. The
Hungarian  PTT was  historically  the exclusive  provider of  telecommunications
services in Hungary. The Hungarian  telecommunications  market was significantly
underdeveloped  without  the  necessary  investment  in  the  telecommunications
infrastructure necessary to achieve a comparable level of teledensity to that of
Western  Europe.  As  of  December  31,  1995,  Hungary  had a  basic  telephone
penetration  rate of approximately 21 telephone access lines per 100 inhabitants
compared to a European  Union average of  approximately  48 access lines per 100
inhabitants and a United States average of approximately 60 access lines per 100
inhabitants. Of such access lines in Hungary,  approximately 40% were located in
Budapest (in which approximately 18% of Hungary's  population  resides).  In the
Company's Operating Areas, access line penetration was approximately nine access
lines  per 100  inhabitants  as of  December  31,  1995.  By  comparison,  basic
telephone  penetration  rates in other Eastern  European  countries  such as the
Czech Republic, Poland, Slovakia and Bulgaria, as of December 31, 1995, were 23,
15, 21 and 28 access lines per 100 inhabitants, respectively.

    Privatization of Matav and Local Telephone Service

         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 MagyarCom, a company then wholly owned
by  Deutsche  Telekom  AG,  the  German  public  telephone  operator  ("Deutsche
Telekom"), and Ameritech,  the United States based  telecommunications  company.
(In 2000  Deutsche  Telekom  purchased  the  entire  ownership  interest  of SBC
Communications  (Ameritech's  successor) in MagyarCom).  In 1997 Matav completed
its initial public  offering  pursuant to which  MagyarCom's  stake in Matav was
reduced to  approximately  60% and the  Hungarian  State's  stake was reduced to
approximately 6%. The Hungarian State also retained certain  shareholder  rights
by retaining one "Golden  Share." In 1999 the Hungarian State sold its remaining
6% ownership  interest in Matav but retained its "Golden  Share." As of December
31, 2000, MagyarCom owned 59.5% of Matav while 40.5% was publicly traded.

         In  1992  the  TTW  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 TTW Ministry solicited bids for concessions to build, own
and operate  telecommunications  networks in the 25 service areas which had been
chosen  to  exit  the  Matav  system.  As of  December  31,  2000,  23 of the 25
concessions for which the TTW Ministry solicited bids had been awarded.  Holders
of those concessions today (each a Local Telephone Operator, "LTO", and together
the "LTOs") include:  the Company  (presently 5 areas);  Vivendi Telecom Hungary
("Vivendi")  owned by  affiliates  of Vivendi SA of France and General  Electric

                                      -5-
<PAGE>

Capital Corp. (9 areas);  an affiliate of United  Pan-Europe  Communications  NV
("UPC") (1 area);  a consortium  comprised of Bezeq (the  Israeli  PTO),  Poalim
Investment  (an  Israeli  investment  and holding  company)  and Matav (3 areas)
(Matav has recently announced an agreement to buy out the ownership interests of
Bezeq and Poalim,  which transaction is subject to regulatory review); and Matav
(5 areas).  Matav also  retained  the rights to service 2 areas for which  there
were no successful bidders.  Each of the LTOs (including Matav) received 25 year
licenses to provide local basic  telephone  service with  exclusivity  rights in
their respective  concessions through 2002 (2001 in the case of Matav except for
5 areas in which Matav has exclusivity  rights through 2002). In addition to the
fees paid to the government  which  aggregated  approximately  $80.0 million (at
historical  exchange  rates),  each of the non-Matav LTOs  negotiated a separate
asset purchase  agreement with Matav for each  concession  area's existing basic
telephone  plant and  equipment,  which  led to the  transfer  of  approximately
260,000  access  lines  from a total of 1.2  million  access  lines in the Matav
system.  Matav's concession areas presently cover approximately 75% of Hungary's
population and approximately 70% of its geographic area.

    Cellular Service

         In addition to the liberalization of basic telephone services,  the TTW
Ministry also initially  selected two consortia to provide  nationwide  cellular
telephone  services.  A consortium  comprised of Matav and MediaOne  Group Inc.,
formerly  part of U.S.  West,  was granted two  licenses to provide  both analog
(NMT-450)  ("Westel  450") and digital  (GSM-900)  ("Westel 900") services while
Pannon GSM  Tavkozlesi  ("Pannon") was granted a license to provide only digital
cellular  services.  Pannon's  current  shareholders  include:  Telenor  AS (the
Norwegian  telecommunications  company)  (25.8%);  Tele  Danmark A/S (the Danish
telecommunications    company)   (6.6%);    Sonera   Corporation   (the   Finish
telecommunications  company)  (23%);  and KPN NV (the  Dutch  telecommunications
company,  "KPN") (44.6%).  MediaOne subsequently sold its holdings in Westel 450
and Westel 900 to Deutsche  Telekom.  Matav is in the process of  exercising  an
option it holds to  purchase  the  interests  in Westel  450 and Westel 900 that
Deutsche Telekom acquired from MediaOne.

         In June 1999, a consortium  comprised of Vodafone  Group Plc.  (50.1%),
RWE Telliance (19.9%),  Antenna Hungaria (20%) and Magyar Posta (10%) (together,
"Vodafone")  was  the  winning  bidder  for a  digital  1800-megahertz  (or  DCS
frequency) mobile phone license. It began operations in late 1999.

    Domestic and International Long Distance Services

         At the end of 2001 with the  further  liberalization  of the  Hungarian
telecommunications  market,  Matav's  right to provide  exclusive  domestic  and
international  long distance voice  transmission  is due to expire.  In 1998, to
further  stimulate future  competition in this market,  the TTW Ministry awarded
Pan-Tel  Rt., a newly  formed  Hungarian  company  ("Pan-Tel"),  the licenses to
provide such services as data transmission,  voice mail and other services which
are not subject to exclusive  concessions.  Pan-Tel  built its own  country-wide
telecommunications  network. The current shareholders of Pan-Tel include MAV Rt.
(the Hungarian railway company) (10.1%),  PT Investment  Holding Company (14.7%)
and KPN (75.2%).

    The Hungarian Telecommunications Industry Today

         During  2000 the  Hungarian  government  moved  the  telecommunications
portfolio  from the  Ministry of  Transportation,  Telecommunications  and Water
Management to the Prime Minister's Office. The Prime Minister's Office is headed
by the  Chancellor  (who is  effectively  the  Deputy  Prime  Minister)  and the
Chancellor  now  has  ministerial  responsibility  for  telecommunications.   An

                                      -6-
<PAGE>


Information Technology Commissioner was appointed to assist the Chancellor.  The
Hungarian government is currently working on new legislation for 2002 to further
liberalize  the  telecommunications  market in accordance  with  European  Union
standards. The regulation of telephony,  cable television and the Internet would
be affected. However, the Company does not expect that the exclusivity period of
its concession rights will be affected.

        Since the privatization of the Hungarian  telecommunications market, the
LTOs and Matav  have spent  approximately  $1 billion  (at  historical  exchange
rates) to build modern state-of-the-art  telecommunications  networks throughout
Hungary.  As a result of such investment,  Matav had  approximately  3.0 million
access  lines  connected to its  telecommunications  networks and the other LTOs
(including  the  Company)  had over  800,000  access  lines  connected  to their
telecommunications networks as of December 31, 2000.

        In the mobile telecommunications  marketplace, Westel 450 and Westel 900
had 76,000 and  1,600,000  subscribers,  respectively,  as of December 31, 2000.
Pannon had approximately 1,250,000 subscribers as of December 31, 2000. Vodafone
had approximately  188,0000  subscribers as of December 31, 2000. As of December
31, 2000, the overall penetration rate for cellular service in Hungary was 31%.

        Due to  the  completion  of  the  Company's  network  modernization  and
construction  program,  access line penetration in the Company's Operating Areas
has  increased to 31 access lines per 100  inhabitants  as of December 31, 2000.
Given that the overall  investment  in the Hungarian  telecommunications  market
over the last several years has produced a  significant  increase in the overall
penetration rate in Hungary to approximately 38% as of December 31, 2000 and the
expansion  of the  mobile  telecommunications  market,  the  Company  expects to
benefit from a continued increase in the use of its telecommunications  services
by  its  customer  base  as  the  overall  Hungarian  telecommunications  market
continues to expand. See also "- Competition."

     HTCC and its Operating Companies

         In 1994, the TTW 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 TTW Ministry.  Matav continues to be the sole provider of domestic
and international  long distance  non-cellular  voice telephone services through
2001.

         HTCC conducts its operations through the Operating Companies. Set forth
below is a chart of HTCC and its principal  subsidiaries  and stockholders as of
March  28,  2001.  Share  ownership  percentages  of HTCC are based on shares of
HTCC's  common stock (the "Common  Stock")  owned as of March 28, 2001,  without
giving effect to outstanding options or warrants.  The ownership percentages for
the Operating  Companies could be affected by certain Hungarian equity ownership
requirements. See "- Regulation - Hungarian Equity Ownership Requirements."

                                      -7-
<PAGE>





                                    [CHART]









         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 32 Center  Street,
Darien,  Connecticut 06820;  telephone (203) 656-3882.  The Company's  principal
office in Hungary is located at Terez krt. 46, H-1066, Budapest; telephone (361)
474-7700.

Certain Stockholders

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

     Citizens Communications Company

         Citizens   Communications  Company  (together  with  its  subsidiaries,
"Citizens") is a New York Stock Exchange listed company which serves 1.4 million
access  lines in 17 states and is  acquiring an  additional  1.7 million  access
lines.  Citizens also owns 85% of Electric  Lightwave,  Inc.  (NASDAQ:  ELIX), a
facilities-based,  integrated  communications provider that offers a broad range
of  telecommunications-intensive  businesses  throughout the United  States.  At
December 31, 2000, Citizens had $7.0 billion of total assets and $1.7 billion in
shareholders'  equity.  For the year ended December 31, 2000,  Citizens had $1.8
billion of revenue and $121.8 million in operating income.

         In May 1995,  Citizens  purchased 300,000 shares of HTCC's common stock
from a former  executive  of the  Company and has since  acquired an  additional
1,902,908  shares of Common Stock and 30,000  shares of the  Company's  Series A
Preferred  Stock  convertible  into 300,000 shares of Common Stock,  pursuant to
certain  agreements  entered  into with HTCC (as amended and restated in certain
cases to date,  the  "Citizens  Agreements").  Citizens also  purchased  103,000
shares  of  Common  Stock on the  open  market  bringing  its  ownership  of the


                                      -8-
<PAGE>

outstanding Common Stock as of March 28, 2001 to 19.1%. The Citizens  Agreements
provide Citizens with certain  preemptive rights to purchase,  upon the issuance
of Common  Stock in certain  circumstances  to third  parties,  shares of Common
Stock in order to maintain its percentage  ownership interest on a fully diluted
basis. For a more detailed description of some of the Citizens  Agreements,  see
Notes 9 and 12 of Notes to Consolidated Financial Statements,  Item 12 "Security
Ownership  of Certain  Beneficial  Owners and  Management,"  and "-  Revision of
Capital Structure."

     Tele Danmark A/S

         Tele Danmark A/S (together with its affiliates,  "Tele Danmark") is the
preeminent  provider of  telecommunications  services in Denmark.  Tele  Danmark
provides a full  range of  telecommunications  services  in  Denmark,  including
landline and cellular telephone services, data communications,  Internet, leased
lines, directory and operator services and cable television. Domestic operations
include 3,735,000 telephone subscriber lines,  1,648,000 cellular users, 801,000
cable television customers and 618,000 Internet dial-up customers.

         At December  31, 1999,  Tele Danmark had total assets of Danish  Kroner
75.1  billion  (approximately  $9.0  billion  at  current  exchange  rates)  and
shareholders'  equity of Danish Kroner 32.6 billion  (approximately $3.9 billion
at current exchange  rates).  During 2000, Tele Danmark had net income of Danish
Kroner 3.591 billion  (approximately  $428 million at current exchange rates) on
net revenues of Danish  Kroner  44.552  billion  (approximately  $5.3 billion at
current exchange rates.)

         Tele Danmark's  activities  abroad have been an important  growth areas
over the last several  years.  Tele Danmark  operates in 12 European  countries.
International  operations  accounted  for 48% of Tele  Danmark's net revenues in
2000.  Tele Danmark has  investments in the Nordic region,  continental  Western
Europe as well as Central and Eastern Europe--among them Belgacom (Belgium), Ben
(the  Netherlands),   Sunrise  (Switzerland),   Talkline  (Germany),   Polkomtel
(Poland),  Contactel (the Czech  Republic) and UMC (Ukraine).  In Hungary,  Tele
Danmark  also holds a 6.6% stake in Pannon,  one of the three  digital  cellular
phone providers in Hungary.

         As a result of certain  agreements between the Company and Tele Danmark
(the "Tele  Danmark  Agreements"),  the Company has issued  2,579,588  shares of
Common Stock to Tele Danmark.  As of March 28, 2001, Tele Danmark owned 21.3% of
the Company's outstanding Common Stock. The Tele Danmark Agreements provide Tele
Danmark with certain preemptive rights to purchase,  upon the issuance of Common
Stock in certain circumstances to third parties, shares of Common Stock in order
to maintain its percentage  ownership  interest of the outstanding Common Stock.
See  Notes 9 and 12 of  Notes  to  Consolidated  Financial  Statements,  Item 12
"Security  Ownership  of  Certain  Beneficial  Owners  and  Management,"  and "-
Revision of Capital Structure."

         Tele Danmark's  stock trades on the  Copenhagen  Stock Exchange and the
New York Stock Exchange.  SBC  Communications of San Antonio,  Texas owns 42% of
the shares,  with the  remaining  shares held by  individual  and  institutional
shareowners all over the world.


                                      -9-
<PAGE>

    Postabank Rt.

         Postabank  was  established  in  1988  and  provides  a wide  range  of
commercial and retail banking services to its private and corporate customers in
Hungary.  As of December 31, 2000,  its total assets were HUF 331 billion  ($1.2
billion).  Today it is the sixth largest Hungarian retail bank in terms of total
assets with a 4.7% market  share of the  deposits and a 1.5% market share of the
loan market. The Hungarian government owns a controlling interest in Postabank.

         In October  1996,  the  Company  entered  into a $170  million  10-Year
Multi-Currency  Credit Facility with Postabank (the "Original  Postabank  Credit
Facility").  In May 1999,  as part of a revision of its capital  structure,  the
Company issued 2,428,572 shares of Common Stock,  warrants to purchase 2,500,000
shares of  Common  Stock and notes in the  aggregate  amount of $25  million  to
Postabank.  The Company also entered  into a $138 million  Dual-Currency  Bridge
Loan  Agreement with Postabank (the  "Postabank  Bridge Loan  Agreement").  As a
result of such issuances and other agreements,  the Company paid off the balance
on the Original  Postabank  Credit Facility and terminated  such  agreement.  In
April 2000 the Company paid off the outstanding  balance on the Postabank Bridge
Loan Agreement with the proceeds of a syndicated loan agreement. See "- Revision
of  Capital  Structure,"   Item  7  "Management's  Discussion  and  Analysis  of
Financial  Condition  and   Results  of  Operations  -   Liquidity  and  Capital
Resources," and Notes 4, 5 and 9 of Notes to Consolidated Financial Statements.

         As of March 28, 2001,  Postabank owned 20.1% of the outstanding  Common
Stock  and  30.9% of the  Common  Stock  on a fully  diluted  basis.  For a more
detailed description of some of the Postabank  Agreements,  see Notes 4, 5 and 9
of Notes to Consolidated  Financial Statements,  Item 13 "Certain  Relationships
and Related  Transactions,"  Item 12 "Security  Ownership of Certain  Beneficial
Owners and Management," and "- Revision of Capital Structure."

    The Danish Investment Fund for Central and Eastern Europe

         The Investment  Fund for Central and Eastern Europe (the "Danish Fund")
is a Danish government initiated and financed investment fund founded in 1989 by
the Danish  Parliament.  The purpose is to promote Danish direct  investments in
Central  and  Eastern  Europe  and  to  enhance  the  possibilities  for  closer
cooperation  between  Danish and  Central and Eastern  European  companies.  The
Danish  Fund  engages in  projects  via  equity  capital  and/or  loans in joint
ventures with a participation of one or more Danish  companies.  The Danish Fund
has  experience in Hungary  (currently  four  projects)  and in  particular  the
Hungarian  telecommunications  sector, as it was involved in Pannon from 1994 to
1996 and in two of the  Operating  Companies  from 1994 to 1997. As of March 28,
2001, the Danish Fund owned 10.6% of the outstanding  Common Stock.  See Item 12
"Security Ownership of Certain Beneficial Owners and Management."

Revision of Capital Structure

         In May 1999 the Company  entered into various  agreements  as part of a
revision of its capital structure with the following  parties:  Postabank;  Tele
Danmark;  the  Danish  Fund;  and  CU  CapitalCorp  and  Citizens  International
Management   Services  Company,   two  wholly-owned   subsidiaries  of  Citizens
Communications Company. As a result of such agreements, the Company extinguished


                                      -10-
<PAGE>

all of its  obligations  (i) to Postabank  under the Original  Postabank  Credit
Facility in the amount of approximately $193 million and the amounts borrowed to
settle a portion  due under a  contractor  financing  facility  in the amount of
approximately  $16 million;  (ii) to one of its  contractors  under a contractor
financing  facility in the amount of  approximately  $35  million;  and (iii) to
Citizens under a $8.4 million  promissory  note which was payable in 2004 and an
obligation to pay Citizens $21 million in 28 quarterly  installments of $750,000
each from 2004 through and  including  2010.  The Company  borrowed $138 million
from Postabank under a one-year Dual-Currency Bridge Loan Agreement in Hungarian
forints and euros and $25  million  pursuant  to certain  unsecured  notes which
mature in 2007. Some of the various agreements which were entered into as of May
10, 1999 are described  herein.  (The  descriptions  and summaries herein do not
purport to be complete,  and are subject to, and qualified in their entirety by,
reference to each such agreement,  copies of which are filed as exhibits hereto.
See Item 14 below).

         The Company and  Postabank  entered  into a  Dual-Currency  Bridge Loan
Agreement (the "Postabank  Bridge Loan")  pursuant to which HTCC's  subsidiaries
borrowed the  equivalent  of $111 million in  Hungarian  forints (at  historical
exchange  rates) and $27 million in euros (at historical  exchange  rates) which
funds were applied to the repayment of the Original  Postabank  Credit Facility.
On April 11, 2000,  the Company  entered into a EUR 130 million  senior  secured
syndicated  bank credit  facility which funds were used to pay off the Postabank
Bridge Loan.

         The Company and  Postabank  also  entered  into a  Securities  Purchase
Agreement (the  "Securities  Purchase  Agreement")  pursuant to which  Postabank
purchased  2,428,572  shares of Common Stock for an aggregate  purchase price of
$34  million.   The  Securities  Purchase  Agreement  provides  for  one  person
designated by Postabank to be nominated  for election to the Company's  Board of
Directors.  Postabank could not transfer its shares until the earlier of (x) the
repayment  in  full of all the  obligations  under  the  Postabank  Bridge  Loan
Agreement or (y) May 10, 2000,  and now  Postabank can only transfer such shares
incrementally  through 2003 subject to the Company's right of first refusal. The
Company's  right of first  refusal  expires in January 2003 and is assignable by
the  Company  to any  beneficial  holder  of  more  than  10%  of the  Company's
outstanding  common  stock.  The  Company  applied the  proceeds  from the stock
issuance to the repayment of the Original Postabank Credit Facility. Pursuant to
the Securities Purchase  Agreement,  the Company issued notes to Postabank in an
aggregate  amount of $25 million (the  "Notes")  with  detachable  warrants (the
"Warrants").   The  Notes,  as  amended,  accrue  interest,   which  is  payable
semi-annually, at 3.5% plus the LIBOR rate for the applicable six month interest
period.  The Notes,  which mature in 2007, are transferable.  The Warrants which
were issued pursuant to a series of Warrant  Agreements  between the Company and
Postabank enable Postabank to purchase  2,500,000 shares of the Company's common
stock at an exercise price of $10 per share.  The exercise  period  commences on
January 1, 2004 and  terminates on March 31, 2007.  The Company has the right to
terminate  the  Warrants  in whole or in part prior to January 1, 2004  provided
that the Company (i) repays a proportionate amount of the outstanding  principal
on the Notes to the  holders of such Notes and (ii) pays an  additional  7.5% of
the  aggregate  principal  amount  of the  Notes  repaid  concurrently  with the
termination of the Warrants to the holders of the Warrants.

         The Company and Tele Danmark  entered into a Stock  Purchase  Agreement
(the "TD  Stock  Purchase  Agreement")  pursuant  to which  the  Company  issued
1,571,429 shares of the Company's common stock in exchange for $11 million.  The
Company  applied  the  proceeds  from the TD  Stock  Purchase  Agreement  to the
repayment of the Original Postabank Credit Facility.

                                      -11-
<PAGE>

         The Company and the Danish Fund entered into a Stock Purchase Agreement
(the  "Danish  Fund Stock  Purchase  Agreement")  pursuant  to which the Company
issued  1,285,714  shares  of the  Company's  common  stock in  exchange  for $9
million.  The Company  applied the proceeds from the Danish Fund Stock  Purchase
Agreement to the repayment of the Original Postabank Credit Facility.

         The Company and Citizens  entered into a Stock Purchase  Agreement (the
"Citizens  Stock  Purchase  Agreement')  pursuant to which the Company issued to
Citizens 1,300,000 shares of the Company's common stock and 30,000 shares of the
Company's Series A Preferred  Stock, par value $0.001 (the "Preferred  Shares").
In  consideration  for such shares,  Citizens (i) transferred to the Company for
cancellation  a $8.4 million  promissory  note issued by the Company to Citizens
which was to mature in 2004,  and (ii) agreed to renounce  and forego any rights
whatsoever to any payment of the $21 million which was payable by the Company to
Citizens in quarterly  installments  of $750,000 from 2004 through and including
2010.  Citizens,  as the holder of the Preferred  Shares, is entitled to receive
cumulative  cash dividends at an annual rate of 5%,  compounded  annually on the
liquidation  value of $70 per share. The Company may redeem the Preferred Shares
at any time.  Citizens can convert each of the  Preferred  Shares into shares of
the Company's common stock on a one for ten basis.  Citizens also waived any and
all  preemptive and  anti-dilution  rights in connection  with the  transactions
described above.

    The April 2000 Syndicated Credit Facility

         On April 11, 2000,  the Company  entered into a EUR 130 million  Senior
Secured Debt Facility  Agreement (the "Debt  Agreement") with a European banking
syndicate  which was arranged by Citibank  N.A.  ("Citibank")  and  Westdeutsche
Landesbank Girozentrale ("WestLB").  The Company drew down EUR 129 million ($121
million at April 20, 2000  exchange  rates),  which funds were used,  along with
another $7.3 million of other Company funds,  to pay off the entire  outstanding
balance  of EUR 134  million  (approximately  $126  million  at April  20,  2000
exchange  rates) on the  Postabank  Bridge Loan,  and fees  relating to the Debt
Agreement.  The borrowers  under the Debt Agreement are the Operating  Companies
who were the  borrowers  under the  Postabank  Bridge Loan  Agreement.  The Debt
Agreement  and  some  of  the  related  agreements  are  described  below.  (The
descriptions and summaries herein do not purport to be complete, and are subject
to, and qualified in their entirety by, reference to each such agreement, copies
of some of which are filed as exhibits hereto. See Item 14 below.)

