Annual Reports

 
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Magyar Telekom Plc. 20-F 2009

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TABLE OF CONTENTS
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

As filed with the Securities and Exchange Commission on May 21, 2009

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





Form 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

Commission file number 1-14720



MAGYAR TELEKOM TÁVKÖZLÉSI NYILVÁNOSAN MÜKÖDÖ RÉSZVÉNYTÁRSASÁG
(Exact Name of Registrant as Specified in Its Charter)

MAGYAR TELEKOM TELECOMMUNICATIONS PUBLIC LIMITED COMPANY
(Translation of Registrant's Name Into English)

Hungary

(Jurisdiction of Incorporation or Organization)

Budapest, 1013, Krisztina krt. 55, Hungary

(Address of Principal Executive Offices)

Thomas Stumpf
Chief Accounting Officer
Magyar Telekom
Budapest, 1013, Krisztina krt 55, Hungary
+36-1-457-4211
tom.stumpf@telekom.hu
(Name, Telephone, Email and/or Facsimile number and Address of the Company Contact Person)

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

Title of each class
  Name of each exchange on which registered

 
 
 
American Depositary Shares, each representing
five Ordinary Shares
  New York Stock Exchange

Ordinary Shares

 

New York Stock Exchange*
Budapest Stock Exchange

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

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

         Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report:

Ordinary Shares......1,042,745,615 nominal value HUF 100 per share (as of December 31, 2008)

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ý    No  o

         If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  o    No  ý

         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 requirements for the past 90 days.    Yes  ý    No  o

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o

         Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing

U.S. GAAP o   International Financial Reporting Standards as issued by the International Accounting Standards Board ý   Other o

         If "Other" has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow.    Item 17 o    Item 18 o

         If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o    No ý


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


Table of Contents


TABLE OF CONTENTS

 
   
  Page  

  Certain Defined Terms and Conventions     iii  

  Forward-looking Statements     iii  

PART I

 

Item 1

  Identity of Directors, Senior Management and Advisers     1  

Item 2

  Offer Statistics and Expected Timetable     1  

Item 3

  Key Information     1  

 

Selected Financial Data

    1  

 

Exchange Rate Information

    2  

 

Risk Factors

    4  

Item 4

  Information on the Company     14  

 

Organization

    14  

 

History and Development

    14  

 

Description of Business and its Segments

    16  

 

Strategy

    17  

 

Overview of Magyar Telekom's Revenues and Principal Activities

    20  

 

T-Home and T-Systems

    20  

 

T-Mobile

    32  

 

Distribution and Sales

    38  

 

Competition

    40  

 

Dependence on patents, licenses, customers, industrial, commercial and financial contracts

    45  

 

Regulation

    45  

 

Pricing

    60  

 

Organizational Structure

    65  

 

Property, Plants and Equipment

    65  

 

Infrastructure and Technology

    65  

 

Environment Protection

    69  

Item 4A

  Unresolved Staff Comments     69  

Item 5

  Operating and Financial Review and Prospects     69  

 

Management overview

    70  

 

Operations review—Group

    76  

 

Operations review—By segment

    89  

 

Liquidity and Capital Resources

    96  

 

Research and Development

    100  

 

Risk Management Policies

    102  

Item 6

  Directors, Senior Management and Employees     104  

 

Board of Directors

    104  

 

Management Committee

    108  

 

Supervisory Board

    110  

 

Indemnification of the Board of Directors and the Supervisory Board

    114  

 

Compensation of Directors and Officers

    114  

 

Board Practices

    116  

 

Employees

    117  

 

Share Ownership of Management

    119  

Item 7

  Major Shareholders and Related Party Transactions     119  

 

Major Shareholders

    119  

 

Related Party Transactions

    120  

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  Page  

Item 8

  Financial Information     120  

 

Consolidated Financial Statements

    120  

 

Other Financial Information

    121  

 

Legal proceedings

    121  

 

Dividend Policy

    124  

 

Significant Changes

    124  

Item 9

  The Offer and Listing     124  

Item 10

  Additional Information     126  

 

Share Capital

    126  

 

Option to Purchase Securities from Registrant or Subsidiaries

    126  

 

Memorandum and Articles of Association

    126  

 

Deposit Agreement

    127  

 

Corporate Governance

    127  

 

Significant Differences in Corporate Governance Practices for Purposes of Section 303A.11 of the New York Stock Exchange Listed Company Manual

    130  

 

Material Contracts

    133  

 

Exchange Control

    133  

 

Taxation

    134  

 

Documents on Display

    136  

Item 11

  Quantitative and Qualitative Disclosures About Market Risk     136  

Item 12

  Description of Securities Other than Equity Securities     136  

PART II

 

Item 13

  Defaults, Dividend Arrearages and Delinquencies     137  

Item 14

  Material Modifications to the Rights of Security Holders and Use of Proceeds     137  

Item 15

  Controls and Procedures     137  

Item 16A

  Audit Committee Financial Expert     142  

Item 16B

  Code of Ethics     142  

Item 16C

  Principal Accountant Fees and Services     143  

Item 16D

  Exemptions from the Listing Standards for Audit Committees     144  

Item 16E

  Purchases of Equity Securities by the Issuer and Affiliated Purchasers     144  

Item 16F

  Change in Registrant's Certifying Accountant     144  

Item 16G

  Corporate Governance     144  

PART III

 

Item 17

  Financial Statements     145  

Item 18

  Financial Statements     145  

Item 19

  Exhibits     145  

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Certain Defined Terms and Conventions

        In this annual report the terms "Magyar Telekom", the "Group", the "Company", "we", "us" and "our" refer to Magyar Telekom Plc. and, if applicable, its direct and indirect subsidiaries as a group; the term "Magyar Telekom Plc." refers to Magyar Telekom Plc. without its subsidiaries; the term "DT" refers to Deutsche Telekom AG.

        In this annual report, the term "Minister" refers to the Minister heading the Ministry of Transport, Telecommunications and Energy.

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


Forward-looking Statements

        The Company may from time to time make written or oral forward-looking statements. Written forward-looking statements appear in documents the Company files with the Securities and Exchange Commission, including this annual report, reports to shareholders and other communications. The U.S. Private Securities Litigation Reform Act of 1995 contains a safe harbor for forward-looking statements. Actual results may differ materially from a forward-looking statement made by Magyar Telekom or on its behalf. Readers should also consider the information contained in Item 3, "Key InformationRisk Factors" and Item 5, "Operating and Financial Review and Prospects", as well as the information contained in the Company's periodic filings with the Securities and Exchange Commission for further discussion of the risks and uncertainties that may cause such differences to occur. The Company's forward-looking statements speak only as of the date they are made, and the Company does not have an obligation to update or revise them, whether as a result of new information, future events or otherwise.

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PART I


ITEM 1—IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

        Not applicable.


ITEM 2—OFFER STATISTICS AND EXPECTED TIMETABLE

        Not applicable.


ITEM 3—KEY INFORMATION

SELECTED FINANCIAL DATA

        This selected consolidated financial and statistical information should be read together with the consolidated financial statements, including the accompanying notes, included in this annual report. We derived these financial data from our consolidated financial statements as of and for the years ended December 31, 2004, 2005, 2006, 2007 and 2008 and the accompanying notes, which have been audited by PricewaterhouseCoopers Könyvvizsgáló és Gazdasági Tanácsadó Kft. ("PwC"). These consolidated financial data are qualified by reference to our consolidated financial statements and accompanying notes, which we have prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB").

 
  Year ended December 31,  
 
  2004   2005   2006   2007   2008   2008  
 
  HUF
  HUF
  HUF
  HUF
  HUF
  U.S.$(1)
 
 
  (in millions, except per share amounts)
 

Consolidated Income Statement Data:

                                     

Amounts in accordance with IFRS

                                     
 

Revenues

    596,792     615,054     671,196     676,661     673,056     3,582  
 

Operating profit

    93,719     141,754     136,391     128,312     162,258     863  
 

Net income

    34,641     78,415     75,453     60,155     93,008     495  
 

Operating profit per share

    90.30     136.46     131.10     123.25     155.83     0.83  
 

Basic earnings per share

    33.38     75.49     72.53     57.78     89.32     0.48  
 

Diluted earnings per share

    33.37     75.46     72.51     57.78     89.32     0.48  

Consolidated Balance Sheet Data:

                                     

Amounts in accordance with IFRS

                                     
 

Total assets

    1,029,568     1,082,948     1,131,595     1,135,578     1,168,856     6,220  
 

Net assets

    576,664     597,694     593,167     581,693     600,342     3,195  
 

Common stock

    104,281     104,281     104,277     104,275     104,275     555  
 

Total shareholders' equity

    516,567     527,567     526,039     514,998     537,263     2,859  

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  Year ended December 31,  
 
  2004   2005   2006   2007   2008  
 
  (in millions)
 

Other data:

                               

Weighted average number of shares

                               
 

Basic

    1,038     1,039     1,040     1,041     1,041  
 

Diluted

    1,038     1,039     1,041     1,041     1,041  

(1)
Translated into U.S. dollars at the official exchange rate of the National Bank of Hungary on December 31, 2008 of U.S. dollar 1.00 = HUF 187.91. These translations are unaudited and presented for convenience purposes only.

Dividends

        The following table sets forth the dividend per Magyar Telekom ordinary share for the years 2004, 2005, 2006, 2007 and 2008. The table shows the dividend amounts in Hungarian forints, together with U.S. dollar equivalents, for each of the years indicated.

 
  Dividend Paid Per Ordinary Share  
 
  HUF   U.S.$(1)  

Year

             

2004

    70     0.3883  

2005

    73     0.3418  

2006

    70     0.3653  

2007

    74     0.4287  

2008

    74     0.3938  

(1)
Translated into U.S. dollars at the official exchange rate of the National Bank of Hungary on December 31, 2008 of U.S. dollar 1.00 = HUF 187.91, December 31, 2007 of U.S. dollar 1.00 = HUF 172.61, December 31, 2006 of U.S. dollar 1.00 = 191.62; December 31, 2005 of U.S. dollar 1.00 = HUF 213.58 and on December 31, 2004 of U.S. dollar 1.00 = HUF 180.29.


EXCHANGE RATE INFORMATION

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

        The National Bank of Hungary ("NBH") quotes and publishes official exchange rates of the Hungarian forint for all major currencies based on prevailing market rates. Unless otherwise stated, conversion of Hungarian forint into U.S. dollars have been made at the rate of USD 1.00 to HUF 187.91, which was the official rate quoted and published on December 31, 2008 (last working day in Hungary in 2008).

        On any given day, the market exchange rate of the Hungarian forint against the euro may vary from the official rate of the NBH. Prior to May 4, 2001, the NBH had a policy of intervening in the foreign exchange market, if the market exchange rate of the Hungarian forint against the euro deviated more than 2.25 percent above or below the official rate. On May 4, 2001, the NBH announced that it had widened this intervention band to 15 percent above and below the official rate. The central parity was set at 282.36 HUF/EUR rate. As of February 26, 2008, the NBH terminated the intervention band. The floating exchange rate allows the NBH to focus more effectively on the inflation targets.

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        The following tables set forth, for the periods and dates indicated, the period-end, average, high and low official rates quoted and published by the NBH for Hungarian forint per U.S. $1.00 and EUR 1.00.

 
  Exchange Rates
(amounts in HUF/U.S.$)
 
 
  Period-End   Average(1)   High   Low  

Year

                         

2004

    180.29     202.63     217.24     180.19  

2005

    213.58     199.66     217.54     180.58  

2006

    191.62     210.51     225.01     191.02  

2007

    172.61     183.83     199.52     171.13  

2008

    187.91     171.80     218.76     144.11  

2008

                         
 

November

    201.76     208.22     217.42     200.35  
 

December

    187.91     196.78     207.17     182.64  

2009

                         
 

January

    229.70     211.69     229.70     194.37  
 

February

    234.09     233.34     244.73     224.77  
 

March

    233.00     233.54     249.29     221.46  
 

April

    215.55     223.70     232.71     215.55  

(1)
The average of the exchange rates on each business day during the relevant period.
 
  Exchange Rates
(amounts in HUF/EUR)
 
 
  Period-End   Average(1)   High   Low  

Year

                         

2004

    245.93     251.68     270.00     243.42  

2005

    252.73     248.05     255.93     241.42  

2006

    252.30     264.27     282.69     249.55  

2007

    253.35     251.31     261.17     244.96  

2008

    264.78     251.25     275.79     229.11  

2008

                         
 

November

    259.59     265.16     272.03     257.13  
 

December

    264.78     264.15     268.57     260.76  

2009

                         
 

January

    294.93     279.84     294.93     264.86  
 

February

    296.54     298.53     307.75     289.78  
 

March

    309.22     304.36     316.00     295.00  
 

April

    287.52     295.13     307.13     287.52  

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

        As of May 20, 2009, the official rate for Hungarian forint per U.S.$ 1.00 and EUR 1.00 was 202.75 and 276.85, respectively.

        We will pay any cash dividends in Hungarian forints, and if you are a holder of American Depository Shares ("ADSs") exchange rate fluctuations will affect the U.S. dollar amounts you will receive upon conversion of cash dividends on the shares represented by ADSs. Fluctuations in the exchange rate between the Hungarian forint and the U.S. dollar will also affect the prices of shares and ADSs.

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RISK FACTORS

        Prior to making any investment decision, you should carefully consider the risks set forth below in addition to other information contained in this annual report. The risks described below are not the only risks we face. Additional risks not currently known to us or risks that we currently regard as immaterial also could have a material adverse effect on our financial condition or results of operations or the trading prices of our securities.

        The following discussion contains a number of forward-looking statements. Please refer to the "Forward-Looking Statements" discussion at the front of this Annual Report for cautionary information.

Our operations are subject to substantial government regulation, which can result in adverse consequences for our business and results of operations.

        The Electronic Communications Act of 2003 ("Electronic Communications Act"), which came into force in January 2004, was enacted by the Parliament to achieve harmonization of the telecommunications regulatory regime in Hungary with the New Regulatory Framework ("NRF") of the EU for electronic communications adopted in 2002, and to encourage further competition in the market. The NRF is currently under review in the EU; however, according to our expectations, the amended regulation will not affect business activities earlier than November 2010.

        Under the Electronic Communications Act, the National Communications Authority ("NCA") was established to regulate the telecommunications industry. The primary responsibility of the NCA is to perform market analysis procedures, under which it defines "relevant markets," or markets subject to the regulatory framework. The NCA analyzes such markets for the level of competition and, if it finds a lack of sufficient competition in such markets, identifies service providers with significant market power ("SMP"), and imposes appropriate regulatory obligations on such providers to encourage competition.

        The NCA carried out a market analysis procedure and has reached its final findings on 17 out of 18 relevant markets identified in an applicable decree in 2004. Under these findings, Magyar Telekom was found to have SMP on 13 of the 16 markets (i.e., markets 1-9, 11-13 and 16). By the end of March 2008, the NCA had published new SMP resolutions concerning 17 markets out of the 18 in the second round of market analyses. Out of these 17 markets, Magyar Telekom was identified as an operator with SMP in all but four markets. As a result, the NCA imposed various obligations on Magyar Telekom with respect to these markets. See "Item 4—Regulation and Pricing".

        The Recommendation of the European Commission on relevant product and service markets within the electronic communications sector susceptible to ex ante regulation in accordance with Directive 2002/21/EC of the European Parliament and of the Council on a common regulatory framework for electronic communication networks and services (2003/311/EC) ("Recommendation"), the regulation on which the market analysis procedure of the NCA is based, was also reviewed by the EU during 2006 and 2007. This new Recommendation entered into force on December 17, 2007. As a result of the EU review, the number of relevant markets decreased from 18 to 7. Magyar Telekom is currently identified as having SMP in all of the 7 remaining markets as well as in all retail markets cancelled from the list of relevant markets. The new Recommendation is expected to become effective in the current round of market analyses by the NCA, which are expected to be completed in 2009. Consequently, the new Recommendation will not affect Magyar Telekom's business activities in the short term. In the long term, we do not expect to be identified as an operator with SMP in market 7 (minimal set of leased lines) and we expect our obligation to provide such services to be abolished. Due to the cancellation of market 15 (mobile origination market), it would be more difficult for the NCA to mandate an access obligation on the mobile operations of Magyar Telekom Plc. (T-Mobile Hungary, "TMH") to introduce Mobile Virtual Network Operators ("MVNOs"). The extension of the definition of market 11 (unbundling of the local loops) from copper to optical networks makes the extension of the unbundling obligation to Magyar

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Telekom's new technology (optical) networks easier for the NCA. This is expected to have an adverse impact on our business results.

        In 2008, Magyar Telekom launched a widespread optical network deployment program, under which approximately 780,000 households will be connected via optical solution by the end of 2013. Currently there is no specific regulation imposed on optical networks on the Hungarian telecommunications market, but there is ongoing consultation on this issue. In the event the NCA decides to impose regulations on optical networks, it would affect both the wholesale and the retail market. This decision is expected in 2009.

        On October 22, 2008, the NCA published comparative biddings for the spectrum usage rights of 450 MHz/GSM/UMTS/26 GHz spectrum blocks. Magyar Telekom and the two other mobile incumbents were excluded from the auctions for the 450 MHz and the 4th GSM/UMTS spectrum blocks. Winners of the auctions were expected to be announced at the latest by end of January 2009, however the NCA postponed the decisions on the results of the bids. On March 16, 2009, the NCA cancelled the auction for the 4th GSM/UMTS spectrum package referring to the economic recession, which made the bids questionable from a financing and profitability point of view. On April 24, 2009, the Council of the NCA dismissed the appeals of three bidders, who may go to the Municipal Court asking for the review of the decision of second instance. On April 30, 2009, the NCA declared the auction for the 450 MHz spectrum block unsuccessful in a decision of first instance, while the auctions for the two 26 GHz spectrum blocks successful. Magyar Telekom won the 26 GHz spectrum block it had bid for, while the other block was won by Antenna Hungária Zrt. GTS Datanet, the unsuccessful bidder of the 26 GHz band ?E" block—won by Antenna Hungária Zrt—appealed against the decision of the NCA on the basis of alleged procedural mistakes. The appeal does not have any effect on Magyar Telekom's successful bid for the 26 GHz band ?D" block. Unsatisfied bidders for the 450 MHz spectrum block may also appeal against the decision of the NCA.

        As a result of the dismissal of their appeals, bidders are expected to litigate. Currently we do not know whether bidders for the 450 MHz band will also appeal the annulment of the tender. There is a low probability of successful appeals against the NCA decisions. However, should the court order a new tender procedure that might be successful in the future, the market entry of new mobile service providers would involve business risks for Magyar Telekom. Using the 450 MHz spectrum block frequency and the CDMA2000 technology the new operator would be able to provide both voice and wireless broadband services mainly on rural areas (smaller cities, villages) from the second half of 2009 at the earliest. These offers would primarily impact our fixed line broadband market on rural areas. Using the fourth license, the new operator would be able to provide full-scale mobile communications services impacting our mobile business significantly.

        National Digital Public Utility.    The government published a proposal entitled "National Digital Public Utility" at the end of 2008. This is a homogeneous and integrated optical backbone and regional transmission network created by the government to secure access to all Hungarian towns. Its financing is planned through the reallocation of EU resources. This network would satisfy the government's telecommunications infrastructure needs. It would operate in a self-sustaining, non-profit way based on the principle of open access, generating revenues from the provision of wholesale services. The full or partial implementation of the concept may have direct impact on Magyar Telekom's network solutions and could indirectly affect the Company's operation.

        In addition, our businesses in Macedonia, Montenegro and Bulgaria are also subject to various regulatory developments. One of the potential consequences of the new law on Electronic Communications in Montenegro is the compulsory introduction of second based billing in 2009 impacting both mobile and fixed revenues.

        In Macedonia, in particular, the current and possible future SMP status of T-Mobile Macedonia on various markets may lead to lower mobile termination rates and additional obligations.

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        The European Commission plans to introduce a recommendation on termination rates by prescribing detailed cost accounting methodology to be applied over a set timeframe by the national regulatory authorities ("NRAs"). As a result, it is possible that TMH's termination rates will be reduced to a lower level than intended by the NCA by 2012. The regulation of termination rates at the EU level can lead to interventions by the Macedonian and Montenegrin regulator as well.

        We cannot fully anticipate the combined impact of these and other regulatory developments on our business and results of operations. Our business and results of operations may be adversely affected by these changes.

We are subject to more intense competition due to the liberalization of the telecommunications sector.

        The scope of competition and any adverse effect on our results depend on a variety of factors that we cannot assess with precision and are for the most part not within our control. Among such factors are business strategies and capabilities of new competitors, prevailing market conditions, as well as the effectiveness of our efforts to prepare for new market conditions. Specific risks include continuous downward pressure on tariff levels, loss of customers as a result of unbundled access to the local loop, loss of fixed line customers as a result of introducing "naked" Asymmetrical Digital Subscriber Line ("ADSL"), competition from alternative operators using new technologies (such as voice over Internet Protocol technology, "VoIP", or cable television, "VoCATV") and migration to lower priced Internet price plans as a result of speed upgrades. In addition, the declining prices of mobile telecommunications services also lead to the migration of fixed line customers.

        The most significant trend in the fixed line market is the increasing share of double-play ("2Play") or triple-play ("3Play") offers which may result in discounts on purchased services for customers. In Hungary, cable penetration is above the European average. From a competition point of view, the non-regulated cable television operators may be able to give more flexible price structure than the regulated market players, such as Magyar Telekom. In case of increasing price competition, this may narrow our ability to give adequate market responses against the competitors' actions.

        In the mobile communications business, we already face intense competition. As all telecommunications markets have become increasingly saturated, the focus of competition has shifted from customer acquisition to retention. Significant customer defections could have an adverse effect on results of operations, and customer acquisition and retention expenses are substantial. Due to the increased level of competition and new price plans, prices for mobile telephone services have been declining over the past several years and may continue to decline.

        New market models using Internet-based messaging and communication services may adversely affect both of our fixed line and mobile voice and messaging services.

        We also face intense competition in the market for Internet services, as well as in the data communications markets from other fixed line, mobile and cable television service providers. As the Hungarian fixed broadband Internet market gets closer to its saturation, the share of Magyar Telekom DSL net additions has declined against competitors' cable Internet offerings. This could adversely affect our further broadband growth prospects.

        Competition posed by new entrants in Macedonia and Montenegro may result in a downward pressure on pricing, sales volume and profitability, which would have an adverse effect on our financial condition and results of operations.

Our ability to sustain revenue growth will depend in part on our ability to increase traffic and offer value added and data services to our customers and our ability to acquire telecommunications companies.

        We expect the number of our fixed access lines and rates for fixed and mobile telephone services to decrease as competition increases. In addition, the growth rate of the Hungarian broadband market is

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expected to slow down. Our ability to sustain revenue growth will therefore depend on our ability to increase the amount of traffic over existing fixed lines and to increase revenues from value added, data and System Integration ("SI") as well as Information Technology ("IT") services. We also plan to grow our mobile subscriber base and our related lines of business, such as Internet and cable television, and expand our coverage area. We may not be able to sustain revenue growth, if we are not able to offer attractive and affordable value added services in the future or if our customers do not purchase our services.

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

        The telecommunications industry is characterized by rapidly changing technology with related changes in customer demands for new products and services at competitive prices. Technological developments are also shortening product life cycles and facilitating convergence of various segments of the increasingly global industry. Our future success will largely depend on our ability to anticipate, invest in and implement new technologies with the levels of service and prices that customers demand. Technological advances may also affect our level of earnings and financial condition by shortening the useful life of some of our assets.

        Next Generation Network ("NGN") is the main stream of technical development that gives the general framework for reaching most of our business strategic goals and for transforming the company. Our NGN strategy focuses on overlay NGN. This approach means that the new technology is built in parallel to the existing network, not in substitution or replacement of existing technology, and we build and use the new technology for introducing new services. In addition, we use the NGN for network transformation by migrating our legacy networks to NGN (IP Multimedia Subsystem based) to change the technology and platform to further provide legacy services and features at a lower operational cost level. Our Next Generation Fixed Access strategy is to widely deploy FTTx (optical network) and EuroDocsis3.0 technology for upgrading cable network.

        We have planned migration to NGN on the basis of recent trends in the telecommunications industry: as vendors allocate resources to develop NGN, they significantly increase legacy system support fees and development costs, we face increasing risk of failures due to aging technology, which may result in revenue loss and stimulate higher churn. The risk of failing to overlay NGN development is that we miss gaining new revenues from broadband-based services and applications as well as integrated, convergent service provision (3Play, quadruple-play, ("4Play")), while we lose traditional business.

        Many of our competitors have started to invest in deploying Next Generation Access network, which might be a threat to the value of our existing network.

        After merging the mobile and fixed line technology areas of the Company, in order to improve the efficiency of the customer service function, we intend to unify the IT and Customer Relationship Management systems that support daily business, the sale of new products and the management of customers. If these development processes are drawn out over time and if the various systems continue to operate concurrently for a longer period, this could contribute to more significant churn and a faster decline in our revenues.

        Due to the accelerated network development of our competitors in the last few years, our services face competition from broadband products of other service providers. The development of this parallel infrastructure affects the price level and the available penetration of our services as well as the return of our investments.

        The operation of our mobile businesses depends in part upon the successful deployment of continually evolving mobile communications technologies, which requires significant capital expenditures. There can be no assurance that such technologies will be developed according to anticipated schedules, that they will perform according to expectations, or that they will achieve commercial acceptance. We may be required to make more capital expenditures than we currently expect if suppliers fail to meet anticipated schedules, performance of such technologies fall short of expectations, or commercial success is not achieved.

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        TMH launched Third Generation ("3G") based services in Hungary in 2005 before any of its competitors. TMH is currently upgrading the network infrastructure to better provide the new generation of services. However, new alternative technologies and standards, e.g., Wireless Fidelity ("WiFi"), World Interoperability for Microwave Access ("WiMAX"), or VoIP, may keep consumers from choosing 3G-based services. These new technologies, especially VoIP, also endanger our fixed line voice business. We are not able to predict at the moment which of these competing technologies will be the most widely accepted platform, however we think that High Speed Downlink Packet Access ("HSDPA") and High Speed Uplink Packet Access ("HSUPA") enabled 3G network, and later the Long Term Evolution ("LTE", 4G) standard are the most likely candidates. There is a frequency spectrum allocation risk for LTE, because currently there is no frequency spectrum available, on which the LTE service could be launched without making compromise.

        Our subsidiary, Pro-M Professzionális Mobilrádió Zrt. ("Pro-M"), also faces risks resulting from technological changes, since the Terrestrial Trunked Radio ("TETRA") technology is evolving according to customer demands. To neutralize this risk, Pro-M needs to keep pace with new developments and apply these to its network, while considering capital expenditure requirements.

        The effects of technological changes on our businesses cannot be predicted. In addition, it is impossible to predict with any certainty whether the technology selected by us will be the most economic, efficient or capable of attracting customer usage. There can be no assurance that we will be able to develop new products and services that will enable us to compete effectively.

The future of our current operational model is subject to currently unforeseeable changes in the future business environment.

        The telecommunications industry is undergoing a major change globally with an effect on the Hungarian market as well. We have considered these market trends including changes in technology, customer requirements, competition and regulation, and accordingly, we have planned our operational restructuring to be in line with these market trends. Our new operational model effective from 2008 is based on customer segments and also provides a solid basis to capture long-term growth. We have designed our new operational model according to our best current knowledge of market trends and our business needs; however, the future business environment might evolve into currently not foreseen directions that will require us to adjust the operational model to date.

Developments in the technology and telecommunications sectors have resulted and may result in impairments in the carrying value of certain of our assets.

        Developments in the technology and telecommunications sectors, including significant declines in stock prices, market capitalization and credit ratings of market participants may result in impairments of our tangible, intangible and financial assets. Future changes in these areas could lead to further impairments at any time. Recognition of impairment of tangible, intangible and financial assets could adversely affect our financial condition and results of operations and might lead to a drop in the trading price of our shares. We review on a regular basis the value of each of our subsidiaries and their assets. The value of goodwill is reviewed annually. In addition to our regular valuations, whenever we identify any indication (due to changes in the economic, regulatory, business or political environments) that goodwill, intangible assets or fixed assets may have been impaired, we consider the necessity of performing certain valuation tests which may result in an impairment charge.

We depend on a limited number of suppliers for equipment and maintenance services.

        In each of our operating divisions, there are a limited number of suppliers for necessary equipment and maintenance services. The failure of these suppliers to meet our equipment and maintenance needs in a timely manner could have a significant effect on our revenues and market position. The construction and

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operation of our networks and the provision of our services and network infrastructure, especially mobile telecommunications services, are dependent on our ability to obtain adequate supplies of a number of key items on a timely and cost-efficient basis. These include handsets and transmission, switching and other network equipment. Significant delays in obtaining such equipment and maintenance services could have a material adverse effect on our business and results of operations.

Our business may be adversely affected by actual or perceived health risks associated with mobile communications technologies.

        Media reports have suggested that radio frequency emissions from mobile telephones are linked to medical conditions such as cancer. In addition, a number of consumer interest groups have requested investigations into claims that digital transmissions from handsets used in connection with digital mobile technologies pose health risks and cause interference with hearing aids and other medical devices. There can be no assurance that the findings of such studies will not have a material effect on our mobile business or will not lead to additional government regulations. Our ability to install new mobile telecommunications base stations and other infrastructure may also be adversely affected, and related costs may increase, due to regulations or consumer action in response to concerns over health risks and adverse effect on the value of properties adjacent to such facilities. The actual or perceived health risks of mobile communications devices could adversely affect mobile communications service providers, including us, through increased barriers to network development, reduced subscriber growth, reduced network usage per subscriber, threat of product liability lawsuits or reduced availability of external financing to the mobile communications industry.

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

        Our technology infrastructure (including our network infrastructure for fixed network services and mobile telecommunications services) is vulnerable to damage and interruption from information technology failures, power loss, floods, windstorms, fires, intentional wrongdoing and similar events. Unanticipated problems at our facilities, system failures, hardware or software failures or computer viruses could affect the quality of our services and cause service interruptions. Any of these occurrences could result in reduced user traffic and revenue and could harm our reputation.

Loss of key personnel could weaken our business.

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

Ongoing internal and government investigations into contracts and activities in Montenegro and Macedonia may result in fines, sanctions and changes to our business practices and compliance programs.

        As previously disclosed, in the course of conducting their audit of Magyar Telekom's 2005 financial statements, PwC identified two contracts the nature and business purposes of which were not readily apparent to them. In February 2006, the Company's Audit Committee retained White & Case (the "independent investigators"), as its independent legal counsel, to conduct an internal investigation into whether the Company had made payments under those, or other contracts, potentially prohibited by U.S. laws or regulations, including the Foreign Corrupt Practices Act ("FCPA"), or internal Company policy. The Company's Audit Committee also informed the U.S. Department of Justice ("DOJ") and the U.S. Securities and Exchange Commission ("SEC"), and the Hungarian Supervisory Financial Authority ("HSFA") of the internal investigation.

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        Based on the documentation and other evidence obtained by it, White & Case preliminarily concluded that there was reason to believe four consulting contracts entered into in 2005 were entered into to serve improper objectives, and further found that during 2006 certain employees had destroyed evidence that was relevant to the investigation. White & Case also identified several contracts at our Macedonian subsidiary that could warrant further review. In February 2007, our Board of Directors determined that those contracts should be reviewed and expanded the scope of the internal investigation to cover these additional contracts and any related or similarly questionable contracts or payments. In May 2008, the independent investigators provided us with a "Status Report on the Macedonian Phase of the Independent Investigation." In the Status Report, White & Case stated, among other things, that "there is affirmative evidence of illegitimacy in the formation and/or performance" of six contracts for advisory, marketing, acquisition due-diligence and/or lobbying services in Macedonia, entered into between 2004 and 2006 between us and/or various of our affiliates on the one hand, and a Cyprus-based consulting company and/or its affiliates on the other hand, under which we and/or our affiliates paid a total of over EUR 6.7 million. The internal investigation is continuing into these and other contracts and certain related issues identified by the independent investigators.

        In 2007, the Supreme State Prosecutor of the Republic of Montenegro informed the Board of Directors of Crnogorski Telekom, our Montenegrin subsidiary, of her conclusion that the contracts subject to the internal investigation in Montenegro included no elements of any type of criminal act for which prosecution would be initiated in Montenegro.

        Hungarian authorities also commenced their own investigations into the Company's activities in Montenegro. The Hungarian National Bureau of Investigation ("NBI") has informed us that it closed its investigation of the Montenegrin contracts as of May 20, 2008 without identifying any criminal activity.

        On March 28, 2009, the NBI informed the Company that, based on a report received by it, it had begun a criminal investigation into alleged misappropriation of funds relating to payments made in connection with the Company's ongoing internal investigation into certain contracts entered into by members of the Magyar Telekom group and related matters. The NBI has requested from the Company materials and information relating to such payments. The Company is cooperating with the ongoing NBI investigation.

        United States authorities commenced their own investigations concerning the transactions which are the subject of our internal investigation, to determine whether there have been violations of U.S. law. The Ministry of Interior of the Republic of Macedonia has also issued requests to our Macedonian subsidiaries, requesting information and documents concerning certain of our subsidiaries' procurement and dividend payment activities in that country (together with U.S. investigations, and the ongoing NBI investigation, "Government investigations"). During 2007, the U.S. authorities expanded the scope of their investigations to include an inquiry into our actions taken in connection with the internal investigation and our public disclosures regarding the internal investigation.

        By letter dated February 27, 2009 addressed to counsel to the Audit Committee, the DOJ requested that the Audit Committee pursue all reasonable avenues of investigation prior to completing and issuing a final report of the internal investigation, including investigation into matters recently identified to counsel for the Audit Committee by the DOJ. The DOJ recognized that a delay in the completion of the report may result from investigation into these matters. The DOJ also requested that the Audit Committee refrain from disseminating any such final report until further notice from the DOJ because of the DOJ's concern that such dissemination could interfere with the DOJ's investigation. The Company, its Board of Directors, and its Audit Committee continue to support the internal investigation and the continuing cooperation with and assistance to the Governmental investigations, as being in the best interests of the Company and its shareholders. In its letter, the DOJ stated that the internal investigation had been of assistance to the DOJ and that such assistance will be taken into account in determining the appropriate disposition of this matter by the DOJ, if any.

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        According to an extract of a press conference published on the official web site of the Macedonian Ministry of Interior on December 10, 2008, the Organized Crime Department of the Ministry submitted files to the Basic Public Prosecution Office of Organized Crime and Corruption in Macedonia, with a proposal to bring criminal charges against four individuals, including three former Magyar Telekom Group employees. According to that public information, these individuals are alleged to have committed an act of "abuse of office and authorizations" in their position in Makedonski Telekom by concluding five consultancy contracts with Chaptex Holdings Ltd in the period 2005-2006 for which there was allegedly no intention nor need for any services in return.

        We cannot predict when our internal investigation or the ongoing Government investigations will be concluded, what the final outcome of those investigations may be, or the impact, if any, they may have on our financial statements or results of operations. We cannot predict what impact, if any, these investigations will have on each other. Government authorities could seek criminal or civil sanctions, including monetary penalties, against us or our affiliates, as well as additional changes to our business practices and compliance programs. For further discussion of the internal and Government investigations, see "Item 8—Legal Proceedings" and "Item 15—Controls and Procedures."

        The internal investigation revealed certain weaknesses in our internal controls and procedures. Our management concluded that, as of December 31, 2007, we had a material weakness in internal controls over financial reporting: management failed to consistently maintain an effective control environment. We believe that certain failures to communicate by certain senior managers did not demonstrate the appropriate level of control consciousness and, therefore, did not demonstrate a positive tone at the top of the organization as of December 31, 2007. We have taken and are taking steps in light of issues raised by the internal and Government investigations. See "Item 15—Controls and Procedures." Based on the Company's remediation efforts, management has concluded that, as of December 31, 2008, the Company's internal control over financial reporting was effective, and that previous material weaknesses have been remedied.

        Notwithstanding the steps we have taken and continue to take to address issues raised by the internal and Government investigations, there is a risk that we may not be able to prevent or detect improper third-party contracts that could cause a material misstatement of our annual or interim consolidated financial statements. In addition, inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our shares and ADSs.

The affirmation of an adverse initial court ruling regarding the Company's April 25, 2008 Annual General Meeting may annul certain resolutions passed at that meeting and may necessitate corrective action.

        On May 23, 2008, two of our minority shareholders filed suit against Magyar Telekom Plc., requesting that the resolutions passed by our AGM on April 25, 2008, including the resolution on the payment of dividends to our shareholders, be annulled. We believe the suit to be without merit and have been vigorously defending against it. We have paid dividends to our shareholders as approved by our shareholders on April 25, 2008. The Metropolitan Court acting as Court of Registry entered the changes resolved by the AGM into the company register. On May 13, 2009, the first instance Court ruled to annul the resolutions (except for one procedural resolution) passed by the AGM on April 25, 2008. The ruling by the first instance Court is neither final nor, by its terms, immediately enforceable, and we believe it to be unfounded. The Company will appeal against this initial ruling and intends to pursue its appeal vigorously. Nevertheless, an affirmation of the first instance Court's ruling may result in the invalidation of resolutions passed by the AGM on April 25, 2008, which may necessitate the Company taking time-consuming and/or expensive corrective action. Also, we cannot exclude that such an affirmation would have other unforeseen detrimental effects on the Company.

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

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

The value of our investments, results of operations and financial condition could be adversely affected by economic developments in Hungary and other countries.

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

        We are closely monitoring the impact of the recent volatility in the global credit and equity markets and its effects on our financial position and performance. The fiscal policy restrictions aimed at reducing Hungary's reliance on external financing have substantially increased the risk of an outright recession; in line with this, analysts have significantly scaled back their Gross Domestic Product ("GDP") growth expectations for 2009. We therefore expect further pressure on the demand for telecommunications services both in fixed and mobile segment through lower household disposable income as well as fewer orders from business customers and the public sector. An increase in the price level generated by the planned increase of VAT (by 5 percentage points from July 1, 2009) could lead to a further decrease of demand. A long term weakness of the Hungarian currency can also negatively affect our customers' disposable income because of the high rate of indebtedness denominated in foreign currencies.

        As a consequence of the declining demand we assume a higher churn rate in voice and broadband services than expected. A drop in average revenue per user and minutes of usage can also be expected in fixed and mobile voice services, while revenues from SMS services can also be affected negatively. In the current and evolving macro-economic conditions, wholesale partners of Magyar Telekom (i.e., Internet Service Providers, ("ISPs")) selling xDSL face increasing risks of insolvency and even bankruptcy. Besides pressure on consumer demand, this may further accelerate the churn of wholesale DSL. Furthermore, we predict an increase in bad debt ratio both in the residential and the corporate customer segments. Due to fiscal policy restrictions, we expect cost cuttings in the government segment, which could influence our revenues through (i) postponing government developments/projects and (ii) decreasing telecommunications spending. Recent difficulties in the tourism sector might have a negative impact on roaming revenues of our mobile operation. We also estimate a drop in advertisement revenues of our online business.

        In addition, our businesses in Macedonia and Montenegro are also affected by similar factors.

        A significant amount of cash of the Group's Macedonian and Montenegrin subsidiaries is held in local banks and in connection with these deposits the counterparty risk may increase considerably due to the global financial crisis. Moreover, cash deposited in these countries runs higher counterparty risk, due to the small number of internationally substantial financial institutions in these countries. These amounts are deposited primarily on fixed interest rate terms in order to minimize exposure to market changes that would potentially adversely change the cashflows from these instruments.

        We may also experience higher financing costs in the future as higher fluctuations of interest rates seems to be more likely due to the volatile international capital and money markets.

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        At this stage it is quite uncertain for how long this volatility will last and what its overall effects will be on our results of operations and financial conditions. For additional information about our financial risk management, see Note 3 to the consolidated financial statements.

Fluctuations in the currency exchange rate could have an adverse effect on our results of operations.

        We are subject to currency translation risks, mainly relating to the results of our Macedonian and Montenegrin operations. Devaluation of the Macedonian denar or appreciation of the Hungarian forint may have a negative impact on Makedonski Telekom's results when converted into HUF. The conversion of Crnogorski Telekom's results into HUF depends on the value of the HUF against the EUR. This is mainly a reporting risk, but through the dividend payments it has direct financial (cashflow) effects on us as well. The recent financial crisis increased the volatility of exchange rate fluctuations, which affect our purchasing costs of goods and services. While the vast majority of our revenues are denominated in the functional currency of the pertinent Group company, part of our operating expenses and capital expenditures are denominated in EUR and USD. The recent significant devaluation of HUF against EUR and USD puts pressure on our operational expenses and capital expenditure due to increased purchasing costs of goods and services.

We are continuously involved in disputes and litigation with regulators, competitors and other parties. The ultimate outcome of such legal proceedings is generally uncertain. The results of those procedures may have a material adverse effect on our results of operations and financial condition.

        We are subject to numerous risks relating to legal and regulatory proceedings, in which we are currently a party, or which could develop in the future. Litigation and regulatory proceedings are inherently unpredictable. Legal or regulatory proceedings in which we are or could be involved (or settlements thereof), may have a material adverse effect on our results of operations or financial condition. For information concerning material litigation in which we currently are involved, see "Item 8. Financial Information—Legal Proceedings." For information concerning our regulatory environment, see "Item 4. Information on the Company—Regulation."

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ITEM 4—INFORMATION ON THE COMPANY

ORGANIZATION

        Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság (in English, Magyar Telekom Telecommunications Public Limited Company) is a limited liability stock corporation incorporated and operating under the laws of Hungary. We operate under a commercial name, Magyar Telekom Nyrt. or Magyar Telekom Plc. Our shares are listed on the Budapest Stock Exchange, and our ADSs are listed on the New York Stock Exchange. Our headquarters are located at 55 Krisztina krt., 1013 Budapest, Hungary. Our telephone numbers are +36-1-458-0000 and +36-1-458-7000. Our agent for service of process in the United States is CT Corporation, 111 Eighth Avenue, New York, New York 10011, USA.


HISTORY AND DEVELOPMENT

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

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

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

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

        In connection with the Company's initial public offering in November 1997, both MagyarCom and ÁPV collectively sold 272,861,367 shares or 26.31 percent of then outstanding shares. In June 1999, ÁPV sold its remaining 5.75 percent stake in Matáv in a secondary offering.

        On October 8, 1999, SBC Communications Inc. ("SBC") completed its acquisition of Ameritech and thus gained control over Ameritech's 50 percent interest in MagyarCom.

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

        On December 20, 2005, Magyar Telekom's Extraordinary General Meeting approved the decision on the merger of Magyar Telekom Plc. and T-Mobile Magyarország Távközlési Rt., our fully owned subsidiary. The court registration of the merger took place on February 28, 2006. From March 1, 2006, Magyar Telekom is the legal successor of TMH. TMH continues its operations within Magyar Telekom under an independent brand.

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        In 2007, Magyar Telekom changed its management structure to comprise four business segments instead of two (formerly, the Fixed Line and Mobile segments). The Fixed Line segment comprised three segments (T-Home, T-Systems and Group Headquarters and Shared Services ("GHS")). The Mobile segment included the T-Mobile business segment. The results for our business segments in 2007 and 2008 are presented on this basis and the segment results for 2006 have been restated for comparative purposes.

        The T-Home (formerly, T-Com) segment is the primary fixed line telecommunications service provider in Hungary, Macedonia and Montenegro. To a lesser extent, T-Home is also present in Romania, Bulgaria and Ukraine, providing alternative telecommunications services in these countries.

        The T-Mobile segment provides digital services in various frequency bandwidths in Hungary, Macedonia and Montenegro and also includes the professional mobile services provided by Pro-M in Hungary.

        The T-Systems segment provides fixed line telecommunications services in Hungary to the largest 3,200 customers of Magyar Telekom Plc. Further, T-Systems also provides system integration and information technology-related services and products to business clients in Hungary.

        The GHS segment includes the activities of the Magyar Telekom headquarters, including Procurement, Treasury, Real Estate, Accounting, Tax, Legal, Internal Audit and similar shared services and other central functions of the Group's management. GHS is disclosed voluntarily as a segment regardless of its size and activities.

        On June 29, 2007, Magyar Telekom's Extraordinary General Meeting approved the merger of Magyar Telekom Plc., Emitel (a former fully owned subsidiary) and the access business area of T-Online Hungary Internet Service Provider Co. Ltd. ("T-Online"). The access business area includes Internet access products such as ADSL, dial-up, cable Internet, as well as Internet Protocol-based TV ("IPTV") and VoIP services.

        Following the expansion of the T-Systems segment's service portfolio, particularly through the acquisitions of KFKI Group and T-Systems Hungary Kft., the Company has reviewed the organizational structure of the segment. Since January 1, 2007, the T-Systems segment has consisted of three divisions—Infocom, IT Infrastructure and IT Applications. The latter two divisions encompassed the activities of six subsidiaries, divided according to their profiles and competencies. In order to increase the segment's transparency and improve sales efficiency, the number of subsidiaries was reduced via legal integration into the two respective divisions, thus forming two individual legal entities (KFKI System Integration Co. Ltd. and IQSYS IT and Consulting Co. Ltd). The legal procedures were completed by January 1, 2008.

        On September 25, 2007, our Board of Directors decided to re-shape the Company's management and organizational structure in order to enhance service quality and improve cost efficiency, as well as exploit new, innovative service and business opportunities. The decision reflects the significant structural changes that are underway in the telecommunications industry, driven by long-term industry trends. Ongoing technological developments and innovation, changes in customer demand, as well as the changing market dynamics and convergence experienced throughout the industry, have resulted in a shift of focus away from a technology-based customer orientation towards the demands of individual customer segments. As a consequence, Magyar Telekom's operational structure in telecommunications services has been re-aligned with this development, to allow the Company to continue to cope successfully with intensifying market competition.

        Accordingly, Magyar Telekom's executive management has devised a new management structure, based on a Group operational model structured around customer segments. The new structure, which supports the Group's strategic goals to focus increasingly on customer demand, was introduced in 2008, as approved by the Board of Directors. Both the organizational framework and scope of activity of individual

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business units, and the responsibility spheres of senior management were affected. The new structure is as follows:

    The Consumer Services Business Unit ("CBU") comprises comprehensive marketing, sales and customer relations activities of both mobile and fixed consumer products and brands (T-Mobile and T-Home).

    The Business Services Business Unit ("BBU") provides mobile and fixed telecommunications, infocommunications and system integration services (including marketing, sales and customer relations activities) under the T-Systems and T-Mobile brands to key business partners (large corporate customers) as well as small and medium enterprises.

    An Alternative Businesses and Corporate Development Business Unit ("ABCD") has been established comprising content, media and other non-access services; it is also responsible for new business development and the coordination of innovative activities. Accordingly, media and content service activities, which have been separated from T-Online Hungary from October 2007, are now incorporated into this business unit.

    The mobile and fixed network management and development activities were transferred to the current IT Management area, which took responsibility for Technology and IT Management.

        Strategic and cross-divisional management functions, as well as the management of our international subsidiaries in Macedonia and Montenegro, are performed by GHS.

        On June 26, 2008, we announced that our Management Committee decided to introduce the T-Home brand as a replacement for the T-Com, T-Online and T-Kábel brands in the autumn of 2008.

        The objective of this decision was to introduce for Magyar Telekom a simpler brand structure that helps customers clearly identify the company and its services, thereby strengthening its market leading position. With the transformation of the brand structure, implemented at Deutsche Telekom in May 2007, a renewed Magyar Telekom is better able to leverage its competitive advantage of having a uniquely broad range of services in Hungary's telecommunications market.

        As a result of rebranding, our customers are able to use, under a single T-Home brand, all home-based fixed-line communication and entertainment services, which were earlier branded T-Com, T-Online and T-Kábel. As part of the repositioning, simultaneously with the introduction of T-Home, the corporate "T" brand and the T-Mobile brand covering residential and business mobile services have also been refreshed, while the full scope of business communications solutions are continued to be offered to corporate customers under the T-Systems brand.


DESCRIPTION OF BUSINESS AND ITS SEGMENTS

        We are the principal provider of fixed line telecommunications services in Hungary, with approximately 2.3 million fixed access lines as of December 31, 2008. We are also Hungary's largest mobile telecommunications services provider, with nearly 5.4 million mobile subscribers (including users of prepaid cards) as of December 31, 2008. We hold a 100 percent interest in Stonebridge Communications AD, which controls Makedonski Telekom, the leading fixed line telecommunications services provider and, through its subsidiary T-Mobile Macedonia, the leading mobile telecommunications operator in Macedonia. We also hold a 76.53 percent ownership in Crnogorski Telekom, the principal fixed line telecommunications services provider and, through its subsidiary T-Mobile Crna Gora, the second largest mobile telecommunications operator in Montenegro.

        In 2008, our consolidated revenues were HUF 673,056 million and our consolidated net income was HUF 93,008 million.

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        We are a full-service telecommunications provider operating in four business segments:

        T-Home and T-Systems.    Our T-Home and T-Systems segments are both engaged in providing fixed line telecommunications services, including local, long distance and international telephone as well as other telecommunications services, including leased line, data transmission, cable television and Internet services. We also provide corporate network services, SI and IT services, sell telecommunications equipment and offer network construction and maintenance services. Our T-Home segment provides these services for residential and small business customers. The T-Systems segment provides fixed line telecommunications services in Hungary to the largest 3,200 customers of Magyar Telekom Plc. Since most of our services are provided by both the T-Home and T-Systems segments, we present the description of services below combined for these two segments.

        The T-Home segment also includes three Macedonian companies. Stonebridge is a holding company through which Magyar Telekom controls Makedonski Telekom. Telemacedonia is a management company through which Magyar Telekom provides management and consulting services to Makedonski Telekom, T-Mobile Macedonia and Stonebridge. Makedonski Telekom is Macedonia's leading fixed line telecommunications company. In addition, the T-Home segment also includes our Montenegrin subsidiary, Crnogorski Telekom. Crnogorski Telekom is the principal fixed line telecommunications service provider in Montenegro based on number of subscribers.

        T-Home is also present in Romania, Bulgaria and Ukraine, providing alternative telecommunications services in these countries.

        T-Mobile.    We are the leading provider of digital mobile services providers in Hungary. Since December 7, 2004, we also have the rights to operate 3G, or Universal Mobile Telecommunications System ("UMTS"), mobile telecommunications services. Mobile telecommunications services have contributed significantly to our revenues.

        The mobile telecommunications services segment also includes T-Mobile Macedonia, the leading mobile telecommunications services provider in Macedonia. T-Mobile Macedonia is a fully owned subsidiary of Makedonski Telekom. The segment also includes T-Mobile Crna Gora, the second largest mobile telecommunications services provider in Montenegro, a fully owned subsidiary of Crnogorski Telekom. On May 1, T-Mobile Crna Gora merged into Crnogorski Telekom and ceased to exist as a separate legal entity. In addition, the T-Mobile segment also includes the professional mobile services provided by Pro-M in Hungary.

        Group Headquarters and Shared Services.    The GHS segment performs strategic and cross-divisional management functions for Magyar Telekom Group, as well as real estate, marketing, security, procurement, human resources and accounting services, mainly internally within the Group. The external revenues of the GHS segment represent below five percent of the group revenues; therefore we do not describe this segment separately in the sections below.


STRATEGY

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

        The telecommunications industry is undergoing a major change globally. We have observed several long-term trends which are changing the structure of the Hungarian telecommunications market. Key drivers of the long-term trends include changes in technology (i.e., IP-based broadband products and solutions, emerging wireless broadband technologies), customer requirements (i.e., increase in mobile usability of content services and terminal devices, 4Play solutions, growing need for customized content),

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competition and regulation (i.e., low entry barriers, new business models, telecommunications and media broadcast industry convergence).

        These worldwide trends are driving towards the concept of an integrated telecommunications, information, media and entertainment market, where market segments are overlapping and market barriers are dissolving.

        Traditional telecommunications market will not deliver sizeable revenue growth and all players will feel pressure on revenue and profitability. Overall the fixed voice market, as major revenue and profit source, is declining; growing segments (especially TV and mobile broadband) are not any more able to fully over-compensate fixed-line decline. We, like other operators, are experiencing strong price pressure with fierce technology platform-based competition, and also changing dynamics of broadband market growth and structure (DSL vs. cable/fixed vs. mobile). The fixed line market is characterized by 3Play bundles with TV becoming driver and core element of service offerings, while in the mobile market broadband is the clear driver. Services beyond core connectivity are needed to improve access base and usage. Continuous cost control is strongly required to manage profitability.

        Several factors drive the competitive landscape locally, while real innovations are coming from global industry players. Factors shaping competitive environment include customer demand for bundling with discount; simple administration; regulatory environment opening up market entry opportunities through Next Generation Access ("NGA"—interactive, IP based, high-speed access); technology platform based competition; economies of scale through regional business models; market consolidation and unforeseen impacts of credit/economic crises. Also, we see many other changes locally with aggressive own access infrastructure build-out and upgrade, and strong consolidation in the ISP and cable markets. The government published a proposal entitled "National Digital Public Utility" at the end of 2008, a homogeneous and integrated optical backbone and regional transmission network created by the state to secure access to all Hungarian towns that may further enhance infrastructure-based competition in certain segments.

        On a global scale, we see a strong pressure on access providers from the device manufacturers (Apple, Nokia, Sony Ericsson) and content service providers (Google, Yahoo, MSN). They attract customers with new services over a commoditized access.

        Accordingly, we have redefined the focus areas of our corporate strategies to better exploit our position as an integrated telecommunications operator with a full range of services, as well as to ensure our long-term competitiveness. Our strategies are designed to enable us to exploit and develop our extended customer base, significantly improve efficiency and capture growth opportunities.