         The Debt  Agreement has two  facilities.  Facility A is a floating rate
term loan in the amount of EUR 125 million (the "Term Facility") which principal
is  repayable  in  installments  semi-annually  on each June 30 and  December 31
beginning on June 30, 2001 and ending on December  31, 2007.  The amounts of the
principal  repayments on the Term Facility are to be escalating  percentages  of
the amount of the facility  which was drawn down (EUR 125 million).  The Company
borrowed the full EUR 125 million,  of which EUR 84.1 million was funded, and is
repayable,  in euros and the  equivalent of EUR 40.9 million was funded,  and is
repayable in, Hungarian  forints.  The Term Facility loans  denominated in euros
accrues  interest at the rate of the Applicable  Margin (defined below) plus the
EURIBOR  rate  for the  applicable  interest  period.  The  EURIBOR  rate is the
percentage rate per annum  determined by the Banking  Federation of the European
Union for the applicable  interest period. The portion of the Term Facility loan
denominated in Hungarian  forints accrues interest at the rate of the Applicable
Margin (defined below) plus the BUBOR rate for the applicable  interest  period.
The BUBOR rate is the  percentage  rate per annum  determined  according  to the
rules  established  by the  Hungarian  Forex  Association  and  published by the
National Bank of Hungary for the  applicable  interest  period.  The  applicable
interest period for the portion of the Term Facility loans  denominated in euros
is, at the Company's  option,  one,  three or six months.  The Company chose six
months.  The  applicable  interest  period for the portion of the Term  Facility
loans  denominated in Hungarian  forints is, at the Company's  option, in one or

                                      -12-
<PAGE>


three months. The Company chose three months.  Interest is payable at the end of
each interest period. The Applicable Margin is initially, subject to adjustment,
1.75%. The Applicable Margin may be adjusted downward incrementally to a minimum
of 1.15% subject to the financial  performance of the Company as measured by the
ratio of the Company's debt to its earnings before interest, taxes, depreciation
and amortization.

         Facility B is a  floating  rate  revolving  loan in the amount of EUR 5
million (the "Revolving  Facility")  which can only be drawn down in euros.  The
Revolving  Facility will be reduced to EUR 2.5 million on December 31, 2005. The
Revolving  Facility is available  until December 31, 2007. The Company  borrowed
EUR 4 million of the Revolving  Facility to pay off the balance of the Postabank
Bridge Loan and fees  associated  with the  transaction  on April 20, 2000.  The
principal amount borrowed under the Revolving Facility is due at the end of each
interest period at which point the Company can,  subject to certain  conditions,
roll over the amount of principal  borrowed.  The applicable interest period for
the Revolving  Facility is, at the Company's option,  one, three, or six months.
The Company has chosen six months at the  present  time.  Interest is payable at
the end of each interest period calculated similar to that for the Term Facility
loan denominated in euros.

         Dependent on its cash flow, the Company is required to prepay up to the
equivalent of $25 million on the Term Facility.  The amount of the prepayment in
any year shall be at least 50% of the  Company's  excess cash flow,  if any, for
the previous  financial  year as defined in the Debt  Agreement.  The prepayment
amount is due  within 15 days of the filing of each  annual  report on Form 10-K
with the Securities and Exchange Commission. There was no "excess cash flow", as
defined  in  the  Debt  Agreement,  for  2000  and,  therefore, there will be no
prepayment in 2001.

         The  Company  paid an  arrangement  fee in the amount of EUR  2,665,000
(approximately $2.5 million at April 20, 2000 exchange rates), which is included
in other assets along with other  direct  costs  incurred in obtaining  the Debt
Agreement, and is being amortized over the term of the related debt. The Company
also paid an agency fee in the amount of $60,000.  The Company is  obligated  to
pay  an  annual  commitment  fee  equal  to the  lower  of  0.75%  or 50% of the
Applicable Margin on any available unused commitment on the Revolving Facility.

         HTCC and one of its  subsidiaries,  HTCC Consulting Rt., are guarantors
for the HTCC subsidiaries  under the Debt Agreement.  The Company pledged all of
its intangible and tangible assets,  including HTCC's ownership interests in its
subsidiaries,  and its real property to secure all of the obligations  under the
Debt Agreement.  The Company and Citibank Rt. (as security agent) entered into a
series of agreements to secure all of the Company's  obligations  under the Debt
Agreement.  The Debt Agreement contains customary representation and warranties.
The  Company is subject to some  restrictive  covenants  including  restrictions
regarding the ability of the Company to pay dividends,  borrow funds, merge with
another company and dispose of its assets. The Debt Agreement contains customary
events of default,  which would  trigger early  repayment of the Debt  Agreement
including  those  related  to a change  of  control.  If  prior to the  later of
December 31, 2001 or the Trigger Date (as defined below), Tele Danmark sells any
of the shares of Common  Stock that it  currently  owns or Tele  Danmark and the
Danish Fund no longer own, in the aggregate,  at least 30.1% of the  outstanding
Common Stock,  the Company would be in default  under the Debt  Agreement.  Tele
Danmark and the Danish Fund currently own 31.9% of the outstanding Common Stock.
The  Trigger  Date is  defined  as the date on which for the  prior  two  fiscal
quarters the Company's debt to EBITDA ratio is less than 3.5 to 1. Following the
Trigger  Date,  Tele Danmark can only transfer its shares with the prior written
consent of banks holding at least 66.7% of the Company's  outstanding debt under
the Debt Agreement.

                                      -13-

<PAGE>

Strategy

         The  Company's  primary  focus is to continue to increase call revenues
and reduce  operating  costs while  continuing to add  residential  and business
customers to its networks.  To accomplish these goals, the Company is continuing
its efforts to expand its product and service  offerings to its entire  customer
base,  improve its customer service,  increase its operational  efficiencies and
increase  its  marketing  efforts.  The Company has  implemented  the  following
operational strategies in order to further its business objectives.

     Revenue Growth

         The  Company  intends to  continue  to  increase  its call  revenues by
increasing  the  usage  of  its  product  and  service  offerings  by  both  its
residential   and  business   customers.   Since  the   availability  of  modern
telecommunications  services is a relatively  new phenomena in Hungary,  the key
factor in  increasing  the usage is  educating  both  customer  segments  on the
availability  and  benefits of the  Company's  products  and  services.  For the
residential  customers,  the Company is focusing  its efforts on  educating  the
residential  customer on the availability of such products and services as voice
mail, caller ID and call waiting, which are all new to the Company's residential
customer base. The Company is also highlighting the benefits of the Internet and
encouraging its use by offering special discounted rates for Internet usage. One
of the tools that the Company is  deploying  to increase  customer  awareness of
these  services is video and personal  demonstrations  in the  customer  service
centers  which are located in each of the Operating  Areas.  The Company is also
focusing its marketing and educating  efforts at its business  customers,  which
represent 40% of the Company's total  revenues.  The Company has placed emphasis
on  increasing  the  installation  and usage  levels of the  Company's  business
customers  by  focusing  on the  marketing  and  sales of  deregulated  services
including  managed  lease  lines,  PBX sales and  services,  ISDN,  Internet and
Digifon Services (e.g. call forwarding, call waiting, call barring). The Company
has assigned an account manager to each business customer who is responsible for
meeting   with   each   business   customer   to  find   out   such   customer's
telecommunications  needs.  The account manager can then demonstrate each of the
Company's  products and  services  and,  working  together  with that  customer,
develop a telecommunications  strategy using the Company's products and services
which can best enhance that customer's business.

          The Company  plans to continue its revenue  growth by  increasing  the
penetration  levels in the  residential  sector.  To that end,  the  Company  is
continuing  its mass  marketing  efforts to the  residences who have not yet had
service.  The Company is also marketing the benefits of additional  lines to its
existing residential and business customer.

     New Products and Services

     The Company continues to offer the latest  telecommunications  products and
services as they become  available  in the  telecommunications  marketplace.  In
2000,  the Company  introduced  Internet  Protocol-based  voice  services to its
customers.  This enables the Company to offer long  distance  and  international
calling  services at discounted  rates without  violating  Matav's domestic long
distance and international  calling monopoly.  The Company is planning to become
an Internet Service Provider in all of its Operating Areas in 2001.

                                      -14-
<PAGE>

     Marketing

         As the exclusive  provider of basic telephone services in the Operating
Areas, the Company's primary marketing objective is to increase the usage of its
telephone  services by its  existing  residential  and  business  customers.  In
addition,  the Company intends to attract new subscribers by targeting the needs
of various market  segments,  while  maintaining  superior  customer service and
reliability based on current "state of the art"  telecommunications  technology.
The Company's  targeted  market segments are: (i)  residential  customers;  (ii)
small businesses and professionals;  (iii) medium and large businesses; and (iv)
government institutions.

         For its residential  customers and potential  customers,  the Company's
marketing  efforts  include  advertising on radio and  television,  door-to-door
marketing surveys,  newspaper  advertising,  participation in local trade shows,
direct mail, community meetings and billboard  advertising.  The Company is also
offering  discounts for Internet users. To increase the residential  penetration
rate, the Company has  implemented  short  marketing  campaigns  targeting those
residences without phone service.  To induce the potential customers the Company
has offered  special  limited time only rates on the connection  fee. Since many
Hungarians  still  prefer  face-to-face  personal  marketing,  the  Company  has
leveraged  the benefits of having a customer  service  center in each  Operating
Area to give personal demonstrations.

         For its larger  business  customers,  the Company  has trained  account
managers to service these customers and potential customers by educating them on
the  availability of "turn-key"  business  communications  solutions and several
"value added services"  including the premium rate services,  voice mail and all
of the Digifon services (e.g. call forwarding,  call waiting, call barring). The
Company believes that this effort will result in a greater  understanding by its
business  customers and potential  business  customers of the potential  revenue
gains that can be achieved with advanced telecommunications technology.

    Customer Service

         The Company believes that providing a high level of customer service is
important to achieving  its  objective of  attracting  additional  customers and
increasing the usage of existing services by its current customer base. Prior to
completion of the construction  program, some customers waited for over 20 years
for telephone service. Today, most residences and businesses can be connected to
one of the Company's networks within 7 days. The Company also operates full time
operator  service  centers in each of the  Operating  Areas which are staffed by
operators capable of providing,  among other things, call completion assistance,
directory assistance and trouble reporting on a 24 hour basis. In addition,  the
Company  operates  customer service centers in each of the Operating Areas which
offer facsimile,  Internet,  photocopying  and telephone bill payment  services.
These service  centers also sell  communications  equipment,  process  telephone
service  applications and handle billing inquiries.  The Company reorganized its
customer  service  centers by  implementing  the necessary  changes to make such
centers more "customer  friendly." The Company is providing more choices for its
customers and more product information instruction.  For its business customers,
the Company has account representatives for each customer.

                                      -15-
<PAGE>

         Most  of  the  Company's   subscriber   base  consists  of  residential
customers.  As of  December  31,  2000,  87%  of  subscribers  were  residential
customers and 13% were business and other institutional  subscribers  (including
government institutions).

     Operational Efficiency

         The Company is increasing its productivity  and operational  efficiency
by achieving  certain  economies  of scale with  respect to network  management,
administration,   customer  service,  billing,   accounts  receivable,   payroll
processing,  purchasing and network  maintenance.  For example,  the Company has
implemented  its own centralized  operating and accounting  system in all of its
Operating Areas. A significant  increase in operational  efficiency has resulted
from the  implementation  of this system  specifically  in the areas of customer
billing  and  financial  accountability.  In  addition,  some  of the  Company's
Operating  Areas are  contiguous,  which  facilitates the realization of certain
economies  of scale.  For  example,  by using  fiber  optic  technology  between
contiguous   Operating  Areas,   the  Company   realizes   certain   operational
efficiencies by  centralizing  certain  functions.  As of December 31, 2000, the
Operating Companies had a total of 321 access lines per employee.

    Mergers and Strategic Alliances

         As the  Hungarian  telecommunications  market  continues to develop and
become more  liberalized  as the monopolies of Matav and the LTOs expire and the
newer entrants  expand their  presence in Hungary,  the Company will continue to
review  its  options  with   respect  to  any  merger  or   strategic   alliance
possibilities that will enhance shareholder value.

Operations

     Services

         The Company provides  non-cellular local voice telephone service in the
Operating  Areas  which  allows   subscribers  to  have  facsimile,   and  modem
transmission  capabilities  and  makes  available  to its  subscribers,  through
interconnection  with Matav,  domestic and international long distance services.
In  addition  to these  standard  services,  the  Company  currently  offers its
subscribers  data  transmission  and  other  value-added   services,   including
Internet,  voice mail, Internet  Protocol-based voice services,  caller ID, call
waiting,  call  forwarding,  three-way  calling,  toll free calling services and
audio text 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  either HUF 10.20 ($.035) or HUF 13.80  ($0.048) per minute for
peak local calls and HUF 3.0 ($0.011) per minute for off-peak  local calls.  The
TTW  Ministry  has  traditionally  adjusted  such  fees  annually  based  on the
Hungarian  Consumer  Price  Index.  However,  for the last  several  years,  the
Hungarian  government has been rebalancing the fees in order to give more weight
to local calls and subscription  fees at the expense of the charges for domestic
long distance and  international  calls. For all local calls within an Operating

                                      -16-
<PAGE>

Area,  the Company  retains all of the revenues  associated  with the call.  For
domestic  long  distance  calls outside of an Operating  Area  (including  those
between   Operating  Areas,   including   adjacent   Operating  Areas)  and  all
international  calls,  the Company has a revenue sharing  arrangement with Matav
the terms of which are  governed  by a decree  of the Prime  Minister's  Office.
Pursuant  to this  revenue  sharing  arrangement,  the  Company  charges for and
collects   from  its   customers   the  fees  for  domestic  long  distance  and
international  calls.  The Company  then pays these fees to Matav but retains an
interconnection  fee. For domestic long distance and international  calls to the
Company's  customers,  the  Company  receives  an  interconnection  fee.  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.  Since  1998 the TTW  Ministry  and now the Prime
Minister's Office have taken gradual steps to regulate the interconnection  fees
in accordance with internationally accepted benchmarks with the goal of creating
a cost-based  interconnection  fee regime.  See "- Regulation - Rate Setting and
Revenue Sharing."

         Subscription  and  Connection  Fees.  The  Company  collects  a monthly
subscription  fee  from  its  customers.  The  basic  monthly  fee is HUF  3,000
($10.54).  The company also offers some of its low usage customers  (residential
customers) a reduced  subscription  fee of either HUF 1,700 ($5.97) or HUF 1,100
($3.86).  For such reduced monthly  subscription  rates,  any such customer pays
their regular monthly measured  service fee plus an additional  charge of either
 .24 times their monthly  measured  service fee (in the case of HUF 1,700 monthly
subscription  fee customers) or .9 times their monthly  measured service fee (in
the case of HUF 1,100 monthly  subscription fee customers).  See "- Regulation -
Rate Setting and Revenue Sharing."

         The Company  charges its customers  connection fees when they are added
to the  Company's  network.  The Company may  collect  the full  connection  fee
provided that the customer is connected within 30 days;  otherwise,  the Company
may only collect a portion of the connection fee and must connect the subscriber
within one year. Upon connection,  the Company may collect the remaining portion
of the fee.  Connection fees are recognized as income over the expected customer
life  (seven  years)  from the  date  that the  connection  is made.  Currently,
connection  fees are HUF 30,000  ($105.36)  for  residential  customers  and HUF
80,000  ($280.97) for business and other  institutional  subscribers  (including
government  institutions),  which are the maximum allowable fees,  pursuant to a
decree of the Prime Minister's Office.  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,  2000,  approximately  3,367  leased  lines  were in  service.  In
addition,  as of December 31,  2000,  the Company had 1,922 public pay phones in
the Operating  Areas in accordance  with the terms of the Concession  Contracts.
The Company  generates  additional  revenues from the  provision of  value-added
services,  including  ISDN,  voice mail,  call  waiting,  call  forwarding,  and
three-way  calling,  as well as  through  the  sale  and  leasing  of  telephone
equipment.

                                      -17-
<PAGE>

     Pricing

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

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

         The Company currently  purchases  telephone sets in bulk from a variety
of  manufacturers.  Customers can choose to buy the phone or lease the phone and
pay a  monthly  fee  of HUF  220  ($0.77).  Although  there  is no  governmental
regulation  relating to lease rates,  the Company  adjusts  such rates  annually
according to the Hungarian PPI.  Approximately 50% of the Company's  subscribers
as of December 31, 2000 leased their phones from the Company.

Network Design, Construction and Performance

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

     Conventional Network Design

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

                                      -18-
<PAGE>

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

     Wireless Network Design

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

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

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

     Network Administration

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

                                      -19-
<PAGE>

The Operating Companies

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

      Hungarotel

         The  Company  holds a 99.0%  interest  in  Hungarotel.  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  391,700 with an estimated 166,900  residences and
23,000  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.  As of  December  31,  2000,  Hungarotel  had 116,300  access  lines
connected to its network.  The  Hungarotel  network  utilizes a combination of a
conventional build, fiber optic and wireless local loop technology.

      KNC

         The Company holds nearly a 100% interest in KNC. 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
149,000,  with an  estimated  66,400  residences  and 8,300  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 dairy producer, Avonmore, and the Japanese company, Paramount Glass.
The  Operating  Area's  proximity  to  Budapest,  1.5 hours by car, and its many
cultural attractions makes it a desirable weekend and tourist destination. As of
December 31, 2000, KNC had 47,700 access lines connected to its network. The KNC
network utilizes a combination of a conventional build, fiber optic and wireless
local loop technology.

      Papatel

         The Company holds nearly a 100% interest in Papatel. The Operating Area
is composed of 51  municipalities  located in the  northern  portion of Veszprem
County and is contiguous with the Raba-Com Operating Area. The population of the
Papatel  Operating  Area  is  approximately  63,200  with  an  estimated  24,100
residences  and  3,800  business  and  other  potential  subscribers  (including
government institutions).  The region is relatively underdeveloped  economically
with  the  principal  economic  activities   centering  around  light  industry,
appliance  manufacturing,  agriculture and forest products.  Significant foreign
investors in the Operating Area include ATAG,  the Dutch  appliance  maker,  and
Electricite de France. As of December 31, 2000,  Papatel had 20,200 access lines
connected  to its  network.  The Papatel  network  utilizes a  combination  of a
conventional build, fiber optic and wireless local loop technology.

                                      -20-
<PAGE>

      Raba-Com

         The Company holds a 99.9% interest in Raba-Com.  The Raba-Com Operating
Area is comprised of 63 municipalities in Vas County,  which borders Austria and
Slovenia.  The Raba-Com Operating Area has a population of approximately 63,900,
with an estimated 25,900  residences and 3,300 business and other  institutional
subscribers   (including  government   institutions).   The  principal  economic
activities  in  the  Raba-Com   Operating  Area  include  heavy   manufacturing,
agriculture and tourism.  Significant employers include: Linde (a German natural
gas distributor): Philips (a Dutch-owned electronics manufacturer);  EcoPlast (a
plastics producer); and Saga (a British-owned poultry processor). As of December
31, 2000,  Raba-Com  had 22,700  access  lines  connected  to its  network.  The
Raba-Com network utilizes a combination of a conventional  build and fiber optic
infrastructure.

Regulation

         In November  1992,  the  Hungarian  Parliament  enacted  the  Hungarian
Telecommunications  Act of 1992 (the  "Telecom  Act") which took effect in 1993.
The Hungarian Telecom Act provided for, among other things, the establishment of
the conditions under which individuals and companies  (including Matav,  foreign
persons and foreign owned companies) could bid for concessions to build, own and
operate local  telecommunications  networks in  designated  service  areas.  The
Hungarian  Telecom Act also gave the TTW Ministry the  authority to regulate the
industry,   including   the  setting  of  local,   domestic  long  distance  and
international  rates,  the sharing of revenues  between the LTOs and Matav,  the
accrediting  of  equipment  vendors and the setting of  standards  in respect of
network    development   and   services   offered.    The   oversight   of   the
telecommunications industry has been transferred to the Prime Minister's Office.
See  "-  Overview  of  Hungarian  Telecommunications  Industry  - The  Hungarian
Telecommunications  Industry  Today."  In order to meet these  obligations,  the
Hungarian   Telecom   Act  created  a   professional   supervisory   body,   the
Communications Authority. Its tasks include supervising the progress of the LTOs
with respect to build-out  scheduling,  equipment  purchases  and the quality of
network  construction.  The Telecom Act will be replaced by new  legislation  on
telecommunications,   which  is  currently   being   drafted  by  the  Hungarian
government.  Such new legislation may substantially  change the terms upon which
the Company  provides its  services.  At this time,  the Company can not predict
with certainty what the final terms of any new  legislation  will be or how such
legislation will affect the Company's  operations.  See "- Overview of Hungarian
Telecommunications Industry - The Hungarian Telecommunications Industry Today."

     Concession Contracts

         Pursuant to the 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 TTW  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,  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 TTW Ministry  (now the Prime  Minister's  Office) 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.

                                      -21-
<PAGE>


         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 Hungarian government will have
the right to grant additional concessions for non-cellular local voice telephone
services.

         Milestones/Network  Construction.  Each  of  the  Concession  Contracts
prescribe  certain  build-out  obligations   ("milestones")  that  require  each
Operating  Company  to  install  a  specified  number  of  access  lines  within
prescribed time periods.  The failure to meet required  construction  milestones
may result in the levying of fines by the Prime  Minister's  Office.  Such fines
are computed based on a contractual formula and may be substantial.  The Company
believes  that  each  of  the  Operating   Companies  has  met  their  build-out
requirements to date in all material respects.

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

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

         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 Prime
Minister's  Office 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 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  appropriate  Hungarian  regulatory  authority,  although  the
existing  Operating  Company  would  have  priority  in the event the  Operating
Company's  proposal  provides for substantially the same terms and conditions as
that of another bidder.

         Termination  upon  Lack of  Performance.  If an LTO is unable to comply
with its  Concession  Contracts,  the Prime  Minister's  Office has the right to
abrogate the  Concession  Contract.  In such an instance,  the Prime  Minister's
Office has authority to determine alternative provisions for such service, which
may include the sale of the LTO's  telecommunications  assets to an  alternative
provider. The Company believes that it has demonstrated  substantial performance
to date under its  Concession  Contracts and that its  relations  with the Prime
Minister's Office are good and, therefore,  the chance of any termination of any
Concession Contract is remote.

                                      -22-
<PAGE>

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

     Hungarian Equity Ownership Requirements.

         The TTW Ministry stipulated in the Concession  Contracts for Hungarotel
and Papatel,  as amended on June 3, 1996,  that each of the Operating  Companies
must meet certain Hungarian  ownership  requirements so that by the seventh year
anniversary of such  amendments  (June 3, 2003) 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
ending  June 3, 2003,  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  Hungarian  owners of a 10% equity
holding in an Operating  Company must have voting power of at least 25% plus one
share, thus providing  Hungarian owners the right to block certain  transactions
which,  under  Hungarian   corporate  law,  require  a  supermajority  (75%)  of
stockholders voting on the matter, such as mergers and consolidations, increases
in share capital and winding-up.

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

         The equity ownership  requirements  and exceptions  described above are
contained in the June 1996  amended  Concession  Contracts  for  Hungarotel  and
Papatel.  The equity  ownership  requirements  expressly  set forth in KNC's and
Raba-Com's  Concession  Contracts call for a strict 25% plus one share Hungarian
ownership  requirement.  However,  the TTW  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  and,
therefore,  the Company deems these Hungarian ownership requirements for Papatel
and Hungarotel applicable to KNC and Raba-Com as well.

         If the Hungarian  ownership does not meet the required levels,  the LTO
is  required  to give  notice to the  Prime  Minister's  Office,  which may then
require the LTO to rectify  the  situation  within  three  months,  or a shorter
period  if it is  determined  that  there  has  been a  delay  in  the  required
notification.  With respect to the Company,  Postabank,  a Hungarian  commercial
bank, owns approximately 20.1% of HTCC which is the majority owner of all of the
Operating  Companies.   Therefore,  the  TTW  Ministry  deemed  the  Company  in
compliance  with the current 10%  ownership  requirement.  In the event that the
Prime Minister's Office adopts new Hungarian equity ownership requirements,  the
Company  will  formulate  plans  to meet  any such  Hungarian  equity  ownership
requirements.  Failure to do so, or failure to comply with the greater  than 25%
Hungarian  ownership  requirement  at the end of the  seven-year  period,  which

                                      -23-
<PAGE>

expires in 2003, might be considered a serious breach of a Concession  Contract,
giving the Prime Minister's  Office the right,  among other things, to terminate
the Concession Contract. There can be no assurance that the Company will be able
to increase  the  Hungarian  ownership  in the  Operating  Companies in a manner
sufficient to comply with such requirements in the future.

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

         New regulations for the liberalized Hungarian telecommunications market
may remove the Hungarian ownership requirement,  but neither the content, effect
or timing of any new regulations are known by the Company at this time.