Magyar Telekom's strategic value proposition

        We need to follow clear strategic guidelines according to our corporate level value proposition (i.e., value for money) with full attention to excellence in customer service, while bringing innovations first to the market with efficient operation and processes behind. Accordingly, we need to have a consciously managed focus on both core and non-core (mainly IT and media) business and products, however with consideration of the differing financial characteristics and business models to effectively manage the transition.

        The strategic objective on the short-/mid-term is to fix critical factors within the core business (simplification of core processes, implement access strategy, simplify IT landscape, optimize resource allocation and cost structure, improve customer experience) and to further strengthen our positions on core connectivity segments (mobile, broadband, TV) that will enable us to shift resources and priorities towards further diversification through service/product innovation and expansion.

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        In order to continue our transformation to becoming a cost efficient integrated service company in an extended market of telecommunications and converged industries, we have set our strategic priorities as follows:

1.     "Three Screen Company" approach

    Three screen company strategy with full service portfolio and improved customer experience in consumer;

    State-of-the-art network and IT capabilities.

2.     Information and Communications Technology ("ICT") leader

    Deliver integrated customer approach, real ICT portfolio;

    Solutions for the Small and Medium Size Enterprises ("SME") segment.

3.     Service Innovation

    Develop and launch new access supporting services;

    Identify significant sources of currently non-core revenues, increase share-of-wallet.

4.     Regional Presence

    Continue to deliver and extend our regional presence, increase economies of scale, discover opportunities through alternative business models;

    Further leverage our merger and acquisition capabilities.

5.     Enabling Corporate Fundamentals

    Build corporate culture in line with the One Company approach.

        Our corporate strategy in place—fixing the core business and capturing sustainable growth—is still valid. Emphases need to be adjusted in line with market development and foreseen opportunities, and execution will be strengthened through focused corporate initiatives and accordingly, with clear strategic implications and roadmaps on business unit level.

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OVERVIEW OF MAGYAR TELEKOM'S REVENUES AND PRINCIPAL ACTIVITIES

        For the years ended December 31, 2006, 2007 and 2008, our total revenues by business segments were as follows:

 
  Year ended December 31,   Year ended
December 31,
 
 
  2006   2007   2008   2008/2007  
 
  (in HUF millions)
   
 

Revenues

                         

T-Home revenues from external customers

    272,822     273,275     260,649     (4.6 )

T-Home revenues from other segments

    42,421     34,426     29,875     (13.2 )
                     

Total revenues of T-Home

    315,243     307,701     290,524     (5.6 )

T-Mobile revenues from external customers

   
327,330
   
325,724
   
331,765
   
1.9
 

T-Mobile revenues from other segments

    22,236     21,146     17,675     (16.4 )
                     

Total revenues of T-Mobile

    349,566     346,870     349,440     0.7  

T-Systems revenues from external customers

   
63,423
   
75,034
   
77,761
   
3.6
 

T-Systems revenues from other segments

    1,946     3,898     7,464     91.5  
                     

Total revenues of T-Systems

    65,369     78,932     85,225     8.0  

GHS revenues from external customers

   
7,621
   
2,628
   
2,881
   
9.6
 

GHS revenues from other segments

    18,776     21,109     19,264     (8.7 )
                     

Total revenues of GHS

    26,397     23,737     22,145     (6.7 )

Less: inter-segment revenues

   
(85,379

)
 
(80,579

)
 
(74,278

)
 
(7.8

)
                     

Total revenues of the Group

    671,196     676,661     673,056     (0.5 )
                     

        Most of our revenues in 2006, 2007 and 2008 were derived from services provided within Hungary, except for the international fixed line and international mobile revenues, which were mainly derived from services provided in Macedonia and Montenegro.

        Our business is not materially affected by seasonal variations.

        In the following sections, we describe our products and services in line with our income statement structure presented in Note 22 to the consolidated financial statements.


T-HOME AND T-SYSTEMS

        In 2008, our T-Home segment generated revenues of HUF 290,524 million and our T-Systems segment generated revenues of HUF 85,225 million before inter-segment eliminations. The operations of T-Home and T-Systems consist of voice retail and wholesale services, Internet services, data transmission, SI/IT services, multimedia, telecommunications equipment sales, as well as other services.

        The T-Home segment also includes the activities of Magyar Telekom in Macedonia, Montenegro and other countries in South-Eastern Europe. Magyar Telekom provides international network and carrier services in South-Eastern Europe through Points of Presence ("PoPs"). Magyar Telekom entered the Romanian market in July 2004, the Bulgarian market in September 2004, and the Ukrainian market in August 2005 to offer various wholesale services. Capitalizing on our experience in these markets, we have entered into the retail market segment in Romania with a full service portfolio and intend to do so in Bulgaria and Ukraine as soon as the regulatory environment becomes favorable.

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T-Home and T-Systems operations in Hungary

Voice Retail Services

        Revenues from voice retail services consist of:

    subscriptions;

    outgoing domestic and international traffic;

    value added and other services.

Subscribers

        The following table sets forth information regarding total fixed access lines of Magyar Telekom Plc. (including Emitel):

 
  At December 31,  
 
  2006   2007   2008  

Number of fixed lines

                   
 

Residential lines

    1,901,398     1,778,444     1,594,974  
 

Business lines

    236,634     223,054     210,556  
 

Public payphones

    20,515     19,458     16,279  
               
   

Total

    2,158,547     2,020,956     1,821,809  
 

ISDN channels

    485,290     470,746     454,218  
               
   

Total

    2,643,837     2,491,702     2,276,027  
               

        Due to fierce competition and mobile substitution, the number of our lines decreased from 2,491,702 as of December 31, 2007 to 2,276,027 as of December 31, 2008.

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

        We also offer voice telephony services through VoIP and VoCATV. At the end of 2008, we had 49,540 VoIP and 50,608 VoCATV customers.

Fees and Charges

        We charge fixed line subscribers a one-time connection fee, monthly subscription charges and call charges based on usage. A call charge contains two elements: a call set-up charge and a traffic charge. Traffic charge is either measured in seconds based on the call's duration, or in minutes, depending on call plans.

        Our one-time connection fee and monthly subscription charges are different for residential and business customers. There are different price plans for residential and business customers as well.

Residential price plans

        Our new T-Home brand (introduced in September 2008) offers fixed line voice, Internet and television services independently of underlying technology. 3Play is in the focus of the portfolio and of the communication, but the elements can also be purchased one by one or in any combination with certain limitations. The more services are subscribed, the more T-Home discount is granted to customers. If two or

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three basic services are used, the customer is granted the "T-Home Double Discount" or the "T-Home Triple Discount," respectively.

        Regarding the T-Home voice portfolio, a new Base price plan was launched, that features a low monthly fee. Base price plan on VoIP made 2Play and 3Play products more competitive compared to the offers of alternative service providers, aiming to prevent customer churn. We also continue to offer flat rate price plans for heavy users.

Business price plans

        We target business customers with flat rate price plans, which are transparent and easy to budget. These are designed to reduce the erosion of our fixed line business, and to provide an opportunity for the reacquisition of traffic that we have lost due to pre-selection. Customers of flat rate price plans can use our network for local and domestic long distance calls for a fixed monthly fee. We also offer flat rate price plans with options for mobile and international calls.

        In September 2008, along with the rebranding campaign, we introduced the new T-Home product portfolio and discount structure also for the small office, home office ("SOHO") customers and small businesses. This is aimed to stimulate customers to subscribe for more services (telephone and Internet) from the same provider. The T-Home SOHO discount includes flat rate voice price plans, aiming to further increase our penetration.

        For SMEs we extended the existing business flat rate portfolio and launched a fixed-mobile closed user group ("CUG") bundled product to retain fixed line traffic in the business segment.

Public Telephones

        As of December 31, 2008, Magyar Telekom operated 16,279 public payphones. The call charges for calls from public payphones are at a premium to those charged to fixed line subscribers. The Act on Electronic Communications requires universal service providers to provide one public payphone per 1,000 inhabitants and at least one public payphone per settlement with less than 1,000 inhabitants.

Products and Services

        Local, Domestic and International Long Distance Telephone Services.    We provide local, domestic and international long distance telephone services to our fixed line subscribers and to fixed line subscribers in other Local Telecommunications Operator ("LTO") areas. Until December 31, 2007, Magyar Telekom had individual arrangements with international telecommunications operators. Since January 1, 2008, Magyar Telekom sends and receives all its international voice and switched transit traffic to and from Deutsche Telekom. The agreement with Deutsche Telekom guarantees international telephone services revenues and profits for Magyar Telekom and allows cost reductions due to this synergy with the parent company.

        Shared Cost/Toll Free Numbers.    The reverse charged numbers ("blue" and "green") are primarily used by business customers leveraging the service benefits in the course of their business operations. The customer base and the usage volume of this service are stable. In line with international regulations, we ensure the international availability of reverse charged numbers both from fixed line and mobile networks.

        Private Branch Exchange ("PBX") Services.    We offer virtual PBX services via VoIP providing internal voice and data integrated business networks for the small and medium business segment.

        Directory Assistance.    We offer directory inquiry services. The domestic directory assistance database includes all fixed line and postpaid mobile subscribers' data in Hungary. We offer a call completion option to subscribers, whereby calls may be connected automatically.

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Wholesale voice services

        Through its wholesale services business Magyar Telekom provides products and services to other domestic and international carriers and service providers.

        Domestic services.    Domestic wholesale services consist of regulated and commercial products. Regulated domestic services primarily consist of call origination and termination services for switched voice traffic. In addition to these traffic type services, Magyar Telekom offers carrier pre-selection service to other domestic service providers. The terms of these regulated services are based on Reference Interconnection Offer, accepted by NCA. Magyar Telekom had 22 bilateral interconnection agreements to provide regulated wholesale services at December 31, 2008. The NCA mandated price reductions on interconnection prices from April 26, 2008. Since May 2005, Magyar Telekom has not been designated as an operator with SMP in the transit market. In order to provide domestic transit services, Magyar Telekom concludes commercial contracts with other service providers.

        International services.    We have two state-of-the-art international gateways as well as fiber optic cable connections serving 26 border crossings. These fiber optic cable connections use synchronous digital hierarchy transmission facilities and we have launched our own Dense Wavelength-Division Multiplexing ("DWDM") backbone network.

        To seize the opportunities presented by the liberalization of the telecommunications market in Romania, we established interconnection arrangements with major Romanian network service providers to offer transit services to Western Europe.

        Due to an agreement with Deutsche Telekom, Magyar Telekom stopped buying and selling international voice services from and to other foreign carriers as of January 1, 2008. From that time Deutsche Telekom became Magyar Telekom's sole international voice partner (with limited exceptions). The agreement guarantees the earlier planned relevant revenues and profits for Magyar Telekom and allows cost reductions due to this synergy with the mother company.

Internet Services

        We offer Internet services based on dial-up, ADSL, VDSL and Gigabit Passive Optical Network ("GPON") technology as well as access through cable television, Wireless Local Area Network ("WLAN") and leased lines to provide residential and business customers with narrowband or broadband Internet services at affordable prices.

        We increased our subscriber base in Hungary to 548,738 by December 31, 2008 from 505,725 a year earlier, including dial up and broadband customers. Our broadband (ADSL, cable television, WLAN and leased line) customers reached 539,027 as of December 31, 2008 compared to 489,368 a year earlier. We are the largest Internet service provider in Hungary with an estimated 79.1 percent market share based on the number of DSL broadband subscribers.

        ADSL is a continuous, high-speed Internet access service based on the Asymmetric DSL technology. The service offers cost-efficient broadband Internet access over existing copper wires. We provide these services on a retail basis to our customers and on a wholesale basis to ISPs. In addition, we offer Naked ADSL, an ADSL service over existing copper wires without a telephony service. To enhance the competitiveness of our ADSL portfolio and to improve the sales of new ADSL connections, we introduced a new entry level ADSL product to the market in September 2008 with 2 Mbit/s maximum download bandwidth. The number of ADSL connections increased from 613,051 at December 31, 2007 to 633,459 at December 31, 2008.

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        Magyar Telekom offers wholesale ADSL service to ISPs. This service enables ISPs to offer an integrated ADSL service combining access and IP services to their retail customers under their own brands. At the end of 2008, we had contractual relationships with 22 ISPs providing ADSL services. Wholesale ADSL service had a slight growth in 2008 with the number of ADSL connections reaching 196,776 by December 31, 2008 (this number is included in total number of Magyar Telekom ADSL).

        ADSL roll-out.    In 2008, we finished the roll-out of ADSL services to the larger settlements (over 3,000 inhabitants) on Magyar Telekom service area. Further ADSL developments were also carried out on smaller settlements.

        VDSL.    In October 2008, we introduced our first services on Very High Bitrate DSL ("VDSL") technology. In addition to the retail high speed 25 Mbit/s DSL product, we provide this service on a wholesale basis to ISPs, which in turn resell these services to residential and small business customers.

        T-Home portfolio.    In September 2008, we introduced our new T-Home brand, including Internet services. T-Home provides Internet services through ADSL service on Public Switched Telephone Network ("PSTN") lines (DSL Classic) or on naked ADSL (DSL Solo) as well as on cable television.

        VDSL.    In October 2008, we introduced retail VDSL service in four districts of Budapest and in six other cities. We offer two new services for residential customers on this technology: 25 Mbit/s Internet access and High Definition ("HD") channels on IPTV.

        TV.    From September 2008, T-Home offers TV services on two different TV platforms: on cable (T-Home analogue and digital Cable TV) and on IP (IPTV). The price of the TV service depends on the number of channels (package type) and the number of T-Home services subscribed by the customer (Double or Triple discount).

        IPTV.    IPTV service was introduced in 2006. IPTV allows broadcasts to be seen on a television set with a set-top-box over ADSL connection. The product line offers various interactive contents, such as time-shift function, electronic program guide ("EPG") on screen, recording onto the hard disc built in the set-top-box, web EPG service, video on demand service and picture-in-picture. In 2008, we continued to increase the coverage of this service. T-Home IPTV is available in more than 200 settlements in Hungary. The total customer base of IPTV reached 28,496 as of December 31, 2008.

        T-Home/T-Mobile integrated broadband offer.    On October 1, 2008, we introduced an integrated broadband offer to provide unlimited fixed-line and mobile Internet together at a discounted price. The purpose of the promotion is to retain ADSL and cable customers with a competitive offer and to sell mobile Internet as a complementary service.

        PC-Net, Laptop-Net.    In 2007, we introduced a new product, PC and Internet in one package. At the end of 2008, we had approximately 5,500 PC-Net subscribers. To better satisfy customer demand, we introduced a new product from July 2008, Laptop and Internet in one package. At the end of 2008, we had approximately 2,000 Laptop-Net subscribers.

        Bundled ADSL ("T-DSL").    We also offer voice and Internet bundles (T-DSL) targeting primarily small and medium business customers. In 2008, we have re-bundled the T-DSL offer with more value added services: T-DSL price plans contain telephone line with flat voice and a flat Internet access and value added services such as virus protection, domain.

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        T-HotSpot.    HotSpot is a wireless broadband Internet solution, based on the WiFi technology for public sites (i.e., hotels, conference centers and restaurants). By November 2008, former T-Com and T-Mobile HotSpots have been consolidated, i.e., the whole T-HotSpot network can be used under the same terms and conditions. At the end of 2008, there were 304 T-HotSpot sites in operation.

        Managed Leased Line Network Internet access ("MLLNI").    We offer MLLN Internet access mainly to our business customers. MLLNI provides transport and access facilities for IP traffic. The product includes domestic and international peering and leased line access, by which the domestic end-point of the customer is connected to our IP network with symmetrical upload and download link. With the growing penetration of xDSL based broadband access technology and its aggressive pricing in the consumer segment, we expect the penetration of the MLLNI to decrease.

        Cable Internet.    In addition to the ADSL and Naked ADSL services, we also provide high-speed cable Internet by using cable television infrastructure. Our main cable television service provider partners are T-Kábel and Vidanet. The total customer base of our cable Internet service reached 127,683 by December 31, 2008.

Data Transmission and Related Services

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

        We lease lines to other local telephone operators and mobile service providers, who use such lines as part of their networks. We also lease lines to providers of data services. In addition, we lease lines to multi-site business customers who use leased lines to transmit internal voice and data traffic.

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

        Flex-Com.    We offer Flex-Com, domestic and international digital leased lines with managed back-up systems that are dedicated to data transmission. The number of Flex-Com connections decreased from 7,710 as of December 31, 2007 to 6,037 lines as of December 31, 2008.

        High Speed Leased Line ("HSLL").    The HSLL service provides permanent, digital, transparent, point-to-point leased line service between service access points ("SAPs"). The connections are established by a service provider according to the needs of its customers. Transmission rates provided by the HSLL service are 2, 34, 45, 140, 155, 622 Mbit/s and 2.5 Gbit/s. The major portion of churn from both Flex-Com and HSLL migrates to our most recent data communication services (e.g., IP Complex, MultiFlex).

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

        Datex-P.    We offer Datex-P, a packet-switched data transmission service based on the X.25 protocol. The service provides low to medium speed domestic switched data communications services with international connectivity to business customers. As a result of the proliferation of new technologies, growth in the number of subscribers has stopped. Between 2003 and 2005, our major objectives were to extend the lifecycle of the product, maintain profitability, optimize the network and reduce costs. In 2005, we assessed and commenced migration of customers to other data transmission services. In 2006, we introduced a flat rate price plan and widened the access option by Ethernet interface.

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        Our leased line customers pay a one-time connection fee based on the type of line leased. Monthly subscription charges vary with the type and length of lines leased and, in some cases, with the term of the lease. With the exception of leased lines required for connection with other networks, leased line charges are not subject to regulation. As part of the overall rebalancing of our rates, we have reduced our leased line charges in real terms over the last few years in response to competition, which partly offset the revenue increase generated by volume and bandwidth increases of the leased line services.

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

        Our revenues from data transmission have slightly grown as a result of both the development of the Hungarian economy and our increasingly sophisticated services. We expect the market for these services to grow with the proliferation of personal computers and increasing consumer demand. We believe that the ability to offer new data products and services will be critical to competing effectively in the future, particularly with respect to business customers.

        Magyar Telekom DataLink.    In 2004, we launched a new data transmission product that offers technology-independent data transmission between business customers' locations. The customer only needs to define three main parameters: bandwidth, Service Level Agreement ("SLA") and interface. This service provides data connection below 2 Mbit/s, with X.21 or Ethernet interfaces. With the introduction of this service, we can better utilize our spare data transmission capacity.

        Symmetrical Internet.    Symmetrical Internet is a wholesale service for ISPs, providing transport and access facilities to IP traffic. The product includes domestic and international peering and leased line access, by which the domestic end-point of the ISP is connected to our IP network. Symmetrical Internet was introduced in 2003, to maintain our competitive position on the Internet leased line market. After the introduction of this product, the majority of our wholesale customers migrated from IP Connect to Symmetrical Internet. IP Connect has similar facilities than Symmetrical Internet, but does not include leased line access.

        IP Complex Plus.    IP Complex Plus is an IP-based Virtual Private Network ("IP-VPN") service. IP Complex Plus service is offered to retail and wholesale customers having multiple remote sites. This service enables them to establish secure data traffic between sites without the need of setting up "point-to-point" connections between two sites. The development of supplementary services, such as ISDN back-up, integrated voice/data, ADSL/Single-Pair High-Speed Digital Subscriber Line ("SHDSL") access and dial-up access to IP-VPNs make this product more attractive to a growing number of business customers. In addition to the current function of integrated voice/data service, we provide number portability for our IP Complex Plus customers. Using this new service, customers can use their existing phone numbers within their private network as well. In 2007, we extended our portfolio with new access technologies, which enable our customers to connect to the IP network with a speed up to 1 Gbit/s.

        International data products.    We provide signaling links for mobile operators to facilitate international roaming. To increase the utilization of our transmission network, we offer attractive price plans for dedicated transit services through Hungary. We also sell international leased lines, including international managed leased lines, international ISDN, X.400 and X.25 services. Our X.25 links are used for packet switched data transmission with 83 international networks. The sales of international leased lines are steadily growing, partly due to the introduction of one-stop-shopping agreements, whereby customers can order from and pay for the service at one end-point of the connection, which eliminate the need to deal with multiple service providers. International Internet connectivity has been enhanced to provide services for Internet service providers. By the end of 2008, the capacity of international Internet connections reached 30 Gbit/s. We provide Internet transit services to several Romanian and Bulgarian ISPs on our two

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IP PoPs in Romania and high-capacity international Internet transit service on our IP PoPs in Hungary to ISPs in Bosnia and Herzegovina, Ukraine and Macedonia.

        MultiFlex.    In 2007, Magyar Telekom launched a new MultiFlex service. It is an Ethernet-level virtual private network service on the Magyar Telekom Ethernet-aggregation and Multi Protocol Label Switching ("MPLS")-backbone network, where access may be provided through multiplicating copper pairs, optical fiber, or, micro, which enables connections to our customers with a speed up to 1 Gbit/s. Magyar Telekom provides proactive fault repair and SLA report, and our partners can access the report via our VIP portal website. In 2008, Magyar Telekom launched a few new service options, such as Internet access and Premium options. By the end of 2008, Magyar Telekom had 136 contracted customers.

Multimedia

        Our cable television ("CATV") group consists of two entities providing various cable television services in Hungary. The larger entity is T-Kábel Hungary, which began providing cable television services on January 1, 1999.

        Through network development and acquisitions, our CATV group increased its number of cable television customers during the past years. We are the second largest cable television provider in Hungary. The growth of subscribers has slowed down in the past two years, because of the growing competition faced from satellite operators, direct competition with other CATV operators and the saturation of the market. The CATV group had approximately 423,000 CATV subscribers as of December 31, 2008 compared to approximately 419,000 a year earlier.

        T-Kábel Hungary offers 45 analog television channels in three program packages and 18 radio stations in most of its networks. Premium digital television services are available in the product portfolio since December 2005. In 2008, we offered 108 digital TV channels in two program packages and 21 mini program packages and 3 radio stations. In 2007, T-Kábel Hungary rolled out the digital simulcast of television channels in South-East Hungary.

        T-Kábel Hungary is the first High Definition TV ("HDTV") service provider in the cable industry in Hungary. The HDTV service of T-Kábel was launched in March 2008. We offer 2 HD mini packages with 8 HD channels to the digital service subscribers. By the end of 2008, T-Kábel customers subscribed to 719 HD packages.

        Our CATV firms—in cooperation with ISPs—offer broadband Internet services. The number of broadband Internet subscribers through our cable television networks increased to approximately 127,000 by December 31, 2008 compared to 102,000 a year earlier.

        T-Kábel Hungary—in cooperation with Magyar Telekom Plc.—installed the Digital Video Broadcasting-Satellite (DVB-S) platform including head-end, uplink station and conditional access system for satellite TV service in 2008. As a part of Magyar Telekom's rebranding campaign, Magyar Telekom launched the service on November 24, 2008 under the brand T-Home Sat TV. DVB-S service offers favorably priced packages and discounts, a variety of channels grouped into thematic packages, and premium picture and voice quality, as well as electronic program listings. Currently two T-Home Sat TV packages are available: the Basic package, which includes 14 channels and the Family package, which has 49 channels. When subscribing for the Family package, optional thematic packages and two HD mini packages can also be chosen.

        At the end of December 2008, the number of active DVB-S customers amounted to 5,338.

        With the introduction of the DVB-S service, Magyar Telekom is able to provide 3Play services (TV, Internet, voice) almost everywhere in the country. The main objective is to become the number one 3Play service provider in Hungary under the T-Home brand, which strengthens and broadens our customer base (less churn sensitivity). We also target to increase our market share through acquisitions.

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Fixed Line Telecommunications Equipment Sales

        We distribute an extensive range of telecommunications equipment, from individual telephone sets to facsimile terminals, PBXs and complete network systems, through a network of customer service centers. In addition to stand-alone telephone-set sales, we offer various packages combining telephone sets with telephone lines and price plans.

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

        The telecommunications equipment sector is highly competitive and characterized by rapid technological innovation. We believe that the supply and service of telecommunications equipment are integral elements of a full service telecommunications provider and are necessary for the expansion of our customer base. In addition, these activities allow us to ensure that technologically advanced equipment required for new services is available in Hungary.

System Integration and Information Technology

        Following the expansion of the T-Systems segment's service portfolio, particularly through the acquisitions of KFKI Group and T-Systems Hungary Kft, the Company has reviewed the organizational structure of the segment. Since January 1, 2007, the T-Systems segment has consisted of three divisions—Infocom, IT Infrastructure and IT Applications. The latter two encompassed the activities of the six subsidiaries, divided according to their profiles and competencies. In order to increase the segment's transparency and improve sales efficiency, the number of subsidiaries was reduced via legal integration into the two respective divisions, thus forming two individual legal entities (KFKI System Integration Co. Ltd. and IQSYS IT and Consulting Co. Ltd). The legal merger procedures were completed by January 1, 2008. This move enabled us to focus more efficiently on strengthening our market leadership in the ICT service market as well as repositioning our corporate market approach as a true IT and telecommunications service provider.

        We achieved significant increases in the sales of complex ICT solutions, outsourcing and managed services. In cooperation with business partners, we also sell the products and services of our subsidiaries and external market partners (e.g., Cisco) to our customers.

        In 2007, we had several Strategic ICT outsourcing projects, which helped us stabilize our position in the ICT outsourcing market. In 2007, within the framework of the Allianz strategic ICT outsourcing program, we launched the regional Outsourcing Service Portal for seven participating countries. The current values of the service parameters, the content of fault tickets, and the level of processing faults can be monitored on the web platform of the portal, which allows us to carry out electronic customer satisfaction surveys. With this solution we established regional level outsourcing competence, which we can also utilize with other customers. In case of strategic ICT outsourcing projects, with up-selling and contract prolongations, we retained our market share of 2007 also in 2008.

        Based on our outsourcing project experiences gained among strategic accounts, we started providing Managed Services ("Custom MenX") for medium size enterprises, and concluded long term contracts in this segment. We also extended the range of Managed Services. In addition to Managed Voice, Managed LAN and Managed Security in 2006, we also added Managed Desktop and Managed Print to the portfolio in 2007. In line with our strategic goals set in 2007, we significantly increased the number of managed service contracts in 2008. We concluded the first contracts for Managed Desktop and Server Hosting services in that year.

        In 2008, we started the development of managed services for SME customers. We created a standard integrated managed service package called Compleo, which includes symmetric Internet with VoIP channels, Managed LAN, Managed IP PBX and IP phones as well as Security (Fire Wall).

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        In addition, we experienced high customer demand in the sales of IP telephony, complex solutions, flat rate price plans and bandwidth expansion. The project sales of security systems and the sales of IT solutions also showed a significant increase. The most important project in this field related to the Electronic Government Backbone Network ("EKG").

Other Revenues

        Other revenues include construction, maintenance, rental, customer care services, telephone book publishing and other miscellaneous revenues.

Share of associates' profits

        Share of associates' profits primarily include our share of profit from Magyar RTL Televízió ZRt. ("M-RTL"), a Hungarian television broadcasting company.

        M-RTL is entitled to provide commercial television programs, but not to engage in broadcast diffusion or distribution activities. The Program Provision Agreement was signed on July 9, 1997, which was the starting date of the license for an initial period of ten years. On July 20, 2005, M-RTL extended the license for an additional five years which is effective from July 10, 2007 until July 9, 2012. M-RTL operates a channel under the brand name, "RTL KLUB".

        Since its launch in 1997, RTL KLUB has rapidly established a strong position in Hungary's television market, being the market leader for the last ten years. Market share among the targeted age 18-49 audience has slightly decreased to 26 percent in 2008 compared to 28 percent in 2007 for the whole day and 33 percent in 2008 compared to 35 percent in 2007 for prime-time (between 7 and 11 p.m.). The decrease of market share is due to the increased number of Hungarian speaking channels on the market. RTL KLUB has successfully converted its leading audience results into television advertising market share.

        RTL KLUB seeks to maintain and increase audience share through investing in local productions, as well as successful internationally licensed programs (e.g., I'm a celebrity, get me out of here!—reality show, Take it or leave it, Poker face—game shows) and through its continued long-term relationships with major film distributors, including Warner Brothers, 20th Century Fox and Buena Vista. M-RTL is strategically focused on sporting events, such as Formula One races and boxing.

        Since its establishment in 2003, IKO New Media Kft. has become one of the leading companies in the Hungarian interactive service market, and is the service provider of telecommunications applications for M-RTL. Through its own license, the company produces TV shows and is one of the largest aggregators of premium rate telecommunications services in Hungary with its own independent entertainment content selling division. IKO Content & Rights Kft. is an aggregator in the content outsourcing market.

        According to the co-operation agreement signed in April 2008, the properties of IKO-Telekom Média Holding Zrt. ("ITMH") will be split between the owners by way of a demerger. As a result, Magyar Telekom will have 100 percent ownership of IKO New Media Kft. and IKO Content & Rights Kft., and will be entitled to a HUF 2 billion compensation, while ITMH, including its 31 percent stake in M-RTL, will remain with IKO Production.

        The co-operation agreement enables Magyar Telekom to further increase its business focus on content-related and interactive service opportunities. At the same time, by strengthening its position in the content service market, Magyar Telekom will become the leading interactive service provider in Hungary.

        The transaction is still pending, subject to the approval of the M-RTL shareholders. The Court of Registry is expected to register the legal separation in the second quarter of 2009.

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T-Home operations in Macedonia

        We fully own a Macedonian holding company, Stonebridge, which owns a 51 percent interest in Makedonski Telekom. Magyar Telekom has commenced a liquidation procedure of Stonebridge in accordance with the relevant Macedonian laws. Once the process is complete, Magyar Telekom will directly own its shares in Makedonski Telekom, thus simplifying the ownership structure.

        Makedonski Telekom is the primary fixed line service provider in Macedonia. Makedonski Telekom provides local, national and international long distance public telephone services, VoIP services, leased line services and Internet services.

        In May 2008, Makedonski Telekom introduced the T-Home brand.

        The following table sets forth information regarding the total fixed access lines of Makedonski Telekom:

 
  At December 31,  
 
  2006   2007   2008  

Number of fixed lines

                   
 

Residential lines

    430,082     404,925     371,285  
 

Business lines

    42,780     40,954     40,344  
 

Public payphones

    2,087     2,015     1,692  
               
   

Total

    474,949     447,894     413,321  
 

ISDN channels

    42,200     44,482     44,694  
               
   

Total

    517,149     492,376     458,015  
               

ADSL connections

    16,462     48,214     98,866  

Number of Internet subscribers

                   
 

Dial-up

    31,066     18,459     5,910  
 

Broadband (ADSL, leased line)

    16,603     48,363     98,995  
               
   

Total

    47,669     66,822     104,905  
               

Market share in the DSL broadband market (retail and wholesale, estimated) (%)

    45     58     59  

Market share in the dial-up market (estimated) (%)

    94     93     96  

        Starting from June 2008, Makedonski Telekom also offers VoIP based services (Call Comfort, Office Comfort and Office Comfort+ packages). VoIP product portfolio was extended in September 2008 when Call & Surf packages were launched on the market for the residential segment.

        Makedonski Telekom launched IPTV in November 2008. Makedonski Telekom offers TV sets as well in its sales network.

        Makedonski Telekom offers end-to-end solutions for its business customers, including a complete portfolio of fixed line products and services, as well as SI solutions.

T-Home operations in Montenegro

        We have a 76.53 percent interest in Crnogorski Telekom. Crnogorski Telekom is the principal fixed line service provider in Montenegro. Its exclusive rights in fixed line telecommunications services expired in December 2003. Crnogorski Telekom provides a wide range of retail and wholesale telecommunications services at domestic and international level (e.g., voice services, broadband access, IPTV services, leased line circuits, data transmission).

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        The following table summarizes key operational information of T-Com Crna Gora ("T-Com CG"), the fixed line operations of Crnogorski Telekom:

 
  At December 31,  
 
  2006   2007   2008  

Number of fixed lines

                   
 

PSTN lines

    173,248     168,062     164,394  
 

ISDN channels

    21,288     21,906     22,416  
               
 

Total

    194,536     189,968     186,810  
               

ADSL connections

    6,639     16,106     38,956  

IPTV customers

   
n.a.
   
2,397
   
17,531
 

Number of Internet subscribers

                   
 

Dial-up

    25,669     28,401     17,455  
 

Broadband (ADSL, leased line)

    6,760     16,252     39,144  
               
   

Total

    32,429     44,653     56,599  
               

Market share in the dial-up market (estimated) (%)

    98     98     98  

        Crnogorski Telekom is the sole provider of ADSL in Montenegro, although competitors started to offer broadband access through WiMAX access. Internet access is provided via the public switched telephone network, leased lines and ADSL. We experienced strong dial-up to ADSL substitution during the last two years.

        Similarly to other fixed line service providers before privatization, Crnogorski Telekom maintained relatively low domestic charges and high charges for international calls. In September 2007, Crnogorski Telekom rebalanced the fixed line voice tariffs adopted by the Montenegrin Agency of Electronic Communications. International charges have decreased both in residential and in business segment, while local charges and subscription fees have increased in residential segment.

        Crnogorski Telekom introduced its IPTV service, called Extra TV on November 30, 2007. In 2008, the IPTV system was upgraded to support an increased number of customers and to improve service quality.

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T-MOBILE

        Our mobile telecommunications services generated revenues of HUF 349,440 million in 2008 before inter-segment eliminations.

T-Mobile operations in Hungary

        As of December 31, 2008, we accounted for an estimated 43.9 percent of the total Hungarian mobile market in terms of subscribers based on the number of active Subscriber Identity Module ("SIM") cards and 44.2 percent in terms of total number of active SIM cards generated traffic in the previous three months. The penetration rate of mobile telephone services in Hungary increased from 109.7 percent at December 31, 2007 to 121.8 percent at December 31, 2008.

        We were the first mobile operator to launch HSDPA service in Hungary in 2006. The outdoor mobile broadband coverage based on population reached about 67.4 percent by the end of 2008. In 2008, the penetration of this service grew significantly and all three Hungarian mobile operators extended their data tariff portfolios, with prices falling. We managed to keep our market leader position in the consumer mobile Internet market, holding market share of 53.4 percent, compared to 24.7 percent of Pannon' and 21.9 percent of Vodafone' share.

        In October 2005, the Hungarian government selected us to build and operate the nation-wide Egységes Digitális Rádiótávközlö Rendszer ("EDR") system (the Hungarian Unified Digital Radio Network) in Hungary. For this purpose, Magyar Telekom established a subsidiary, Pro-M in December 2005.

        EDR is a 380-400 MHz band nation-wide Professional Mobile Radio ("PMR") network. The main users of EDR are various public safety (emergency) and law enforcement bodies (e.g. police and fire departments, National Ambulance Service). The high-quality EDR network replaces the analog radios currently used by these agencies.

        We were able to offer favorable terms mainly due to our existing radio and fixed line infrastructure, on which the EDR network is based. The EDR service utilizes the TETRA technology, which is a global standard for Public Safety and Security mobile radio communication, defined and approved by the European Telecommunications Standards Institute ("ETSI") as the official European Standard for digital Professional Mobile Radio.

        The roll-out of EDR was finished in 2006 and TETRA system continuously operates since that time. Under the terms of the agreement the government has been paying us annual payments of HUF 9.3 billion from 2007 until 2015.

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Subscribers

        The table below sets forth information concerning the number of our subscribers at the dates indicated:

 
  At December 31,  
 
  2006   2007   2008  

Number of subscribers

                   
 

Postpaid subscribers

    1,545,115     1,793,620     2,066,495  
 

Prepaid subscribers

    2,886,021     3,059,872     3,295,297  
               
 

Total subscribers

    4,431,136     4,853,492     5,361,792  
               

Average monthly Minutes of Use ("MOU") per subscriber

    142     149     152  

Churn ratio (%)

                   
 

Postpaid subscribers

    9.9     10.0     9.9  
 

Prepaid subscribers

    21.9     21.1     18.8  
 

Total subscribers

    17.9     17.1     15.4  

Average monthly Revenue per User in HUF

                   
 

Postpaid subscribers

    9,849     8,635     7,720  
 

Prepaid subscribers

    2,300     2,205     1,890  
 

Total subscribers

    4,800     4,542     4,087  

Mobile penetration in Hungary (%)

   
99.0
   
109.7
   
121.8
 

TMH's market share (%)

    44.5     44.0     43.9  

        The Hungarian mobile market reached a penetration rate of 121.8 percent by end of 2008. The increase in the number of TMH subscribers since December 31, 2006 is attributable to a number of factors, including the expansion of mobile broadband services and the success of community offers. Total growth rate both in 2007 and 2008 exceeded previous year's average due to the significant increase of inactive subscribers (i.e., subscribers who did not generate traffic in the last three months) included in the subscriber base mainly at Pannon, one of our competitors.

        Churn policy.    Generally, a contract customer of TMH is churned either after the voluntary termination upon the lapse of his contracted loyalty period or after forced contract termination due to the customer's failure to fulfill payment obligations. In the absence of re-charging, a prepaid customer is churned after a period of 12 to 16 months depending on the amount charged on the prepaid card.

        Traffic.    TMH's average traffic per subscriber is comparable to other European countries and was 152 minutes in 2008. Average traffic per subscriber has increased each year since 2004 as a result of successful price plans and significant price erosion targeting both postpaid and prepaid segment.

Products and services

Voice services

        In July 2008, we introduced a new tariff plan which mixes the advantages of prepaid and postpaid packages in a new postpaid package (i.e., favorable rates, comfortable postpaid invoicing with controllable expenses). Subscribers of this package must recharge the balance once the monthly subscription fee has been used toward usage.

        In October 2008, we launched new prepaid and postpaid tariff packages for iWiW members offering favorable tariffs within the user-group.

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        International roaming service was available for our mobile subscribers on 410 networks in 187 countries as of December 31, 2008, of which 214 networks in 119 countries were available for prepaid customers. On December 31, 2008, customers could use 219 General Packet Radio Service ("GPRS") networks in 109 countries. Since January 1, 2008, Magyar Telekom sends and receives all its international voice traffic to and from Deutsche Telekom when Deutsche Telekom offers more favorable price and better quality than other international carrier service providers.

Non-voice services

        In 2008, we continued to enhance our non-voice service portfolio, introduced several new products, increased the penetration and usage of the existing products and extended the access of some of our domestic products abroad:

    We provide premium-rate Short Message Service ("SMS"), premium voice traffic, Multimedia Message Service ("MMS") and videophone. Due to the growth in the number of MMS Interworking partners, the international MMS traffic volumes are more than 1.5 times higher in case of both outbound and inbound directions, compared to the previous year. By the end of 2008, our subscribers can send/receive MMS to/from about 60 international mobile networks.

    We launched location-based messaging service via MMS with cooperation of various partners in July 2008 (the first third party owned location-based service is picture sending via MMS). As a further development, we launched location-based service platform via web and Wireless Application Protocol ("WAP") channels for third party's content service (advertisements and partner finder) in October 2008. These services give the opportunity for our partners to provide their TMH's customers with value-added content services based on location after the customer's approval of the transaction. We believe that wide range of content services will offer to our customers the comfort ensured by location-based services.

    We renewed our t-zones portal with new structure and design in July 2008 by widening our digital contents' portfolio. Our t-zones WAP portal offers news, chat, multimedia contents such as online streaming, music and downloadable content (e.g., pictures, ring-tones, Java games). iWiW has been optimized for mobile use, and it is now available through t-zones. iWiW Message-board SMS has been launched in September 2008. iWiW members can now use their mobile phones to send messages to the message-board of their friends and relatives. From the end of 2008, customers can access the mobile optimized Freemail service, which enables users to read and manage their e-mails easily through their mobile handsets. News, sports, weather and other contents are available via InfoSMS and InfoMMS as well.

    In December 2007, we launched our Mobil TV streaming service with 12 TV channels and high quality streaming option. The service can be accessed on both t-zones and web'n'walk portals. To improve user experience, Mobile TV client has been downloadable (with fast channel switching and embedded EPG) for dedicated devices from August 2008. By the end of 2008, the number of channels was increased to 14 basic (one of them is the Hungarian market-leader commercial TV channel) and 6 optional ones.

    The web'n'walk service (a service that allows mobile phone users to surf the Internet on their mobile phones) ensures access to the Internet on mobile phones for our postpaid customers from June 1, 2006. In addition to Internet browsing, customers have the opportunity to download a wide range of content, such as Java games, ring tones, videos and to enjoy Mobile TV service. In March 2008, we changed our web'n'walk search engine to Yahoo. Owing to the strategic co-operation between Yahoo and TMH, the usage of web'n'walk became easier, thus considerably increasing the number of searches made in web'n'walk. Web'n'walk 3.0 introduced in 2008 ensures easier browsing for the users and enables them to have a 'One click access' to the personalized contents display on the homepage of web'n'walk.

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    In 2007, we significantly widened the range of products that can be purchased by WAP or SMS. Using mobile purchase service, customers can buy various products and services offered by us and third-party vendors. We have rearranged the Dynamic SIM toolkit menu that simplifies the access of mobile purchase services. We experienced a strong growth in sales of products such as parking tickets, lottery and highway fees. We believe that mobile purchasing has a great potential for further growth in 2009.

    We launched a Mobile Payment service in cooperation with Pannon and FHB Bank in October 2008. After registration, the service enables customers to buy several products and services charging the customer's FHB bank account. Registered customers are also able to pay for their telecommunications accounts and other goods in T-Pont shops through their FHB bank accounts.

    Electronic top-up services are available at many Automatic Teller Machines ("ATMs"), petrol stations, Internet banks, Telebanks, Mobilbanks, on public Internet sites, in post offices, newsagent network, T-Mobile franchise and wholesale partners. In 2008, the number of electronic top-up outlets increased significantly. The share of electronic top-up increased, reaching about 86 percent by the end of 2008.

    For corporate customers we offer a full range of telecommunications solutions. The most successful services are Bulk SMS, Corporate LAN Access and Fleet Management in the corporate segment. The revenues from the usage of Blackberries and corporate e-mail services increased by over 80 percent in 2008.

    In 2008, TMH reduced the tariffs of mobile Internet used abroad by 50 percent, and in 42 roaming networks to one sixth within the EU as well as in further three countries.

    The increase in the usage of Packet Switched Data services played an important role in 2008. The number of GPRS postpaid users rose by 70 percent by the end of 2008 compared to a year earlier.

    Magyar Telekom continues to leverage the opportunity of Fixed Mobile Convergence ("FMC"), e.g., we have launched integrated broadband offers (bundling ADSL and mobile Internet).

Equipment and activation

        We distribute an extensive range of mobile device portfolio, such as terminals, accessories, notebooks, netbooks, data products, SIM cards and vouchers.

        We focus on both acquisition and retention, offering several favorable packages to our customers, like the interest-free installment option for almost all mobile handsets and notebooks, or in case of our existing customers, the popular loyalty offers with more favorable prices and conditions.

        We offer combined mobile service and device offers to our customers, finely-tuning the eventualities of existing mobile services, together with supportive devices.

        The best example of this is the successful introduction of iPhone 3G in the Hungarian market exclusively by TMH. iPhone 3Gs can be also bought bundled with iPhone specific tariff plans (ikon 400 and ikon 600), which help fully exploit iPhone 3G's multimedia capabilities.

        TMH sells and leases equipments manufactured by other companies.

        The telecommunications device sector is highly competitive and characterized by rapid technological innovation, mainly in the mobile business. We believe that supply and service of telecommunications devices are integral elements of a full service telecommunications provider, and are necessary for the expansion of our customer base. In addition, these activities allow us to ensure that technologically advanced equipments required for new services are available on the Hungarian market.

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Other mobile services

        Pro-M realizes service revenues from providing EDR telecommunications services for various public safety (emergency) and law enforcement bodies based on the EDR contract. The agreement provides continuous payments until 2015.

Fees and charges

        Since January 1998, mobile subscriber rates have been deregulated, and carriers have had the freedom to set the level of fee components (i.e., connection fee, subscription fee and traffic charges).

        We charge subscribers a one-time connection fee, monthly subscription charges, event charges and time-based traffic charges. Customers using prepaid cards do not pay monthly subscription charges (but in case of some price plans monthly recurring fees do exist). We do not charge subscribers for incoming calls, other than calls received while roaming. We receive payments from other telecommunications service providers for terminating calls on our network. We maintained the widest range of price plans and successfully introduced additional plans in 2008 to acquire new subscribers and develop loyalty.

T-Mobile operations in Macedonia

        T-Mobile Macedonia is the leading mobile operator in Macedonia, continuously providing the highest technological and advanced services in order to meet the growing needs of mobile customers in the highly competitive market. The principal activities of T-Mobile Macedonia's operations are digital mobile telephone services based on GSM technology and non-voice services such as SMS, MMS and GPRS.

        T-Mobile Macedonia had expanded its customer base from 1,212,539 at the end of 2007 to 1,379,191 by the end of 2008. T-Mobile Macedonia had 59.4 percent market share in terms of subscribers based on the number of active SIM cards in the Macedonia mobile market. The mobile market penetration in Macedonia is over 110 percent.

        The table below sets forth information concerning the number of T-Mobile Macedonia subscribers at the dates indicated:

 
  At December 31,  
 
  2006   2007   2008  

Number of subscribers

                   
 

Postpaid subscribers

    177,311     280,707     360,706  
 

Prepaid subscribers

    767,219     931,832     1,018,485  
               
 

Total subscribers

    944,530     1,212,539     1,379,191  
               

Average MOU per subscriber

    72     90     96  

Average monthly Revenue per User in HUF

    3,206     3,054     2,586  

Mobile penetration in Macedonia (%)

    68.3     93.3     110.5  

T-Mobile Macedonia's market share (%)

    66.5     62.3     59.4  

        The increase in the number of T-Mobile Macedonia subscribers in the last three years is attributable to a number of factors, including the reductions of call charges in real terms, success of community offers and campaigns with attractive handset prices. The churn rates of customers are quite high in Macedonia.

        T-Mobile Macedonia faced intense price-based competition in 2008, mainly driven by VIP that entered the market in September 2007. Competitors launched various campaigns and price plans at very low prices both for postpaid and prepaid customers.

        With clear focus on retention and growth of the valuable customers base and in order to meet Macedonian mobile subscribers' needs for lower prices, T-Mobile Macedonia adjusted the prices for some

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of the existing price plans and introduced several services with attractive prices as extensions of the existing price plans, mainly based on the community offers.

        T-Mobile Macedonia was awarded a 3G license on December 17, 2008.

T-Mobile operations in Montenegro

        T-Mobile Crna Gora is the second largest mobile operator in Montenegro with 36.1 percent mobile market share. Since its inception in 2000, it offers innovative and advanced services to the Montenegrin market and has been experiencing dynamic growth.

        The main activities of T-Mobile Crna Gora's operations are digital mobile telephone services and non-voice services, such as SMS, MMS based on the GSM, UMTS, GPRS, Enhanced Data rates for GSM Evolution ("EDGE") and HSDPA technologies. T-Mobile Crna Gora actively employs various promotions and incentives to encourage use of its services. In addition to a variety of service packages, T-Mobile Crna Gora offers WAP, MMS, content SMS and premium-rate SMS services. In 2007, T-Mobile Crna Gora started the development of a new 3G network, and extended its service portfolio with web'n'walk and Mobile Internet, in order to meet the growing needs of mobile customers in an increasingly demanding and competitive Montenegrin mobile market.

        The table below summarizes the key operational statistical figures of T-Mobile Crna Gora:

 
  At December 31,  
 
  2006   2007   2008  

Number of subscribers

                   
 

Postpaid subscribers

    48,252     73,675     89,070  
 

Prepaid subscribers(1)

    283,364     335,266     417,449  
               
 

Total subscribers

    331,616     408,941     506,519  
               

Average MOU per subscriber

    127     120     105  

Average monthly Revenue per User in HUF

    3,858     3,252     2,886  

Mobile penetration in Montenegro (%)(2)

    103.8     168.7     185.6  

T-Mobile Crna Gora's market share (%)(2)

    42.3     33.8     36.1  

(1)
In October 2006, the prepaid voucher lifecycle was extended from 3 to 11 months in Montenegro, resulting in an increase in the number of prepaid subscribers.

(2)
Data published by the Montenegrin Agency of Telecommunications based on the total number of active subscribers in the previous three months.

        T-Mobile Crna Gora's operations, customer base and revenues are significantly affected by seasonal factors. In 2007, the entrance of a third mobile operator, Mtel, significantly increased the competition in the Montenegrin mobile market.

        In the summer of 2007, T-Mobile Crna Gora experienced the largest roaming revenue growth since the beginning of its operation, attributable to the high number of tourists visiting the Montenegrin seaside, the higher roaming charges and preferred network agreements. In 2007, the penetration level in the summer season exceeded 160 percent, as a large number of tourists purchased prepaid cards, and the new entrant started its operation with attractive offers. In 2008, strong competition induced tariff declines and lower mobile usage could not be offset by higher customer base, which resulted in lower retail traffic voice revenues. Due to the weaker summer season, visitor revenues also dropped in 2008 compared to 2007. These factors resulted in lower ARPU in 2008 as compared to 2007.

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DISTRIBUTION AND SALES

T-Home operations in Hungary

        In September 2008, Magyar Telekom introduced the T-Home brand. In parallel with the T-Home brand introduction, all 48 shops have been transformed to comply with the new T-Home brand requirements. The T-Home design has been visualized and displayed in all direct shops.

        Besides customer acquisition, cross-selling, up-selling and customer retention type of activities, shops are heavily loaded with customer service related tasks. In 2009, the direct shop network has to face two major challenges: to decrease the average customer waiting time by simplifying and improving IT processes and to put more emphasis on cross-selling and up-selling activities by focusing on the new T-Home portfolio (2Play and 3Play offers) in order to increase customer value.

        115 indirect shops also provide T-Home related products and services and this number will be further increased in 2009. In 2009, in the recently integrated shops, the major task will be to improve T-Home sales performance. T-Home services are also sold via an extensive Telesales channel as well as a door to door agent network which is currently being reformed to meet quality as well as efficiency requirements.

T-Home operations in Macedonia

        Makedonski Telekom has developed different sales channels in order to serve customers from different segments. Makedonski Telekom uses direct sales channel, such as its own retail network, direct agents and key account managers; indirect sales channel based on indirect master dealers with their network of own shops, partner shops and free lancers; on-line sales channel and call centre which performs telesales.

        The main sales channel is the Makedonski Telekom shop network. There are seven T-Home standalone shops and 21 joint shops with T-Mobile Macedonia, which offer the complete T-Mobile and T-Home product portfolio. A new joint shop introducing a new concept (café and shop) was opened on January 23, 2009. A part of the Makedonski Telekom product portfolio (e.g., telephone sets, photo equipment, computers, printers, network equipment) is available to the customers using installments payment through their telephone bill.

        Direct agents serving the SME segment put strong emphasis on sale of PBX-based solutions and IT network solutions in 2008.

T-Home operations in Montenegro

        In 2008, the main focus of our sales activities in the Montenegrin fixed line operations was to increase ADSL sales. In order to profit from the market dominance of Crnogorski Telekom and to stimulate growth of non-voice revenues, several promotions have been implemented and ADSL offers have been restructured. As a result of intensive promotions and the restructuring of ADSL offers, ADSL subscriber base increased significantly.

        Crnogorski Telekom has developed different sales channels in order to provide best services to residential and business customers. Crnogorski Telekom's direct sales channels consist of own shop network (14 joint T-Mobile and T-Com shops), key account managers and SME coordinators. Crnogorski Telekom's indirect sales channels include the partner shop's network, dealers, web sales, "door to door" sales and Call Center.

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T-Systems

Enterprise

        We deliver high service level to our Enterprise customers with full dedication to not only client management, but also technical support and service desk level. 81 key account managers handled approximately 2,800 large enterprises as of December 31, 2008 in governmental accounts, industrial accounts, commercial accounts, utility and media accounts and financial accounts split. The largest multinational companies are being served on Deutsche Telekom group level by a separate team in order to assure utmost attention to their trans-border needs.

        In 2008, we have launched the "Top30" project, in the framework of which we handle top customers of T-Systems and our subsidiaries KFKI and IQSYS in an integrated way. As T-Systems offers traditional telecommunications (fixed and mobile data and voice) services as well as IT services to its customers, a special team is dedicated to handle companywide info-communications, managed services and outsourcing projects both in the sales and implementation phases.

SME

        In 2008, we accomplished dedicated customer service within SME segment, i.e., all of the approximately 45,000 SME customers are managed by dedicated T-Systems sales managers. Our SME account managers are responsible for 40 percent of our customer base in terms of account and sales targets, while the other part is being managed through our indirect partners. Our own account managers and our indirect partners offer the whole T-Systems and T-Mobile portfolio, which includes IT, voice, data and complex services as well. In our sales activity, both our own account managers and our indirect network play an important role, where the indirect network has exclusivity with Magyar Telekom. In 2008, we started a project to brand our indirect sales channel "T-Partner".

        In 2008, the main focus has been on integrated offers, selling at least two different types of services to customers at the same time. In 2009, our goal is to grow further in IT and application services within our SME customer base.

T-Mobile operations in Hungary

        Magyar Telekom had 48 direct shops at the end of 2008. All shops provide full scale of sales and customer care related services in the entire consumer product portfolio. Handset repair service is also available in all shops. In parallel with the T-Mobile brand facelift, all shops have been transformed to comply with the new, refreshed T-Mobile brand requirements.