         Rate-Setting and Revenue Sharing

         Pursuant to the  Hungarian Act LXXXVII of 1990 on Pricing (the "Pricing
Act") and the Telecom Act, the Prime  Minister's  Office as successor to the TTW
Ministry in oversight of the telecommunications  industry,  issues, in agreement
with the  Hungarian  Ministry of  Finance,  decrees  regulating  the tariffs for
telecommunications services provided by the Company, Matav and the other LTOs.

         In 1997 the TTW Ministry adopted Decree No. 31/1997 of the KHVM on Fees
Related to  Telecommunication  Services  Subject to Concession (the "1997 Tariff
Decree") which regulated the Operating  Companies'  subscription  fees, fees for
local  calls,  and fees  collected  on  behalf of Matav  for long  distance  and
international  calls.  The 1997 Decree also provided for a rebalancing  formula,
which allowed greater  increases in the charges for subscription  fees and local
calls than in domestic long distance or international calls.

         For 2001, in accordance with the general policies set forth in the 1997
Tariff Decree, the Prime Minister's Office adopted Decree No. 1/2001 (I.26) (the
"2001  Tariff  Decree")  which  provides  for  the  following   changes  to  the
subscription  fees from those charged by the Company in 2000: an 11% increase in
the  subscription  fee for the  Company's  residential  customers  (based on the
discounted  monthly  subscription fee for 2001 of HUF 1,700); and a 12% increase
in the  subscription  fee for the Company's  business  customers and residential
customers not opting for either of the discounted monthly subscription fee plans
(of which the HUF 1,700 monthly  subscription fee referred to above is one). See
"-  Operations  - Services -  Subscription  and  Connection  Fees." For measured
service calls,  the 2001 Tariff Decree provided for: no increase or a two forint
per minute  decrease in off-peak  local  calls;  a 13%  increase in certain peak
local  calls and no increase in certain  other peak local  calls;  a decrease in
long distance calls of between 11% and 17%; and decreases in international calls
ranging from 3% to 22%. See "-  Operations - Services - Measured  Service."  The
2001 Tariff  Decree set a price cap for all  service  categories  through  2001,
which provides for a rate increase based on anticipated  CPI for 2001. The Prime
Minister's  Office may also reduce the CPI percentage  increase by an efficiency
factor in calculating the maximum allowable price increase.  The intended effect
of the 2001 Tariff  Decree was to provide for an overall 2001 price  increase of
6% as compared to 2000 based on the anticipated inflation rate in 2001. The 2000
increase in the  Hungarian  CPI,  which for the purposes on the Tariff Decree is
based on the twelve-month period ending October 2000, was 10.4%.

                                      -24-
<PAGE>

         The  Prime  Minister's   Office  also  regulates  the  revenue  sharing
arrangements between the LTOs (including the Operating Companies) and Matav with
respect  to  long  distance  and   international   calls.  The  revenue  sharing
arrangements  provide for the Operating  Companies to retain an  interconnection
fee from the fees  collected  from the Operating  Companies'  customers for long
distance and international calls and for Matav to pay the Operating Companies an
interconnection   fee  for  domestic  long  distance  or   international   calls
terminating  with  one of the  Operating  Company's  customers.  In 1998 the TTW
Ministry announced that it intended to start regulating the interconnection fees
based  on  internationally  accepted  benchmarks  with the  goal of  creating  a
cost-based  interconnection  fee regime within the  parameters of European Union
standards.  To that end, starting in 1999, the interconnection fees were revised
to compensate  the LTOs more  favorably  for costs than in the prior years.  For
2001,  the Ministry  adopted  Decree 8/2001  (III.9) (the "2001  Interconnection
Decree")  which  provides  for the  Operating  Companies  to  receive in 2001 an
average  interconnection  fee of HUF  12.94/minute for the initiation of mobile,
domestic  long  distance  and  international  calls  and an  average  fee of HUF
6.38/minute  for  the   termination  of  mobile,   domestic  long  distance  and
international  calls. Over the last year, the Company has continued to lobby the
Prime  Minister's  Office  with  regard to the  implementation  of a longer term
cost-oriented  interconnection  fee regime,  which is already a requirement  for
European  Union  members.  Cost-based  interconnection  fees  are  likely  to be
implemented in 2002 when Matav's exclusivity rights expire. See "-Competition."

         The Prime Minister's  Office  regulates the subscriber  connection fees
which are currently HUF 80,000  ($280.97) for business  customers and HUF 30,000
($105.36) for residential customers. See "- Operations - Services - Subscription
and Connection Fees."

     Hungarian Taxation

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

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

         Social Insurance  Contributions.  The level of contributions for social
insurance  in Hungary is one of the highest in Europe.  In 2000  employers  were
required to pay the state 33% of an employee's gross salary as a social security
contribution   and  3.0%  of  an  employee's  gross  salary  as  the  employer's
contribution  to the  unemployment  fund.  In addition,  the Company must pay an
additional HUF 3,900 ($13.70) per month for each employee for health  insurance.
The  Company's  share of  pension,  unemployment,  social  security  and  health
insurance payments are reflected in operating and maintenance expenses.

                                      -25-
<PAGE>

Competition

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

         In 1998,  the TTW  Ministry  awarded  Pan-Tel  the  license  to provide
non-exclusive  telecommunications  services such as data  transmission and voice
mail. The current shareholders of Pan-Tel include MAV Rt. (the Hungarian railway
company,  "MAV"), PT Investment  Holding Company and KPN NV (the Dutch telephone
company).  Pan-Tel has  substantially  built a nationwide  fiber optic  backbone
network along the rights-of-way of MAV. Pan-Tel is currently  providing business
communications  services such as digital data, fax and video  transmission using
Internet  Protocol  ("IP")  data  transmission  technology,  primarily  to large
customers.  Pan-Tel focused on the large, multinational companies and government
organizations  as its initial target market.  In 1999, the Hungarian  government
granted  Pan-Tel two separate  licenses to provide  IP-based  voice  services to
residential and business  customers.  The Hungarian  government  determined that
such  service  did not  violate  Matav's  monopolistic  voice  concession  since
voice-over  IP is  considered  "data  transfer".  Matav,  some of the other LTOs
(including the Company),  and certain newer entrants into the  marketplace  have
initiated  voice-over IP services.  Pan-Tel also owns a majority stake in one of
Hungary's largest Internet Service Providers.

         The  Company  faces  competition  from  the  four  Hungarian   cellular
providers:  Westel 450;  Westel 900;  Pannon;  and Vodafone.  Historically,  the
airtime and monthly fees charged by the cellular  operators are  generally  more
than the fees for  comparable  services  charged by the  Company.  The  cellular
telephone  providers  are,  however,   currently  deploying  various  discounted
pre-paid plans, which make pricing comparisons difficult.

         Other Hungarian telecommunications  providers, and potential providers,
include the following entities which have either entered,  or plan to enter, the
telecommunications marketplace,  particularly the business marketplace:  Novacom
Telecommunications  Kft.,  which is owned by  affiliates  of RWE Telliance AG, a
German  telecommunications  company,  EnBW AG, a German electricity provider and
Elmu Rt., the Hungarian electricity distributor ("Elmu"), is expanding the fiber
optic  infrastructure  of Elmu;  GTS Hungary Kft.  ("GTS")  which  provides data
transmission  services  through a nationwide  microwave  network and a satellite
based  network  (GTS  also  owns one of the  leading  Hungarian  ISPs);  Antenna
Hungaria,  the  national  broadcaster  which is still  controlled  by the state;
Global One  Telecommunications  Kft., which provides  IP-based data transmission
services;  Ireland-based eTel Hungary,  which is targeting the corporate market;
BT Hungaria,  an affiliate of British Telecom;  Sweden's Telia AB; the Hungarian
oil and gas company MOL Rt;  Germany's  Infigate GmbH; and U.S.-based  UUNet, an
affiliate of MCI WORLDCOM.

         The Hungarian cable  television  market is highly  fragmented with over
150 cable  television  providers.  The Hungarian  cable  television  industry is
undergoing  consolidation.  An affiliate of United Pan-Europe  Communications NV
("UPC") is the largest cable television  operator in Hungary and owns a LTO with
one  concession  area.  UPC  owners  include  UnitedGlobalCom  Inc.,  the global
television  operator of Denver,  Colorado  (51%),  and Microsoft  Corp.  (8%) of
Redmond, Washington.

                                      -26-
<PAGE>

         The  Hungarian  government  is in the  process  of  revising  its  laws
regarding  the  regulation  of  the  telecommunications  market  in  Hungary  in
accordance  with European Union  standards.  The regulation of telephony,  cable
television and the Internet would be affected.  The Company does not expect that
the exclusivity period of its concession  rights,  which expire in 2002, will be
affected.  However, the outcome of any future telecommunications laws can not be
predicted with any certainty at this point in time.

         Hungary's  application  for membership in the European Union (the "EU")
was  accepted.  Hungary is now in the  process of  negotiating  the terms of its
accession into the EU. The EU has adopted numerous  directives  providing for an
open telecommunications market among its member nations. Hungary is not expected
to become a member of the  European  Union  until 2003 at the  earliest by which
time the exclusivity rights of the LTOs and Matav will have expired.

Employees

         The Company had a total of  approximately  645  employees,  including 5
expatriates,  as of March 2001.  The Company  considers its  relations  with its
employees to be satisfactory.

                               Item 2. Properties

         The Company  leases its office  space in Budapest at a current  monthly
rental of DM 30,750  (approximately  $14,000  at  current  exchange  rates). The
Company  leases  800 square feet of office space at 32 Center Street, Darien, CT
at a monthly  rental of $1,600.  The Company  believes that its leased and owned
office space is adequate for its present  needs but is currently  reviewing  its
alternatives as to its future needs.

         In addition, each Operating Company owns or leases the following office
or customer  service space in its respective  Operating Area: KNC owns or leases
57,000 square feet of total space; Raba-Com owns or leases 15,000 square feet of
total space;  Hungarotel owns or leases 119,594 square feet of total space;  and
Papatel  owns or leases  18,000  square  feet of total  space.  The  Company has
secured all the necessary  rights-of-way with respect to its  telecommunications
networks.

                            Item 3. Legal Proceedings

         Hungarotel  is  a  defendant  in  a  lawsuit  filed  by  Dialcont  Kft.
("Dialcont")  on March 28,  1996  alleging  a breach of  contract  for  services
allegedly  provided by Dialcont during 1994 and 1995.  Dialcont  claimed HUF 222
million ($779,700). The Metropolitan Court in Budapest awarded Dialcont HUF 77.7
million  ($273,000) plus interest and costs of HUF 135.5 million ($476,000) in a
judgement  issued  in  October  2000.  Hungarotel  has  filed an  appeal  to the
Hungarian Supreme Court.

         A provision in Hungarotel's Concession Contracts provides for a payment
by Hungarotel of a sum equal to ten times the local business tax. At the time of
the inception of the Concession  Contracts,  the local business tax was 0%. When
this  increased in one of the regions  within the  Hungarotel  Operating Area in
1996,  one  municipality  claimed  that  Hungarotel  was liable to pay the local
business tax at ten times the prevailing rate. However, the municipality has not
been  able  to  enforce  this  undertaking  because  it is  not a  party  to the
Concession  Contracts.  The  municipality has taken this matter up with both the
Communications  Authority and the TTW Ministry.  In May 1999, the then Hungarian


                                      -27-
<PAGE>

Deputy State  Secretary gave a verbal  confirmation  that the TTW Ministry would
not enforce the undertaking against Hungarotel.  Subsequently, in November 1999,
the TTW  Ministry  sent a  letter  to the  municipality  informing  it that  the
disputed  business tax  provision  was not  enforceable  because the  indefinite
nature of the  undertaking  constituted an unjustified  burden on Hungarotel and
that the  undertaking was not in compliance with the laws on Local Business Tax.
The most recent  development  in this  matter is a letter from the  municipality
dated January 18, 2001,  demanding the sum of HUF 648.0 million ($2.3  million).
The letter states that, in the absence of payment,  the  municipality  will take
the matter up with the Prime Minister's Office, the Communications Authority and
others.  Hungarotel  intends  to  defend  this  action  and  believes  that such
provision is unenforceable.

         Raba-Com is a defendant in a lawsuit filed by an individual residential
customer  in Hungary on  December 4, 1997.  The  plaintiff  sought a refund of a
minimal amount alleging that his home was connected to Raba-Com's  network in an
untimely fashion.  The court ruled against Raba-Com and Raba-Com has appealed to
the Hungarian Supreme Court.  Should,  however,  Raba-Com lose its appeal at the
Supreme  Court level,  the Company  could be subject to  additional  claims from
other residential customers for refunds. The Company believes it has meritorious
defenses  against  this claim and any others  that may be filed  regarding  this
matter.

         A portion of KNC's  network used  wireless  technology to certain homes
instead  of a fixed  connection.  One  village in KNC's  Operating  Area filed a
lawsuit  demanding  that KNC  install  fixed  lines  to all of the  homes in the
village.  It is KNC's position that it is permissible to use wireless technology
as it deems  appropriate.  KNC lost in the lower  court but won on  appeal.  The
plaintiff village has until April 27, 2001 to file a request for review with the
Hungarian  Supreme  Court.  The village  would have to show that the lower court
erred in the application of the law. The Company believes that the plaintiff has
no valid  grounds for a review and believes that KNC would prevail on the merits
of its case.

         During 1996 and 1997,  the Company  entered into  several  construction
contracts  with a  Hungarian  contractor  which  totaled  $59.0  million  in the
aggregate,  $47.5 of which was financed by a contractor financing facility.  The
contractor  financed  the  facility  through  Postabank.  The  Company  and  the
contractor  have a disagreement  with respect to several issues  relating to the
quality  and  quantity  of the work  done by the  contractor.  The  Company  has
rejected  invoices from the  contractor in the amount of  approximately  HUF 700
million  (approximately  $2.5  million).  In order to resolve these issues,  the
Company  purchased from Postabank  some of Postabank's  receivables  owed by the
contractor  to  Postabank  (approximately  $14  million)  with  respect  to  the
contractor financing facility. The Company also purchased from Postabank some of
the  obligations  which the Company owed to the contractor  under the contractor
financing facility which were assumed by Postabank  (approximately $25 million).
The  Company  then set off its  remaining  uncontested  liabilities  owed to the
contractor  (approximately $3.2 million) against the amounts owed to the Company
by the  contractor  (approximately  $14 million).  The contractor is now seeking
payment under separate  invoices in the amount of approximately  $24 million for
work which the Company is disputing because of quality and quantity issues.  The
Company still has contractual claims against the contractor of approximately $31
million attributable to deficiencies in the work performed by the contractor. In
1999, Reorg Rt., a subsidiary of Postabank ("Reorg"), responsible for collecting
Postabank's  bad  debts  initiated  debt  collection   proceedings  against  the
contractor.  In June 2000 Reorg  claimed the benefit of certain  invoices in the

                                      -28-
<PAGE>

amount of HUF 455  million  ($1.6  million)  that the  contractor  had issued to
Hungarotel,  asserting  that the contractor had assigned those invoices to it as
security in the debt collection  proceedings.  Hungarotel rejected Reorg's claim
on the grounds that the contractor had no right to assign the invoices and that,
in any event,  Hungarotel has a substantive  defense and a  counterclaim  on the
merits to the  underlying  claims on the  invoices.  A court  hearing on Reorg's
claim against  Hungarotel  will be held in April 2001.  The Company is reviewing
its  options  with  respect to such  dispute.  At this time the  outcome of such
dispute cannot be predicted with  certainty.  The Company  believes that it will
prevail on the merits such that it will not be  responsible  for the full amount
of the contractor's claims. There can, however, be no assurances as to the final
outcome or course of action of such dispute.

         The Company is involved in various other legal  actions  arising in the
ordinary  course of business.  The Company is contesting  these legal actions in
addition to the suits noted above; however, the outcome of individual matters is
not  predictable  with  assurance.  Although  the ultimate  resolution  of these
actions  (including the actions discussed above) is not presently  determinable,
the Company believes that any liability resulting from the current pending legal
actions involving the Company, in excess of amounts provided therefor,  will not
have a material 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, 2000.

                                     PART II

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

Market Information

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

                                      -29-
<PAGE>


         The  following  table sets  forth the high and low sale  prices for the
Common Stock as reported by the Amex for each quarter in 1999 and 2000.

                                    High           Low
Quarter Ended:
-------------

1999
March 31, 1999 . . . . . . . . .    $ 5-1/4        $ 3-1/4
June 30, 1999. . . . . . . . . .      7              3-3/4
September 30, 1999 . . . . . . .      6-1/2          4-9/16
December 31, 1999. . . . . . . .      7-1/4          4-13/16

2000
March 31, 2000 . . . . . . . . .    $10-1/2        $ 6-7/8
June 30, 2000. . . . . . . . . .      8-5/8          5-1/2
September 30, 2000 . . . . . . .      7-3/8          4-3/4
December 31, 2000. . . . . . . .      6-3/8          4-1/8

         On March 27,  2001,  the closing sale price for the Common Stock on the
Amex was $7.40.

Stockholders

         As of March 28, 2001, the Company had 12,103,180 shares of Common Stock
outstanding  held by 104  holders of record.  The Company  believes  that it has
approximately 1,300 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,  2000,  including  financial  statements  filed  therewith.
Stockholders  wishing a copy may send their  request to the Company at 32 Center
Street, Darien, CT 06820.

Dividend Policy

         In 1999,  the Company  issued  30,000 shares of its Series A Cumulative
Convertible  Preferred  Stock  with a  liquidation  value  of $70 per  share  to
Citizens.  Any holder of such Preferred Shares is entitled to receive cumulative
cash dividends in arrears at the annual rate of 5%,  compounded  annually on the
liquidation value. As of December 31, 2000, the total arrearage on the Preferred
Shares  was  $175,000.  Under  Delaware  law,  HTCC is  restricted  from  paying
dividends at this time.  Therefore,  the Company does not anticipate  paying any
dividend on its  preferred  stock until such time as it is legally  permissible.
Furthermore, 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 on its common
stock until earnings of the Company warrant such dividends,  and there can be no
assurance that the Company can achieve such 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

                                      -30-
<PAGE>

obligations  of  the  Operating  Companies.  The  Operating  Companies  are  the
borrowers under the Debt Agreement  which provides that the Operating  Companies
can only make  distributions to HTCC for limited purposes which does not include
dividends. See Item 1 "Business - Revision of Capital Structure - The April 2000
Syndicated Credit Facility."

Recent Sales of Unregistered Securities

          On September 1, 1998, the Company issued 18,469 shares of Common Stock
to Alcatel Austria AG as further and final consideration for the purchase by the
Company in 1995 of controlling equity interests in Hungarotel and Papatel.

          On  September  30,  1998,  the Company issued 100,000 shares of Common
Stock to Citizens as part of a  settlement  of the  termination  of a management
services agreement.

          On May 12, 1999 the Company entered into a series of transactions with
Citizens,  the Danish  Fund,  Postabank  and Tele  Danmark pursuant to which the
Company revised its capital structure. As part of such transactions, the Company
issued: 1,300,000 shares of Common Stock to Citizens; 1,285,714 shares of Common
Stock to the Danish Fund;  2,428,572  shares of Common Stock to  Postabank;  and
1,571,429 shares of Common Stock to Tele Danmark. The Company also issued 30,000
shares of its Series A Cumulative  Convertible Preferred Stock to Citizens.  The
30,000 shares of preferred stock are convertible by Citizens into 300,000 shares
of Common Stock.  The shares of preferred stock are redeemable by the Company at
the  liquidation  value of $70 per share.  The Company  also issued  warrants to
Postabank to purchase  2,500,000  shares of Common  Stock at $10 per share.  The
exercise  period is from  January 1, 2004  through  March 31,  2007.  For a more
detailed  description  of these  agreements,  see Item 1 "Business - Revision of
Capital Structure" and Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."

          On December 21, 2000, the Company issued 72,000 shares of Common Stock
to the International Finance Corporation,  a member of the World Bank Group (the
"IFC").  The  Company  issued  the shares in  exchange  for the IFC's 20% equity
interest in Papatel.

          All of these unregistered issuances were in reliance upon an exemption
from the registration provisions of the Securities Act of 1933 (the  "Securities
Act") set forth in Section 4(2) thereof  relative to  transactions  by an issuer
not involving any public offering.  Each of the purchasers was informed that the
transactions were being effected without  registration  under the Securities Act
and that the shares acquired could not be resold without  registration under the
Securities  Act unless the sale is effected  pursuant to an  exemption  from the
registration requirements of the Securities Act.


                                      -31-

<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)

<TABLE>
<S>                                    <C>           <C>            <C>             <C>           <C>
                                        2000          1999            1998             1997           1996
                                        ----          ----            ----             ----           ----
For the Year
Operating revenues, net                $42,974       $ 45,438       $ 38,707        $26,522*       $17,126*
Operating income (loss)                $16,469       $ 16,189       $ (6,059)      $ (1,263)      $(20,553)
Operating income (loss) per
  common share                           $1.37          $1.68         ($1.14)        ($0.28)        ($4.93)
Loss before extraordinary items        $(5,331)      $(17,773)      $(50,612)      $(36,236)      $(54,769)
Net income (loss)                      $(5,331)       $ 3,172       $(50,612)      $(36,236)      $(54,769)
Net income (loss) per common share      $(0.45)        $ 0.33        $ (9.53)        $(7.97)       $(13.14)
At Year-End
Total assets                           $147,318      $154,683       $177,067       $186,485       $156,615
Long-term debt, excluding
  current installments                 $124,814      $139,661       $202,881       $194,537       $148,472
Total stockholders' (deficiency)
  equity                               $(10,878)      $(6,946)      $(89,037)      $(41,837)      $(23,790)

</TABLE>

*  Revenues  are  adjusted  to  reflect  the  requirements  of  the  SEC's Staff
   Accounting  Bulletin  101   ("SAB 101")  which   requires  the  deferral   of
   installation  revenue  and  related installment costs.  These adjustments did
   not affect the previously reported net losses; such adjustments resulted in a
   reduction  of  previously  reported  revenues  and  costs  of $11,369,000 and
   3,784,000 in 1997 and 1996, respectively.

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

Introduction

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

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

                                      -32-
<PAGE>

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

         The Company  funded its  construction  costs and working  capital needs
over several years  primarily  through  Credit  Facilities  with Postabank and a
$47.5 million  contractor  financing  facility.  On March 30, 1999,  and May 12,
1999, the Company entered into a series of transactions (see Notes 4, 5 and 9 of
Notes to Consolidated  Financial  Statements)  which  restructured the Company's
debt and capital  structure.  As the final step in the Company's debt and equity
restructuring,  on April 11,  2000,  the Company  entered into a EUR 130 million
Senior Secured Debt Facility with a European banking syndicate. See "- Liquidity
and Capital Resources."

         To date, the Company's  activities have involved the acquisition of the
concessions  and  telecommunications  networks  from  Matav  and the  subsequent
design,   development  and   construction   of  the  modern   telecommunications
infrastructure  that  the  Company  now has in  service.  The  Company  paid the
Ministry $11.5 million (at historical exchange rates) for its concessions, spent
approximately  $23.2  million  (at  historical  exchange  rates) to acquire  the
existing  telecommunications assets in its Operating Areas from Matav, and spent
$190 million  through  December 31, 2000 (at historical  exchange  rates) on the
development and  construction of its  telecommunications  infrastructure.  Since
commencing the provision of telecommunications  services in the first quarter of
1995, the Company's network construction and expansion program has added 145,500
access  lines  through  December 31, 2000 to the 61,400  access  lines  acquired
directly  from Matav.  As a result,  the Company  had  206,900  access  lines in
operation at year end 2000.

Comparison of Year Ended December 31, 2000 to Year Ended December 31, 1999

         The  Company's  Hungarian  subsidiaries'  functional  currency  is  the
Hungarian forint. The average Hungarian forint/U.S. dollar exchange rate for the
year ended  December  31, 2000 was 281.10,  as compared to an average  Hungarian
forint/U.S. dollar exchange rate for the year ended December 31, 1999 of 238.08.
This  devaluation of the Hungarian  forint against the U.S.  dollar reflects the
strengthening of the U.S. dollar against the Hungarian forint during the period.
When  comparing the year ended  December 31, 2000 to the year ended December 31,
1999,  it  should  be noted  that all U.S.  dollar  reported  amounts  have been
affected  by this 18%  devaluation  in the  Hungarian  subsidiaries'  functional
currency.

   Net Revenues
                                                                Year ended
      (dollars in millions)                              2000            1999

      Measured service revenues                         $ 30.7          $ 35.2
      Subscription revenues                               13.1            10.9
      Net interconnect charges                            (6.5)           (7.0)
                                                         -----           -----
      Net measured service and subscription revenues      37.3            39.1
      Connection fees                                      2.1             1.8
      Other operating revenues, net                        3.6             4.5
                                                         -----           -----
      Telephone Service Revenues, Net                    $43.0           $45.4
                                                         =====           =====
                                      -33-
<PAGE>


         The Company recorded a 5% decrease in net telephone service revenues to
$43.0  million for the year ended  December 31, 2000 from $45.4  million for the
year ended December 31, 1999.

         Net  measured  service and  subscription  revenues  decreased  to $37.3
million for the year ended  December  31,  2000 from $39.1  million for the year
ended  December 31,  1999.  Measured  service  revenues  decreased  13% to $30.7
million  in 2000  from  $35.2  million  in  1999,  while  subscription  revenues
increased  20% to $13.1  million  in 2000 from $10.9  million in 1999.  Measured
service revenues increased in functional currency terms by approximately 2% as a
result of an  increase in average  access  lines in service  from  approximately
190,000  lines for the year ended  December  31, 1999 to  approximately  202,400
lines for the year ended  December 31, 2000,  offset by an average 3.6% decrease
in call tariffs between 1999 and 2000 as a result of tariff  re-balancing  which
was  introduced  during 2000.  Under  tariff  re-balancing,  a more  cost-driven
payment  structure is envisaged  with monthly  subscription  fees  increasing to
cover  network  infrastructure  expenses  over time.  In Hungary,  over the past
several years, as in many other countries,  cheaper local call charges have been
subsidized by expensive  international  and domestic  long-distance  calls.  The
overall effect on a gross revenue basis for the telecom industry, as a whole, is
expected to be neutral.  The increase in measured service revenues in functional
currency terms,  however,  has been offset by the approximate 18% devaluation of
the  functional  currency  during  the year  and,  therefore,  measured  service
revenues show a 13% decrease  year-on-year  in U.S.  dollar terms.  Subscription
revenues increased in functional currency terms by approximately 41% as a result
of tariff  re-balancing  effective  February 1, 2000, as well as the increase in
average  access  lines in  service.  The  increase in  subscription  revenues in
functional  currency  terms,  however,  has been offset by the  approximate  18%
devaluation   of  the  functional   currency   during  the  year  and  therefore
subscription   revenues   show  only  a  20%  increase  in  U.S.   Dollar  terms
year-on-year.

         These  revenues  have been reduced by net  interconnect  charges  which
totaled  $6.5  million for the year ended  December 31, 2000 as compared to $7.0
million  for the year ended  December  31,  1999.  As a  percentage  of call and
subscription revenues, net interconnect charges have declined from 15.2% for the
year ended  December  31, 1999 to 14.8% for the year ended  December  31,  2000.
Based upon recent  negotiations with Matav and the TTW Ministry (later the Prime
Minister's  Office),  the  Company  expects  net  interconnect   charges,  as  a
percentage of call and subscription  revenues, to decrease in 2001 compared with
2000 levels.

         Connection  fees,  which represent fees paid by customers to connect to
the Company's  networks,  increased 17% for the year ended  December 31, 2000 to
$2.1  million from $1.8  million for the year ended  December  31, 1999.  In the
fourth  quarter of 2000, the Company  implemented  the Securities and Exchange's
Staff Accounting Bulletin No. 101 ("SAB 101"), with effect from January 1, 2000,
which requires connection fees and corresponding  direct incremental costs to be
deferred and amortized over future periods. As a result of the implementation of
SAB 101, certain connection fees and costs recognized in prior periods have been
deferred and are being amortized over the estimated average subscriber life of 7
years.  There was no cumulative effect on earnings from the adoption of SAB 101,
nor  has  its  adoption  had a  material  impact  on the  Company's  results  of
operations.  Following  the  adoption of SAB 101, the  amortization  of deferred
connection fee revenue and associated  direct  incremental  costs is included in
telephone service revenues and operating and maintenance expenses.

                                      -34-
<PAGE>

         Other operating  revenues,  which include  revenues  generated from the
provision of direct lines and other  miscellaneous  telephone  service revenues,
totaled $3.6 million for the year ended  December 31, 2000,  as compared to $4.5
million during the year ended December 31, 1999.

     Operating and Maintenance Expenses

         Operating and  maintenance  expenses  decreased 2% to $17.1 million for
the year ended December 31, 2000 as compared to $17.5 million for the year ended
December 31, 1999.  In functional  currency  terms,  operating  and  maintenance
expenses  increased 6%,  excluding  the effect of the change in  accounting  for
connection fees and corresponding  direct  incremental costs, for the year ended
December  31,  2000,  as  compared to the year ended  December  31,  1999.  This
increase in functional currency terms is due to inflationary  increases in costs
at the Company's Hungarian subsidiaries, offset by savings related to reductions
in the number of  ex-patriates  working  for the  Company.  On a per line basis,
operating and maintenance  expenses  decreased to approximately  $84 per average
access  line for the year ended  December  31,  2000 from $92 for the year ended
December 31, 1999.  On a per line basis,  operating  and  maintenance  costs are
expected to decline as additional access lines are added during 2001.

     Depreciation and Amortization

         Depreciation and amortization  charges decreased $2.4 million,  or 20%,
to $9.4 million for the year ended  December 31, 2000 from $11.8 million for the
year ended  December  31,  1999.  This  decrease in U.S.  Dollar terms is due to
depreciation and amortization charges decreasing in functional currency terms by
approximately  6% combined  with the 18%  devaluation  of the  Hungarian  forint
during the period.  The 6% decrease in depreciation and amortization  charges in
functional  currency terms is due to additional  depreciation  being recorded at
two of the  Company's  subsidiaries  during  1999 ($0.7  million  at  historical
exchange rates) on certain network equipment.  The equipment was replaced due to
the  subsidiaries'   relinquishment  of  rights  to  use  certain   broadcasting
frequencies, previously granted by TTW Ministry.

     Income from Operations

         Income from  operations  increased to $16.5  million for the year ended
December  31, 2000 from $16.2  million  for the year ended  December  31,  1999.
Contributing to such improvement  were lower operating and maintenance  expenses
and lower depreciation and amortization charges.

     Foreign Exchange Losses

         Foreign exchange losses  increased $2.0 million,  net of a gain of $0.9
million related to the Company's forward hedging contracts,  to $4.8 million for
the year ended  December 31, 2000 from $2.8 million for the year ended  December
31, 1999. Such foreign  exchange losses resulted  primarily from the devaluation
of the Hungarian forint against the U.S. dollar and euro during the period. This
increase  in  foreign  exchange  losses  during  the  period  is also due to the
Company's  refinancing  of its  debt  obligations  in April  2000.  Prior to its
refinancing,  approximately  20%  of  the  Company's  debt  was  denominated  in
currencies  other  than  the  Hungarian  forint,   whereas   subsequent  to  its
refinancing,  the Company's debt is approximately  69% denominated in currencies

                                      -35-
<PAGE>

other  than the  Hungarian  forint.  Therefore,  when  such  non-forint  debt is
converted into Hungarian forints, the Company reports foreign exchange losses on
its consolidated financial statements when the Hungarian forint devalues against
such non-forint  currencies  during the reporting  period.  See "- Inflation and
Foreign  Currency," and Item 7A "Quantitative and Qualitative  Disclosures About
Market Risk - Market Risk Exposure."

     Interest Expense

         Interest  expense  decreased  43% to $18.5  million  for the year ended
December 31, 2000 from $32.5 million for the year ended December 31, 1999.  This
$14.0 million  decrease was partially  attributable to lower average debt levels
during the year ended  December 31, 2000 as compared to the year ended  December
31, 1999, due to the Company's restructuring of its debt obligations in May 1999
and the subsequent  refinancing of those  obligations in April 2000. As a result
of the  refinancing  in April 2000,  the  Company's  borrowings  went from being
mostly Hungarian  forint  denominated to mostly euro  denominated.  The decrease
also reflects the lower  interest  rates paid on borrowings in U.S.  dollars and
euros,  compared to Hungarian  forints.  As a result of the restructuring in May
1999 and the refinancing in April 2000, the Company's  weighted average interest
rate on its debt  obligations  went from 13.17% for the year ended  December 31,
1999, to 10.70% for the year ended  December 31, 2000, a 19% decrease.  Included
in interest expense for the year ended December 31, 2000 is  approximately  $1.6
million of amortization  of the forward points on the Company's  forward foreign
currency contracts. See "- Liquidity and Capital Resources."

     Interest Income

         Interest  income  decreased to $1.5 million for the year ended December
31, 2000 from $1.7 million for the year ended December 31, 1999 primarily due to
lower interest rates on Hungarian forint deposits during the period.

     Loss Before Extraordinary Items

         As a result of the factors discussed above, the Company recorded a loss
before  extraordinary  items of $5.3 million,  or $0.45 per share,  for the year
ended  December  31, 2000 as compared  to a loss before  extraordinary  items of
$17.8 million, or $1.85 per share, for the year ended December 31, 1999.

      Extraordinary Items, net

         For  the  year  ended  December  31,  1999,  the  Company  recorded  an
extraordinary  item, net of $20.9 million  comprised of extraordinary  income of
$27.2 million  which  consists of a $9.0 million gain on  extinguishment  of the
liabilities  the  Company  had  with  Citizens  and  a  $18.2  million  gain  on
extinguishment of all amounts due under a contractor financing facility,  offset
in part by a non-cash  charge of $6.3  million  related to the  write-off of the
remaining  unamortized  deferred  financing costs and credits  pertaining to the
Original Postabank Credit Facility.

      Net Income (Loss)

         As a result of the factors  discussed above, the Company recorded a net
loss available for common  stockholders of $5.4 million, or $0.45 per share, for
the year ended December 31, 2000 as compared to net income  available for common
stockholders of $3.1 million, or $0.33 per share for the year ended December 31,
1999.


                                      -36-
<PAGE>

Comparison of Year Ended December 31, 1999 to Year Ended December 31, 1998

         The average  Hungarian  forint/U.S.  dollar  exchange rate for the year
ended  December  31,  1999 was  238.08,  as  compared  to an  average  Hungarian
forint/U.S. dollar exchange rate for the year ended December 31, 1998 of 214.98.
When  comparing the year ended  December 31, 1999 to the year ended December 31,
1998,  it  should  be noted  that all U.S.  dollar  reported  amounts  have been
affected  by this 11%  devaluation  in the  Hungarian  subsidiaries'  functional
currency.


   Net Revenues
                                                              Year ended
      (dollars in millions)                              1999            1998
      Measured service revenues                        $ 35.2          $ 32.2
      Subscription revenues                              10.9            10.7
      Net interconnect charges                           (7.0)           (9.8)
                                                        -----           -----

      Net measured service and subscription revenues     39.1            33.1
      Connection fees                                     1.8             2.0
      Other operating revenues, net                       4.5             3.6
                                                        -----           -----
      Telephone Service Revenues, Net                   $45.4           $38.7
                                                        =====           =====


         The Company  recorded a 17% increase in net telephone  service revenues
to $45.4 million for the year ended December 31, 1999 from $38.7 million for the
year ended December 31, 1998.

         Net measured service and subscription  revenues  increased 18% to $39.1
million for the year ended  December  31,  1999 from $33.1  million for the year
ended December 31, 1998. Measured service revenues increased 9% to $35.2 million
in 1999 from $32.2 million in 1998 while  subscription  revenues increased 2% to
$10.9  million in 1999 from $10.7 million in 1998.  These  increases in call and
subscription  fee  revenues  were the result of a 7% increase in average  access
lines in service from  approximately  178,000 lines for the year ended  December
31, 1998 to approximately 190,000 lines for the year ended December 31, 1999.

         These  revenues were offset by net  interconnect  charges which totaled
$7.0  million for the year ended  December  31, 1999 as compared to $9.8 million
for the year ended  December 31, 1998. As a percentage of call and  subscription
revenues, net interconnect charges declined from 23% for the year ended December
31, 1998 to 15% for the year ended December 31, 1999, due to a higher proportion
of local  traffic  as  additional  access  lines are  placed in  service  plus a
negotiated reduction in interconnect fees effective January 1, 1999.

         Connection  fees for the year ended  December  31,  1999  totaled  $1.8
million as  compared  to $2.0  million  for the year ended  December  31,  1998.
Connection  fees increased in functional  currency terms by 5% due to additional
access lines being  connected in 1999 as compared to 1998.  However,  due to the
devaluation  of the  Hungarian  Forint  during  1999,  connection  fees for 1999
remained relatively consistent in U.S dollar terms with 1998 amounts.

                                      -37-
<PAGE>

         Other operating  revenues increased 25% to $4.5 million during the year
ended  December 31, 1999 compared to $3.6 million during the year ended December
31, 1998 due to revenues  generated from the provision of direct lines and other
miscellaneous telephony service revenues.

     Operating and Maintenance Expenses

         Operating and maintenance expenses for the year ended December 31, 1999
decreased to $17.5 million compared to $19.6 million for the year ended December
31, 1998. On a per line basis,  operating and maintenance  expenses decreased to
approximately  $92 per average  access line for the year ended December 31, 1999
from  $110 for the year  ended  December  31,  1998 as a result  of the  Company
achieving  productivity  improvements  and  increasing  its  focus  on  reducing
operating   expenses,   particularly   through   reductions  in  the  number  of
ex-patriates  working  for  the  Company,  as  well  as the  devaluation  of the
Hungarian forint.

     Depreciation and Amortization

         Depreciation  and amortization  charges  increased to $11.8 million for
the year ended  December 31, 1999 from $11.6 million for the year ended December
31, 1998. Depreciation and amortization charges increased in functional currency
terms by approximately 13% due to additional capital  expenditures  between 1998
and 1999 and extra  depreciation on certain network equipment.  However,  due to
the  devaluation  of  the  Hungarian   forint  during  1999,   depreciation  and
amortization  charges for the year ended 1999 remained relatively  consistent in
U.S. dollar terms with 1998 amounts.

     Management Fees

         There was no  management  fee expense for the year ended  December  31,
1999 as compared to $2.5  million for the year ended  December  31,  1998.  This
decrease was due to the termination of a management  services  agreement between
the Company and Citizens International  Management Services Company. See Note 12
of Notes to  Consolidated  Financial  Statements.  The Company does not have any
continuing management services agreements.

     Cost of Termination of Management Services Agreement

         For the year ended  December  31, 1998,  the Company  recorded a charge
totaling  $11.1  million  representing  the  present  value of  payments  due to
Citizens  International  Management  Services  Company under a  termination  and
consulting agreement. See Note 12 of Notes to Consolidated Financial Statements.

     Income (Loss) from Operations

         Income from  operations  was $16.2 million for the year ended  December
31, 1999  compared to a loss from  operations of $6.1 million for the year ended
December 31, 1998.  Adjusted for the cost of terminating the management services
agreement  and  management  fees,  income  from  operations  for the year  ended
December 31, 1998 amounted to $7.6 million.  Contributing  to such  improvements
were higher  revenues  and lower  operating  and  maintenance  expenses  and the
elimination  of the  management  fees  described  above  during  the year  ended
December 31, 1999 as compared to the year ended  December  31,  1998,  offset by
increased depreciation and amortization charges during 1999.

                                      -38-
<PAGE>

     Foreign Exchange Losses

         Foreign  exchange losses increased $2.6 million to $2.8 million for the
year ended  December 31, 1999 from $0.2 million for the year ended  December 31,
1998. Such foreign  exchange  losses resulted  primarily from the devaluation of
the  Hungarian  forint  against the U.S.  dollar  during 1999.  This increase in
foreign exchange losses during 1999 is due to the Company's restructuring of its
debt  obligations in May 1999. Prior to its  restructuring  the Company had debt
denominated in Hungarian forints. Subsequent to the Company's restructuring,  it
has debt obligations denominated in U.S. dollars and euros, as well as Hungarian
forints.  Therefore,  when such  non-forint  debt is  converted  into  Hungarian
forints,  the  Company  reports  foreign  exchange  losses  on its  consolidated
financial  statements when the Hungarian forint devalues against such non-forint
currencies during the reporting period.  See "- Liquidity and Capital Resources"
below for information  regarding the Company's debt  restructuring.  See also "-
Inflation  and  Foreign  Currency,"  and Item 7A  Quantitative  and  Qualitative
Disclosures About Market Risk - Market Risk Exposure" below.

     Interest Expense

         Interest expense decreased to $32.5 million for the year ended December
31, 1999 from $45.9 million for the year ended December 31, 1998.  This decrease
was attributable to lower average debt levels during the year ended December 31,
1999 as compared to the year ended December 31, 1998.  This reduction in average
debt levels outstanding during 1999 is due to the Company's restructuring of its
debt  obligations  in May 1999.  The decrease also reflects lower interest rates
paid on borrowings in U.S. Dollars and Euros compared to Hungarian Forints.

     Interest Income

         Interest  income  increased to $1.7 million for the year ended December
31, 1999 from $0.7 million for the year ended December 31, 1998 primarily due to
higher average cash balances outstanding during 1999.

     Other, net

         Other expense  amounted to $0.4 million for the year ended December 31,
1999 as compared to other income of $0.8 million for the year ended December 31,
1998. This decrease is due to an approximate  $0.8 million gain realized related
to the  termination  of the former  management  services  agreement  between the
Company and Citizens International  Management Services Company during 1998. The
Company does not have any continuing management services agreements. See Note 12
of Notes to Consolidated Financial Statements.

     Loss Before Extraordinary Items

         As a result of the factors discussed above, the Company recorded a loss
before  extraordinary  items of $17.8 million,  or $1.85 per share, for the year
ended  December  31, 1999 as compared  to a loss before  extraordinary  items of
$50.6 million, or $9.53 per share, for the year ended December 31, 1998.

                                      -39-
<PAGE>

      Extraordinary Items, net

         For  the  year  ended  December  31,  1999,  the  Company  recorded  an
extraordinary  item of $20.9 million comprised of extraordinary  income of $27.2
million  which  consists  of a  $9.0  million  gain  on  extinguishment  of  the
liabilities  the  Company  had  with  Citizens  and  a  $18.2  million  gain  on
extinguishment of all amounts due under a contractor financing facility,  offset
in part by a  non-cash  charge of $6.3  million  related  to the  write-off  the
remaining  unamortized  deferred  financing costs and credits  pertaining to the
Original Postabank Credit Facility.

      Net Income (Loss)

         As a result of the factors  discussed  above,  the Company recorded net
income of $3.2 million,  or $0.33 per share for the year ended December 31, 1999
as  compared to a net loss of $50.6  million,  or ($9.53) per share for the year
ended December 31, 1998.

Liquidity and Capital Resources

         The Company has historically funded its capital requirements  primarily
through  a  combination  of debt,  equity  and  vendor  financing.  The  ongoing
development and  installation of the network in each of the Company's  operating
areas  required  significant  capital  expenditures  ($190 million at historical
exchange  rates through  December 31, 2000).  By the end of 1998,  the Company's
networks had the capacity, with only normal capital expenditure  requirements in
the  future,  to  provide  basic  telephone  services  to  virtually  all of the
potential subscribers within its Operating Areas.

         On October 15, 1996,  the Company  entered into a $170 million  10-year
Multi-Currency  Credit Facility with Postabank (the "Original  Postabank  Credit
Facility").  Proceeds from the Original Postabank Credit Facility could be drawn
entirely in Hungarian  forints and up to 20% of the principal  could be drawn in
U.S.  dollars  through  March 31,  1999.  Drawdowns  in  Hungarian  forints bore
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
bore interest at 2.5% above LIBOR. Interest for the first two years was deferred
at the Company's option. Amounts outstanding in Hungarian Forints, including any
deferred interest,  were payable in 32 equal quarterly installments beginning on
March 31, 1999.

         In October 1996,  the Company  borrowed the equivalent of $82.3 million
in Hungarian forints under the Original Postabank Credit Facility. Approximately
$75.2  million of this  amount  was used to repay  Citicorp  all funds  advanced
pursuant to a $75.0 million  secured term loan credit  facility  entered into in
March 1996, and $2.0 million was paid for certain other fees. The remaining $5.1
million was used to pay management fees and reimbursable  costs owed to Citizens
pursuant to a Management  Services  Agreement with Citizens.  An additional $5.6
million  of the  Original  Postabank  Credit  Facility  was  used  to  pay  loan
origination  fees and costs to Postabank  under the terms of the loan agreement,
$2  million  of  which  were  reimbursed  to  the  Company  in  equal  quarterly
installments  over a two year period,  with the net amount being  amortized over
the life of the loan  facility.  The  remainder  of the  proceeds  were  used to
complete  construction  of the  Company's  telecommunication  networks,  provide
additional  working  capital,   and  refinance  or  repay  other  existing  debt
obligations.  As of December 31, 1998,  the Company had borrowed the entire $170
million under the Original Postabank Credit Facility.

                                      -40-
<PAGE>

         On May 12, 1999, the Company entered into various agreements as part of
a revision of its capital structure with the following parties:  Postabank; Tele
Danmark;  the  Danish  Fund;  and  CU  CapitalCorp  and  Citizens  International
Management  Services Company,  two wholly-owned  subsidiaries of Citizens.  As a
result of such agreements,  the Company  extinguished all of its obligations (i)
to  Postabank  under the  Original  Postabank  Credit  Facility in the amount of
approximately  $193  million,  and the amounts  borrowed to settle a portion due
under a  contractor  financing  facility  in the  amount  of  approximately  $16
million; (ii) to one of its contractors under a contractor financing facility in
the amount of  approximately  $35 million;  and (iii) to Citizens  under an $8.4
million  promissory  note  which was  payable in 2004 and an  obligation  to pay
Citizens $21 million in 28  quarterly  installments  of $750,000  each from 2004
through  and  including  2010.  The  effect  of  these  transactions   caused  a
significant  reduction in the financial  obligations of the Company. The Company
simultaneously  borrowed from  Postabank  $138 million (at  historical  exchange
rates) under a one-year  dual currency  bridge loan  agreement  (the  "Postabank
Bridge  Loan ") in  Hungarian  forints  and euros and $25  million  pursuant  to
certain  unsecured  notes which mature in 2007.  Some of the various  agreements
which were entered into as of May 12, 1999 are further described below.

         Pursuant to the Postabank Bridge Loan, HTCC's subsidiaries borrowed the
equivalent of $111 million (at historical  exchange rates) in Hungarian  forints
and $27  million  in euros (at  historical  exchange  rates),  which  funds were
applied to the repayment of the Original Postabank Credit Facility. The loan was
repayable  no later than May 10, 2000 and bore  interest  at an initial  rate of
2.25% (the  "Margin")  plus the Budapest  Bank Offering Rate or Euro LIBOR Rate,
which Margin  increased  incrementally  to 4.25%, in quarterly  increments of 1%
over the loan term.

         The Company and  Postabank  also  entered  into a  Securities  Purchase
Agreement (the  "Postabank  Securities  Purchase  Agreement")  pursuant to which
Postabank  purchased  2,428,572  shares  of the  Company's  common  stock for an
aggregate  purchase  price of $34 million.  The  Postabank  Securities  Purchase
Agreement  provides for one person  designated  by Postabank to be nominated for
election to the Company's  Board of Directors.  Postabank can only transfer such
shares  incrementally  through  2003  subject  to the  Company's  right of first
refusal.  The Company's  right of first  refusal  expires in January 2003 and is
assignable  by the  Company  to any  beneficial  holder  of more than 10% of the
Company's  outstanding  common stock.  The Company applied the proceeds from the
stock  issuance to the  repayment of the  Original  Postabank  Credit  Facility.
Pursuant to the Postabank  Securities  Purchase  Agreement,  the Company  issued
notes to  Postabank in an aggregate  amount of $25 million  (the  "Notes")  with
detachable  warrants  (the  "Warrants").  The Notes  accrue  interest,  which is
payable  semi-annually,  at the LIBOR rate applicable for the six month interest
period,  plus  3.5%.  The Notes  which  mature in 2007,  are  transferable.  The
Warrants enable  Postabank to purchase  2,500,000 shares of the Company's common
stock at an exercise price of $10 per share.  The exercise  period  commences on
January 1, 2004 and  terminates on March 31, 2007.  The Company has the right to
terminate  the  Warrants  in full or  proportionately  prior to  January 1, 2004
provided that the Company (i) repays a  proportionate  amount of the outstanding
principal on the Notes to the holders of such Notes and (ii) pays an  additional
7.5% of the aggregate principal amount of the Notes repaid concurrently with the
termination of the Warrants to the holders of the Warrants.