        In Magyar Telekom's distribution the exclusive indirect partner network plays important role with its 223 shops. The design and the outlook of the network have been significantly improved by transforming more than half of the shops into the new refreshed T-Mobile design. In 2008, 115 shops have become quasi-integrated, i.e., they sell T-Mobile and T-Home product portfolio as well. The cooperation with Internet and IT equipment retailers has been further developed by increasing the number of partners from 9 to 15 with several points of sales. In four main retail outlets (MediaMarkt shops), we introduced a "shop in shop" concept resulting in small "T-Points" with strong focus on customer acquisition. The exclusive indirect partner network has to face the same challenges in 2009 as the direct shop network, i.e., improve customer waiting service level and better exploit cross-selling and up-selling opportunities.

        We also sells our prepaid products (e.g., prepaid SIM packages, plastic top-up cards, on-line top-up) through major Hungarian retail channels. Prepaid products are available at 14,124 sales points nationwide (including 9,800 shops where on-line top-up is available, e.g., post offices).

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T-Mobile operations in Macedonia

        T-Mobile Macedonia distributes its services in its own retail shops and through indirect partners (dealers). At the end of 2008, the retail shop network consisted of 34 shops, of which 13 are solely operated by T-Mobile Macedonia, while the other 21 are joint shops with Makedonski Telekom. All shops carry the full portfolio of products and services of T-Mobile Macedonia. In 2009, additional four joint shops are planned to be open.

        Another channel of the distribution network is the dealers' cooperation. Currently the network consists of 13 master dealers (including 2 direct contractors) with 140 shops. All the shops offer the full portfolio of sales activities, except for collection. By the end of 2008, all the dealers' shops have been redesigned with outdoor illuminated signs according to "T-Partner" image. Prepaid packages (with or without handsets) are available in all dealers shops and in additional 7,000 kiosks, which sell prepaid vouchers.

T-Mobile operations in Montenegro

        After a successful brand introduction in September 2006, T-Mobile Crna Gora continues to strengthen its market position, as well as brand awareness. Under the T-Mobile brand, the brand values include high international competence and high quality standards. Since the entrance of the third mobile operator in 2007, T-Mobile Crna Gora is now challenged by stronger competition and high market saturation.

        In 2008, the number of T-Centers reached 14. These are accompanied by a network of 15 exclusive Partner Shops which use a similar design to the own shops. Both types of outlets provide a permanent portfolio of handsets and the full range of services for new and existing customers. In addition, there were approximately 1,200 contracted points of sale for prepaid vouchers and SIM cards at the end of 2008.

        Business customers are served by key account managers taking care of the top 300 clients and SME coordinators who are in charge of SME and SOHO companies. Top clients are divided by industries (e.g., banks, hotels, large manufacturers, government) and small companies are divided by regions.

        In 2008, T-Mobile Crna Gora continued to be the market leader in the postpaid segment of mobile customers. The numerous promotions and the wide sales network resulted in increase in the number of both prepaid and postpaid customers in the business and residential segment as well.


COMPETITION

T-Home operations in Hungary

        We face strong competition in all areas of our fixed line operations including voice, Internet, cable television and IT services. Competitors include other LTOs, mobile telecommunications providers, Internet service providers, alternative service providers and cable television service providers.

        The concentration of the telecommunications market continued in 2008. Externet bought up Vivanet, which enhanced its position in the Internet market. By acquiring eTel, Interware has become able to provide voice services. Monortel merged into UPC and offers its services under the UPC Telekom brand. With the purchase of Actel, EnterNet obtained an own infrastructure.

Voice

        In recent years, mobile carriers are our largest competitors on the voice market. Mobile penetration has increased from 109.7 percent at December 31, 2007 to 121.8 percent by the end of 2008, which not only led to intense competition on the mobile telecommunications market, but also affected the fixed line telephone market. In 2008, the main reason for fixed line churn was mobile substitution.

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        In our service areas, a number of carriers (Invitel, GTS Datanet, Interware and UPC Telekom) offer pre-selection and call-by-call services and were able to attract some of our customers. However, we respond to this challenge with attractive price plans, and successfully limit their expansion. We also offer similar price plans in order to attract new customers from LTO areas, however with only moderate success so far.

Internet

        Cable operators (e.g., UPC Telekom, Fibernet, Digikábel), alternative service providers based on Unbundled Local Loop ("ULL") (e.g., GTS Datanet, EnterNet), mobile service providers and other ISPs are our competitors on the Internet market. In 2008, we kept our leading position with the continuous increase of the number of ADSL lines, however, our market share declined mainly because of the spread of cable Internet.

        Compared to the previous years, the growth of fixed line Internet penetration was slower in 2008. A technology shift from ADSL to cable Internet can be experienced in the broadband market because in case of cable Internet, higher bandwidth is available at lower prices. Mobile Internet plays an increasingly important role, it represents approximately 25 percent of total Internet subscriptions, however the majority uses mobile Internet as a complimentary service beside fixed line technologies.

        ULL services have only marginal shares in the broadband market, therefore the NCA ordered the decrease of ULL access fees. We expect a slight growth of ULL services, which could lead to more intensive competition.

TV

        In 2008, the trend of digitalization continued in the television market. NCA issued a tender for digital terrestrial broadcasting which was won by Antenna Hungária Zrt. The digital terrestrial broadcasting television service is available from December 2008, with network coverage of almost 60 percent and the programs dominantly are available without a subscription fee.

        Invitel launched IPTV offers on its own service area and therefore became a 3Play service provider. Parallel to the launch of digital television services, UPC Telekom introduced a new offer structure and harmonized its voice, Internet and television packages.

        In October 2008, the NCA announced calls for a tender that allows new mobile carriers to enter the market. As a result of the tender, competition could become even more intensive in the Hungarian voice and broadband market.

T-Home operations in Macedonia

        On January 1, 2005, Makedonski Telekom's exclusive rights to provide fixed line telephone services expired, but as a result of the delay in implementation of the new regulatory framework, competition from other fixed line service providers started only in February 2007. Makedonski Telekom, however, faced indirect competition earlier from other mobile service providers and, to a limited extent, from other VoIP providers. In 2008, the main competition in the fixed line voice services was posed by mobile service providers. New fixed line service providers also started their operations by offering outgoing calls to Makedonski Telekom subscribers, either over VoIP or through carrier selection services. In addition, there is intense competition in the area of terminating international incoming calls on the fixed and mobile networks in Macedonia. By end of 2008, there were eight operators that terminated international traffic.

        The nature of fixed line competition has shifted from offering cheap outgoing calls (through carrier selection and VoIP) towards offering complete fixed line services.

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        In April 2007, OnNet entered into an ULL Agreement with Makedonski Telekom based on Makedonski Telekom's Unbundling Reference Offer ("MATERUO"). Based on this agreement, OnNet offers its commercial services to the customers from May 2008. Commercial wholesale line rental agreement with OnNet, based on OnNet's request, has been signed as well.

        Cosmofon launched fixed line voice services in June 2008 over its GSM network, and in August 2008 it started to offer services based on 3G technology.

        Both major CATV operators, CableTel and Telekabel, as well as several smaller CATV operators started to offer fixed line services in the last quarter of 2008.

        Number portability has become available since September 1, 2008. Since fixed line customers are mostly Makedonski Telekom customers, we expect negative effects of number portability.

        To respond these challenges, Makedonski Telekom launched attractive bundled offers including flat components, VoIP, ADSL and IPTV.

        Until the end of 2008, Makedonski Telekom concluded interconnection contracts with three mobile operators and ten fixed line operators.

        Makedonski Telekom is the leading provider of leased line and data transmission services. CATV and wireless operators have built their own networks and are also capable to offer data transmission services, transmission capacity and various broadband services. Based on Makedonski Telekom's new wholesale leased line offer with decreased prices, we expect to sign several wholesale agreements with alternative operators.

        We expect more opportunities for alternative operators as Makedonski Telekom had to introduce new wholesale products based on regulatory obligations from the first quarter of 2009.

        In the Internet broadband market, there are three major service providers in addition to Makedonski Telekom: OnNet, CableTel and Telekabel. Makedonski Telekom has approximately 49 percent market share based on the number of retail subscribers at the end of 2008. It faces competition mainly from CATV operators' cable broadband Internet, offered to the CATV customers through their own networks and from broadband services through Makedonski Telekom's wholesale ADSL offer. Mobile operator Cosmofon also started to offer mobile broadband Internet access, through its 3G network, from September 2008.

        In November 2008, Makedonski Telekom entered the TV market by offering 3Play services: TV, Internet and voice bundles. Competitors also announced similar services, and CableTel already launched its first offer in October 2008. On April 25, 2009, the AEC granted radiofrequencies for digital TV services through digital video broadcasting- terrestrial ("DVB-T") to Telekom Slovenije.

T-Home operations in Montenegro

        In 2007, a new mobile and fixed line operator entered the Montenegrin telecommunications market: Mtel, the third mobile operator and licensed operator for development and exploitation of WiMAX-based network, launched its WiMAX fixed network.

        In the third quarter of 2007 and the first quarter of 2008, eight licenses for VoIP operators were issued as well. Two of them have signed agreements on interconnection and access with us in July 2008. They are able to offer outgoing call services to our customers through carrier selection and freephone service. The transit of incoming international calls via VoIP providers to our network is still not a regulated service and it is subject to a commercial agreement between parties.

        Fixed-mobile service substitution is expected to become increasingly significant. The high mobile penetration and the introduction of a third mobile operator in 2007 have intensified this trend.

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        Nine Multichannel Multipoint Distribution Service ("MMDS") and CATV licenses were awarded at the beginning of 2007. Some of the cable operators have declared their intention to provide Internet and telephony services. Terms and conditions for joint usage of our underground infrastructure were published in 2008, but currently only three of these cable operators are using this possibility at five municipalities in Montenegro (in total length of less than 20 km). MMDS and satellite operators, who were able to start first with service provisioning and who are not dependant on our infrastructure, are currently market leaders in CATV segment.

        Strong competition is developing in the wholesale segment as well. It is expected that significant players like Telekom Serbia, National Broadcasting Company and Electricity Company will enter the Internet and data wholesale business after significant investments in their communications infrastructure have been realized during 2008.

T-Systems

        In 2008, our main competitors in the fixed line market were Invitel and GTS Datanet. In response to market consolidation and competitors' alliances, T-Systems focused on providing integrated network services and systems integration. These activities include managed and outsourcing services, sales based on providing consulting survey for complex customers' needs and focusing on large projects. With these product offerings, T-Systems positioned itself as an Information Technology/Technology Consulting ("IT/TC") solution provider for the corporate segment.

        We divide the IT market into two segments according to the type of services. Our main competitors in the IT Infrastructure services segment are HP, Synergon, S&T, IBM, Albacomp and Getronics. Our main competitors in the IT Application Development services segment are HP, Synergon, IBM, Albacomp, Accenture, FMC and Unisys. Our goal in this highly competitive market is to keep our leading position in the IT services market by achieving a larger growth rate than the average, to win significant projects and to use a new business model in the small and medium business sector: standardized products via economies of scale.

T-Mobile operations in Hungary

        In 2008, the Hungarian mobile telecommunications market was characterized by intense competition, driven by new broadband services, lower prices and aggressive marketing. The mobile penetration rate further increased to 121.8 percent by the end of 2008. We continued to focus on customer retention and the development of mobile broadband services. Despite the intense competition, as of December 31, 2008, we accounted for an estimated 43.9 percent of the total Hungarian mobile market in terms of subscribers based on the number of active Subscriber Identity Module ("SIM") cards and 44.2 percent in terms of total number of active SIM cards generating traffic in the previous three months.

        The direct competitors of TMH are Pannon and Vodafone. Vodafone, the smallest mobile network operator in terms of the number of subscribers in Hungary, continued to focus on acquisitions (especially in the field of mobile broadband) supported by aggressive flat tariff offers and marketing campaigns. Vodafone's market share slightly increased to 21.0 percent by the end of 2008. Pannon kept a strong mobile market share and community focus, and maintained its stable second position in the market. By the end of 2008, it had a market share of 35.1 percent driven by the considerable increase of its inactive subscriber base.

T-Mobile operations in Macedonia

        There are at present three mobile operators operating in the Macedonian mobile market. The mobile market penetration measured in terms of subscribers is over 110 percent, which is mainly due to strong and intense competition conducted on the basis of prices, subscription options, subsidized handsets, range of services offered, innovation and quality of service. The second largest mobile telecommunications service

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provider in the country based on the number of subscribers, Cosmofon began commercial operation in June 2003. Its marketing and advertising efforts are aggressive with low and competitive handset pricing, attractive price plans, a broad array of advertising and indirect channels of sales. Cosmofon broadened its operations in the field of fixed line telecommunications services in June 2008 and started its 3G commercial operations in the prepaid, postpaid and Internet segment in August 2008.

        In February 2007, the Macedonian telecommunications regulator awarded a third mobile license to Mobilkom Austria. The operator entered into the Macedonian market with 2.5G Services in September 2007 under the name VIP. VIP started intensive campaigns even before its official start of operations. VIP entered into a national roaming agreement and site sharing agreement with T-Mobile Macedonia, but is also building its own GSM network. The partnership with Vodafone helped VIP to introduce Blackberry together with introduction of Virtual Private Network ("VPN") capabilities.

        While greater competition was brought to the mobile market with the entry of a third market player, the investment of Deutsche Telekom in OTE/Cosmote significantly increased Deutsche Telekom's position in Macedonia. The Macedonian Commission for Protection of Competition ("CPC") decided that Deutsche Telekom should sell Cosmofon as corrective measure on the market. In March 2009, Telekom Slovenije purchased 100 percent shares of Cosmofon and currently owns the two major competitors, Cosmofon and OnNet.

        T-Mobile Macedonia was awarded a 3G license on December 17, 2008. The tender obligations impose a commercial launch of the service within six months from the date of granting the license (June 17, 2009) and 50 percent population coverage within a year from the date of granting the license (i.e., by December 17, 2009), additional 30 percent (or 80 percent total) population coverage within 3 years as from the date of granting the license (i.e., by December 17, 2011).

        In March 2009, T-Mobile Macedonia introduced 3G iPhone on the Macedonian market.

        On May 7, 2009, the Agency has published on its web site the decision of the Commission no. 11-20/3 from May 5, 2009, as its second instance body, for choosing T-Mobile Macedonia as best bidder on the tender for granting 2 radiofrequency licenses in the 1800 MHz band. T-Mobile Macedonia will be able to enhance the performance of its network with this additional band. T-Mobile Macedonia needs to pay the one off fee of EUR 2 million by June 5, 2009.

        On January 9, 2009 the Government of Republic of Macedonia decided on initial fee of EUR 5 million per license for a tender for granting two new 3G licenses.

        On December 31, 2008, T-Mobile Macedonia had 59.4 percent, Cosmofon had 29.1 percent and VIP had 11.5 percent market share based on the number of subscribers.

T-Mobile operations in Montenegro

        T-Mobile Crna Gora started its commercial operations as the second mobile telecommunications service provider in Montenegro in 2000, four years after the first mobile provider, Promonte, started its operations. In 2007, a third mobile operator, Mtel, entered the Montenegrin mobile market.

        At the end of 2008, T-Mobile Crna Gora had 36.1 percent, Promonte had 38.2 percent, while Mtel had 25.7 percent market share in terms of number of active subscribers. T-Mobile Crna Gora is the market leader in the postpaid segment with 42.9 percent market share.

        In November 2006, the Montenegrin telecommunications regulator issued a tender for two 3G licenses as well as a tender for a mixed 2G-3G license for a third mobile operator. In the first quarter of 2007, T-Mobile Crna Gora and Promonte were awarded with one 3G license each and Telekom Serbia won the combined 2G-3G license. T-Mobile Crna Gora launched 3G services in June 2007. Promonte and Mtel offer 3G services as well.

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        As in other countries, competition in mobile services is intense and driven by pricing, subscription options, subsidized handsets, coverage, as well as quality and portfolio of services offered. Our competitors' marketing and advertising activities are aggressive.

        T-Mobile Crna Gora's goal is to increase its market share by introducing segment-oriented price plans, continuously offering new attractive handsets, exploiting synergies with Deutsche Telekom, and maintaining existing customer relations and community involvement as a sponsor of important social, cultural, sports and educational events.


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

        We do not believe that we are dependent on any patent or other intellectual property right, on any individual third party customer or on any industrial, commercial or financial contract. Similar to other fixed line and mobile operators, we require telecommunications licenses from, and/or register our services at the governments of Hungary, Macedonia, Montenegro, Romania, Bulgaria and the Ukraine, the countries in which we provide telecommunications services.


REGULATION

Overview

        Our operations, as well as those of our subsidiaries and affiliates, are subject to sector-specific telecommunications regulations and general competition law, as well as a variety of other regulations. The extent to which telecommunications regulations apply to us depends largely on the nature of our activities in a particular country, with the conduct of traditional fixed-line telephony services usually being subject to the most extensive regulation. Regulations can have a very direct and material effect on our overall business, particularly in jurisdictions that favor regulatory intervention.

The EU Regulatory Framework

        In 2002, the European Union adopted several legislative measures, which included a general framework directive and four specific directives regarding the following topics (collectively constituting the "EU Framework"):

    access to and interconnection of electronic communications networks;

    mandatory minimum service standards for all users ("universal service") and users' rights;

    authorization and licensing regimes;

    data protection and privacy;

    data retention, and

    decision on a regulatory framework for radio spectrum policy in the EU.

        The NRF, in particular:

    sets out the rights, responsibilities, decision-making powers and procedures of the NRAs and the European Commission;

    identifies specific policy objectives that NRAs must achieve in carrying out their responsibilities; and

    provides that operators with SMP in relevant communications markets can be subject to obligations set out in the directives on universal service and access.

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        Since Hungary joined the European Union on May 1, 2004, our operations have been subject to the EU Framework on telecommunications regulation. EU Member States are required to enact EU legislation in their domestic law and to take EU legislation into account when applying domestic law. Hungary fully implemented the NRF with the enactment of the Electronic Communications Act and fully implemented decrees in 2004.

        In each EU Member State, an NRA is responsible for enforcing the national telecommunications laws that are based on the EU Framework. NRAs generally have significant powers under their relevant telecommunications acts, including the authority to impose network access and interconnection obligations, and to approve or review the charges and general business terms and conditions of providers with SMP. In general, a company can be considered to have SMP if its share of a particular market exceeds 40 percent. Market share is determined based on revenue, number of subscribers, usage volume figures or a combination of these depending on the particular market. NRAs also have the authority to assign wireless spectrum and supervise frequencies.

        The European Commission supervises the NRAs and formally and informally influences their decisions in order to ensure the harmonized application of the EU Framework throughout the European Union. Companies can challenge decisions of the relevant NRA before national courts. Such legal proceedings can lead to a decision by the European Court of Justice, which is the ultimate authority on the correct application of EU legislation.

Special Requirements Applicable to Providers with SMP

        The most significant impact on our business stems from the EU Framework's special requirements applicable to providers with SMP. Obligations in relation to network access, price setting, separate accounting for interconnection services, publication, and non-discrimination, can be imposed on those operators that are designated by the relevant NRA as having SMP in an electronic communications market. Such determinations are based on EU guidelines and EU competition case law.

        In particular, the NRA may subject providers with SMP, and their affiliates, to the following rules and obligations:

    The prior approval or retroactive review of charges, insofar as such charges and conditions relate to a market in which the provider holds SMP.

    The obligation to offer other companies unbundled special network access (including interconnection) as well as access to certain services and facilities on a non-discriminatory basis.

        In addition, providers with SMP can be obliged to maintain segregated accounting systems with regard to access services. This obligation is intended to allow for transparency with respect to various telecommunications services in order to prevent, among other things, the cross-subsidization of services. In this regard, the NRA may specify the structure of a provider's internal accounting for particular telecommunications services, which can increase costs of compliance.

        Under the EU Framework, the European Commission periodically issues a market recommendation, which is a list of telecommunications markets that it considers susceptible to sector-specific regulation. NRAs must take this list of markets into account when defining the markets that are to be analyzed for the existence of competitive restraints. If an NRA finds that a market is not competitive, it establishes which providers have SMP in this market and may impose certain measures prescribed by statute.

        In February 2003, the European Commission issued its first recommendation, which related to the retail markets for fixed-line public telephone service and leased lines, as well as the wholesale markets for the ULL, fixed network interconnection, leased lines, broadband access, mobile voice call termination, mobile access and call origination, international roaming, and broadcasting transmission services. We have been designated as an operator with SMP in almost all of these markets in Hungary. Future market

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analyses by NRAs have to consider a new recommendation of the European Commission effective as of December 17, 2007 as described in "—Legislative Developments" below.

        NRAs may analyze additional markets not included in the EU recommendation if justified by special national circumstances. NRAs are required to conduct market analyses on all communications markets included in the European Commission's recommendation, as well as those that the NRAs have decided to include within the scope of sector-specific regulation in agreement with the European Commission. All NRA market analyses are subject to the supervision of the European Commission and can be challenged if the European Commission does not agree with the NRA's findings.

        In addition to the European Commission's recommendation, there is a separate EU regulation on unbundled access to the local loop, which became effective in January 2001. It contains the obligations to provide full unbundled access to copper-paired wire lines, as well as unbundled access to the high-frequency spectrum of those lines (line-sharing). Since each member state has specifically addressed local loop unbundling by individual regulatory measures under the framework, the new EU proposals to amend the regulatory framework as described below provide for the termination of the separate EU regulation on local loop unbundling. Unbundling has led to a moderate loss of our market share.

Legislative Developments

        Under the EU Framework, the European Commission must regularly review its market recommendation. On December 17, 2007, the European Commission issued the second version of its market recommendation, which now has to be considered by NRAs when analyzing telecommunications markets. The new version of the market recommendation reduced the number of markets to be reviewed from 18 to 7. In particular, most retail markets have been removed from the list of markets that are susceptible to telecommunications regulation. However, the most important retail market relating to retail access to the fixed telephone network remains subject to such regulation. Further, some wholesale markets are now described in a broader manner. For example, the market for local loop unbundling is no longer restricted to metallic loops. Whether these broader definitions lead to an expansion or a reduction of regulation is difficult to predict at this time. The new market recommendation primarily relates to the retail market for access to the public telephone network at a fixed location, wholesale markets for call origination of fixed telephone networks, call termination of individual fixed networks, network infrastructure access (including shared or fully unbundled access) at a fixed location, broadband access, terminating segments of leased lines, and voice call termination on individual mobile networks.

        In addition, the entire EU Framework is subject to a review, which is currently in progress. The European Commission has issued proposals to amend the current framework, which must be accepted by the European Parliament and the Council of Ministers before becoming legislation. These proposals do not include any deregulation efforts. Instead, the European Commission has proposed establishing a regulatory agency at the EU level, and to extend veto rights of the European Commission with respect to an NRA decision. Furthermore, the European Commission proposes to provide NRAs the power to separate the network operations of providers with SMP from the service business of such providers in certain circumstances. On September 24, 2008, the European Parliament approved significant changes to these proposals in its first reading. The main amendment to the proposals recommends the development of the European Regulators Group organization instead of the creation of a full regulatory agency at the EU level, rejects the extension of Commission veto rights, subjects the separation remedy to the fulfillment of strict conditions and intends to introduce a series of measures for enhancing investments in NGNs. The Telecommunications Council decided on its own amendment proposal on November 27, 2008. The European Commission, the Parliament and the Council will have to agree on a compromise amendment proposal to be approved in second reading in the second quarter of 2009 according to plans. Any changes to the framework would become effective following their transposition into national law, expected by November 2010. Whether the regulatory framework will increase or decrease the regulatory burden on us will depend on the changes being adopted by the European Union, the manner in which revised directives

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are subsequently implemented in the EU Member States, and how the revised regulatory framework will be applied by the respective NRA.

Competition Law

        The European Union's competition rules have the force of law in all EU Member States. The main principles of the EU competition rules are set forth in Articles 81 and 82 of the European Community Treaty ("E.C. Treaty") and in the EU Merger Regulation (the "Merger Regulation"). In general, the E.C. Treaty prohibits "concerted practices" and all agreements that may affect trade between Member States and which restrict, or are intended to restrict, competition within the EU, and prohibits any abuse of a dominant position within the common market of the EU, or any substantial part of it, that may affect trade between Member States. The European Commission enforces these rules in cooperation with the national competition authorities, which may also directly enforce the competition rules of the E.C. Treaty. In addition, the national courts have jurisdiction over alleged violations of EU competition law.

        The Merger Regulation requires that all mergers, acquisitions and joint ventures involving participants meeting certain turnover thresholds are to be submitted to the European Commission for review, rather than to the national competition authorities. Under the amended Merger Regulation, concentrations will be prohibited if they significantly impede effective competition in the common European market, or a substantial part of it, in particular as a result of the creation or strengthening of a dominant position.

        In addition, all EU Member States (and other jurisdictions in which we operate) have legislation in place, which is substantially similar to the EU competition rules. Thus, in markets where we are dominant, our ability to practice business freely and to establish our own prices can be restricted. Moreover, our opportunities to cooperate with other companies, or to enhance our business by fully or partially acquiring other businesses, can also be limited.

The EU Regulation of the Mobile Market

        The recommendation on relevant markets, which has to be analyzed by NRAs, has been updated on December 17, 2007, and requires NRAs to analyze one mobile communication market in order to determine whether regulatory remedies must be imposed: call termination in mobile networks.

        The markets for access and call origination and international roaming have been deleted from the list of recommended markets to be analyzed. However, it will be possible for NRAs to analyze and regulate further markets, if (a) high and non-transitory entry barriers are present in this market, (b) a market structure does not tend towards effective competition within the relevant time horizon taking into account the state of competition behind the barriers of entry, or (c) competition law alone is insufficient to adequately address the market failures concerned.

        On February 20, 2006, the European Commission announced that, in light of the inability of NRAs to impose regulatory remedies, it had begun to work on an EU regulation on international voice roaming charges. On June 30, 2007, an EU regulation entered into force which regulates international roaming tariffs for wholesale and retail customers on the basis of a capped pricing system. As a consequence, our mobile operations in the European Union had to lower their wholesale and retail roaming tariffs, which negatively affected our revenues. On the basis of a price schedule mandated by this EU regulation, further reductions of wholesale and retail roaming prices took place in mid-2008 and will have to be made in mid-2009. Furthermore, the EU regulation mandates the introduction of additional transparency measures requiring us to make additional investments.

        The European Commission has reviewed the development of prices for data roaming, resulting in proposals to regulate those prices. On September 23, 2008, the European Commission presented a legislative proposal to the European Parliament and Council to revise the EU Roaming Regulation. The

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proposal asks for extension of voice telephony roaming price caps for a further three years beyond the current expiry at end June 2010, mandating per second billing, regulating SMS wholesale and retail prices as well as wholesale data roaming prices and introducing further transparency rules starting from July 2009. The revised Regulation would apply until end of June 2013. The Telecommunications Council supported the Commission proposals on November 27, 2008. The European Parliament, however, has not yet decided on the proposed amendment.

        In addition, the European Commission plans to introduce a recommendation on mobile termination rates by prescribing detailed cost accounting methodology to be applied over a set timeframe by the NRAs. As a result, it is possible that TMH termination rates will be reduced to a lower level than intended by the NRA by 2012. However, the harmonization of termination rates—introduced on January 1, 2009 according to the NCA's decision—will have a positive effect on our company.