         The Company and Tele Danmark  entered into a Stock  Purchase  Agreement
(the "TD  Stock  Purchase  Agreement")  pursuant  to which  the  Company  issued
1,571,429 shares of the Company's common stock in exchange for $11 million.  The
Company  applied  the  proceeds  from the TD  Stock  Purchase  Agreement  to the
repayment of the Original Postabank Credit Facility.

                                      -41-
<PAGE>

         The Company  and the Danish  Fund for  Central and Eastern  Europe (the
"Danish Fund")  entered into a Stock Purchase  Agreement (the "Danish Fund Stock
Purchase  Agreement")  pursuant to which the Company issued  1,285,714 shares of
the Company's  common stock in exchange for $9 million.  The Company applied the
proceeds from the Danish Fund Stock  Purchase  Agreement to the repayment of the
Original Postabank Credit Facility.

         The Company and Citizens  entered into a Stock Purchase  Agreement (the
"Citizens  Stock  Purchase  Agreement')  pursuant to which the Company issued to
Citizens 1,300,000 shares of the Company's common stock and 30,000 shares of the
Company's Series A Cumulative  Convertible Preferred Stock, par value $0.01 (the
"Preferred Stock").  In consideration for such shares,  Citizens (i) transferred
to the Company for  cancellation  an $8.4 million  promissory note issued by the
Company to Citizens  which was to mature in 2004,  (ii) agreed to forego half of
the accrued  interest due on the promissory  note through May 15, 1999 and (iii)
agreed to renounce  and forego any rights  whatsoever  to any payment of the $21
million  which was payable by the Company to Citizens in quarterly  installments
of $750,000 from 2004 through and including 2010. Citizens, as the holder of the
Preferred  Stock, is entitled to receive  cumulative cash dividends at an annual
rate of 5%,  compounded  annually on the liquidation value of $70 per share. The
Company may redeem the Preferred  Shares at any time.  Citizens can convert each
of the Preferred  Shares into shares of the Company's  common stock on a one for
ten basis.  The Citizens Stock Purchase  Agreement  provided that if the average
closing  price of HTCC's  common  stock for the twenty (20)  trading days ending
March 31,  2000 was less than  $7.00 per share,  then the  Company  would  issue
additional  shares of Preferred Stock to Citizens.  The average closing price of
the Company's  common stock for the above  mentioned  period was more than $7.00
per share and, as a result,  no additional  shares of Preferred Stock was issued
to  Citizens.  Citizens  also waived any and all  preemptive  and  anti-dilution
rights in connection with the  transactions  described above. As a result of the
Stock  Purchase  Agreement  with Citizens,  the Company  recorded  extraordinary
income of $9.0 million  during the second  quarter of 1999 which  represented  a
gain on the extinguishment of the liabilities the Company had with Citizens.

         During 1996 and 1997,  the Company  entered into  several  construction
contracts with a contractor which totaled $59.0 million in the aggregate,  $47.5
million of which was financed by a contractor financing facility. The contractor
financed  the  construction  through a facility  provided  by  Postabank.  As of
December 31, 1998, the balance owed under the contractor  financing facility was
$36.6 million.  On March 30, 1999,  Postabank assumed HUF 7 billion plus accrued
interest of HUF 348 million  (approximately $30.9 million at historical exchange
rates) of the Company's  liability under the contractor  financing facility from
the contractor,  due to the contractor's financial  difficulties,  and sold this
debt back to the  Company  for HUF 3 billion  (approximately  $12.6  million  at
historical  exchange rates). The purchase of the debt was financed by Postabank.
On the same  day,  the  Company  purchased  HUF 4 billion  (approximately  $16.8
million at historical exchange rates) of loans the contractor had with Postabank
for HUF 900 million  (approximately  $3.8 million at historical  exchange rates)
and  subsequently  offset the  booked  value of the loans  purchased  of HUF 900
million  (approximately  $3.8 million at historical  exchange rates) against the
outstanding amounts owed to the contractor. The purchase of these loans was also
financed  by  Postabank.  As a result of the  above  transactions,  the  Company
recorded an extraordinary gain of HUF 4.3 billion  (approximately  $18.2 million
at historical exchange rates) during the second quarter of 1999, which reflected
the extinguishment of all amounts due under the contractor financing facility.

                                      -42-
<PAGE>

         On April 11, 2000,  the Company  entered into an EUR 130 million Senior
Secured Debt Facility  Agreement (the "Debt  Agreement") with a European banking
syndicate.  The Company  drew down EUR 129 million of the  Facility on April 20,
2000 ($121  million at April 20, 2000  exchange  rates),  which funds were used,
along  with $7.3  million of other  Company  funds (at April 20,  2000  exchange
rates) to pay off the entire  outstanding  EUR 134 million  (approximately  $126
million at April 20, 2000  exchange  rates)  principal  and  interest due on the
Postabank  Bridge Loan which was due to mature on May 12, 2000,  and to pay fees
associated with the Debt  Agreement.  The borrowers under the Debt Agreement are
the Operating  Companies who were the borrowers under the Postabank Bridge Loan.
The Debt  Agreement  and some of the related  agreements  are further  described
below.

         The Debt  Agreement has two  facilities.  Facility A is a floating rate
term loan in the amount of EUR 125 million (the "Term Facility") which principal
is  repayable  in  installments  semi-annually  on each June 30 and  December 31
beginning on June 30, 2001 and ending on December  31, 2007.  The amounts of the
principal  repayments on the Term Facility are to be escalating  percentages  of
the amounts  drawn down.  The Company has borrowed the full EUR 125 million,  of
which  EUR 84.1  million  was  funded  in,  an is  repayable  in,  euros and the
equivalent  of EUR 40.9  million was funded in, and is repayable  in,  Hungarian
forints.  The portion of the Term  Facility  loan  denominated  in euros accrues
interest at the rate of the Applicable  Margin  (defined below) plus the EURIBOR
rate for the applicable interest period. The EURIBOR rate is the percentage rate
per annum  determined by the Banking  Federation  of the European  Union for the
applicable interest period. The portion of the Term Facility loan denominated in
Hungarian forints accrues interest at the rate of the Applicable Margin (defined
below) plus the BUBOR rate for the applicable interest period. The BUBOR rate is
the percentage rate per annum determined  according to the rules  established by
the Hungarian  Forex  Association  and published by the National Bank of Hungary
for the  applicable  interest  period.  The applicable  interest  period for the
portion  of the Term  Facility  loan  denominated  in euros is six  months.  The
applicable  interest period for the portion of Term Facility loan denominated in
Hungarian  forints  is three  months.  Interest  is  payable  at the end of each
interest period. The Applicable Margin is initially 1.75%. The Applicable Margin
may be  adjusted  downward  incrementally  to a minimum of 1.15%  subject to the
financial  performance  of the Company as measured by the ratio of the Company's
senior  debt  to  its  earnings  before   interest,   taxes,   depreciation  and
amortization. Dependent on its cash flow, the Company will be required to prepay
the  equivalent  of $25  million  on the Term  Facility  until  such time as $25
million has been prepaid.  The amount of the  prepayment in any year shall be at
least 50% of the Company's excess cash flow, if any, for the previous  financial
year as defined in the Debt  Agreement.  The prepayment  amount is due within 15
days of the  publication  of each  annual Form 10-K  filing.  For the year ended
December 31, 2000, the Company does not have any excess cash flow, as defined in
the Debt Agreement, and therefore no mandatory prepayment is going to be made by
the Company in 2001.

         Facility B is a  floating  rate  revolving  loan in the amount of EUR 5
million (the "Revolving  Facility")  which can only be drawn down in euros.  The
Revolving  Facility will be reduced to EUR 2.5 million on December 31, 2005. The
Revolving  Facility is available  until December 31, 2007. The Company  borrowed
EUR 4 million of the Revolving  Facility to pay off the balance of the Postabank
Bridge Loan and fees  associated  with the  transaction  on April 20, 2000.  The
principal amount borrowed under the Revolving Facility is due at the end of each
interest period at which point the Company can,  subject to certain  conditions,

                                      -43-
<PAGE>

roll over the amount of principal  borrowed.  The applicable interest period for
the Revolving  Facility is, at the Company's option,  one, three, or six months.
The Company has chosen six months at the  present  time.  Interest is payable at
the end of each interest period calculated similarly to that for a Term Facility
loan denominated in euros.

         The  Company  paid an  arrangement  fee in the amount of EUR  2,665,000
(approximately  $2.5 million at April 20, 2000 exchange  rates),  which has been
capitalized with other direct costs incurred in obtaining the Debt Agreement and
is being amortized over the term of the related debt. In addition, an agency fee
in the amount of $60,000 has also been paid.  The Company is  obligated to pay a
commitment  fee equal to the lower of 0.75% or 50% of the  Applicable  Margin on
any available unused commitment on the Revolving Facility.

         HTCC and one of its  subsidiaries,  HTCC Consulting Rt., are guarantors
for the Operating  Companies under the Debt Agreement.  The Company and Citibank
Rt. (as security  agent) have entered into a series of  agreements to secure all
of the  Company's  obligations  under the Debt  Agreement  pursuant to which the
Company has pledged all of its intangible and tangible assets,  including HTCC's
ownership interests in its subsidiaries,  and its real property.  The Company is
subject to restrictive  covenants,  including restrictions regarding the ability
of the Company to pay dividends,  borrow funds, merge and dispose of its assets.
The  Debt  Agreement  contains  customary  representations  and  warranties  and
customary  events of default,  including  those  related to a change of control,
which would trigger early repayment of the balance under the Debt Agreement.  If
prior to the later of the  December  31,  2001 or the  Trigger  Date (as defined
below),  Tele Danmark  sells any of the shares of Common Stock that it currently
owns or Tele Danmark and the Danish Fund,  together,  no longer own 30.1% of the
outstanding  Common Stock,  then an event of default shall have  occurred.  Tele
Danmark  and the Danish  Fund  currently  own a  combined  total of 31.9% of the
outstanding  common stock.  The Trigger Date is defined as the date on which for
the prior two fiscal  quarters the  Company's  debt to EBITDA ratio is less than
3.5 to 1. Following the Trigger Date,  Tele Danmark can only transfer its shares
with the prior written  consent of banks holding at least 66.7% of the Company's
outstanding debt under the Debt Agreement.

         The Company had  12,087,179  shares of common stock  outstanding  as of
December 31, 2000,  which were held by the following  parties in the percentages
indicated:  Postabank 20.1%; Tele Danmark 21.2%; the Danish Fund 10.6%; Citizens
19.1%;  and others 29.0%. On a fully-diluted  basis,  the Company has 15,821,816
shares outstanding,  which were held by the following parties in the percentages
indicated:  Postabank 31.2%; Tele Danmark 16.2%; the Danish Fund 8.1%;  Citizens
16.5%; and others 28.0%.

         Net cash provided by operating  activities totaled $8.3 million for the
year ended  December  31,  2000  compared  to $18.5  million  for the year ended
December 31,  1999.  For the period ended  December 31, 1999,  cash  provided by
operations  reflects the deferral of $13.3 million of interest,  which was added
to amounts due under the Postabank Bridge Loan. For the years ended December 31,
2000 and 1999, the Company used $8.8 million and $9.9 million,  respectively, in
investing  activities,  which  was  primarily  used  to  fund  additions  to the
Company's telecommunications networks. Financing activities provided net cash of
$0.5  million and $1.0  million for the years ended  December 31, 2000 and 1999,
respectively.

                                      -44-
<PAGE>

Inflation and Foreign Currency

         For the  year  ended  December  31,  2000,  inflation  in  Hungary  was
approximately  9.8% on an annualized  basis. It is the stated policy goal of the
Hungarian government to keep inflation from exceeding  approximately 6% in 2001.
Due to the  strengthening of the U.S. dollar on  international  currency markets
during the year,  the Hungarian  forint/U.S.  dollar  exchange rate increased to
284.73 as of December 31, 2000,  as compared to an exchange rate of 252.52 as of
December 31, 1999, an effective year-on-year devaluation of 12.8%.

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

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

Prospective Accounting Pronouncements

         Statement  of  Financial  Accounting  Standards  No. 133 ("SFAS  133"),
"Accounting for Derivative  Instruments and Hedging  Activities",  was issued by
the Financial  Accounting  Standards Board in June 1998 and subsequently amended
by Statement of Financial  Accounting  Standards  No. 138 ("SFAS 138") issued in
June 1999.  SFAS 133 and SFAS 138  standardize  the  accounting  for  derivative
instruments,   including  certain  derivative   instruments  embedded  in  other
contracts.  Under the  Standards,  entities are required to carry all derivative
instruments in the statement of financial position at fair value.

         The  Company  adopted  SFAS 133 and SFAS 138 on January  1,  2001.  The
Company does not anticipate that the adoption of SFAS 133 and SFAS 138 will have
a material effect on the Company's  consolidated  financial position and results
of operations.

       Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk Exposure

         The Company is exposed to various types of risk in the normal course of
its  business,   including  the  impact  of  foreign   currency   exchange  rate
fluctuations  and interest  rate  changes.  Company  operations,  including  all
revenues and  approximately  84% of operational costs are Hungarian forint based
and are  therefore  subject to exchange rate  variability  between the Hungarian
forint and the U.S.  dollar.  This  variability is mitigated by several factors,
including the Hungarian National Bank policy to peg the Hungarian forint and the

                                      -45-
<PAGE>

telecommunications  pricing law. The "crawling  peg" policy of the National Bank
of Hungary maintains a scheduled daily devaluation of the Hungarian forint which
has been pegged 100% to the euro since January 1, 2000. The Hungarian  forint is
allowed to trade within 2.25% of the  mid-point  of this trading  band.  For the
first quarter of 2001, the Hungarian government's devaluation policy is 0.3% per
month.  The  Hungarian   government  has  announced  that  the  monthly  planned
devaluation rate will be decreased as of April 1, 2001 to 0.2% per month for the
Hungarian  forint,   which  would  total   approximately   2.7%  for  2001.  The
telecommunications  pricing law allows prices to increase by the Consumer  Price
Index (CPI),  adjusted for an efficiency  factor of 2% in 2000 and 2.9% in 2001.
Thus, to the extent that adjusted CPI follows devaluation, and to the extent the
Company elects and is able to increase its revenues  proportionate  to increases
in the CPI, revenues are somewhat insulated from exchange rate risk.

         The debt obligations of the Company are Hungarian forint, euro and U.S.
dollar  denominated.  The interest rate on the Hungarian forint debt obligations
is based on the Budapest Bank Offer Rate (BUBOR). The interest rates on the euro
and U.S.  dollar  denominated  obligations  are based on EURIBOR  and USD LIBOR,
respectively. Over the medium to long term, the BUBOR rate is expected to follow
inflation and devaluation  trends and the Company does not currently  believe it
has any material  interest rate risk on any of its Hungarian forint  denominated
debt  obligations.  If a 1% change in the BUBOR interest rate were to occur, the
Company's interest expense would increase or decrease by approximately  $369,000
annually based upon the Company's  current debt level. If a 1% change in EURIBOR
interest rates were to occur,  the Company's  interest expense would increase or
decrease by approximately $0.8 million annually based upon the Company's current
debt  level.  If a 1% change  in USD LIBOR  interest  rates  were to occur,  the
Company's  interest  expense would  increase or decrease by  approximately  $0.3
million annually based upon the Company's current debt level.

         The  Company  is also  exposed  to  exchange  rate risk  insofar as the
Company  has debt  obligations  in other  than the  functional  currency  of its
majority owned  Hungarian  subsidiaries.  Given the Company's debt  obligations,
which include euro and U.S. dollar denominated debt, if a 1% change in Hungarian
forint/euro exchange rates were to occur, the Company's exchange rate risk would
increase or decrease by approximately $820,000 annually based upon the Company's
current debt level.  If a 1% change in  Hungarian  forint/U.S.  dollar  exchange
rates were to occur, the Company's exchange rate risk would increase or decrease
by approximately $250,000 annually.

         The Company  utilizes  foreign  currency  forward  contracts  to reduce
certain exposure to exchange rate risks associated with cash requirements  under
the Company's  long-term  debt  obligations  that mature within six months.  The
forward  contracts  establish the exchange  rates at which the Company will sell
the  contracted  amount of  Hungarian  forints for euros at a future  date.  The
Company  utilizes  forward  contracts  which are six months in  duration  and at
maturity  will  either  receive or pay the  difference  between  the  contracted
forward rate and the exchange rate at the settlement date. The contracted amount
of  foreign   currency   forwards  at  December   31,  2000  is  EUR   2,998,000
(approximately $2,790,000). The counterparties to the Company's foreign currency
forward  contracts are substantial  and  creditworthy  multinational  commercial
banks or other  financial  institutions  which  are  recognized  market  makers.
Neither the risks of counterparty  nonperformance nor the economic  consequences
of counterparty nonperformance associated with these contracts are considered by
the Company to be material.

                                      -46-
<PAGE>

               Item 8. Financial Statements and Supplementary Data

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

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

         None.

                                    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 - Current  Directors  and
Nominees for  Director"  and "- Section  16(a)  Beneficial  Ownership  Reporting
Compliance"  in the  Company's  definitive  proxy  statement for the 2001 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 2001 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," and "- Stock  Ownership  of  Management"  in the  Company's
definitive proxy statement for the 2001 Annual Meeting of  Stockholders,  a copy
of which  will be filed not later  than 120 days  after the close of the  fiscal
year.

             Item 13. Certain Relationships And Related Transactions

         There is  incorporated  in this Item 13 by  reference  the  information
appearing under the caption  "Election of Directors - Certain  Relationships and
Related  Transactions"  and "-  Indebtedness  of  Management"  in the  Company's
definitive proxy statement for the 2001 Annual Meeting of  Stockholders,  a copy
of which  will be filed not later  than 120 days  after the close of the  fiscal
year.

                                      -47-
<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.











                                      -48-
<PAGE>



         (a)(3)   List of Exhibits

Exhibit
Number                             Description
--------          --------------------------------------------------------------

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

 3(i)             Certificate of  Incorporation  of the Registrant,  as amended,
                  filed  as  Exhibit  4.1  to  the   Registrant's   Registration
                  Statement  on  Form  S-8  filed  on  January  31,  2001  (File
                  #333-54688) and incorporated herein by reference

 3(ii)            By-laws of the Registrant, as amended, filed as Exhibit 4.2 to
                  the Registrant's  Registration  Statement on Form S-8 filed on
                  January 31, 2001 (File #333-54688) and incorporated  herein by
                  reference

4.1               Specimen  Common Stock  Certificate,  filed as Exhibit 4(a) to
                  the Registrant's  Registration Statement on From SB-2 filed on
                  October 27, 1994 and  incorporated  herein by reference  (File
                  #33-80676)

4.2               Certificate  of  Designation  of Series A - Preferred Stock of
                  Hungarian  Telephone  and Cable Corp., filed as Exhibit 4.1 to
                  the Registrant's Quarterly Report on Form 10-Q for the quarter
                  ended March 31, 1999 and incorporated herein by reference

9                 Voting trust agreement (None)

10                Material contracts:

10.1              Concession  Agreement  dated May 10, 1994 between the Ministry
                  of  Transportation, Telecommunications and Water Management of
                  the  Republic  of   Hungary  and   Raba-Com  Rt.,   filed   as
                  Exhibit 10(y)(y) to  the  Registrant's  Current Report on Form
                  8-K  for  February 28, 1994  (Registrant  File  #1-11484)  and
                  incorporated herein by reference

10.2              Concession  Agreement  dated May 10, 1994 between the Ministry
                  of Transportation,  Telecommunications and Water Management of
                  the  Republic of Hungary and  Kelet-Nograd  Com Rt.,  filed as
                  Exhibit  10(z)(z) to the  Registrant's  Current Report on Form
                  8-K for  February  28, 1994  (Registrant  File  #1-11484)  and
                  incorporated herein by reference

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

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

                                      -49-
<PAGE>

Exhibit
Number                                   Description
--------         ---------------------------------------------------------------

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

10.6              Non-Employee Director  Stock Option Plan, as amended as of May
                  25, 2000

10.7              1992 Incentive Stock Option Plan of the Registrant, as amended
                  to date, filed as Exhibit 4.3 to the Registrant's Registration
                  Statement  on  Form  S-8 filed on January 31, 2001 (File #333-
                  5688)and incorporated herein by reference

10.8              Amended and Restated Employment  Agreement dated as of January
                  30, 2001 between the Registrant and Ole Bertram

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

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

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

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

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

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

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

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

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

                                      -50-
<PAGE>

Exhibit
Number                                    Description
--------         ---------------------------------------------------------------

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

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

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

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

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

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

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

10.25             Dual-Currency   Bridge  Loan   Agreement   between   Hungarian
                  Telephone and Cable Corp. and its  subsidiaries  and Postabank
                  es Takarekpenztar Reszvenytarsasag,  as Lender, Facility Agent
                  and Security Agent dated as of May 12, 1999,  filed as Exhibit
                  10.1 to the Registrant's Quarterly Report on Form 10-Q for the
                  quarter  ended  March  31,  1999 and  incorporated  herein  by
                  reference

10.26             Securities  Purchase Agreement between Hungarian Telephone and
                  Cable  Corp.,  as  Seller  and  Postabank  es   Takarekpenztar
                  Reszvenytarsasag, as Buyer, dated as of May 12, 1999, filed as
                  Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q
                  for the quarter ended March 31, 1999 and  incorporated  herein
                  by reference

10.27             Form  of   Warrant  to  Purchase  Common  Stock  of  Hungarian
                  Telephone and  Cable Corp., dated as of May 12, 1999, filed as
                  Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q
                  for the quarter  ended  March 31, 1999 and incorporated herein
                  by reference


                                      -51-
<PAGE>


Exhibit
Number                                   Description
--------         ---------------------------------------------------------------

10.28             Form of Unsecured Note issued by Hungarian Telephone and Cable
                  Corp. to Postabank es Takarekpenztar  Reszvenytarsasag,  dated
                  as of May 12, 1999,  filed as Exhibit 10.4 to the Registrant's
                  Quarterly  Report on Form 10-Q for the quarter ended March 31,
                  1999 and incorporated herein by reference

10.29             Stock Purchase Agreement between Hungarian Telephone and Cable
                  Corp., as Seller,  and Tele Danmark A/S, as Buyer, dated as of
                  May 12,  1999,  filed  as  Exhibit  10.5  to the  Registrant's
                  Quarterly  Report on Form 10-Q for the quarter ended March 31,
                  1999 and incorporated herein by reference

10.30             Stock Purchase Agreement between Hungarian Telephone and Cable
                  Corp., as Seller,  and the Danish  Investment Fund for Central
                  and Eastern Europe, as Buyer,  dated as of May 12, 1999, filed
                  as Exhibit 10.6 to the  Registrant's  Quarterly Report on Form
                  10-Q for the quarter  ended  March 31,  1999 and  incorporated
                  herein by reference

10.31             Stock  Purchase  Agreement among Hungarian Telephone and Cable
                  Corp.,  as  Seller,  and  Citizens   International  Management
                  Services  Company,  as Buyer, and CU CapitalCorp., dated as of
                  May 12, 1999,  filed  as  Exhibit  10.7  to  the  Registrant's
                  Quarterly  Report on Form 10-Q for the quarter ended March 31,
                  1999 and incorporated herein by reference

10.32             EUR 130  million  Senior Secured Debt Facility dated April 11,
                  2000  among  Hungarian  Telephone  and  Cable  Corp.  and  its
                  subsidiaries;  Citibank  N.A.  and   Westdeutsche   Landesbank
                  Girozentrale,  as arrangers;  Citibank  International  PLC  as
                  facility agent;  and  Citibank Rt. as Security Agent, filed as
                  Exhibit 10.32  to the Registrant's Report on Form 10-K for the
                  year  ended  December  31,  1999  and  incorporated  herein by
                  reference.