The Telecommunications Regulatory Regime in Hungary

        The telecommunications industry has been governed by:

    Act C of 2003 on Electronic Communications (the "Electronic Communications Act");

    Act XVI of 1991 on Concessions, as amended (the "Concessions Act");

    Act LXXXVII of 1990 on Pricing (the "Pricing Act"); and

    Act LVII of 1996 on the Prohibition of Unfair and Restrictive Market Practice (the "Competition Act").

The Electronic Communications Act and the Contract on Universal Service Provision

        The Electronic Communications Act came into effect on January 1, 2004. Under the Act, the NCA, the supreme supervisory body, and the Permanent Court of Arbitration for Communications ("CAC") were established.

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

        Universal Service.    The Electronic Communications Act provides that universal services are basic communications services that should be available to all at an affordable price. Universal services include access to fixed line voice telephone services of certain quality enabling access to Internet services, a regulated density of public payphones, a public directory of telephone users, national domestic inquiry service as well as free call-blocks and emergency calls. Access to voice services at an affordable price is effected by designation of universal service providers (the Minister shall appoint the most efficient service provider).

        We were designated as a universal service provider and entered into a universal service contract with the Minister. The contract was valid until December 31, 2008 and could be extended for an additional four years. The negotiations started with the Minister on the future terms of the contract have not led to an agreement. Therefore the Minister issued a decree on December 31, 2008 imposing an obligation on Magyar Telekom (and the other two operators) to provide universal services in 2009 without being designated as a universal service provider and without having concluded a universal services contract. Our interpretation of the legal status is that the Act on Electronic Communication provides that (i) the obligation to provide universal services may only be imposed on operators designated as universal service providers and (ii) the terms of such obligations need to be agreed in a contract between the designated operator and the Minister. In the absence of such a designation and without having concluded such a contract, we have no obligation to provide universal services from January 1, 2009.

        Subscriber Contracts.    Service providers must establish general terms and conditions of subscriber contracts. The Electronic Communications Act provides general rules of agreements between subscribers

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and telecommunications services providers for telecommunications services. The ministerial Decree 16/2003 (XII.27.) on "Telecommunications Subscriber Contract" contains other important rules relating to subscriber contracts. In subscriber contracts, parties can modify the provisions of the Electronic Communications Act only if they are more favorable to the subscribers.

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

        SMP Regulation.    On February 11, 2003, the European Commission identified in its recommendation (2003/311/EC) the following 18 relevant product and service markets within the electronic communications sector susceptible to ex ante regulation in accordance with Directive 2002/21/EC on a common regulatory framework for electronic communication networks and services:

        Retail level:

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

    2.
    Access to the public telephone network at a fixed location for non-residential customers.

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

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

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

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

    7.
    The minimum set of leased lines.

        Wholesale level:

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

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

    10.
    Transit services in the fixed public telephone network.

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

    12.
    Wholesale broadband access.

    13.
    Wholesale terminating segments of leased lines.

    14.
    Wholesale trunk segments of leased lines.

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

    16.
    Voice call termination on individual mobile networks.

    17.
    The wholesale national market for international roaming on public mobile networks.

    18.
    Broadcasting transmission services, to deliver broadcast content to end users.

        In 2004, analysis of 17 out of 18 markets was initiated by the NCA. The results of the analysis on fixed line retail markets have identified Magyar Telekom as having SMP and imposed a price cap on retail access

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market services (market 1 and 2) for residential and non-residential customers. In addition, it required Magyar Telekom to allow fixed line residential and non-residential customers to select other service providers for local and/or national and international calls (markets 3-6) and obliged Magyar Telekom to provide the minimum set of leased lines (market 7). On the wholesale markets, the NCA imposed the obligations of transparency (markets 8-9, 11-13), accounting separation (markets 8-9, 11-13), access and interconnection obligations (markets 8-9, 11-13), various obligations regarding cost-based prices and price control (markets 8-9, 11-13) and non-discrimination (markets 12-13). The market analysis procedure also identified TMH as having SMP in the mobile termination market (market 16) and imposed the obligations of transparency, accounting separation, access/interconnection and cost-based prices and price control.

        The new round of analysis of the 18 relevant product and service markets started in the second half of 2006 and analysis of all of these markets has been completed. Market 17 concerning the wholesale national market for international roaming on public mobile networks has not and will not be analyzed because Regulation No. 717/2007/EC of the European Commission and the Council on price caps applied to wholesale and retail international roaming voice charges and on transparency requirements for the provision of roaming tariffs to end users came into force on June 30, 2007. Magyar Telekom's SMP status has been unchanged compared to the previous round of market analysis and in most cases our obligations have been changed only slightly by having more detailed rules apply to our provision of services. A more significant change has been the introduction of an obligation to offer wholesale naked ADSL at regulated prices.

        The aforementioned list of relevant markets taken into account in the market analysis of the NCA was reviewed in the EU in 2006 and 2007. The amended recommendation of the EU that contains the relevant markets entered into force on December 17, 2007. As a result, retail call markets (market 3-6) and the minimum set of leased lines became deregulated as well as wholesale markets for transit services in the fixed telephone network, wholesale trunk segments of leased lines, access and call origination on public mobile telephone networks and broadcasting transmission services to deliver broadcast content to end users. The new recommendation is expected to become effective in the current round of market analyses by the NCA, which are expected to be completed in 2009.

        Local Loop and Bit-stream Unbundling.    According to the Electronic Communications Act and Government Decree 277/2003, (XII.24.) on "The detailed rules of procedures related to the reference offers and networking contracts", operators with SMP providing unbundled access or broadband access are obliged to unbundle local loops and prepare reference offers for unbundled local loops (whether fully or partially unbundled) and bit-stream access and to provide these services when there is a request for them by other telecommunications service providers.

        Providers with SMP may refuse the request for unbundling only if:

    there are technical barriers or the unbundling would put an unfair burden on the obliged service provider; and

    providing access to the local loop or bit-stream access would endanger the unity of the provider's network.

        Interconnection.    According to the Electronic Communications Act and Government Decree 277/2003 (XII.24.), providers with SMP are obliged to prepare reference offers for interconnection and to provide these services upon the reference offer when there is a request for them by other telecommunications service providers.

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

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        Carrier Selection.    According to the Electronic Communications Act, voice telephone customers have the right to select different service providers for each call directions. The implementing regulation was released in Government Decree 73/2004 (IV.15.) in April 2004.

        Number Portability.    Fixed line telecommunications service providers are required to provide number portability on their networks, and to allow subscribers to change service providers without changing their telephone numbers in the same geographic location. In May 2004, non-geographic and mobile number portability were also implemented.

        Licensing and Allocation of Frequencies.    With the exception of radio receiver device, radio equipment, radio stations and radio communication networks may be operated on the basis of a general or exclusive radio license. A radio license may be issued exclusively on the basis of a valid frequency assignment license, with certain exceptions. Radio equipment, radio stations, radio networks and radio communications systems may be installed with a frequency assignment license, with certain exceptions. Payment of fees is required for reservation and usage of frequencies assigned for civil purposes, reservation of identifiers and use of the assigned identifiers. In the case of terrestrial public mobile communications there is no frequency reservation fee, only frequency usage fee.

        Magyar Telekom Plc. pays a frequency license fee on the basis of Decree 6/1997 (IV.22.) KHVM on "Frequency Reservation and Usage Fee" and Government Decree 120/1998 (VI.17.) on "Rules of Payment of Frequency Reservation and Usage Fee". 18/2008. (VIII.8.) KHEM decree modified the 6/1997. (IV.22.) KHVM decree and introduced new allowances for mobile broadband systems resulting in a 34 percent saving in the 3G/UMTS base station spectrum usage fee since July 1, 2008. Additional rules related to frequency usage include Government Decree 346/2004 (XII.22.) on "Specification of the National Table of Frequency Allocation" and Government Decree 78/2006 (IV.4.) on "Rules of the Auction and Tender to Obtain the Frequency Usage Right". These decrees were modified on October 19, 2008 laying down the legal framework for the licensing of 450 MHz fourth spectrum block and 26 GHz spectrum blocks.

        Magyar Telekom Plc. pays a number usage fee for call numbers used by the Company, according to Decree 11/2005 (IX.28.) IHM on "Fees of Engaging the Identification Numbers Necessary for the Provision of Public Telephone Services".

        Frequency assignments must conform to the National Table of Frequency Allocations, which lays out the entire spectrum and the purpose and availability of frequency bands.

        Rights of Way.    According to the Electronic Communications Act, communications service providers are entitled with prior notice to enter private property where communications facilities (equipment, cables, antennas) are located for maintenance and repair. The public telecommunications service provider must enter into a contract with the property owner setting forth conditions for the common use of the property. The property owners are also obliged to remove obstructions to public telecommunications networks.

        The Hungarian Parliament approved the Act CLXXIV of 2007 on the amendment of Act C of 2003 on Electronic Communications on December 17, 2007 which came into effect in March 2008.

        The Act includes the implementing provisions for Regulation No. 717/2007/EC of the European Parliament and of the Council of June 27, 2007 on roaming on public mobile telephone networks within the Community and amending Directive 2002/21/EC.

        The Act serves to transpose the following legislation of the European Communities:

    a)
    Directive 2002/21/EC of the European Parliament and of the Council of March 7, 2002 on a common regulatory framework for electronic communications networks and services;

    b)
    Directive 2002/22/EC of the European Parliament and of the Council of March 7, 2002 on universal service and users' rights relating to electronic communications networks and services;

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    c)
    Directive 2006/24/EC of the European Parliament and of the Council of March 15, 2006 on the retention of data generated or processed in connection with the provision of publicly available electronic communications services or of public communications networks and amending Directive 2002/58/EC.

        The Act contains a new paragraph introducing a new task for the NCA; it shall—in as much as permitted by law—take into account the recommendations issued by the Commission pursuant to Article 19 (1) of Directive 2002/21/EC of the European Parliament and of the Council of March 7, 2002 on a common regulatory framework for electronic communications networks and services. Where the regulatory authority chooses not to follow the relevant recommendation, it shall inform the European Commission giving the reasoning for its position.

        The main rules of the Act are in connection with the Data Retention Directive. Additionally, this Act obliges the telecommunications service providers to retain data for the purposes of prosecution of criminal offences, national security and national defense.

Mobile Concession Contracts

        Under the Concession Contract, dated November 4, 1993, as amended (the "900 Concession Contract"), between the Minister and TMH, TMH was granted the right to provide public GSM mobile telephone services for 15 years. In November 2007, TMH signed the renewed Concession Contract along with the Cooperation Agreement with the Minister. The new Concession Contract prolonged the duration of the 900 MHz frequency usage right until May 2016. TMH paid HUF 10 billion for the 900 MHz license prolongation and committed to a HUF 20 billion mobile broadband investment obligation in underdeveloped regions of the country.

        On October 7, 1999, an amended 900 Concession Contract was signed, allowing TMH to start commercial service in the 1800 MHz band for 15 years beginning November 26, 2000. By virtue of the amendment to the Concession Contract in 1999, by the end of 2003, the three digital mobile telecommunications service providers had the same spectrum resources allocated to them both on the 900 and the 1800 MHz bands. The DCS 1800 license of TMH will expire in 2014, but extendable without tender for a 7.5 year period. TMH pays an annual concession fee of USD 1 million.

        Frequency Fees.    TMH had frequency usage fee payment obligations for channels allocated by the NCA in the 900 MHz and in the 1800 MHz band. In 2008, TMH paid HUF 3,900 million frequency usage fee for the right to use radio channels in the 2x8 MHz wide Primary 900 MHz band and HUF 279 million for the right to use the radio channels in the 2x15 MHz wide DCS 1800 MHz band.

        TMH also paid frequency fees for the International Mobile Telecommunications ("IMT") 2000/UMTS band. In 2008, TMH paid HUF 1,302 million frequency fee for the right to use radio channels in the 2x15 MHz wide IMT-2000/UMTS frequency band. In addition, TMH paid HUF 1,145 million in 2008 for the right to use microwave frequencies.

        Fees and Charges.    TMH's subscriber charges are not subject to regulation under the Pricing Act or any ministerial decree.

        Roaming Agreements and Tariffs.    TMH may sign roaming agreements with other public mobile telecommunications service operators outside of Hungary in accordance with the rules of the GSM Association, an association of GSM operators and associated members. A new Regulation (of the European Parliament and of the Council No. 717/2007/EC) applied specific caps on wholesale and retail international roaming voice charges and set transparency requirements for the provision of roaming tariffs to end users. Text messaging and data communications were not covered immediately but subject to regulatory monitoring. The regulation came into effect on June 30, 2007 but new retail charges (Eurotariff) were applicable from September 30, 2007. On September 23, 2008, the European Commission presented a

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legislative proposal to the European Parliament and Council to revise the EU Roaming Regulation. The proposal asks for extension of voice telephony roaming price caps for a further three years beyond the current expiry at end June 2010, mandating per second billing, regulating SMS wholesale and retail prices as well as wholesale data roaming prices and introducing further transparency rules starting from July 2009. The revised Regulation would apply until end June 2013. The Telecommunications Council supports the proposal but the European Parliament has not decided yet on the amendment.

        Market Assessment, SMP Designation Process and Interconnection.    See "—Pricing".

        Termination.    TMH met all of its concession obligations in 2008. If an event of default occurs under the 900 Concession Contract, the Minister may issue a cure notice to TMH. TMH would then have 90 days to agree with the Minister on a plan of action for curing the default. If TMH does not reach an agreement with the Minister or if TMH does not cure any such default within an agreed period of between three to six months, the Minister may issue a notice terminating the 900 Concession Contract.

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

        The right was awarded after a tender process that started on September 1, 2004 and concluded on December 7, 2004. TMH applied for all three frequency blocks ("A", "B" and "C") separately and won the usage right of frequency block "A". The right to use the frequencies vested upon payment of the first installment of the license fee on December 27, 2004.

        TMH was obliged by the term of the license decree to start commercial IMT-2000/UMTS service in the inner city of Budapest within 12 months of the grant of the license. This obligation was met. It was also obliged to expand the coverage to 30 percent of the Hungarian population within 36 months of the license. In December 2006, Magyar Telekom fulfilled the population coverage target of the IMT-2000/UMTS license.

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

        On October 22, 2008, the NCA published comparative biddings for the spectrum usage rights of 450 MHz/GSM/UMTS/26 GHz spectrum blocks. Magyar Telekom and the two other mobile incumbents were excluded from the auctions for the 450 MHz and the 4th GSM/UMTS spectrum blocks. Winners of the auctions were expected to be announced at the latest by end of January 2009, however the NCA postponed the decisions on the results of the bids. On March 16, 2009, the NCA cancelled the auction for the 4th GSM/UMTS spectrum package referring to the economic recession, which made the bids questionable from a financing and profitability point of view. On April 24, 2009, the Council of the NCA dismissed the appeals of three bidders, who may go to the Municipal Court asking for the review of the decision of second instance. On April 30, 2009, the NCA declared the auction for the 450 MHz spectrum block unsuccessful in a decision of first instance, while the auctions for the two 26 GHz spectrum blocks successful. Magyar Telekom won the 26 GHz spectrum block it had bid for, while the other block was won by Antenna Hungária Zrt. GTS Datanet, the unsuccessful bidder of the 26 GHz band "E" block—won by Antenna Hungária Zrt—appealed against the decision of the NCA on the basis of alleged procedural mistakes. The appeal does not have any effect on Magyar Telekom's successful bid for the 26 GHz band "D" block. Unsatisfied bidders for the 450 MHz spectrum block may also appeal against the decision of the NCA.

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Competition Law Restrictions

        The Electronic Communications Act and the Contract on Universal Service Provision in line with the Competition Act prohibit us from the abuse of our dominant position in the markets where we are in a dominant position.

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

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

Broadcasting and Transmission

        Broadcasting and transmission in Hungary are governed by Act I of 1996 on Radio and Television Broadcasting ("Media Act"), Act LXXIV of 2007 on Program Distribution and Digital Switchover ("Program Distribution Act") and the Electronic Communications Act. Under the Media Act and the Program Distribution Act, the National Radio and Television Board ("NRTB") has the primary authority for issuing tenders for broadcasting contracts and registering broadcasters and transmitters and the NCA has the primary authority for issuing tenders in relation to the Digital Switchover.

        National and regional television and radio broadcasting or broadcast "distribution" to local operators generally require registration at the NCA and may be carried out on the basis of a program distribution contract in accordance with the Media Act between the NRTB and the distributor. Frequencies will be assigned under the terms of the Electronic Communications Act and the Program Distribution Act. Entities registered as program distributors are permitted to transmit broadcasts of third parties to subscribers through a cable transmission network or via any other means (satellite, IPTV).

        The restriction under the Media Act on our further expansion in the program distribution sector was lifted on January 1, 2004. Accordingly, we are now free to increase our ownership interest in any program distributor, including cable television companies, despite our existing controlling interest in one cable television company.

        The Media Act is under a full revision; the third draft was published at the end of February 2009. The passing of a new Media Act is subject to a qualified majority of the Parliament, and the new Act is proposed to enter into force on July 1, 2009.

Development of the Telecommunications Regulatory Regime in Macedonia

        A new Macedonian law concerning electronic communications (Law on Electronic Communications, "ECL"), which was enacted on March 5, 2005, brought the country's telecommunications regulations closer to the EU regulatory framework, with some transitional provisions. It also provides a number of strict obligations for the existing operators.

        In the second half of 2006, the Government of the Republic of Macedonia enacted a number of bylaws and rulebooks regulating different communication areas. On May 4, 2007, the ECL was amended and criminal responsibility was introduced for the responsible person within the legal entity for not publishing the reference interconnection offer and the offer for unbundled access to the local loop. Additional amendments of the ECL were adopted on August 4, 2008, as a result of which the Concession Contracts of Makedonski Telekom, T-Mobile Macedonia and Cosmofon concluded in accordance with the old telecommunications act with the Ministry of Transport and Communications were terminated as of

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September 4, 2008. All the relevant provisions from the Concession Contracts were included in the ECL amendments. On September 5, 2008 the AEC, ex officio, has issued a notification to Makedonski Telekom and T-Mobile Macedonia for those public electronic communications networks and/or services which have been allocated thereto under the Concession Contracts. Radiofrequency licenses were issued to the operators for the bands granted with the Concession Contracts in a form prescribed by the ECL.

        On December 31, 2004, Makedonski Telekom's monopoly rights in the Macedonian telecommunications market expired, thus making it possible for other network and service providers to enter the Macedonian telecommunications markets, upon the submission of notification to the AEC and the registration thereof. By December 2008, the AEC had registered 158 network operators and 36 providers of public fixed telephony services. Makedonski Telekom published Network Access Agreement for the VoIP service providers for international calls.

        Under the ECL, Makedonski Telekom has been designated as an SMP in the market for fixed line voice telephone networks and services, including the market for access to the networks for data transmission and leased lines. Makedonski Telekom as an SMP operator has the obligation to enable its subscribers to access publicly available telephone services of any interconnected operator with officially signed interconnection contract.

        In July 2005, the AEC issued regulations governing the conditions of interconnection. Rules for access to, and the use of, specific network facilities were issued in August 2005, and regulations governing the opening of the local loop to competitors, and carrier selection, were adopted in December 2005. The amended bylaws for local loop unbundling, accounting separation and rules for access to and the use of specific network facilities were enacted in September 2008. In December 2008, four additional bylaws were enacted concerning local bit stream access, wholesale line rental, retail price regulation and an amended bylaw for interconnection.

        On August 8, 2005, Makedonski Telekom submitted its first Referent Interconnection Offer ("MATERIO") to AEC. The interconnection prices contained in this offer were approved on January 23, 2006. In November 2006, the first interconnection contract was signed according to the conditions determined in the Reference Interconnection Offer ("RIO"). The AEC approved the amended MATERIO on December 17, 2007. By December 2008, Interconnection Agreements were signed with ten fixed line operators and three mobile operators. One alternative operator (OnNet) has local interconnection and two of the operators have carrier selection (OnNet and Nexcom) agreement with us.

        On May 23, 2008, the AEC issued approval for the new decreased interconnection and unbundling fees based on the audit report on Makedonski Telekom's cost-accounting system issued by independent auditor. Makedonski Telekom's first MATERUO was submitted to the AEC on September 5, 2005 and approved on July 19, 2006. MATERUO was also amended in 2007 twice by decreases of the shared access prices and by commercial technical provisions. The latest MATERUO was submitted in October 2008, which was based on the new amended bylaw for MATERUO Reference Offer. The latest changes in RUO were applied from January 2009 after AEC approval. On April 16, 2007, Makedonski Telekom signed the first RUO based unbundling agreement with an alternative fixed network operator.

        To prepare for competition in its fixed line business, Makedonski Telekom carried out several changes to its retail pricing structure. For example, Makedonski Telekom continued to align the prices it charged for network access products and calling services with the underlying costs. In addition, on the basis of the ECL, the AEC imposed obligation for cost-based prices for wholesale services. To the extent that any of its subscriber line prices do not yet fully reflect the cost of service, a negative impact on Makedonski Telekom's competitiveness in the wholesale and retail markets can be expected. In July 2007, the wholesale ADSL agreement with competitor OnNet was signed.

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        According to the obligations imposed by the ECL, a new number portability bylaw was published by the AEC on December 27, 2006. Operators of publicly available telephone services must enable their subscribers to retain their numbers when changing telecommunications operators. The number portability has been implemented on Makedonski Telekom's and T-Mobile Macedonia's networks and commercial start of the service in Macedonia was on September 1, 2008. Based on latest MATERIO, number porting setting fee could be charged by inter-operator charging principle or by end customers.

        On September 4, 2008, new bylaws for wholesale leased lines and minimal set of leased lines were adopted by AEC. Makedonski Telekom prepared the offers and submitted for approval in line with the deadlines. Based on new enacted bylaws in December 2008 for wholesale line rental, local bit stream access and retail price regulation, several additional regulated wholesale products were submitted for approval to AEC. The wholesale line rental was approved by AEC on March 18, 2009.

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

        On December 27, 2007, the Commission of AEC decided to publish the public tender to provide universal electronic communications services in Macedonia. On February 22, 2008, Makedonski Telekom and Cosmofon were selected as candidates to be universal service providers in the prequalification process. Written invitations (without public announcement) by AEC will be sent to selected candidates soliciting their offers to provide universal electronic communications services.

        In 2007, the AEC granted six regional and two national authorizations for radio frequency utilization in the 3.4–3.6 GHz band for realization of a fixed wireless access, WiMAX. According to the tender rules, operators with national licenses were obliged to provide services from January 2008 and operators with regional licenses were obliged to provide services from March 2008. WiMAX operators started their operations with delay and until now they do not have significant impact on the electronic communications market. On August 14, 2008, AEC published tender for assignment of two regional licenses which were previously seized because the operators which gained the licenses did not fulfill the tender conditions. Licenses for both regions were granted to Cosmofon.

        The retail services provided by the mobile network operators in Macedonia are currently not subject to industry-specific price regulation. On June 29, 2007, the AEC has published the draft analysis conducted on call termination services in public mobile communication networks (market 16). Based on the analysis, on November 26, 2007, T-Mobile Macedonia and Cosmofon were designated with SMP status and several obligations were imposed on them, such as interconnection and access, transparency and non-discrimination in interconnection and access, accounting separation, price control and cost accounting. T-Mobile Macedonia appealed this decision. The appeal was rejected by the Commission of the AEC on January 18, 2008.

        As designated SMP on the mobile voice termination market, T-Mobile Macedonia submitted RIO to the AEC on February 29, 2008. On March 28, 2008, the AEC decided to significantly decrease the domestic mobile termination rates. T-Mobile Macedonia submitted an appeal against the decision of the AEC. On June 12, 2008 the Commission of the AEC, as review board of second instance of the AEC, confirmed the decision of the AEC. As a result, the new termination rates of T-Mobile Macedonia are valid from August 1, 2008. T-Mobile Macedonia initiated a procedure before the Administrative Court to dispute the decision of the Commission of AEC, although it does not prolong the application of new RIO. The administrative procedure has still not been started. T-Mobile Macedonia has concluded

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interconnection contracts with most of its interconnection partners according the RIO with a validity period from August 1, 2008.

        In addition, T-Mobile Macedonia might be designated with SMP status on the relevant market for access to public mobile communication networks and services for the purpose of call origination in public mobile communication networks (market 15 from the former European Commission recommendation). A further regulation of the international call termination prices as part of the market 16 analysis is also possible on the same level as the domestic mobile termination rates.

        The third mobile operator, VIP, was granted an authorization for radio frequencies utilization in the GSM 900 and DCS 1800 radio frequency bands on the entire territory of the Republic of Macedonia on January 31, 2007 and had its commercial start with its prepaid and postpaid offers.

        The AEC announced a call for expressions of interest for a fourth mobile operator on April 2, 2007.

        In November 2007, the AEC published a public tender for granting one license for 3G radio frequencies utilization. Cosmofon won the tender and started the 3G commercial operations in August 2008.

        On September 2, 2008, the Government of Republic of Macedonia published a decision for granting additional three 3G licenses for EUR 10 million fee for each license. On September 15, 2008, the new tender for these additional three 3G licenses was published. T-Mobile Macedonia was the only operator, which applied on this tender. Based on the decision on November 21, 2008, the Commission of the AEC granted the 3G license to T-Mobile Macedonia. T-Mobile Macedonia is obliged to launch commercial start of the 3G services by June 17, 2009. T-Mobile Macedonia paid EUR 10 million as one-off fee for the 3G license.

        Due to the decreased retail tariffs and increased traffic, T-Mobile Macedonia filed a request for GSM 1800 frequencies. The AEC published a tender for granting two licenses for the 1800 MHz band for a fee of EUR 2 million for each license. T-Mobile Macedonia was the only bidder in this tender.

        On May 7, 2009, the Agency has published on its web site the decision of the Commission no. 11-20/3 from May 5, 2009, as its second instance body, for choosing T-Mobile Macedonia as best bidder on the tender for granting 2 radiofrequency licenses in the 1800 MHz band. T-Mobile Macedonia will be able to enhance the performance of its network with this additional band. T-Mobile Macedonia needs to pay the one off fee of EUR 2 million by June 5, 2009.

Macedonia and the European Union

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

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

        On November 5, 2008 European Commission issued the 2008 Progress report for Macedonia. In the report under Chapter 10 (Information society and media), the European Commission concluded that significant progress can be reported in the area of electronic communications, including enforcement measures. The ECL has been aligned with EU rules. Progress was made by AEC in imposing competitive safeguards: interconnection rates were drastically reduced, number portability was introduced and a

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universal service provider was pre-selected. These measures, as stated in the report, have resulted in growing competition in the fixed and broadband markets and a significant decrease in prices.

Development of the Telecommunications Regulatory Regime in Montenegro

        Following the privatization of Crnogorski Telekom, the gradual liberalization of the telecommunications markets in Montenegro has started and this process has become more pronounced in recent years. The legal environment is rapidly changing. A new competition law came into force on January 1, 2006 and the consumer protection law was adopted in May 2007.

        The new law on Electronic Communications was adopted in Montenegro by the Parliament on July 29, 2008. The Government of Montenegro expects that this new EU conform law will speed up the development of electronic communications networks and services; stimulate competition; provide open and equal access to networks and electronic communications services; improve efficiency and introduce new technologies and services; provide efficient customer protection; provide easy access to information on tariffs and services; stimulate Internet usage and encourage investment in the telecommunications sector.

        The Montenegrin Agency for Electronic Communications shall conduct a market analysis and identify operators with SMP within one year from the day the law on Electronic Communications enters into force and require SMP operators to introduce remedies as defined by the relevant EU directives. Until SMP operators are identified, it shall be considered that Crnogorski Telekom is an operator with SMP in the markets of fixed voice telephony network and services, including the market of access to network for data transfer and leased lines, while all telephone network operators (including T-Mobile Crna Gora) are operators with SMP in markets of termination of calls in their respective networks. The law on Electronic Communications however does not prescribe what obligations the SMP operators have to fulfil before the first market analysis is completed.

        The aim of these obligations is to significantly lower the market entry barriers for new providers in the telecommunications markets, which may lead to potential market share losses for Crnogorski Telekom in the medium and long term.

Regulatory fees

        Under the new regulatory regime Crnogorski Telekom will have to pay a fee for market supervision (maximum 1.5 percent of total gross revenue), numeration fees and radio frequency fees. These fees must be paid according to the previous regulatory regime until December 31, 2008 and from January 1, 2009 according to the new one once the regulator adopts the related bylaws. The new fees might be higher than the ones paid under the previous law when only a one percent of gross revenue fee was paid.

Carrier selection

        New RIO of Crnogorski Telekom has been published in April 2008. Carrier selection was included in the new RIO, while the implementation of carrier pre-selection has been postponed.

        Currently, in addition to Crnogorski Telekom and T-Mobile Crna Gora, four operators have been assigned with carrier selection code, but only one of them signed interconnection agreement with Crnogorski Telekom in July 2008, with carrier selection included.

Sharing of infrastructure

        The RIO also defines terms and conditions of co-location, for the purpose of interconnection realized at Crnogorski Telekom's premises. This includes renting of space at buildings, masts and ducts as well. RIO conditions are valid only for operators looking for interconnection/access while usage of infrastructure by operators for other purposes is currently subject to commercial negotiations. Currently, three cable

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operators have signed agreement with Crnogorski Telekom for lease of cable infrastructure in five different municipalities.

Termination of calls

        The fixed termination fee ("FTR") has been reduced by 10 percent from July 1, 2008. The national termination fee is now EUR 0.027/min which is still relatively high, while local termination is EUR 0.0225/min. Termination of international calls in Crnogorski Telekom's network transited by domestic operators is currently not regulated allowing commercial negotiations with competitors. Additional reduction of FTR and the intention to equalize fees regardless of traffic origin have been announced by the Montenegrin Agency for Electronic Communications together with the introduction of cost-based termination in the forthcoming period. This might lead to significant decrease of revenue from call termination.

        Local governments in Montenegro have the authority to levy municipal taxes on telecommunications equipment placed under roads, resulting in a high degree of uncertainty for Crnogorski Telekom with respect to the overall tax liabilities.

Montenegro and the European Union

        Montenegro became an independent state in 2006 and signed a Stabilization and Association Agreement with the European Union at the end of 2007. The Interim Stabilization and Association Agreement came into force on January 1, 2008. Montenegro submitted its application for membership in the EU in December 2008.


PRICING

Hungarian Fixed Line Operations

Subscription Fees and Usage Charges

        Under the Pricing Act, as modified by the Electronic Communications Act, the Minister is responsible for establishing the maximum rates for universal services. Tariff regulation in Hungary is currently based on a price cap method for universal services. Since February 1, 2002, fixed line rates and connection fees have been regulated by Decree 3/2002 (I.21.) MeHVM on "Charges for Voice Telephone Services Provided by Companies with SMP and Price Plans Related to Universal Services" ("the 2002 Fixed Line Tariff Decree"). This decree has been modified to limit its scope of price regulation to universal services. The 2002 Fixed Line Tariff Decree established the price cap formula, under which our annual price increase cap was set as the forward-looking Consumer Price Index ("CPI") less a three percent productivity factor. Since our universal service contract expired on December 31, 2008 (See "—Regulation, The Electronic Communications Act and the Contract on Universal Service Provision, Universal Service) we believe that the above price regulations do not apply to us any more.

        According to the SMP resolutions concerning residential and business access markets, a price cap should apply to subscription fees of various price plans. These SMP resolutions were effective for 2005. A resolution with the same price cap regulation was published in 2007 effective from the end of 2007 until a new resolution is published. The SMP resolutions concerning residential and business access markets extend the applicability of price caps to all subscription fees. The resolutions provide that the maximum aggregate price increase of the subscription fees—business and residential separately—cannot be higher than the CPI for the current year.

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

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        In 2006, the NCA initiated a controlling process on price cap compliance in all three areas (universal services, residential and business access). We submitted the data required by the enquiry. We were not certain about the calculation method used by the NCA. As a result, there was a briefing on our request on December 15, 2006, at which the NCA informed us of the method to be used. According to the calculation of the NCA, we breached the price cap by 5.9 percentage points on the residential access market. We disputed the correctness of the method set forth by the NCA. The NCA did not accept any of our concerns with regards to the method it used to determine our price increase. As a result, the regulator ruled that we are permitted to increase our residential subscription fees until 2010 only in a way, so that the residential subscribers are compensated for the loss they suffered as a result of the price cap breach. The 2007 SMP resolution contains an appendix about the methodology of how the aggregate price increase should be calculated for each year. We did not agree with that methodology, and appealed against the resolution on court. We lost this court case and did not file a subsequent appeal against the court's ruling. We compensated residential subscribers for the price cap breach by the end of 2008, so in 2009 the usual price cap regulation can be applied.

        We slightly increased our subscription fees for the residential market on January 1, 2007 and for the corporate market on March 1, 2007. Traffic fees have not changed significantly in 2007. No significant subscription or traffic fee increase was made in 2008, either in the residential or in the corporate market.

Rates for PSTN Access to the Internet

        Since January 1, 2004, retail rates for PSTN access to the Internet are no longer regulated. Since 2002, however, a part of the charge billed to the customer—30 percent in peak time and 10 percent in off-peak time—must be transferred to ISPs. In the case of flat rate Internet access, 13 percent of the fee must be shared with ISPs. The obligation to transfer part of our Internet revenue has been revoked, however, we decided to continue sharing this revenue with the ISPs.

Leased Line Fees

        After our concession ended in the area of leased lines required for interconnection, the leased lines market became unregulated in 2002. In 2005, we were identified as an operator with SMP on the retail market of a minimum set of leased lines and on the wholesale market of terminating segments of leased lines. In both cases we have been identified as the only operator with SMP in Hungary.

        For the leased line termination market, the SMP resolution has adopted the "retail minus" pricing rule, requiring us to provide all wholesale leased line access services at prices approximately 33 percent lower than the listed retail prices. We are also required to provide all services identified in the resolution on a national basis. We have complied with this new regulation by reducing our wholesale leased line access prices by the set amount. This regulation only refers to Flex-Com prices.

        A new resolution published in 2008 has identified us as an operator with SMP both in the markets of wholesale market of terminating segments of leased lines and in minimum sets of leased lines. The only change in the resolutions compared to the prior resolutions is that the resolution on wholesale leased line access now regulates leased lines up to and including the bandwidth of 2 Mbit/s, as opposed to only those below 2 Mbit/s, and the "retail minus" pricing rule set at 33 percent in the prior resolution has changed to 29 and 28 percent. The "retail minus" pricing rule is not set in the SMP resolution, but is determined after the NCA examined the data submitted by us as a result of the obligation in the SMP resolution.

Regulated Wholesale Prices

        Since December 23, 2001, the interconnection rates are no longer regulated on an itemized basis but as part of the RIO. Since January 1, 2004, local bit-stream access must be offered as part of the Reference Offer for the Unbundling of the Local Loop ("RUO"), which also regulates pricing for the local bit-stream access. The cost methodologies used in the reference offers are provided in the Ministerial

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Decree 18/2003 (XII.27.) IHM on cost calculation of electronic telecommunications services. The cost-based unbundling and interconnection rates must be approved by the NCA. The reference offers must contain approved rates.

        The NCA published its SMP resolution with respect to the wholesale broadband market, and identified Magyar Telekom Plc., as well as all other LTOs, as operators with SMP. The SMP resolution adopted a "retail-minus" pricing rule for the wholesale broadband market of nationwide bit-stream access service. Pricing for the local bit-stream access service is currently regulated on a cost-based rule under the RUO. A new SMP resolution dealing with the broadband market was published in January 2008. It introduced a new obligation according to which SMP operators have to offer wholesale naked ADSL at regulated prices. The expected retail margin is determined in a fix amount instead of a percentage commonly used internationally.

        In the first round of market analysis, we have been identified as an operator with SMP in the voice termination and origination market and the wholesale market on unbundling of copper loops, along with all other LTOs. These SMP resolutions included obligations to submit RIO and RUO to the NCA. The NCA also adopted cost-based pricing rules, based on Long Run Incremental Costs ("LRIC") for the RIO and Fully Distributed Costs ("FDC") for the RUO. We submitted our first draft RIO in June 2005 and first draft RUO in October 2005. After several rejections and repeated submissions the NCA accepted our RIO on May 3, 2006 and our RUO on September 11, 2006. The RIO took effect from September 15, 2005 retrospectively and the RUO from January 20, 2006 also retrospectively. New SMP resolutions for the voice termination and origination markets, as well as the wholesale market of unbundling of copper loops were published at the end of 2007. The resolution about the wholesale market of unbundling of copper loops rules that the tariffs for RUO should be determined by LRIC method as opposed to the FDC method used before. As ordered by the new SMP resolutions, new RIO and RUO were submitted in February 2008. They were approved in July and September 2008, respectively, with a retroactive effect from April 26, 2008. On July 2, 2008, we submitted the joint RIO and RUO with Emitel as a consequence of the merger of Emitel and Magyar Telekom Plc. in October 2007. These new reference offers were approved on March 26, 2009.

Other Wholesale Prices

        The Electronic Communications Act provides that network access fees are to be set based on a number of objective criteria, with transparency and without discrimination. The cost of wholesale access services are now required to be calculated based on LRIC and the pricing for these services must be approved by the NCA, even if the service provider is not obliged to make a reference offer for these services.

Network Access and Interconnection Agreements between Magyar Telekom and ISPs

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

Reverse Charging Agreements between Magyar Telekom and ISPs

        We have entered into reverse charging agreements with a number of ISPs. Under these agreements, customers remit payment for Internet services to the ISPs rather than directly to us. This scheme allows ISPs to offer various price plans based on their customers' needs.

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"Price Squeeze" (Predatory Pricing) Issues

        Under the Electronic Communications Act, service providers with SMP are prohibited from pricing retail network services below their wholesale prices. When service providers reduce their end user prices and it causes a "price squeeze", they are obliged to proportionally reduce their wholesale prices in their reference offers. This provision only applies if the price reduction affects more than ten percent of subscribers for the service, or the impact of the price reduction exceeds five percent of net sales of the service.

        If the regulatory authority identifies a price squeeze, the NCA examines whether the price of the network service is in line with the incurred costs. If the network prices are cost-based, the NCA refers the case to the Competition Authority. If the network prices are not cost-based, the NCA determines the minimum mandatory margin between the price of the network service and the end user service and/or orders the service provider to modify the reference offer. In practice, however, only the National Competition Authority has carried out price squeeze tests so far.

Hungarian Mobile Operations

Market Assessment, SMP Designation Process and Interconnection

        Upon request for interconnection (to provide either network access or network interconnection) from another telecommunications operator, TMH is required under the Electronic Communications Act and a related decree to provide such services, if such request is reasonable on both technical and economic grounds and provision of such services is not impossible due to the limitation of resources.

Macedonian Fixed Line and Mobile Operations

        Under the ECL, Makedonski Telekom has been designated as an SMP in the market for fixed line voice telephone networks and services, including the market for access to the networks for data transmission and leased lines. Pricing for the retail services provided by T-Mobile Macedonia is not subject to regulation, while wholesale pricing for mobile termination of national calls is regulated. The AEC issued an SMP designation to T-Mobile Macedonia and Cosmofon on November 26, 2007 on the relevant market 16 from the former European Commission recommendation—"Mobile call termination". According to the ECL, based on market analysis, the AEC may impose retail price regulations and price controls on operators with SMP in a relevant market if it determines that the wholesale regulated market does not achieve the expected results.

        The SMP operators are obliged to keep separate accounting records for their wholesale and retail activities.

Regulated retail prices

        The fixed line voice market in Macedonia became highly competitive in 2008. New fixed line operators Cosmofon and OnNet launched services with decreased prices. Other alternative operators also started to offer fixed line voice products with attractive prices.

        The regulatory framework for the retail tariff regulation for Makedonski Telekom until August 2008 was provided in the Concession Contract. With the latest changes of the ECL published on August 4, 2008, the existing Concession Contracts of Makedonski Telekom including retail price cap regulation is no longer valid as of September 4, 2008.

        According to the ECL and the by-law for retail price regulation of fixed voice telephony services, the AEC may prescribe one of the following ways of retail regulation of fixed telephony services:

    Price cap;

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    Individual price approval;

    Cost based prices; or

    Benchmarks prices.

        Based on the by-law, Makedonski Telekom should inform the AEC 30 days before any price change of standard fixed voice telephony services on relevant market 1 to 6.

        The mobile market in Macedonia is becoming more challenging for retail pricing. Competition has increased since the third operator started to operate in September 2007. The entrance of VIP caused significant price changes on the Macedonian market in all segments. All three mobile operators, T-Mobile Macedonia, Cosmofon and VIP, launched several price plans and strong community offers with attractive prices during 2008.

Regulated Wholesale Prices

        Makedonski Telekom had a cost based price obligation for the regulated wholesale services (interconnection and unbundling of local loop), using FDC methodology until July 2007 and using LRIC subsequently. A proposal for interconnection fees with LRIC was submitted in July 2007 and for unbundling fees in December 2007. On May 23, 2008, the AEC issued approval for the new decreased interconnection and unbundling fees for about 18 percent, based on the audit report for the Makedonski Telekom cost accounting system issued by independent auditor. The fees are applied from June 1, 2008.

        On December 31, 2008, the AEC approved the modification of Makedonski Telekom's Reference Offer for Unbundled Access to Local Loop based on new bylaw for level of detail information that will be published in Reference Offer for Unbundled Access to Local Loop. As a result, fees for ULL decreased by approximately ten percent from January 1, 2009.

        The level of regulated wholesale prices directly depends on the finalization of the price adjustment of Makedonski Telekom's regulated retail prices.

        Based on the decision of CPC, Makedonski Telekom introduced a wholesale digital leased line product in November 2007. The wholesale products are offered at prices which are 30 percent lower than retail prices. In October 2008, Makedonski Telekom submitted offers for wholesale leased lines and minimal set of leased lines based on bylaws enacted in September 2008 by AEC. AEC approved the offer for minimal set of leased lines on December 25, 2008. On December 30, 2008, Makedonski Telekom introduced wholesale offer for provisioning terminating segments and/or trunk segments of leased lines upon approval from AEC. With wholesale leased line offer approval from AEC, Makedonski Telekom will have double regulation of the wholesale leased line service because of the overlapping of the responsibilities of the relevant regulatory bodies. The prices of wholesale leased line offer regulated by AEC are determined on basis of benchmarks.

        Based on the new enacted bylaws by AEC in December 2008 for wholesale line rental and local bit stream access, Makedonski Telekom submitted several additional offers for regulated wholesale products, such as stand-alone bit stream access and regulated wholesale line rental offers. According to the by-laws, prices are determined on "retail-minus" principle.

        SMP designation imposes obligations for transparency and non-discrimination in interconnection and access, accounting separation, price control and cost accounting obligations for T-Mobile Macedonia and Cosmofon.

        According to the above mentioned regulation, the mobile termination rate ("MTR") was reduced approximately 40 percent with a decision issued by the AEC on March 28, 2008. The same termination rate was imposed to Cosmofon, while VIP was not included in the process of regulation and was not designated with SMP status on Market 16, and currently is having preferred status with higher mobile termination rate in the same proportion. T-Mobile Macedonia appealed the decision of imposing the new MTR by the AEC, but the appeal does not postpone the execution of the decisions of the AEC. The new MTRs of T-Mobile Macedonia are applied from August 1, 2008.

        Currently, only national mobile termination is regulated, but there is also a possibility that the international termination rates may be reduced in the future to a same level as the national MTRs.

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ORGANIZATIONAL STRUCTURE

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

        For a list of principal operating subsidiaries and associates of the Company as of December 31, 2008, see Note 2.2. to the consolidated financial statements.


PROPERTY, PLANTS AND EQUIPMENT

        The real estate portfolio of the Company had a book value of HUF 106,967 million at December 31, 2008. Approximately 80 percent of this amount relates to properties of Magyar Telekom Plc.

        We have one of the largest real estate holdings in Hungary. We use substantially all of these properties for telecommunications installations, offices, warehouses, garages and shops. Our equipment and machinery primarily consist of switches, communication towers and other telecommunications equipment.

        The number of sites used by Magyar Telekom Plc. is approximately 2,400, out of which approximately 22 percent are owned by the Company, 42 percent jointly owned and 36 percent leased. These figures include the sites used for telecommunications towers and antennas, but do not include the number of base stations. We have approximately 3,000 base stations, of which 10 percent is owned by Magyar Telekom Plc. and 90 percent is leased from other telecommunications operators or other third parties.

        The total area of properties used by Magyar Telekom Plc. as of December 31, 2008 was approximately 675,000 m2. The majority of sites used in our operations are smaller than 100 m2. Approximately 40 percent of the total area is used to house telecommunications equipment and other technical devices. The largest site is our headquarters building located at Krisztina krt. 55 in Budapest, with floor space of over 30,000 m2.

        In order to increase the utilization of real estates and increase efficiency, we sell or rent our surplus properties. For more details on property, plant and equipment, see Note 12 to the consolidated financial statements.


INFRASTRUCTURE AND TECHNOLOGY

T-Home and T-Systems operations in Hungary

        The following table provides information on the length of the copper and fiber optic cables contained in Magyar Telekom Plc.'s access, backbone and rural area networks in Hungary at December 31, 2008, and each of the two prior years in kilometers (not including the network of T-Kábel):

 
  At December 31,  
 
  2006   2007   2008  
 
  (in kilometers)
 

Copper cable

    159,951     161,457     162,737  

Fiber optic cable

    15,026     15,454     16,547  

        Expansion of Access Networks.    At the end of 2000, we began to offer broadband Internet access services, based on ADSL with Asynchronous Transfer Mode ("ATM") technologies. In 2004, we selected Ethernet-based Digital Subscriber Line Access Multiplexers ("DSLAMs") to provide a more cost effective ADSL solution together with the ATM technology already in use. The ADSL transmission system provides high-speed digital access to any data network over existing copper wires without interruption of Plain Old Telephone Service ("POTS") and ISDN2 services with the data speed of 1, 4, 8 and 18 Mbit/s. In 2008, we continued the roll-out of the ADSL technology nationwide. At the end of 2008, more than 630,000 customers were using ADSL lines for connection to the Internet. By the end of 2008, our infrastructure allowed up to two million of our analog and ISDN2 subscribers to have access to the ADSL

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service. This represents coverage of over 1,260 towns and cities (potentially approximately 3,000,000 households) in our service area. In 2008, we introduced the VDSL2 technology to provide high-speed data access with data speed of 25 Mbit/s.

        We used fiber optic cables (HYTAS access and direct business access network) for our fixed line local loop networks for approximately 127,000 customers at the end of 2008. We installed a substantial amount of local network fiber optic cable in Budapest, where segments of the old cable network were in poor condition and where we believe the demand for high capacity and high quality transmission will be the greatest (e.g., shopping malls, industrial parks).

        We plan to extend our local fiber optic network both inside and outside Budapest to cover new business demands in existing areas, mainly to provide broadband services through optical access as well. In 2009, we plan to introduce Fiber to the Home ("FTTH") technology for covering more than 200,000 households.

        Backbone Network.    We have a digital fiber optic national long distance network that connects local primary area networks. We have implemented the DWDM technology and Synchronous Digital Hierarchy ("SDH") systems in both the national long distance and Budapest networks. The countrywide DWDM backbone network provides 24 times 10 Gbit/s capacity in the most important areas of Hungary, as well as in international directions. Between 2001 and 2007, we carried out capacity and geographical extensions of the DWDM network. In the first half of 2008, we established a nationwide Next Generation DWDM express layer network. It provides high capacity (80 times 10Gbit/s), and a very flexible usability and cost effectiveness solutions (e.g., optical switching, Optical Transport Network functions, L2 (Layer 2) Ethernet functions, 40 Gbit/s channels). Optical cables were installed in TMH's main transmission networks to serve 3G and the core network. In addition to cost advantages, SDH systems provide a flexible transmission infrastructure with automatic transmission paths. We use a new generation of the SDH system that, besides increasing network availability and transmission capacity, enables new services, such as data transmission (e.g., Ethernet). Since we currently have a robust optical backbone network, we have no immediate plans for expansion.

        IP/MPLS.    Since 2000, we have provided Internet access and IP-VPN services on the same IP/MPLS platform. The network is built-up of Gigabit Ethernet ("GE") and 10 GE connections. The network has several access options (dial-up, leased line, broadband DSL, CATV, Ethernet) with PoPs in each primary area in Hungary. Available services include L2 VPN, IP-VPN (scalable interconnection for corporate sites with integrated voice and data option), IPSec and xDSL to Virtual Private Networks, Virtual Private Dial-up Network and wholesale Internet services for ISPs. The connectivity network that concentrates xDSL traffic towards the IP core is based on ATM and Ethernet technology. In 2007, we developed a carrier-grade IP core network to be able to ensure high availability, demanded quality of service, scalability and security for 3Play, VoIP and broadband data communication services, and also for the common T-Home and T-Mobile IP platform.

        In 2008, significant capacity, quality and functional upgrades have been performed, including the development of the countrywide 10 Gbit/s core network, installation of new GE and 10 GE connections, duplications of devices to increase redundancies, and changes of old devices. In addition, Quality of Service ("QoS") was introduced into the IP network in order to efficiently serve the IPTV offerings and other high-availability features were also installed in 2008 in order to increase network capacity according to traffic demand, to install new network functions and to develop connectivity and integrity with different communication networks to become an appropriate transport platform for NGN and 3Play services.

        The IP core and access network was developed to provide broadband digital video transmission to utilize multicast technology alongside QoS as a wholesale product.

        Development of our traditional (such as PSTN/ISDN) networks has been limited to maintenance and legal compliance purposes. The key focus has instead been on development of technologies and networks

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compatible with or forming a part of NGN, such as VoIP. Voice-over CATV, Integrated Voice and Data service ("IP Complex Plus") and Voice-over Internet ("KLIP") have been introduced in recent years. An IP Multimedia Subsystem ("IMS") was also installed, which is considered to be the base for future multimedia services to be provided on broadband. The first service on the platform was the geographical number-based Publicly Available Telephone Service ("PATS"). In 2008, we continued to deploy a carrier-grade multi-service NGN, upgraded the IMS, and launched new services, such as IP Centrex, video-telephony, Click-to-dial. We launched the commercial IPTV service at the end of 2006 and in 2008 it represents coverage of 523 towns with approximately 28,500 customers.

        Applications.    Freephone, split charging, prepaid and postpaid services are provided on an Intelligent Network Platform. By the end of 2007, the life cycle of the platform ended, the vendor support was stopped. In order to establish a carrier-grade Service Delivery Platform, which is able to connect to the NGN networks as well as towards the legacy PSTN/ISDN, Magyar Telekom issued a tender. The new platform was deployed during 2008, and the services were migrated to it. By this platform, Magyar Telekom is able to develop new services or tailor existing ones for individual customer demands in a fast and easy way.

        Information Technology.    We have dedicated a significant amount of resources to improve our information technology systems. We believe that the continuing development of these systems is essential to improving customer service and the efficiency and productivity of our employees.

        Our nationwide operational support system integrates the following elements:

    Customer Relationship Management ("CRM");

    billing, e-billing;

    automated call collection;

    network traffic management;

    workforce and workflow management;

    element, network and service management (configuration, alarm management, SLA management); and

    process controlled technical inventories.

        This operational support system environment permits us to focus on our customers' needs, to offer more personalized services, itemized billing, to bundle products and services in price plans and to generate a single bill for customers with multiple locations. We have created the basics of the centralized alarm supervision and the support systems for IPTV, VoIP and XPlay services have been developed and initiated using the legacy systems. We also introduced an automatic trouble shooting support system along the Next Generation Operation Support System conception. We have been operating an automatic establishment support system of NGN services.

T-Mobile operations in Hungary

        2G Network.    At December 31, 2008, our GSM network consisted of 2,447 base station sites providing 99.9 percent population coverage. Our EDGE Packet Switched Data Service population coverage reached 85 percent.

        UMTS and HSDPA/HSUPA.    The 3G network enables—besides rapid data transmission and video-telephone—more comprehensive and interesting content than before, including, in addition to image and text, fast transmission of high quality multimedia materials. In August 2005, TMH launched commercial UMTS service, first in Hungary. On May 17, 2006, we launched commercial HSDPA service in the internal districts of Budapest, also as a first operator in Hungary. For the time being, each 3G cell is

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capable of HSDPA, therefore the UMTS/HSDPA population outdoor coverage reached 67.4 percent by the end of 2008, serving 302 settlements in Hungary. The network allows 7.2 Mbit/s nominal downlink speed and HSUPA is provided with 1.4 Mbit/s in Budapest as well.

T-Home operations in Macedonia

        Makedonski Telekom endeavors to maintain its network at a high technological level to offer and provide a wide range of products and services that will satisfy customers' demands. In the last few years, we made significant efforts to upgrade the network to extend its capacities in order to support strong growth of broadband services.

        The PSTN/ISDN network in the Republic of Macedonia has been fully digitalized since the end of 2003. The liberalization of the telecommunications market required Makedonski Telekom to perform a substantial upgrade of the PSTN/ISDN platform. With the upgrade, switching systems are able to support carrier selection and pre-selection functions. In 2008, lawful interception, as regulatory obligations for switching systems, has been finalized. Lawful interception is a security process, in which a network operator or service provider gives law enforcement officials access to the communications of private individuals or organizations.