10.33             Form  of  Amended   and  Restated  Unsecured  Note  issued  by
                  Hungarian   Telephone  and  Cable   Corp.  to   Postabank   es
                  Takarekpenztar  Reszvenytarsasag,  dated as of April 11, 2000,
                  filed as Exhibit 10.33 to the Registrant's Report on Form 10-K
                  for the year ended December 31, 1999 and  incorporated  herein
                  by reference.

10.34             Security  Deposit   Agreement   dated  April  11,  2000  among
                  Hungarian  Telephone  and  Cable  Corp. as Depositor; Citibank
                  Rt.,  as  Depositee  and   Security  Agent;   and   Hungarotel
                  Tavkozlesi Rt.,   Raba  Com.  Rt.,   Papa es  Tersege  Telefon
                  Koncesszios Rt.,  and Kelet-Nograd Com Rt., as Countersignors,
                  filed as Exhibit 10.34 to the Registrant's Report on Form 10-K
                  for the year ended December 31, 1999 and  incorporated  herein
                  by reference.

10.35             Security  Deposit  Agreement  dated  April 11, 2000 among HTCC
                  Consulting  Rt.,  as Depositor; Citibank Rt., as Depositee and
                  Security Agent; and  Hungarotel Tavkozlesi Rt., Raba Com. Rt.,
                  Papa es Tersege Telefon Koncesszios  Rt., and Kelet-Nograd Com
                  Rt.,  as  Countersignors,   filed  as  Exhibit  10.35  to  the
                  Registrant's Report  on Form 10-K for the year ended  December
                  31, 1999 and incorporated herein by reference.


                                      -52-
<PAGE>


Exhibit
Number                                  Description
--------         ---------------------------------------------------------------

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

12                Statement re computation of ratios  (not required)

13                Annual report to security holders  (not required)

16                Letter re change in certifying accountant  (not required)

18                Letter re change in accounting principles  (None)

21                Subsidiaries of the Registrant

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

23                Consent of KPMG Hungaria Kft.

24                Power of Attorney  (not required)

27.1              Financial Data Schedule


         (b)      Reports on Form 8-K

         None.

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of March 29, 2001.

                                      HUNGARIAN TELEPHONE AND CABLE CORP.
                                      (Registrant)


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

         Pursuant to the  requirements of the Securities  Exchange of 1934, this
Report  has been  signed  below by the  following  persons  and on behalf of the
Registrant and in the capacities indicated as of March 29, 2001.

Signature/Name                                       Title


/s/William T. McGann                       Treasurer and Controller
-----------------------------------
William T. McGann                          (Principal Accounting Officer;
                                           Principal Financial Officer)

/s/Daryl A. Ferguson                       Director, Co-Chairman of the Board
-----------------------------------
Daryl A. Ferguson


                                      -53-
<PAGE>


Signature/Name                                       Title



/s/Torben V. Holm                          Director, Co-Chairman of the Board
------------------------------------
Torben V. Holm


/s/Soren Eriksen                           Director
------------------------------------
Soren Eriksen


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


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


/s/Leonard Tow                             Director
-----------------------------------
Leonard Tow

                                     -54-
<PAGE>


              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES

 Index to Consolidated Financial Statements and Financial Statements Schedules

         The following information is included on the pages indicated:

         Consolidated Financial Statements:                               Page

              Independent Auditors' Report................................F-2
              Consolidated Balance Sheets.................................F-3
              Consolidated Statements of Operations and Comprehensive
                   Income (Loss)..........................................F-4
              Consolidated Statements of Stockholders' Deficiency.........F-5
              Consolidated Statements of Cash Flows.......................F-6
              Notes to Consolidated Financial Statements...........F-7 - F-29

         Financial Statements Schedules:

              Schedule of Quarterly Financial Data........................S-1
              Schedule II - Valuation Accounts............................S-2





























                                      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,  2000  and  1999,  and  the  related  consolidated  statements  of
          operations and comprehensive income (loss),  stockholders'  deficiency
          and cash flows for each of the years in the  three-year  period  ended
          December 31, 2000.  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 in the United  States of America.  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, 2000 and 1999, and the results of their  operations and their cash
          flows for each of the years in the  three-year  period ended  December
          31, 2000, in conformity with generally accepted accounting  principles
          in the United States of America.


                                                  KPMG HUNGARIA KFT.

          Budapest, Hungary
          March 9, 2001


                                       F-2


<PAGE>


              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                           Consolidated Balance Sheets
                           December 31, 2000 and 1999
                        (In thousands, except share data)

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

                                    Assets                            2000               1999
                                    ------                            ----               ----

Current assets:
    Cash and cash equivalents                                 $     15,596             17,197
    Restricted cash                                                    107                111
    Accounts receivable, net of allowance
       of $1,140 in 2000 and $1,030 in 1999                          5,511              6,940
    Other current assets                                             2,917              1,967
                                                                 ---------          ---------

       Total current assets                                         24,131             26,215

Property, plant and equipment, net                                 101,670            115,526
Goodwill, net of accumulated amortization
    of $1,883 in 2000 and $1,628 in 1999                             6,331              7,859
Other intangibles, net of accumulated amortization
    of $1,232 in 2000 and $1,156 in 1999                             3,806              4,526
Deferred costs                                                       8,212                  -
Other assets                                                         3,168                557
                                                                 ---------            -------
Total assets                                                  $    147,318            154,683
                                                                   =======           ========
                   Liabilities and Stockholders' Deficiency

Current liabilities:
    Current installments of long-term debt                    $      8,063                  -
    Short-term loans                                                 3,722              5,048
    Accounts payable                                                 2,577              3,994
    Accruals                                                         5,307              5,561
    Other current liabilities                                        1,725              1,349
    Due to related parties                                           1,226                996
                                                                ----------           --------

       Total current liabilities                                    22,620             16,948

Long-term debt, excluding current installments                     124,814            139,661
Due to related parties                                                 676              1,728
Deferred credits and other liabilities                              10,086              3,292
                                                                ----------          ---------
Total liabilities                                                  158,196            161,629
                                                                  --------            -------
Commitments and Contingencies

Stockholders' deficiency:
    Cumulative Convertible Preferred stock, $.01 par value;
       $70.00 liquidation value.  Authorized 200,000 shares;
       issued and outstanding 30,000 shares in 2000 and 1999             -                  -
    Common stock, $.001 par value.  Authorized
       25,000,000 shares; issued and outstanding
       12,087,179 shares in 2000 and 11,981,579 in 1999                 12                 11
    Additional paid-in capital                                     144,601            144,052
    Accumulated deficit                                          (170,143)          (164,705)
    Accumulated other comprehensive income                          14,652             13,696
                                                                 ---------        -----------
       Total stockholders' deficiency                             (10,878)            (6,946)
                                                               -----------         ----------
Total liabilities and stockholders' deficiency                $    147,318            154,683
                                                                ==========        ===========
See accompanying notes to consolidated financial statements.

</TABLE>
                                       F-3


<PAGE>


              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
      Consolidated Statements of Operations and Comprehensive Income (Loss)
                       Years ended December 31, 2000, 1999
                      and 1998 (In thousands, except share
                               and per share data)

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

                                                   2000             1999            1998
                                                   ----             ----            ----

Telephone services revenues, net           $      42,974           45,438           38,707
                                            ------------     ------------      ------------

Operating expenses:
    Operating and maintenance expenses            17,077           17,467           19,575
    Depreciation and amortization                  9,428           11,782           11,560
    Management fees                                    -                -            2,500
    Termination of management
       services agreement                              -                -           11,131
                                            ------------     ------------      -----------

    Total operating expenses                      26,505           29,249           44,766
                                            ------------     ------------      ------------

Income (loss) from operations                     16,469           16,189          (6,059)

Other income (expenses):
    Foreign exchange losses, net                 (4,842)          (2,786)            (230)
    Interest expense                            (18,500)         (32,450)         (45,856)
    Interest income                                1,482            1,708              686
    Other, net                                        60            (434)              847
                                            ------------     ------------      ------------

Loss before extraordinary items                  (5,331)         (17,773)         (50,612)

Extraordinary items, net                               -           20,945                -
                                            ------------     ------------      ------------

Net income (loss)                          $     (5,331)            3,172         (50,612)

Cumulative convertible preferred stock
  dividends (in arrears)                           (107)             (68)                -
                                            ------------     ------------      ------------

Net income (loss) available for
    common stockholders                          (5,438)            3,104         (50,612)

Comprehensive income adjustments                     956            6,396            2,336
                                            ------------     ------------      ------------

Total comprehensive income (loss)          $     (4,482)            9,500         (48,276)
                                           =============     ============      ============

Earnings (loss) per common share -
  basic and diluted:

    Before extraordinary items             $      (0.45)           (1.85)           (9.53)
    Extraordinary items                    $           -             2.18                -
                                            ------------     ------------      ------------

    Net earnings (loss)                    $      (0.45)             0.33           (9.53)
                                            ============     ============      ============

Weighted average number of
Common shares outstanding -
  basic and diluted                           12,010,660        9,617,939        5,309,985
                                            ============     ============      ============
</TABLE>

See accompanying notes to consolidated financial statements.

                                       F-4


<PAGE>



              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
               Consolidated Statements of Stockholders' Deficiency
                  Years ended December 31, 2000, 1999 and 1998
                        (In thousands, except share data)

<TABLE>
<S>                               <C>        <C>     <C>       <C>        <C>          <C>             <C>           <C>
                                                                                        Accumulated
                                                                Additional              Other                        Total
                                              Common  Preferred Paid-in    Accumulated  Comprehensive  Deferred      Stockholders'
                                    Shares    Stock   Stock     Capital    Deficit      Income         Compensation  Deficiency
---------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997      5,235,370    $ 5      -      70,772     (117,197)       4,964          (381)      $(41,837)
Earned compensation                    -          -      -          -            -             -           125            125
Cancellation of shares               (25,000)     -      -        (256)          -             -           256             -
Exercise of options and warrants      56,400      -      -         224           -             -            -             224
Shares issued as compensation         10,625      -      -          93           -             -            -              93
Shares issued to Citizens            100,000      -      -         513           -             -            -             513
Shares issued as consideration
  relating to former acquisitions     18,469      -      -          -            -             -            -              -
Options granted in connection with
  termination agreement                -          -      -         121           -             -            -             121
Net loss                               -          -      -          -      (50,612)            -            -         (50,612)
Foreign currency translation           -          -      -          -            -         2,336            -           2,336
adjustment
-------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998      5,395,864    $ 5      -      71,467    (167,809)        7,300            -       $ (89,037)
Shares issued to Tele Danmark A/S  1,571,429      2      -      10,998           -             -            -          11,000
Shares issued to Postabank         2,428,572      2      -      33,998           -             -            -          34,000
Shares issued to Citizens          1,300,000      1      -      11,199           -             -            -          11,200
Shares issued to Danish Fund       1,285,714      1      -       8,999           -             -            -           9,000
Stock issuance cost                    -          -      -      (1,488)          -             -                       (1,488)
Warrant issued in connection with
  long-term notes                      -          -      -       8,825           -             -            -           8,825
Modification of option terms           -          -      -          54           -             -            -              54
Cumulative convertible preferred
  stock dividends (in arrears)         -          -      -          -          (68)            -            -             (68)
Net income                             -          -      -          -        3,172             -            -           3,172
Foreign currency translation
  adjustment                           -          -      -          -            -          6,396           -           6,396
-------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1999     11,981,579   $ 11      -     144,052    (164,705)        13,696           -         $(6,946)
Exercise of options and warrants      33,600      -      -         262           -             -            -             262
Modification of option terms           -          -      -         (45)          -             -            -             (45)
Shares issued to International
  Finance Corporation                 72,000      1      -         332           -             -            -             333
Cumulative convertible preferred
  stock dividends (in arrears)         -          -      -          -         (107)            -            -            (107)
Net loss                               -          -      -          -       (5,331)            -            -          (5,331)
Foreign currency translation
  adjustment                           -          -      -          -            -            956           -             956
-------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2000     12,087,179   $ 12      -     144,601    (170,143)        14,652           -        $(10,878)
-------------------------------------------------------------------------------------------------------------------------------

</TABLE>

See accompanying notes to consolidated financial statements.


                                       F-5


<PAGE>




              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                  Years ended December 31, 2000, 1999 and 1998
                                 (In thousands)

<TABLE>
<S>                                                <C>                <C>           <C>
                                                            2000           1999           1998
                                                            ----           ----           ----

Net cash provided by operating activities           $      8,291         18,522         11,118
                                                       ---------       --------      ---------

Cash flows from investing activities:

     Construction of telecommunications
         networks                                         (8,786)        (9,998)       (16,451)
     Decrease (increase) in construction deposits             26            (17)           520
     Acquisition of interests in subsidiaries               (343)             -              -
     Other                                                   288             86            301
                                                       ---------       --------      ---------
         Net cash used in investing activities            (8,815)        (9,929)       (15,630)
                                                       ----------      --------      ---------
Cash flows from financing activities:

     Borrowings under long-term debt agreements          117,170         41,391         16,099
     Borrowings under short-term debt agreements           3,754        124,753              -
     Proceeds from exercise of options and warrants          262              -            224
     Deferred financing costs paid under long-term
       debt agreements                                    (3,104)             -              -
     Repayments and settlement of long-term debt        (117,534)      (217,697)        (7,048)
     Proceeds from issuance of common stock, net               -         52,511              -
                                                       ---------       --------      ---------
         Net cash provided by financing activities           548            958          9,275
                                                       ---------       --------      ---------
Effect of foreign exchange rate changes on cash           (1,625)          (843)          (305)
                                                       ----------      ---------     ----------

Net increase (decrease) in cash                           (1,601)         8,708          4,458

Cash at beginning of year                                 17,197          8,489          4,031
                                                       ---------       --------      ---------
Cash at end of year                                 $     15,596         17,197          8,489
                                                       =========       ========      =========

</TABLE>

See accompanying notes to consolidated financial statements.



                                       F-6
<PAGE>

              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998


(1)    Summary of Significant Accounting Policies
       -------------------------------------------------------------------------

       (a)    Description of Business and Other Related Matters

              Hungarian  Telephone and Cable Corp. ("HTCC" and together with its
              consolidated  subsidiaries,  the "Company") was organized on March
              23,  1992  to  own  and  manage  telecommunications  companies  in
              Hungary.   Four   subsidiaries  of  the  Company  ("the  Operating
              Companies")  are presently  engaged in the ownership and operation
              of  public  switched  telephone  service.  Two  of  the  operating
              companies  commenced  operations in two concession regions in 1995
              and  the  other  two  commenced  operations  in  three  additional
              concession areas effective January 1, 1996.

              By the end of 1998, the Company's networks had the capacity,  with
              only normal capital  expenditure  requirements  in the future,  to
              provide basic telephone services to virtually all of the potential
              subscribers  within its operating  areas.  The Company  funded its
              network  construction and working capital needs primarily  through
              various  credit  facilities  with  Postabank  Rt. and a contractor
              financing  facility.  On March 30,  1999,  and May 12,  1999,  the
              Company entered into a series of  transactions  (see Notes 4, 5, 9
              and  12)  which   restructured  the  Company's  debt  and  capital
              structure.  As the final step in the  Company's  debt and  capital
              restructuring,  on April 11, 2000, the Company  entered into a EUR
              130 million Senior  Secured Debt Facility with a European  banking
              syndicate (see Note 5).

       (b)    Principles of Consolidation and the Use of Estimates

              The  consolidated  financial  statements  include  the   financial
              statements  of   Hungarian  Telephone  and  Cable  Corp.  and  its
              subsidiaries;   Kelet-Nograd  Com   Rt.,  ("KNC"),  Raba-Com  Rt.,
              ("Raba-Com"),  Hungarotel Tavkozlesi Rt.  ("Hungarotel"),  Papa es
              Tersege Telefon  Koncesszios Rt. ("Papatel"),  HTCC Consulting Rt.
              ("HTCC  Consulting")  and Pilistav Rt. ("Pilistav").  All material
              intercompany  balances and transactions have been eliminated.

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

       (c)    Revenue Recognition

              Telephone  service  revenues  are  recognized  when earned and are
              primarily  derived  from  usage of the  Company's  local  exchange
              networks and facilities or under revenue  sharing  agreements with
              Matav, the international  and national long distance  interconnect
              service provider. Revenues are stated net of interconnect charges.

              In the fourth quarter of 2000, the Company  implemented  the SEC's
              Staff  Accounting  Bulletin No. 101 ("SAB 101"),  with effect from
              January 1, 2000, which requires  connection fees and corresponding
              direct  incremental costs to be deferred and amortized over future
              periods.  As a result of the  implementation  of SAB 101,  certain
              connection  fees and costs  recognized  in prior periods have been
              deferred  and are  being  amortized  over  the  estimated  average
              subscriber  life of 7 years.  There  was no  cumulative  effect on


                                      F-7


<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998


              earnings  from the adoption of SAB 101, nor has its adoption had a
              material  impact on the Company's  results of  operations  for any
              period   presented.   Following  the  adoption  of  SAB  101,  the
              amortization  of deferred  connection  fee revenue and  associated
              direct incremental costs is included in telephone service revenues
              and operating and maintenance expenses.

        (d)   Foreign Currency Translation

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

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

       (e)    Cash Equivalents

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

        (f)   Inventories

              Inventories,  which are included in other current assets,  consist
              primarily of telephones for resale and spare parts,  are stated at
              the lower of cost or market, and are valued using the FIFO method.

       (g)    Property, Plant and Equipment

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

       (h)    Goodwill and Other Intangible Assets

              The  excess  of  cost  over  net  assets  acquired,  goodwill,  is
              amortized   over  the   25-year   concession   period   using  the
              straight-line  method.  Other intangible assets represent the cost
              of concession  fees paid and are being  amortized over the 25-year
              concession period using the straight-line method.


                                      F-8

<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998


       (i)    Stock Based Compensation

              The Company accounts for its stock option plans in accordance with
              Statement  of  Financial  Accounting  Standards  ("SFAS") No. 123,
              which  allows  entities  to continue  to apply the  provisions  of
              Accounting  Principles  Board ("APB") Opinion No. 25, in measuring
              compensation  cost for stock  based  compensation  awards,  and to
              provide pro forma net income (loss) and pro forma earnings  (loss)
              per share  disclosures  for employee  stock option  grants made in
              1995 and thereafter as if the fair-value-based  method, as defined
              in SFAS No. 123, had been applied.

       (j)    Income Taxes

              Deferred tax assets and liabilities,  net of valuation allowances,
              are recognized  for the future tax  consequences  attributable  to
              operating  loss  and tax  credit  carry-forwards  and  differences
              between  the  financial  statement  carrying  amounts of  existing
              assets and  liabilities and their  respective tax bases.  Deferred
              tax assets and liabilities, if any, are measured using enacted tax
              rates  expected  to apply to taxable  income in the years in which
              these  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 operations in the period that
              includes the enactment date.

              The Company's  Hungarian  operating  subsidiaries were 100% exempt
              from  Hungarian  income tax for a period of five  years  beginning
              from  January 1, 1994 and are 60% exempt for the  subsequent  five
              years, as long as (1)  capitalization  stays above  50,000,000 HUF
              (approximately  $176,000 at December 31, 2000 exchange rates), (2)
              foreign ownership exceeds 30% of the registered  capital,  and (3)
              more than 50% of the revenue earned arises from  telecommunication
              services.

       (k)    Net Earnings (Loss) Per Share

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

              Net earnings (loss) and weighted  average shares  outstanding used
              for computing  diluted loss per common share were the same as that
              used for  computing  basic loss per  common  share for each of the
              years ended  December  31,  2000,  1999 and 1998.  The Company had
              potentially   dilutive  common  stock  equivalents  of  3,734,637,
              8,237,059  and  7,474,915  for the years ended  December 31, 2000,
              1999  and  1998,  respectively,  which  were not  included  in the
              computation of diluted net loss per common share because they were
              antidilutive for the periods presented.  The basis for determining
              whether common stock  equivalents  were  potentially  dilutive was
              loss before extraordinary items.

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

              The Company  evaluates the carrying value of long-lived  assets to
              be held and used,  including goodwill,  whenever events or changes
              in  circumstances  indicate  that the  carrying  amount may not be
              recoverable.   The  carrying  value  of  a  long-lived   asset  is
              considered  impaired when the projected  undiscounted  future cash
              flows related to the asset are less than its carrying  value.  The
              Company  measures  impairment  based on the  amount  by which  the

                                      F-9

<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998


              carrying  value of the  respective  asset  exceeds its fair market
              value.  Fair  market  value  is  determined  primarily  using  the
              projected future cash flows discounted at a rate commensurate with
              the risk involved.  Losses on long-lived  assets to be disposed of
              are determined in a similar manner, except that fair market values
              are reduced for the cost to dispose.

       (m)    Foreign Exchange Financial Instruments

              Foreign exchange  financial  instrument  contracts are utilized by
              the Company to manage certain foreign exchange rate risks. Company
              policy   prohibits   holding  or  issuing   derivative   financial
              instruments for trading purposes.

              The Company  accounts for foreign exchange  financial  instruments
              under SFAS 52. To qualify for hedge  accounting under SFAS 52, the
              contracts  must  meet  defined   correlation   and   effectiveness
              criteria,  be  designated  as hedges  and result in cash flows and
              financial  statement effects which  substantially  offset those of
              the position being hedged.

              Under  SFAS 52 hedge  accounting,  these  contracts  are valued at
              current  spot  rates on a monthly  basis.  The  change in value is
              recognized  currently in income  through  foreign  exchange  gains
              (losses) and is intended to offset the transaction losses or gains
              on  the  foreign  currency   denominated   liabilities  which  the
              contracts are intended to hedge. The foreign exchange loss for the
              year ended December 31, 2000 of $4,842,000 is stated net of a gain
              of $880,000 relating to the Company's  forward hedging  contracts.
              Any forward points on these  contracts are amortized over the life
              of the contract through interest expense.

 (2)   Cash, Restricted Cash and Short-Term Investments

       (a)    Cash

              At December 31, 2000,  cash of $5,957,000  comprise the following:
              $335,000 on deposit in the United States and $5,622,000 consisting
              of $874,000  denominated  in U.S.  dollars and the  equivalent  of
              $4,748,000  denominated in Hungarian forints on deposit with banks
              in Hungary.

       (b)    Cash Equivalents

              Cash equivalents amounted to approximately  $9,639,000 at December
              31,  2000  and  consisted  of  Hungarian  government   securities,
              denominated in Hungarian  forints,  purchased under  agreements to
              resell which mature within three months.

       (b)    Restricted Cash

              At December 31, 2000,  approximately $7,000 of cash denominated in
              U.S.  dollars  was  deposited  in escrow  accounts  under terms of
              construction  contracts.  In addition,  approximately  $100,000 of
              cash denominated in Hungarian  forints was restricted  pursuant to
              certain arrangements with other parties.


                                      F-10

<PAGE>

              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998


(3)    Property, Plant and Equipment

       The components of property,  plant and equipment at December 31, 2000 and
       1999 are as follows:
<TABLE>
<S>                                         <C>                    <C>         <C>

                                                     2000               1999    Estimated Useful Lives
                                                     ----               ----    ----------------------
                                                          (in thousands)
         Land and Buildings                   $      5,763              6,526      25 to 50 years
         Telecommunications equipment              121,457            128,116      7 to 25 years
         Other equipment                             5,613              5,766      5 years
         Construction in progress                      952              1,921
                                                  --------           --------
                                                   133,785            142,329

         Less: accumulated depreciation            (32,115)           (26,803)
                                                  --------           --------
                                              $    101,670            115,526
                                                  ========           ========
</TABLE>

 (4)   Short-Term Loans

       Short-term loans at December 31, 2000 and 1999 consist of the following:

                                                        2000            1999
                                                        ----            ----
                                                            (in thousands)
       Revolving loan:
         Euro - EUR 4,000,000 outstanding           $    3,722             -

       Bridge loan:
         Euro - EUR 25,000,000                              -          25,238
         Hungarian Forint - HUF 25,940,624,000              -         102,727
                                                      --------       --------
       Total short-term loans                            3,722        127,965
       Less amounts refinanced subsequent
         To year-end                                        -        (122,917)
                                                      --------       --------

       Short-term loans                             $    3,722          5,048
                                                      ========       ========

       On May 12, 1999, as a part of the  restructuring  of its debt and capital
       structure,  see Notes 5 and 9, the Company  borrowed  from  Postabank  es
       Takarekpenztar  ("Postabank"),  a Hungarian commercial bank, $138 million
       ($128 million at December 31, 1999 exchange  rates) under a one-year dual
       currency bridge loan agreement in Hungarian forints and euros. The bridge
       loan was  repayable on May 12, 2000 and bore  interest at an initial rate
       of  2.25%  (the  "Margin")  plus the  Budapest  Interbank  Offering  Rate
       ("BUBOR")  or the Banking  Federation  of the  European  Union  Interbank
       Offering Rate ("EURIBOR") which Margin increased  incrementally to 4.25%,
       in quarterly  increments  of 1% during the loan term.  On April 11, 2000,
       the  Company  signed  a EUR 130  million  senior  secured  debt  facility
       agreement  with a syndicate of Hungarian  and  non-Hungarian  banks,  the
       proceeds of which were used to repay the bridge loan. As a result of this
       refinancing,  the Company classified $123 million (at historical exchange
       rates) of its short-term loans at December 31, 1999, as long-term debt.

        The principal amount borrowed under the Revolving Loan Facility, a EUR 5
        million  facility,  which will reduce to a EUR 2.5  million  facility on
        December  31, 2005,  and which forms part of the EUR 130 million  Senior
        Secured  Debt  Facility,  is due at the end of each  interest  period at


                                      F-11
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998


        which point the Company can,  subject to certain  conditions,  roll over
        the amount of principal borrowed until the expiration of the facility in
        December 2007. The applicable  interest  period for this Facility is, at
        the Company's option,  one, three, or six months. The Company has chosen
        six months at the present  time.  Interest is payable at the end of each
        interest  period  calculated  similar to that for the Term Facility loan
        denominated in euros. See Note 5 for further  information  regarding the
        EUR 130 million senior secured debt facility agreement.

(5)    Long-term Debt


       Long-term debt at December 31, 2000 and 1999 consists of the following:

                                                              2000      1999
                                                              (in thousands)
       Loan payable, interest at EURIBOR + applicable
       margin  (6.82% at  December 31, 2000), payable
       in  14   semi-annual  installments   beginning
       June  30,   2001  with   final   payment   due
       December  31, 2007; EUR 84,135,000 outstanding
       at December 31, 2000.                             $   78,288         -

       Loan  payable,  interest at BUBOR + applicable
       margin (13.78%  at December 31, 2000), payable
       in 14 semi-annual  installments beginning June
       30,  2001  with final payment due December 31,
       2007;   HUF   10,504,856,000  outstanding   at
       December 31, 2000                                     36,893         -

       Notes  payable,  interest  at USD LIBOR + 3.5%
       (10.23% at  December  31, 2000), due March 31,
       2007  (less  unamortized  discount  based   on
       imputed  interest  rate  of 5% - $7,304,000 in
       2000; $8,256,000 in 1999)                             17,696     16,744

       Short-term   loans  refinanced   subsequent to
       year-end                                                  -     122,917
                                                          ----------   ---------
       Total long-term debt                              $  132,877    139,661

       Less current installments                              8,063         -
                                                         ----------    ---------
       Long-term debt, excluding current installments    $  124,814    139,661
                                                          ==========   =========

       The aggregate  amounts of  maturities  of long-term  debt for each of the
       next five  years,  and in  aggregate  thereafter,  at  December  31, 2000
       exchange rates,  are as follows:  2001,  $8,063,000;  2002,  $12,670,000;
       2003, $16,125,000;  2004, $16,125,000;  2005, $18,429,000 and $61,465,000
       thereafter.

                                      F-12
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998


       On October 15, 1996, the Company and its subsidiaries entered into a $170
       million  10-year  Multi-Currency  Credit  Facility  with  Postabank  (the
       "Original  Postabank  Credit  Facility").  On May 12,  1999,  the Company
       entered  into  various  agreements  as part of the  restructuring  of its
       capital structure with the following parties: Postabank; Tele Danmark A/S
       ("Tele Danmark");  and the Danish Investment Fund for Central and Eastern
       Europe  (the  "Danish  Fund")  (see Notes 9 and 12).  As a result of such
       agreements,  the Company extinguished all of its obligations to Postabank
       under  the  Original   Postabank   Credit   Facility  in  the  amount  of
       approximately  $193 million and the $16.4 million  borrowed in settlement
       of the  amount  due under the  contractor  financing  facility  described
       below. As part of these transactions, the Company borrowed from Postabank
       $138 million ($128  million at December 31, 1999 exchange  rates) under a
       one-year dual  currency  bridge loan  agreement in Hungarian  forints and
       euros and $25 million  pursuant to certain  unsecured  notes payable (the
       "Notes")  (see below).  Proceeds  from the Senior  Secured Debt  Facility
       Agreement in April 2000, as described below,  were  subsequently  used to
       refinance  $122,917,000 of the outstanding  Postabank loan as of December
       31, 1999.  Accordingly,  long-term  debt as of December 31, 1999 includes
       $122,917,000  borrowed  in May 1999 which was  refinanced  subsequent  to
       December 31, 1999. See below and Note 4 for further explanation.

       As a  result  of the  extinguishment  of the  Original  Postabank  Credit
       Facility,  the Company recorded an extraordinary  loss of HUF 1.5 billion
       (approximately  $6.3 million at  historical  exchange  rates)  during the
       second quarter of 1999 which  represented  the write-off of the remaining
       unamortized deferred financing costs pertaining to the Original Postabank
       Credit Facility.

       During  1996 and  1997,  Hungarotel  entered  into  several  construction
       contracts with a Hungarian  contractor which totaled $59.0 million in the
       aggregate  (at  historical  exchange  rates),  $47.5 million of which was
       financed by a contractor financing facility.  The contractor financed the
       construction through a facility provided by Postabank. As of December 31,
       1998, the balance owed under the contractor  financing facility was $36.6
       million. On March 30, 1999,  Postabank assumed HUF 7 billion plus accrued
       interest of HUF 348 million  (approximately  $30.9  million at historical
       exchange rates) of the Company's liability under the contractor financing
       facility  from  the  contractor,   due  to  the  contractor's   financial
       difficulties,  and sold this debt back to the  Company  for HUF 3 billion
       (approximately  $12.6 million at historical exchange rates). The purchase
       of the debt was  financed  by  Postabank.  On the same day,  the  Company
       purchased  HUF 4  billion  (approximately  $16.8  million  at  historical
       exchange  rates) of loans the  contractor  had with Postabank for HUF 900
       million  (approximately  $3.8 million at historical  exchange  rates) and
       subsequently  offset the booked  value of the loans  purchased of HUF 900
       million (approximately $3.8 million at historical exchange rates) against
       the  outstanding  amounts owed to the  contractor.  The purchase of these
       loans  was  also  financed  by  Postabank.  As  a  result  of  the  above
       transactions,  the  Company  recorded  an  extraordinary  gain of HUF 4.3
       billion (approximately $18.2 million at historical exchange rates) during
       the second  quarter of 1999 which  reflected  the  extinguishment  of all
       amounts due under the contractor financing facility.

       On  April 11, 2000,  the Company  entered into an EUR 130 million  Senior
       Secured  Debt Facility  Agreement  (the "Debt  Agreement" or  "Facility")
       with a European banking syndicate.  The Company drew down EUR 129 million
       of the  Facility  on  April 20,  2000  ($121  million  at April 20,  2000
       exchange  rates),  the funds of which  were used, along with $7.3 million
       of other Company funds (at April 20, 2000 exchange rates) to  pay off the
       outstanding  EUR 134 million  (approximately  $126  million  at April 20,
       2000 exchange rates)  principal  and interest due on the Postabank Bridge
       Loan which was due to mature on May 12, 2000, and to pay  fees associated
       with  the Debt Agreement.  The borrowers under the Debt Agreement are the
       Operating  Companies who  were the borrowers  under the Postabank  Bridge
       Loan.  The Debt Agreement has two facilities,  which are comprised of the
       Revolving  Facility  described  in Note 4 and the Term Facility described
       below.


                                      F-13

<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998


       The Term  Facility  is a floating rate term loan in the amount of EUR 125
       million, for which  principal is repayable  semi-annually on each June 30
       and  December 31  beginning  on June 30, 2001 and  ending on December 31,
       2007.  The amounts of the principal  repayments on  the Term Facility are
       to be  escalating  percentages  of  the amounts  drawn down.  The Company
       borrowed the full EUR 125  million,  of which EUR  84,135,000 was funded,
       and is  repayable,  in euros and the  equivalent  of EUR  40,865,000  was
       funded, and is repayable,  in Hungarian forints.  The Term Facility loans
       denominated  in euros  accrue  interest  at  the  rate of the  Applicable
       Margin (defined below)  plus the EURIBOR rate for the applicable interest
       period.  The EURIBOR rate is the  percentage rate per annum determined by
       the Banking Federation of  the European Union for the applicable interest
       period.  The Term Facility loans denominated  in Hungarian forints accrue
       interest at the rate of the  Applicable  Margin  (defined below) plus the
       BUBOR rate for the  applicable  interest  period.  The BUBOR  rate is the
       percentage rate  per annum determined  according to the rules established
       by the Hungarian Forex  Association and published by the National Bank of
       Hungary for  the applicable  interest  period.  The  applicable  interest
       period for Term  Facility Loans  denominated in euros is six months.  The
       applicable  interest  period  for  Term  Facility  Loans  denominated  in
       Hungarian  forints  is three  months.  Interest  is payable at the end of
       each  interest  period.  The Applicable  Margin is initially  1.75%.  The
       Applicable  Margin may be adjusted downward incrementally to a minimum of
       1.15% subject to the financial  performance of the Company as measured by
       the ratio of  the Company's  senior debt to its earnings before interest,
       taxes,  depreciation and  amortization.  Dependent  on its cash flow, the
       Company will  be required to prepay the  equivalent of $25 million on the
       Term  Facility  until  such time as $25  million  has been  prepaid.  The
       amount  of the  prepayment  in any year  shall  be  at  least  50% of the
       Company's  excess cash flow, if any,  for the previous  financial year as
       defined in  the Debt  Agreement.  The prepayment  amount is due within 15
       days of  the  publication  of each annual Form 10-K filing.  For the year
       ended  December 31, 2000, the Company does not have any excess cash flow,
       as defined in the  Debt Agreement,  and therefore no mandatory prepayment
       is going to be made by the Company in 2001.

       The  Company  paid an  arrangement  fee in the  amount  of EUR  2,665,000
       (approximately  $2,508,000  at April 20, 2000 exchange  rates),  which is
       included  in other  assets  along with other  direct  costs  incurred  in
       obtaining the Debt Agreement, and is being amortized over the term of the
       related  debt.  In  addition,  an agency fee in the amount of $60,000 has
       also been paid. The Company is obligated to pay an annual  commitment fee
       equal  to the  lower  of 0.75%  or 50% of the  Applicable  Margin  on any
       available unused commitment on the Revolving Loan Facility.

       The Company utilizes foreign currency forward contracts to reduce certain
       exposure to exchange rate risks associated with cash  requirements  under
       the Company's  long-term debt  obligations that mature within six months.
       The forward  contracts  establish the exchange rates at which the Company
       will sell the  contracted  amount  of  Hungarian  forints  for euros at a
       future date. The Company utilizes forward  contracts which are six months
       in duration  and at maturity  will either  receive or pay the  difference
       between  the  contracted  forward  rate  and  the  exchange  rate  at the
       settlement date. The contracted  amount of foreign  currency  forwards at
       December 31, 2000 is EUR 2,998,000 (approximately $2,790,000).

       HTCC and one of its subsidiaries, HTCC Consulting Rt., are guarantors for
       the  Operating  Companies  under  the Debt  Agreement.  The  Company  and
       Citibank Rt. (as security agent) have entered into a series of agreements
       to secure  all of the  Company's  obligations  under  the Debt  Agreement
       pursuant  to which the Company  has  pledged  all of its  intangible  and
       tangible   assets,   including   HTCC's   ownership   interests   in  its
       subsidiaries,   and  its  real  property.   The  Company  is  subject  to
       restrictive  covenants,  including  restrictions regarding the ability of
       the  Company to pay  dividends,  borrow  funds,  merge and dispose of its
       assets.  The  Debt  Agreement  contains  customary   representations  and
       warranties and customary events of default,  including those related to a

                                      F-14
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998


       change of control,  which would  trigger  early  repayment of the balance
       under the Debt  Agreement.  If prior to the later of December 31, 2001 or
       the Trigger Date (as defined below), Tele Danmark sells any of the shares
       of Common  Stock that it  currently  owns or Tele  Danmark and the Danish
       Fund, together, no longer own 30.1% of the outstanding Common Stock, then
       an event of default shall have occurred. Tele Danmark and the Danish Fund
       currently own a combined total of 31.9% of the outstanding  common stock.
       The Trigger Date is defined as the date on which for the prior two fiscal
       quarters  the  Company's  debt to  EBITDA  ratio  is less  than 3.5 to 1.
       Following  the Trigger  Date,  Tele Danmark can only  transfer its shares
       with the prior  written  consent of banks  holding at least  66.7% of the
       Company's outstanding debt under the Debt Agreement.

       In  connection  with the  restructuring  of its capital  structure in May
       1999,  as described  above,  the Company  issued notes to Postabank in an
       aggregate   amount  of  $25  million  with   detachable   warrants   (the
       "Warrants").  The Notes accrue interest,  which is payable semi-annually,
       at the USD LIBOR rate  applicable for the six month interest  period plus
       3.5%  (10.23% at December 31,  2000).  The Notes which mature in 2007 are
       transferable.  The Warrants enable Postabank to purchase 2,500,000 shares
       of the Company's  common stock at an exercise price of $10 per share. The
       exercise period  commences on January 1, 2004 and terminates on March 31,
       2007.  The fair value of the  warrants  amounted to $8.8  million and was
       credited to additional paid-in capital,  with the offsetting charge being
       accounted for as a discount on the Notes.  The fair value of the warrants
       was  determined  using the  Black-Scholes  Option  valuation  model.  The
       unamortized  discount on the notes at December 31, 2000 was approximately
       $7.3 million,  and is reflected as a reduction of the carrying  amount of
       the Notes. The Company has the right to terminate the Warrants in full or
       proportionately  prior to January 1, 2004  provided  that the Company (i)
       repays a proportionate  amount of the outstanding  principal on the Notes
       to the  holders  of such  Notes and (ii) pays an  additional  7.5% of the
       aggregate  principal  amount of the Notes  repaid  concurrently  with the
       termination of the Warrants to the holders of the Warrants.

(6)    Deferred Credits and Other Liabilities

       During  1999, two of the Company's  operating  subsidiaries  entered into
       agreements    with    the   Hungarian    Ministry   of    Transportation,
       Telecommunications   and  Water  Management  (the  "Ministry")   for  the
       relinquishment  of  rights  to use  broadcasting  frequencies  previously
       granted  by the Ministry.  The frequencies were used to provide telephone
       services  to certain customers.  Under the first agreement,  the Ministry
       paid  HUF 557 million  ($2,205,000 at historical  exchange rates),  which
       was  equal to the net book value of the  equipment  which was required to
       be  taken out of service.  Under the second agreement,  the Ministry paid
       HUF  308  million   ($1,278,000  at  historical  exchange  rates)   as  a
       contribution   towards  the  cost of new  fixed  network  equipment.  The
       amounts  received  under  these  agreements  were  credited  to  deferred
       credits and  other liabilities,  and under the first agreement are offset
       against  the  cost  of  the  related  equipment  and,  under  the  second
       agreement, are offset against the cost of the new equipment.

       Included  in deferred credits and other liabilities at December 31, 2000,
       is $8,212,000  of connection fee revenues,  from current and prior years,
       which  have been deferred  following the Company's  implementation of SAB
       101 during  the fourth  quarter of 2000. A similar  amount,  representing
       the associated  deferred costs, is included in deferred costs at December
       31, 2000.

                                      F-15

<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998


(7)    Income Taxes

       The  statutory  U.S.  Federal tax rate for the years ended  December  31,
       2000, 1999 and 1998 was 35% and the Hungarian  corporate  income tax rate
       for the  years  ended  December  31,  2000,  1999 and  1998 was 18%.  For
       Hungarian  corporate  income tax purposes,  the operating  companies were
       entitled  to a 100%  reduction  in income  taxes for the five year period
       ending  December  31,  1998 and are now  entitled to a 60%  reduction  in
       income  taxes for the  subsequent  five year period  ending  December 31,
       2003.  The effective  tax rate was zero for the years ended  December 31,
       2000, 1999 and 1998 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,  2000 of  approximately
       $28,477,000 which expire as follows: 2010, $6,025,000;  2011, $6,328,000;
       2012, $2,256,000; 2018, $1,925,000; and 2019, $11,943,000. As a result of
       various equity transactions,  management believes the Company experienced
       an "ownership  change" in 1999, as defined by Section 382 of the Internal
       Revenue Code which limits the annual  utilization  of net operating  loss
       carryforwards incurred prior to the ownership change.

       For Hungarian corporate income tax purposes,  the Hungarian  subsidiaries
       have unused net  operating  loss  carryforwards  at December 31, 2000, at
       current  exchange rates, of  approximately  $65,234,000.  Of this amount,
       $11,030,000 may be carried forward  indefinitely  while $6,882,000 may be
       carried forward until 2001,  $10,413,000  until 2002,  $17,322,000  until
       2003, $9,429,000 until 2004 and $10,158,000 until 2005.

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

                                                            December 31
                                                   -----------------------------
                                                         2000          1999
                                                         ----          ----
                                                           (in thousands)

              Net operating loss carryforwards       $   9,967         5,866
              Write down of assets                         167           418
              Stock compensation                         1,467         1,467
              Citizen's options                              -         3,926
              Termination benefits                         323           746
              Management fees                                -         3,236
              Interest expense                           1,699         1,381
              Other                                        231           474
                                                      --------      --------
              Total gross deferred tax assets           13,854        17,514
              Less valuation allowance                 (13,854)      (17,514)
                                                      --------      --------
              Net deferred tax assets                $       0             0
                                                      ========      ========


       In  assessing  the  realizability  of  deferred  tax  assets,  management
       considers  whether it is more likely than not that some portion or all of
       the deferred tax assets will not be realized. The ultimate realization of
       deferred tax assets is dependent  upon the  generation of future  taxable
       income  during the periods in which those  temporary  differences  become
       deductible.  Management considers projected future taxable income and tax
       planning in making these assessments. During 2000 and 1999, the valuation
       allowance decreased by $3,660,000 and $2,451,000, respectively.


                                      F-16
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998


 (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.

              During 2000, the Ministry was  restructured,  with  responsibility
              for telecommunications being moved to the Prime Minister's Office,
              a  government   department   presided   over  by  the   Chancellor
              (effectively,  the  Deputy  Prime  Minister).  References  to "the
              Ministry"  for the period  post  restructuring  are,  accordingly,
              references to the Prime Minister's Office.

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

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

              The concession  agreements  provide for,  among other things,  the
              subsidiaries to provide  telephone  service to specific numbers of
              customers  by specified  dates or be subject to possible  monetary
              penalties and possibly reduction in the period of exclusivity.  As
              of December 31, 2000, the Company  believes it has fulfilled these
              service  requirements  in its  concession  areas  in all  material
              respects.

              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.

                                      F-17
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998


              The  Ministry  has  stipulated  in the  Concession  Contracts  for
              Hungarotel and Papatel,  as amended on June 3, 1996,  that each of
              these  two  Operating   Companies  must  meet  certain   Hungarian
              ownership  requirements so that by the seventh  anniversary of the
              amendment,  Hungarian  ownership must consist of at least 25% plus
              one share of the relevant  Operating  Company.  For the seven-year
              period  following the date of the amendment,  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  Hungarian
              ownership  of a 10% equity  holding in an  Operating  Company must
              have voting power of at least 25% plus one share,  thus  providing
              Hungarian  owners the right to block certain  transactions  which,
              under Hungarian  corporate law,  require a supermajority  (75%) of
              stockholders   voting  on  the   matter,   such  as  mergers   and
              consolidations, increases in share capital and winding-up.

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

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

              Following  a capital  transaction  with Postabank in May 1999 (see
              Note 9) each  of the  Operating  Companies is deemed in compliance
              with  the 10% ownership requirement, however none of the Companies
              are  currently  in  compliance  with  the 25% voting  requirement.
              Failure  to comply with the 25% Hungarian ownership requirement at
              the end of  the seven-year period, which expires in 2003, might be
              considered a serious  breach of a Concession Contract,  giving the
              Ministry  the  right,   among   other  things,  to  terminate  the
              Concession   Contracts.   New  regulations  for   the  liberalized
              telecommunications  market  in  2002  may  remove   the  Hungarian
              ownership requirement,  but  the content,  effect or timing of any
              new  regulations  on  this issue are unknown at the present  time.
              However,  in the event the ownership requirement is enforced,  the
              Company  believes  that  it  will  be  able  to  restructure   its
              ownership components in a manner satisfactory to the Ministry.

       (b)    Construction Commitments

              KNC has a long-term frame contract with Siemens which provides for
              the continued  construction of a local  telephone  network and the
              addition of new subscribers in its service area.  During 1999, the
              contract  was  amended  to expand the  number of  subscribers  the
              contractor  must connect in order to complete the  contract.  This
              contract  totals,  with the amendment  during 1999,  approximately
              $20.0 million, $2.3 million of which remains to be expended.


                                      F-18
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998

              Hungarotel  has two contracts  with Siemens for continued  network
              expansion to meet current and expected future customer demand. The
              contracts   totalled   approximately   $4.9   million,   of  which
              approximately  $3.0  million  remains to be expended  in 2001.  In
              connection with one of the Siemens  contracts,  Hungarotel is also
              building a new office building in one of its concession areas. The
              cost of the building is expected to be approximately $0.5 million,
              at December 31, 2000 exchange rates, the full amount of which will
              be expended in 2001.

        (c)   Leases

              The Company and its subsidiaries lease office and other facilities
              in the United  States and Hungary,  which require  minimum  annual
              rentals.  Rent expense under  operating  lease  agreements for the
              years  ended  December  31,  2000,  1999 and 1998,  was  $301,000,
              $395,000 and $199,000,  respectively, and is included in operating
              and maintenance  expenses.  Lease obligations for each of the next
              five years,  and in the aggregate  thereafter,  are as follows (at
              December 31, 2000 exchange rates): 2001, $327,000; 2002, $314,000;
              2003, $320,000; 2004, $323,000; and 2005, $327,000.

       (d)    Legal Proceedings

              Hungarotel  is a defendant  in a lawsuit  brought in Hungary  that
              alleges breach of contract.  The plaintiff was seeking  payment of
              approximately HUF 222 million (approximately  $780,000 at December
              31, 2000 exchange rates) plus interest.  By a judgement in October
              2000, a Hungarian court made an award in favor of the plaintiff in
              the amount of HUF 77.7 million (approximately $273,000 at December
              31, 2000 exchange  rates) plus interest.  As of December 31, 2000,
              interest  and  costs  stood at  approximately  HUF  141.5  million
              (approximately  $497,000 at December 31, 2000 exchange rates). The
              Company  continues  to believe that it has  satisfactory  defenses
              against  the  claims  and has filed an appeal  with the  Hungarian
              Supreme Court against this  judgement.  The Company has accrued in
              its  financial  statements  an amount  which it  believes  will be
              sufficient  to  satisfy  the  ultimate  cost  of  resolving   this
              litigation.

              During   1996  and  1997,   Hungarotel   entered   into    several
              construction  contracts with a Hungarian contractor which  totaled
              $59.0  million  in the  aggregate,  $47.5  million  of  which  was
              financed by a contractor  financing facility.  By January 1998  it
              became clear to Hungarotel that there were problems with  the work
              undertaken by the contractor and Hungarotel  rejected  invoices in
              the amount of approximately HUF 700  million  (approximately  $2.5
              million at December  31, 2000  exchange  rates) for,  among  other
              reasons,   the  contractor's  failure  to  meet   the  contractual
              capacity  requirements  and breaches of warranties  regarding  the
              quality  of work.  During  1998 the  Company  and  the  contractor
              engaged  in  settlement  discussions  in  order to  resolve  these
              issues but were unable to reach a  settlement.  Following a series
              of transactions with the contractor's  major creditor, the Company
              was able to settle, through legal  offset, the contractor's claims
              arising from the accepted but  unpaid  invoices.  In addition,  in
              March 1999, Hungarotel acquired  a  HUF 3.1 billion (approximately
              $10.9  million at  December  31, 2000  exchange  rates)  net claim
              against the contractor in order to strengthen its position  in any
              potential procedures initiated by the contractor.  The  contractor
              is  seeking  payment  under  separate  invoices  in the  amount of
              approximately $24 million for work which the Company is  disputing

                                      F-19
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998


              because of quality and  quantity  issues.  The  Company  still has
              claims against the contractor of approximately  $31 million  which
              is more than the  contractor's  claim.  In December  1999, a  debt
              collection company initiated debt collection  proceedings  against
              the Hungarian  contractor for  non-payment  of  various debts.  In
              June 2000,  the debt  collection  company  claimed  the benefit of
              certain  invoices that the contractor had issued to  Hungarotel in
              the  amount of  HUF 455  million  (approximately  $1.6  million at
              December 31,  2000 exchange  rates),  stating that the  contractor
              had  assigned  those  invoices  to  it "as  security"  in the debt
              collection  proceedings.  Hungarotel rejected  the debt collection
              company's claim for, among other reasons,  the  absence of a right
              by the  contractor to assign the invoices and  that, in any event,
              Hungarotel  has a  substantive  defense and  counterclaim  on  the
              merits to the underlying  claim on the invoices.  A  court hearing
              regarding  the HUF 455 million  claim plus  interest and  costs is
              scheduled for the early spring 2001. The Company believes  that it
              will prevail.

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

              Papatel  is  involved  in  a  dispute  with the  Hungarian  taxing
              authorities  (the  "APEH")  pursuant  to  which  the APEH  alleges
              Papatel  owes HUF 26 million  (approximately  $91,000  at December
              31, 2000 exchange  rates) for various  reasons.  Papatel  believes
              that the APEH claim is  without merit and is vigorously  defending
              itself against such claims.

              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  and  those  described  above  will  not have a
              material effect on the Company's  consolidated financial position,
              results of operations or liquidity.

 (9)   Common Stock and Cumulative Convertible Preferred Stock

       On September 30, 1998, the Company  entered into certain  agreements with
       certain wholly-owned subsidiaries of Citizens Utilities Company (Citizens
       Utilities  Company and its  subsidiaries  are hereinafter  referred to as
       "Citizens") pursuant to which the Company issued 100,000 shares of Common
       Stock (see Note 12). The value of the shares on the date of issue totaled
       $513,000 which was recorded as an increase to Common Stock and additional
       paid-in capital.

       During  1998,  the  Company  issued  18,469  shares  of  Common  Stock as
       contingent  consideration  related to the  acquisition  of Hungarotel and
       Papatel in 1995, per the acquisition agreement.

                                      F-20
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998


       On May 12, 1999,  the Company and Tele Danmark A/S ("TD")  entered into a
       Stock Purchase Agreement (the "TD Stock Purchase  Agreement") pursuant to
       which the Company issued  1,571,429  shares of the Company's common stock
       in exchange for $11 million. The Company applied the proceeds from the TD
       Stock  Purchase  Agreement to the  repayment  of the  Original  Postabank
       Credit Facility (see Note 5).

       On May 12, 1999,  the Company and the Danish Fund for Central and Eastern
       Europe (the "Danish Fund")  entered into a Stock Purchase  Agreement (the
       "Danish  Fund Stock  Purchase  Agreement")  pursuant to which the Company
       issued  1,285,714 shares of the Company's common stock in exchange for $9
       million.  The  Company  applied the  proceeds  from the Danish Fund Stock
       Purchase  Agreement to the  repayment of the  Original  Postabank  Credit
       Facility (see Note 5).

       On May 12, 1999,  the Company and Citizens  entered into a Stock Purchase
       Agreement (the "Citizens Stock Purchase Agreement") pursuant to which the
       Company issued to Citizens 1,300,000 shares of the Company's common stock
       and  30,000  shares  of the  Company's  Series A  Cumulative  Convertible
       Preferred Stock, par value $0.01 (the "Preferred Stock") in consideration
       for the  extinguishment of liabilities the Company had with Citizens (see
       Note 12).  The  value of the  common  stock on the date of issue  totaled
       $9,100,000 and was recorded as an increase to Common Stock and additional
       paid-in  capital.  The value of the preferred shares on the date of issue
       totaled  $2,100,000  which was  recorded  as an  increase  to  Cumulative
       Convertible Preferred Stock and additional paid-in capital.  Citizens, as
       the holder of the Cumulative  Convertible Preferred Stock, is entitled to
       receive  cumulative  cash  dividends at an annual rate of 5%,  compounded
       annually on the liquidation  value of $70 per share.  The Company may, at
       its  option,  redeem  the  Preferred  Stock at any time.  The  Cumulative
       Convertible  Preferred Stock is convertible  into shares of the Company's
       common stock on a one for ten basis.

       On  May 12,  1999,  the Company and  Postabank  entered into a Securities
       Purchase  Agreement  (the  "Postabank  Securities  Purchase   Agreement")
       pursuant to which Postabank  purchased 2,428,572 shares of  the Company's
       common  stock  for  an  aggregate  purchase  price  of $34  million.  The
       Postabank   Securities   Purchase  Agreement  provides  for   one  person
       designated  by Postabank to be nominated  for election  to the  Company's
       Board  of   Directors.   Postabank   can   only   transfer   such  shares
       incrementally  through  2003  subject  to  the  Company's  right of first
       refusal.  The Company's  right of first  refusal  expires in January 2003
       and is assignable by the Company to any  beneficial  holder of  more than
       10% of the Company's  outstanding  common stock. The Company  applied the
       proceeds  from the  stock  issuance  to the  repayment  of  the  Original
       Postabank  Credit  Facility  (see  Note 5).  Pursuant  to  the  Postabank
       Securities Purchase Agreement,  the Company issued  notes to Postabank in
       an aggregate  amount of $25 million with  detachable  warrants  (see Note
       5).

       During the fourth quarter of 2000, the Company  entered into an agreement
       with the International  Finance Corporation ("IFC") pursuant to which the
       IFC agreed to exchange its 20% ownership  interest in Papatel for a total
       of 72,000 shares of the Company's  Common Stock.  The value of the shares
       on the date of issue totaled $333,000,  which was recorded as an increase
       to Common Stock and additional paid-in capital.

       As of December  31, 2000 and 1999,  the Company had 30,000  shares of its
       cumulative  convertible preferred stock, with a $70.00 liquidation value,
       outstanding.  Any holder of the cumulative convertible preferred stock is
       entitled to receive  cumulative cash dividends payable in arrears,  at an
       annual rate of 5%, compounded annually on the liquidation value of $70.00
       per share.  As of December 31, 2000 and 1999, the total  arrearage on the
       cumulative   convertible   preferred  stock  was  $175,000  and  $68,000,
       respectively,  and is included in due to related parties.  The Company is
       currently legally prohibited under Delaware law from paying any dividends
       on the cumulative convertible preferred stock.

                                      F-21
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998

       The Company has  reserved  3,734,637  shares as of December  31, 2000 for
       issuance under stock option plans, compensation agreements,  warrants and
       under the  conversion  terms  applicable  to its  outstanding  cumulative
       convertible preferred stock.

 (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
       has since been increased following  stockholder approval, to 1,250,000 as
       of December 31, 2000. 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, 2000,  853,490 options  provided for by the Plan had been issued,  of
       which 196,100 were exercised and 657,390 remained outstanding.

       During 1998, a former officer exercised options to purchase 51,750 shares
       of Common Stock at $4.00 per share.  Proceeds  from the exercise of these
       options totaled $207,000. During 2000, a former officer exercised options
       to purchase  28,600  shares of Common Stock at $8.00 per share.  Proceeds
       from  the  exercise  of  these  options  totaled  $228,800.  The  options
       exercised were issued from the Company's stock option plan.

       In  1997,  the  Company   adopted  a  director  stock  option  plan  (the
       "Directors'  Plan")  which  provides  for the issuance of an aggregate of
       250,000 stock  options.  Options  granted under the  Directors'  Plan are
       exercisable for up to 10 years from the date of grant. As of December 31,
       2000, 90,000 options provided for by the Directors' Plan had been issued,
       of which 10,000 were exercised and 80,000 remained outstanding.

       During  2000,  a former  director  exercised  options,  granted  from the
       Directors'  Plan,  to purchase  5,000 shares of Common Stock at $6.78 per
       share. Proceeds from the exercise of these options totaled $33,900.

       The Company  applies APB  Opinion No. 25 and related  interpretations  in
       measuring  compensation  cost under its stock based  compensation  plans,
       including the Directors' Plan. As a result,  no compensation  expense has
       been  recognized  by the Company  with regard to  employee  and  director
       awards under its stock option plans, as the exercise price of all options
       has equaled or exceeded  the fair market  value of the  Company's  common
       stock price at the  respective  grant dates.  Had the Company  determined
       compensation  cost for options  issued  under the plans based on the fair
       value at the grant date in  conformity  with SFAS No. 123, the  Company's
       net pro forma income (loss) and Earnings (Loss) Per Share would have been
       as follows:
<TABLE>
<S>                                                   <C>          <C>         <C>
                                                         2000         1999        1998
                                                           ----       ----        ----
                                                                (in thousands)

           Net  income (loss)          As reported     ($5,331)     $3,172     ($50,612)
                                         Pro forma     ($5,850)     $2,526     ($51,065)

           Earnings (loss) per share   As reported      ($0.45)      $0.33       ($9.53)
                                         Pro forma      ($0.50)      $0.27       ($9.62)
</TABLE>

       For purposes of the pro forma  calculation under SFAS 123, the fair value
       of each option  grant has been  estimated  on the date of grant using the
       Black-Scholes  option-pricing model with the following assumptions: (1) a
       risk free rate of 6.69% in 2000,  5.03% in 1999 and 5.58% in 1998, (2) an
       expected life of 6 years for 2000, 5 years for 1999 and 6 years for 1998,
       and (3)  volatility of  approximately  72% for 2000, 81% for 1999 and 84%
       for 1998.
                                     F-22

<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998


       The following is a summary of stock options, including those issued under
       the Plan and Directors'  Plan referred to above,  and other  compensation
       agreements  which were  granted,  exercised  and  cancelled for the three
       years ended December 31, 2000:

<TABLE>
<S>                 <C>                             <C>              <C>
                                                        Outstanding      Option Price
                                                        Options          Per Share
              ------------------------------------- ---------------- ------------------
                     December 31, 1997                   758,097          $3.60-$20.00
                     Granted                             151,000          $5.81-$8.00
                     Exercised                          (56,400)          $3.60-$4.00
                     Cancelled                                 -               -
              ------------------------------------- ---------------- ------------------
                     December 31, 1998                   852,697          $4.00-$20.00
                     Granted                             189,990          $3.25-$6.00
                     Exercised                                 -               -
                     Cancelled                         (116,950)          $8.00-$20.00
              ------------------------------------- ---------------- ------------------
                     December 31, 1999                   925,737          $3.25-$14.00
                     Granted                             140,000          $5.93-$6.21
                     Exercised                          (33,600)          $6.78-$8.00
                     Cancelled                          (97,500)          $9.44-$12.25
              ------------------------------------- ---------------- ------------------
                     December 31, 2000                   934,637          $3.25-$14.00
              ------------------------------------- ---------------- ------------------
</TABLE>

       The  following  table  summarizes  information  about  shares  subject to
       outstanding  options as of December 31, 2000 which were issued to current
       or former employees,  or directors pursuant to the Plan, Directors' Plan,
       employment or other agreements.

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

           543,237     $3.25-$6.78            $4.80             3.69             523,237         $4.75
           176,400     $8.00-$9.44            $8.58             2.23             176,400         $8.58
            15,000        $11.69             $11.69             1.83              15,000        $11.69
           200,000        $14.00             $14.00             0.58             200,000        $14.00
           -------                                                               -------
           934,637     $3.25-$14.00           $7.60             2.72             914,637         $7.63
           =======                                                               =======

</TABLE>

       Stock Grants

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

                                      F-23
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998


       In December 1995, the Company  entered into  employment  agreements  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 vested
       over a four-year  period from the effective date of each agreement.  As a
       result of these  employment  agreements,  in 1995 the Company recorded an
       increase in additional paid-in-capital of $1,050,000, and a corresponding
       increase in deferred  compensation,  which was being  amortized  over the
       vesting  period.  During 1998, the Company  canceled 25,000 shares of the
       total  102,500  shares  granted  in  December  1995.  As a result  of the
       cancellation,   the   Company   recorded   a   decrease   in   additional
       paid-in-capital  of $256,000,  and a  corresponding  decrease in deferred
       compensation.

       In November  1999,  the Company  cancelled  30,000 fully vested  employee
       stock options  previously issued with an original exercise price of $8.00
       per share and an  expiration  date of March 31, 2003,  and issued  30,000
       options with like terms  except that the newly  issued  options have been
       granted with an exercise price of $5.46 per share, the fair value of such
       options  at  the  date  of  modification.   The  Company  has  recognized
       approximately  $45,000  of  compensation  income in 2000 and  $54,000  of
       compensation expense in 1999 as a result of the modification.


 (11)  Reconciliation of Net Income (Loss) to Net Cash Provided by Operating
       Activities
       -------------------------------------------------------------------------

       The reconciliation of net income (loss) to net cash provided by operating
       activities for the years ended December 31, 2000, 1999 and 1998 follows:

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

                                                                   2000          1999          1998
                                                                   ----          ----          ----
                                                                            (in thousands)
       Net income (loss)                                    $    (5,331)        3,172       (50,612)
       Adjustments to reconcile net income to
           net cash provided by operating activities:
              Depreciation of property, plant and
                     equipment                                    8,772        11,008        10,598
              Amortization of intangibles                           656           774           962
              Asset write-downs                                     183           237            45
              Non-cash compensation                                 (45)           54           339
              Unrealized foreign currency loss                    5,050         2,580           353
              Extraordinary items, net                                -       (20,193)            -
              Termination charges                                     -             -        11,131
              Other (income)/expense                                 38        (1,177)         (787)
              Unpaid/non-cash interest                            1,478        16,345        36,494
           Changes in operating assets and liabilities:
              Accounts receivable                                   654        (1,277)        2,199
              Restricted cash                                        (9)           60           444
              VAT receivable                                          -             -         2,503
              Other assets                                         (754)        2,508         1,461
              Accounts payable and accruals                      (1,473)        4,929        (6,156)
              Due to related parties                               (928)         (498)        2,144
                                                                --------      --------      -------
       Net cash provided by operating activities            $     8,291        18,522        11,118
                                                                =======       =======       =======


       Cash paid during the year for:
              Interest                                      $    12,526        10,521         9,362
                                                                =======       =======       =======
</TABLE>

                                      F-24
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998

       Summary of non-cash transactions:

       During 2000 the Company:

       o  Issued 72,000 shares of Common Stock valued at $333,000 to the IFC in
          exchange for its interest in one operating subsidiary.

       During 1999 the Company:

       o  Issued    1,300,000   shares    of     Common    Stock    valued    at
          $9,100,000  and 30,000  shares of  Cumulative  Convertible  Preferred
          Stock valued at $2,100,000 in settlement of an $8.4 million promissory
          note   and   Citizens'   renouncement  and  forgiveness  of any rights
          whatsoever in  respect of the $21 million  aggregate amount payable to
          Citizens  beginning in 2004.
       o  Modified  the  exercise  price  on  30,000  stock options issued to an
          executive pursuant to a termination agreement.

       During 1998 the Company:

       o  Issued  100,000  shares of  Common   Stock  valued  at  $513,000 and a
          promissory  note  in  the  amount  of  $8.4  million  to  Citizens  in
          settlement  of  $9.6  million  of  accrued  fees  and expenses due and
          payable  to  Citizens  under   the   terminated  management   services
          agreement.
       o  Issued  10,625  shares  of Common Stock as compensation  to two former
          executive officers  valued at $93,000.
       o  Canceled  25,000  restricted  shares to a former executive pursuant to
          a retirement  agreement.
       o  Issued  2,110,896  options to purchase Common Stock valued at $121,000
          in settlement of Citizens' accrued preemptive rights.

 (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
              installments  over  a  72 month period commencing August 31, 1996,
              and also issued options to purchase 200,000 shares of Common Stock
              at an exercise  price of $14.00 per share.  These commitments  are
              supported by letters of credit.  The Company  recorded a charge of
              approximately   $6.3  million  in  1996  and  has  made   payments
              aggregating  approximately  $1,208,000  in each of 2000,  1999 and
              1998 related to these agreements.


                                      F-25

<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998


       (b)    Transactions with Tele Danmark A/S

              After the transaction  with Tele Danmark,  as discussed in Note 9,
              TD's share  ownership  in the  Company  is 21.2% of the  Company's
              outstanding  common  stock as of December  31,  2000.  TD has been
              granted preemptive rights to maintain its ownership percentage.

       (c)    Transactions with the Danish Fund

              As a result of the transaction  with the Danish Fund, as discussed
              in Note 9, the Danish  Fund's  share  ownership  in the Company is
              10.6% of the Company's outstanding common stock as of December 31,
              2000.

       (d)    Transactions with Postabank

              As a result of the transactions with Postabank  discussed in Notes
              4, 5 and 9, Postabank's share ownership in the Company is 20.1% of
              the Company's outstanding common stock as of December 31, 2000.

       (e)    Transactions with Citizens

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

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

                                      F-26
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998


              The  Company  recorded  a charge  totaling  $11.1  million in 1998
              representing the present value of the $21 million aggregate amount
              payable to Citizens beginning in 2004.

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

              On May 12,  1999,  the Company and  Citizens  entered into a Stock
              Purchase  Agreement  (the  "Citizens  Stock  Purchase  Agreement')
              pursuant to which the Company issued to Citizens  1,300,000 shares
              of the  Company's  common stock and 30,000 shares of the Company's
              Series A Cumulative  Convertible  Preferred Stock, par value $0.01
              (the  "Preferred   Stock").  In  consideration  for  such  shares,
              Citizens  (i)  transferred  to the  Company for  cancellation  the
              $8,374,000 promissory note issued by the Company to Citizens which
              was to mature in 2004,  (ii) forgave half of the accrued  interest
              due on the  promissory  note through May 15, 1999 and (iii) agreed
              to renounce and forego any rights whatsoever to any payment of the
              $21  million  which was  payable  by the  Company to  Citizens  in
              quarterly  installments  of  $750,000  each from 2004  through and
              including  2010. The Citizens Stock  Purchase  Agreement  provided
              that if the average  closing price of the  Company's  common stock
              for the twenty (20)  trading  days ending  March 31, 2000 was less
              than $7.00 per share,  then HTCC would issue additional  Preferred
              Stock to  Citizens.  The average  closing  price of the  Company's
              common  stock for the above  mentioned  period was more than $7.00
              per share and as a result,  no additional shares of HTCC Preferred
              Stock have been issued to Citizens.  Citizens  also waived any and
              all preemptive  and  anti-dilution  rights in connection  with the
              transactions  described in Notes 5 and 9. As a result of the Stock
              Purchase   Agreement   with   Citizens,   the   Company   recorded
              extraordinary  income of $9.0 million during the second quarter of
              1999,  which  represented  the gain on the  extinguishment  of the
              liabilities the Company had with Citizens.

              After the above  transactions,  on December 31, 2000 Citizens held
              19.1% of the Company's outstanding common stock.

                                      F-27
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998


       Amounts  payable to related  parties as of  December  31,  2000 and 1999,
       excluding long-term debt, were as follows:

                                                         2000             1999
                                                         ----             ----
       Payable to former officers and directors    $   1,727,000    $  2,656,000
       Due to Citizens                                   175,000          68,000
                                                       ---------    ------------
                                                   $   1,902,000    $  2,724,000
                                                       =========    ============

(13)     Extraordinary Items

       The extraordinary  item in 1999 resulted from a series of transactions as
       follows:

        Gain on extinguishment of amounts due under a contractor
        financing facility (see Note 5)                             $18,161,000
        Gain on extinguishment of liabilities to Citizens (see Note
        12(e))                                                        9,039,000
        Less: write-off of unamortized deferred financing costs and
        credits pertaining to the Original Postabank Credit
        Facility (see Note 5)                                        (6,255,000)
                                                                   -------------
                                                                    $20,945,000
                                                                   =============
(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 2000, 1999 or 1998.


(15)   Segment Disclosures

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

       Products and Services

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

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

                                      F-28
<PAGE>
              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998


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

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

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

                         (in thousands)       2000         1999       1998
                                              ----         ----       ----

           Telephone services               $39,867     $42,088      $35,969
           Network services                   2,398       2,193        1,402
           Other service and product
              revenues                          709       1,157        1,336
                                            -------      -------      ------
                                            $42,974     $45,438      $38,707
                                           ========     =======      =======

       Major Customers

       For the  years  ended  December  31,  2000,  1999 and  1998,  none of the
       Company's  customers  accounted for more than 10% of the Company's  total
       revenue.











                                      F-29

<PAGE>

                Schedule of Quarterly Financial Data (unaudited)

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

                                 December 31      September 30      June 30       March 31
                                     (amounts in thousands, except per share amounts)

Fiscal 2000 quarters ended:
 Net revenues*                   $   10,288     $   10,662    $    10,887     $   11,137
 Operating income                     3,623          4,368          4,466          4,012
 Net income (loss) available for
   common stockholders                  954         (2,700)          (209)        (3,456)

 Earnings (loss) per share:
   Net income (loss)             $     0.08     $   (0.22)    $     (0.02)    $    (0.29)
                                   ========       ========        ========       ========

Fiscal 1999 quarters ended:
 Net revenues                    $   12,274     $   11,169    $    10,790     $    11,205
 Operating income                     4,900          3,796          3,537           3,956
 Income (loss) before
   extraordinary items               (2,055)        (2,736)        (4,968)         (8,014)
 Extraordinary items, net**               -              -         20,945               -
 Net income (loss) available
   for common stockholders           (2,082)        (2,763)        15,963          (8,014)

 Earnings (loss) per share:
   Before extraordinary items    $    (0.17)    $    (0.23)   $     (0.55)    $     (1.49)
   Extraordinary items                    -              -           2.32               -
                                   --------       --------       --------         --------
   Net income (loss)             $    (0.17)    $    (0.23)   $      1.77     $     (1.49)
                                   ========       ========       ========         ========

</TABLE>

* Revenues for the first three quarters of 2000,  as previously  reported,  have
  been restated  to  reflect  a change  in  accounting  for  connection  fees in
  conformity  with  the  SEC's  Staff Accounting Bulletin No. 101. The effect of
  this  change resulted in net revenues, as previously reported,  increasing for
  the quarters ended  September 30, June 30, and March 31 by $258,000,  $231,000
  and $306,000, respectively.

**For a description of the second quarter 1999 extraordinary  items, see Note 13
  of Notes to Consolidated Financial Statements.








                                      S-1


<PAGE>

                         Schedule II - Valuation Accounts


                        Balance at      Provision for                Balance
                        the Beginning   Bad Debt       Translation   at the End
        DESCRIPTION     of Year         Expense        Adjustment    of Year
                        -----------------------------------------------------
Allowance for doubtful
accounts receivable

Year ended
December 31, 1998        $540,000       $469,000     ($47,000)       $962,000
                        =========      =========      ========      =========
Year ended
December 31, 1999        $962,000       $227,000    ($159,000)     $1,030,000
                        =========      =========      ========      =========
Year ended
December 31, 2000      $1,030,000       $230,000    ($120,000)     $1,140,000
                        =========      =========      ========      =========








                                   S-2

<PAGE>

              HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES


                                Index to Exhibits

Exhibit No.    Description

10.6           Hungarian Telephone  and Cable Corp. Non-Employee  Director Stock
               Option Plan, as amended as of May 25, 2000.

10.8           Employment Agreement  between Hungarian Telephone and Cable Corp.
               and Ole Bertram as amended as of January 31, 2001.

21             Hungarian Telephone and Cable Corp. Subsidiaries.

23             Consent of KPMG Hungaria Kft.

27.1           Financial Data Schedule.