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

        Makedonski Telekom's primary area networks are connected to the fiber optic national long distance network. The SDH technology has been implemented in the backbone network, in the transmission networks in Skopje and other cities in the country. For connection of Remote Subscriber Units, Plesiochronous Digital Hierarchy ("PDH") equipment is used as well. In 2008, implementation of new DWDM backbone and metropolitan network in Skopje was finalized. Nodes are equipped to support increased bandwidth demands from Makedonski Telekom services, domestic and foreign ISPs, T-Mobile Macedonia requirements, as well as customer demands for international leased lines. Cross-border capacities are extended appropriately.

        The existing copper-wire network is a good basis for introduction of broadband services based on the DSL technologies. At the end of 2003, Makedonski Telekom introduced broadband Internet access services based on the ADSL technology. In 2008, in order to support higher speed of Internet packages and introduction of IPTV, ADSL2+ was used. For connection of business customers, Metro Ethernet equipment is used. Key business customers are connected to the network with optical cables.

        In 2008, Makedonski Telekom finalized the redesign of its IP/MPLS backbone network. The redesigned IP network should provide IP transmission capacities both for high speed Internet and new IPTV services. The dual-star IP/MPLS network is connected to the global Internet network through two main Internet gateways. Available services include IP-VPN, ADSL high speed Internet access, ADSL-based VPN service, dial-up Internet access, Video Surveillance, Internet Symmetrical Access, wholesale Internet services for ISPs, web services, content-oriented services and video streaming. Frame Relay/X.25 services have been migrated to IP-based VPN service. Due to the increased number of ADSL subscribers, new Broadband Remote Access Servers ("BRASs") were installed on certain locations during 2008.

        In order to protect its users from Denial of Service ("DOS"), in 2006, Makedonski Telekom installed the Intrusion Detection and Prevention System which was extended during 2008.

        Makedonski Telekom launched 3Play offers in November 2008. In order to achieve this, during 2008, new equipment (e.g., Head end, IPTV platform) was installed and necessary configuration of the existing access and transport network was made.

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        In order to prepare the network for prospective high bandwidth services, Makedonski Telekom started a pilot project in 2008 for implementation of FTTH solutions. Wider deployment is planned from 2009.

T-Mobile operations in Macedonia

        T-Mobile Macedonia has built a high quality and high capacity network that meets the requirements and needs of its growing subscriber base.

        At the end of 2008, the radio access network consisted of 643 base stations installed on 472 sites, 4,621 transceiver units, 186 microwave transmission hops and 111 repeaters. The core network and supporting systems consist of two home location registers, two next generation mobile switching center servers, five media gateways (two of them are active and other three are in the process of implementation), two classical mobile switching centers (will be switched off after all Media gateways are installed) and six base station controllers installed on four different sites. Additionally, Prepaid node, GPRS Support nodes, SMS/VMS/MMS are operating via T-Mobile network. In order to support next generation services with higher capacity in the transmission network, new Packet backbone network was implemented on four sites. All network elements are centrally controlled and monitored via operation and support system located in Skopje.

        Rating and billing platforms provide enhanced and seamless services for the entire prepaid and postpaid customer base as well as for the interconnection partners. Our comprehensive solutions for promotions, discounts and incentives provide extensive flexibility for tailored offerings and customer satisfaction. Back-end systems enable content aggregation from various content-delivery partners, simultaneously availing sophisticated m-payment, m-charging, messaging and remote configuration methods for the plethora of services.

        T-Mobile Macedonia has also built functionalities to host the third mobile entrant on the local market, while simultaneously enforcing our capabilities for even more business processes automation, as well as data security and availability.

        In addition, T-Mobile Macedonia has developed infrastructure to enable number portability on the local market complying with the local regulation.


ENVIRONMENT PROTECTION

        The management committee of Magyar Telekom adopted the Sustainability Strategy of the Company in January 2005 to strengthen our commitment to sustainable development.

        As a part of our commitment to sustainability, we developed a sustainability section for Magyar Telekom's website (http://www.telekom.hu/society_and_environment/sustainability_reports). This section includes our reports and news relating to sustainability and discusses our philosophy and approach to sustainability.


ITEM 4A—UNRESOLVED STAFF COMMENTS

        Not applicable.


ITEM 5—OPERATING AND FINANCIAL REVIEW AND PROSPECTS

        The following discussion should be read together with the consolidated financial statements, including the accompanying notes, included in this annual report. The consolidated financial statements, the accompanying notes as well as the discussion of results presented below have been prepared in accordance with IFRS. Revenues and operating expenses discussed under "—Results of Operations—By Segment" do not reflect intersegment eliminations.

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        The strategies and expectations referred to in the following discussions are considered forward-looking statements and may be strongly influenced or changed by shifts in market conditions, new initiatives we implement and other factors. We cannot provide assurance that the strategies and expectations referred to in these discussions will come to fruition. Forward-looking statements are based on current plans, estimates and projections, and therefore, you should not place too much reliance on them. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statements in light of new information or future events. Forward-looking statements involve inherent risks and uncertainties, most of which are difficult to predict and are generally beyond our control. We caution you that a number of important factors could cause actual results or outcomes to differ materially from those expressed in, or implied by, the forward-looking statements. Please refer to "Forward-Looking Statements" and "Item 3. Key Information—Risk Factors" for descriptions of some of the factors relevant to these discussions and other forward-looking statements in this Annual Report.


MANAGEMENT OVERVIEW

General

        In 2008, we created a new management structure and, in parallel, redesigned our brands. These were significant steps towards becoming a truly integrated company, with a leaner organization, simplified branding and more powerful and competitive product offerings from T-Home, T-Mobile and T-Systems. The new branding structure enables us to position Magyar Telekom as an integrated 3Play service company and leverage our competitive advantage of having a uniquely broad range of services in Hungary's telecommunications market.

        Magyar Telekom's fixed line and mobile integration process enabled us to set up a new management structure in 2008, supporting an even greater focus on customer needs. As a result, we now have new, leaner and more efficient business units serving our residential and corporate clients. Within these business units we offer our full range of telecommunications services, wireline and wireless voice, data and broadcasting. In addition, leveraging our market leading position and unique competence we offer IT and SI services for corporate customers.

        Building upon the organizational transformation, we decided to rebrand our fixed line services and introduced the T-Home brand, bringing all of our residential fixed line services under one brand name. With the rebranding, we introduced very attractive double and 3Play bundled products to position Magyar Telekom as a real 3Play telecommunications company in Hungary. The introduction of our satellite TV services expanded the geographical availability of our bundled products, making us currently the only telecommunications company in Hungary capable of offering voice, data and TV service throughout the whole country. We believe that all these steps were necessary to offset the erosion of traditional fixed line traffic. In terms of financials, in 2008, T-Home Hungary's revenues decreased by five percent, however EBITDA margin increased to 42 percent showing the results of our efficiency enhancing efforts.

        T-Mobile Hungary again closed a very successful year, preserving its market leading position in 2008. Mobile broadband services were undoubtedly the growth driver of the Hungarian mobile market in 2008. Thanks to our high-quality 3G network, we achieved significant growth in the mobile broadband customer base. As a result, SIM card-based penetration increased further, and reached 122 percent at the end of 2008. The integration of our operations has enabled us to exploit our unique position in the Hungarian market and launch fixed-mobile broadband bundles. We launched the 3G-enabled Apple iPhone with great success in August 2008. T-Mobile Hungary also introduced new mobile broadband packages and special mobile voice tariffs for the members of our iWiW social Internet network. Revenues at T-Mobile Hungary were broadly stable in 2008 compared to 2007 and EBITDA margin exceeded 42 percent.

        In our corporate segment, we reduced the number of subsidiaries at the beginning of 2008 with the aim of increasing the segment's transparency and improving efficiency. The transformation to the new

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company structure has been successful allowing us to benefit from extending unified customer relationship management to small and medium-sized businesses. T-Systems is now Hungary's market leader in SI/IT services in a very fragmented market. Financially the segment closed a strong 2008 year with revenue growth of eight percent. Falling traditional voice revenues were offset by increasing SI/IT revenues and the segment reached a healthy EBITDA margin of 28 percent in 2008. These results justify our strategy to build strong market positions in SI/IT in order to strengthen our up-selling and cross-selling capabilities.

        Besides our extensive marketing efforts in 2008, we did not lose sight of the fact that telecommunication is an innovation and technology-driven industry. Keeping that in mind, we have also set up separate units for new business development (ABCD) and for technology. Regarding our new business developments, we further strengthened our market leading position in the Hungarian online content and advertising market as well as in the server hosting market. We operate iWiW, the largest social Internet network, and [origo], the most-visited web site in Hungary, as well as Dataplex, a large capacity data storage center.

        At our international subsidiaries, 2008 was mainly characterized by increasing market competition. In Macedonia, strict regulatory environment, alternative operators and one of the mobile operators' fixed line offers were the drivers behind increased competition in the fixed line market, while in Montenegro wholesale revenues came under pressure due to the market leading mobile operator rerouting its traffic. These factors were counterbalanced by our successful efficiency-enhancing efforts and strong focus on broadband services. The number of DSL connections more than doubled in both countries, helped also by continuous network upgrades and introduction of favorable new packages. In addition, our IPTV service was also launched in Macedonia, where we introduced the T-Home brand during the first half of 2008.

        International mobile markets showed a further increase in subscriber numbers. In Macedonia, penetration exceeded 110 percent and in Montenegro increased close to 190 percent. In both countries market environment somewhat normalized after the entrance of the third mobile operator which took place in 2007. Although, on a year-on-year comparison margins and revenues came under significant pressure in Montenegro, in Macedonia T-Mobile was able to counterbalance the negative effects of the third entrant and even increased its revenues and reached EBITDA margin well above 50 percent. In Montenegro, T-Mobile launched its 3G service by offering mobile broadband Internet, while in Macedonia our mobile operator won the 3G license at the end of 2008 and will start services before June 2009.

        Looking forward, we will focus on continued successful execution of our strategy, which focuses on operational efficiency, service excellence and regional expansion. We think that the transformation of 2008 strengthened the positions of the new Magyar Telekom in both the Hungarian and international telecommunications markets. Due to the very unfavorable external financial and macroeconomic situation, coupled with intense market competition, we expect a very demanding year for the telecommunications industry.

        On the other hand, the current economic environment also offers us new opportunities. We believe that we may benefit from increasing our role in the SI/IT outsourcing market and leading further consolidation in markets such as cable TV, SI/IT, media and content. The global economic crisis has lowered asset prices considerably in recent quarters opening even better chances for long-term strategic investors like Magyar Telekom. Therefore, we are still committed to executing value-accretive acquisitions both in Hungary and in our region. We think that our company is well positioned to face the challenges ahead and even exploit potential opportunities resulting from the current demanding market environment.

Dividend

        The Board of the Company proposed a HUF 74 per ordinary share dividend distribution which was approved by the Annual General Meeting of the Company on April 2, 2009.

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Organizational Structure and Business Activities

        The headcount reduction is part of our overall aim to simplify the group structure and increase efficiency. The new organizational structure, focusing on customer segments, has been in force since 2008.

Basis of presentation

        The consolidated financial statements of Magyar Telekom have been prepared in accordance with IFRS as issued by IASB.

        The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group's accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4 to the consolidated financial statements.

        Magyar Telekom reports results for its business segments primarily based on products and services that are subject to risks and returns that are different from those of other businesses. The primary reporting segments are based on the business lines of the Group. Before 2007, Magyar Telekom had two business segments, Fixed Line and Mobile. In 2007, Magyar Telekom split up its Fixed Line segment into T-Home, T-Systems and GHS. The Mobile segment remained substantially unchanged. The results for our business segments in 2007 and 2008 are presented on this basis and the segment results for 2006 have been restated for comparative purposes.

        The Group will adopt IFRS 8 in 2009, which will result in a significant restructuring of the Group's segment disclosure. The Group restructured the way chief operating decision makers decide on allocation of resources in 2008, which is different from the reportable segments of the Group as per IAS 14. In the new structure, concluded during 2008, the primary focus is on the customer segmentation (consumer/business) rather than on the technology serving the customers (fixed line/mobile).

        The movement of HUF against the Macedonian Denar ("MKD") and EUR can significantly affect all revenue and expense lines at our Macedonian and Montenegrin subsidiaries.

Critical Accounting Estimates

        The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with IFRS. Reported financial conditions and results of our operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of the financial statements.

        Critical accounting estimates are defined as accounting estimates and assumptions where:

    the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and

    the impact of the estimates and assumptions on financial condition or operating performance is material.

        We base our estimates on historical experience and on various other assumptions, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

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

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        For a list of our critical accounting estimates and judgments, see Note 4 to the consolidated financial statements.

Recent Accounting Pronouncements

        We have reviewed the new standards, amendments and interpretations to existing standards that have been published but which are not yet effective and have not been adopted by the Group prior to their effectiveness. For a list of recent IFRS accounting pronouncements, see Note 2.1.3 to the consolidated financial statements.

Outlook

        The telecommunications industry is undergoing major changes globally. We have observed several long-term trends which are changing the structure of the Hungarian telecommunications market. Key drivers of the long-term trends include changes in technology (i.e., IP-based broadband products and solutions, emerging wireless broadband technologies), customer requirements (i.e., mobility and ease of use, 3Play solutions), competition and regulation (i.e., low barriers to entry, new business models).

        To adapt to these changes in the market, Magyar Telekom introduced a new management and organizational structure in 2008 in order to enhance service quality and improve cost efficiency, as well as exploit new, innovative service and business opportunities. We also integrated our fixed line operation in one brand—T-Home. In 2009, we will continue to exploit integration and group synergies to allow the company to continue to cope successfully with intensifying market competition.

        Magyar Telekom's current plans and outlook are based on our best knowledge and expected circumstances. Nevertheless the behavior of our competitors can hardly be predicted completely. Therefore a stronger than assumed impact of alternative operators, new market entrants and new solutions in any country where Magyar Telekom is present could result in a negative impact on our business performance.

        We should emphasize that each of our business segments is affected by its unique business environment, and we are subject to circumstances and events that are yet unforeseen or beyond our control. The global economic crisis that started from the United States real estate markets, and since then has swept across the world financial system, negatively affecting the Hungarian economy. The financing of the Hungarian budget deficit has been in jeopardy because loan resources are dried up. The government successfully applied for emergency help to international financial institutions, International Monetary Fund ("IMF") and European Central Bank ("ECB"). With the possible infusion of USD 25 billion by these institutions, the Hungarian economy could avoid short-term liquidity crisis in case of market-based deficit financing is not available. The government already started discussions about the prolongation of loans expiring in March 2010 because recovery is not expected in 2010.

        The government has implemented several measures and plans some to fight against the crises and secure the balance of the budget. The 5 percentage point increase of VAT, effective from July 2009 means an immediate price increase on the already pressured residential market, which could lead to a further decrease in demand. The business market has also hit by heavy spending cuts in every government sector.

        Despite the restrictive government measures and negative business environment, we expect that our core business units, with undertaking additional measures, will be able to continue to generate strong cash flows and can keep up the dividend policy.

        We have identified several risk factors which may affect our business in the future including changes in the regulatory environment, in competition, and in foreign exchange rates. See the detailed description of these and other risk factors in "Item 3—Risk Factors".

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Revenues

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

        In fixed line operations, we expect continued decline in fixed line voice revenues due to continued line reduction and fixed line unit price erosion driven by mobile substitution and the increased competition in the fixed line market, including competition from VoIP or VoCATV providers. The weakening demand as a result of restrictive government measures (especially the VAT increase) is expected to increase churn, because more customers currently holding both fixed and mobile subscriptions tend to give up fixed line. As indicated in our strategy, to mitigate the decrease in fixed line voice revenues we are now moving from the traditional traffic-based revenue structure to an access-based revenue structure, which will allow us to substitute declining traffic revenues with content, entertainment and bundled access revenues. Fixed line interconnection tariffs are expected to be reduced gradually further in 2009 and in the years after, having additional negative impact on our fixed line revenue streams.

        As the leading broadband provider in Hungary, we are committed to accelerating growth in country-wide broadband penetration by applying a multi-access cost-efficient approach.

        We aim to move towards content and media businesses to support traditional access services, build new revenue streams and exploit new revenue sources. We are combining our product portfolio in order to provide all services for every customer demand on every platform (three-screen approach), where all customer screens (computer, mobile, TV) are provided by Magyar Telekom.

        In Macedonia, competition has been increasing and reinforcing in the fixed line segment, especially with the entrance of Cosmofon in the Macedonian fixed line market in June 2008. Revenues will also be negatively affected by the regulation and liberalization of all telecommunications market segments. Broadband and IPTV growth can only slow the decline down.

        Crnogorski Telekom's wholesale business suffers and faces difficulties in the near future. As a consequence of the future introduction of cost-based pricing by the Montenegrin Telecommunications Agency, national fixed termination rates and international fixed and mobile termination rates are expected to be decreased.

        To maintain sustainable competitiveness in the corporate sector, we have committed to further developing our IT competencies by focusing on complex service offerings through managed services, system integration and outsourcing through consultant services to corporate customers. Expanding our business operation to these new areas with lower profitability results in a dilutive effect on the profitability both on fixed line segment and Magyar Telekom Group level.

        In the mobile operations, market penetration in Hungary is now saturated, and we expect lower growth rates due to a smaller number of potential new subscribers. This trend is partly offset by the migration of prepaid customers to postpaid packages and the future growth potential of value-added and data services, which is supported by the continuing roll-out of UMTS and HSDPA services.

        On October 22, 2008, the NCA published comparative biddings for the spectrum usage rights of 450 MHz/GSM/UMTS/26 GHz spectrum blocks. Magyar Telekom and the two other mobile incumbents were excluded from the auctions for the 450 MHz and the 4th GSM/UMTS spectrum blocks. Winners of the auctions were expected to be announced at the latest by end of January 2009, however the NCA postponed the decisions on the results of the bids. On March 16, 2009, the NCA cancelled the auction for the 4th GSM/UMTS spectrum package referring to the economic recession, which made the bids questionable from a financing and profitability point of view. On April 24, 2009, the Council of the NCA dismissed the appeals of three bidders, who may go to the Municipal Court asking for the review of the decision of second instance. On April 30, 2009, the NCA declared the auction for the 450 MHz spectrum block unsuccessful in a decision of first instance, while the auctions for the two 26 GHz spectrum blocks successful. Magyar Telekom won the 26 GHz spectrum block it had bid for, while the other block was won

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by Antenna Hungária Zrt. GTS Datanet, the unsuccessful bidder of the 26 GHz band "E" block—won by Antenna Hungária Zrt—appealed against the decision of the NCA on the basis of alleged procedural mistakes. The appeal does not have any effect on Magyar Telekom's successful bid for the 26 GHz band "D" block. Unsatisfied bidders for the 450 MHz spectrum block may also appeal against the decision of the NCA.

        In December 2008, the NCA enforced the regulation for mobile termination fee decrease within the networks of all three Hungarian mobile operators in three steps, starting from January 2009 until December 2010, by approximately 40 percent compared to current rates.

        The government of Macedonia approved Austrian Mobilkom's bid to become the country's third mobile operator at the beginning of 2007. In line with the license rules, the new operator "VIP" launched services in September 2007. The entry of VIP into the market resulted in increased competition on the Macedonian mobile market. As a result of intensified competition, we do not expect growth in mobile revenues in Macedonia.

        As the winner of the first 3G public tender published in November 2007, Cosmofon started offering mobile services supported by 3G technology in August 2008. In December 2008, T-Mobile Macedonia also was granted the right to use UMTS frequency blocks for 10 years. The license fee amounted to EUR 10 million and was paid in December 2008.

        In the Montenegrin market, the new entrant—Telekom Serbia ("MTS")—started a rush expansion and has already grabbed more than 25 percent market share. We expect the very sharp competition to continue in 2009. The market is saturated and the penetration increased close to 190 percent fuelled by dual usage and data cards.

Expenses

        In line with our strategy, we plan to improve our internal operational efficiency in all business segments. The new agreement with the Trade Unions permits a further headcount reduction of approximately 300 employees at Magyar Telekom Plc. by the end of 2009. In order to focus more on the total labor cost and not solely on headcount number and employee-related expenses, we introduced a Total Workforce Management system from the beginning of 2009. The system enables us to increase the flexibility and efficiency with which all human resource-related expenses are managed, including contracted or rented employees as well as outsourcing and entrepreneurial contracts.

        The permanent weakness of the Hungarian currency has a negative impact on our costs especially in cost categories where the prices are in EUR or indexed to EUR.

        Though decreasing termination fees result in lower interconnection revenues, this effect is partially offset by decreasing outpayment costs.

        In line with world market developments and the liberalization of the Hungarian energy market, we have experienced rapid growth in energy prices, high above the inflation level. We expect energy prices will remain high in 2009, impacting us negatively.

Total investments in tangible and intangible assets

        The Company renewed its mobile concession contract for use of the 900 MHz frequency band that had expired on November 4, 2008 for an additional term of seven and a half years, as agreed with the Hungarian Government. At the same time, the Company agreed to carry out large-scale investment projects to further increase mobile broadband coverage. In addition to the payment of the HUF 10 billion concession fee in 2007, Magyar Telekom agreed with the Government to spend at least HUF 20 billion in 2008 and 2009 on further increasing mobile broadband coverage in Hungary.

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        We aimed at and succeeded in achieving the total investments in tangible and intangible assets to sales ratio to around 15 percent in 2008 without non-cash items and the fees paid for the 3G license in Macedonia. We aim to maintain the absolute 2008 level in 2009, despite the weakening Hungarian currency. This flat level also includes the investments in the fibre roll-out program announced earlier.

        We expect an increasing proportion of total additions will relate to the fiber network project and other high-growth areas in the fixed line segment, such as Internet, broadband and data transmissions, while our mobile segment will continue the roll-out of the UMTS and HSDPA infrastructure.

        According to our strategic directions we are committed to further strengthening and leveraging our presence in the South-East European region. Therefore, we are continuously seeking for further value-creating acquisition and investment targets with even larger scale.

Revenue and EBITDA targets

        In view of the very challenging environment that we face, not just in Hungary but in our international markets as well, and based on our current economic outlook, for 2009, with undertaking some additional measures and without considering the strong risk in volatility of local currencies and recession related country risk of operations of Magyar Telekom, we are targeting revenues to decline by one percent and EBITDA to decline by one to two percent compared to the 2008 results (excluding both special influences and the one-off item related to the fixed-to-mobile provision reversal). We are continuously monitoring the economic environment and its impact on our business and will communicate if and when our assessment of our outlook changes.


OPERATIONS REVIEW—GROUP

Revenues

        The following table sets forth information regarding our revenues:

 
  Year ended December 31,   Year ended
December 31,
 
 
  2006   2007   2008   2007/2006   2008/2007  
 
  (in HUF millions)
  (% change)
 
 

Fixed line revenues

    319,187     309,333     299,895     (3.1 )   (3.1 )
 

Mobile revenues

    327,330     325,767     331,765     (0.5 )   1.8  
 

SI/IT revenues

    24,679     41,561     41,396     68.4     (0.4 )
                           

Total revenues

    671,196     676,661     673,056     0.8     (0.5 )
                           

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Fixed Line Revenues

        The following table sets forth information regarding our fixed line revenues:

 
  Year ended December 31,   Year ended
December 31,
 
 
  2006   2007   2008   2007/2006   2008/2007  
 
  (in HUF millions)
  (% change)
 
 

Subscriptions

    93,387     90,789     85,440     (2.8 )   (5.9 )
 

Domestic outgoing traffic

    69,724     51,423     51,498     (26.2 )   0.1  
 

International outgoing traffic

    10,267     10,107     7,926     (1.6 )   (21.6 )
 

Value-added and other services

    8,902     7,453     6,169     (16.3 )   (17.2 )
                           

Voice-retail revenues

    182,280     159,772     151,033     (12.3 )   (5.5 )
 

Domestic incoming traffic

   
9,125
   
10,459
   
6,689
   
14.6
   
(36.0

)
 

International incoming traffic

    19,566     19,860     14,805     1.5     (25.5 )
                           

Voice-wholesale revenues

    28,691     30,319     21,494     5.7     (29.1 )

Internet

   
49,733
   
57,796
   
59,823
   
16.2
   
3.5
 

Data

    27,121     27,440     28,839     1.2     5.1  

Multimedia

    17,506     18,102     18,830     3.4     4.0  

Equipment

    4,249     5,395     7,058     27.0     30.8  

Other fixed line revenues

    9,607     10,509     12,818     9.4     22.0  
                           

Total fixed line revenues

    319,187     309,333     299,895     (3.1 )   (3.1 )
                           

        The table below sets forth information regarding total fixed access lines in Hungary, Macedonia and Montenegro:

 
  Year ended December 31,   Year ended
December 31,
 
 
  2006   2007   2008   2007/2006   2008/2007  
 
   
   
   
  (% change)
 

Number of fixed lines at Magyar Telekom Plc. (including Emitel)

                               
 

Residential

    1,901,398     1,778,444     1,594,974     (6.5 )   (10.3 )
 

Business

    236,634     223,054     210,556     (5.7 )   (5.6 )
 

Public payphones

    20,515     19,458     16,279     (5.2 )   (16.3 )
                           
   

Total

    2,158,547     2,020,956     1,821,809     (6.4 )   (9.9 )
 

ISDN channels

    485,290     470,746     454,218     (3.0 )   (3.5 )
                           
   

Total

    2,643,837     2,491,702     2,276,027     (5.8 )   (8.7 )
                           

Number of fixed lines at Makedonski Telekom

                               
 

Residential

    430,082     404,925     371,285     (5.8 )   (8.3 )
 

Business

    42,780     40,954     40,344     (4.3 )   (1.5 )
 

Public payphones

    2,087     2,015     1,692     (3.4 )   (16.0 )
                           
   

Total

    474,949     447,894     413,321     (5.7 )   (7.7 )
 

ISDN channels

    42,200     44,482     44,694     5.4     0.5  
                           
   

Total

    517,149     492,376     458,015     (4.8 )   (7.0 )
                           

Number of fixed lines at T-Com Crna Gora

                               
 

PSTN lines

    173,248     168,062     164,394     (3.0 )   (2.2 )
 

ISDN channels

    21,288     21,906     22,416     2.9     2.3  
                           
   

Total

    194,536     189,968     186,810     (2.3 )   (1.7 )
                           

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        Voice-retail revenues.    Voice-retail revenues consist of revenues from subscriptions, domestic and international traffic revenues as well as value-added and other services revenues.

        Fixed line voice-retail revenues decreased both in 2007 and 2008, mainly driven by lower outgoing traffic revenues at Magyar Telekom Plc. due to wider use of flat-rate price plans, lower usage and decreased customer base resulting mainly from competition and mobile substitution.

        Subscriptions.    Revenues from subscriptions consist of revenues from monthly subscription fees for price plans. Revenues from subscriptions are principally a function of the number and mix of residential, business and ISDN access lines and corresponding charges.

        The decrease in subscription revenues in 2007 and in 2008 was due to lower revenues in the Hungarian fixed line operations driven by lower average number of both PSTN and ISDN subscribers. Lower subscription revenues at Makedonski Telekom were mainly driven by declining average PSTN customer base. These decreases were somewhat offset by higher subscription revenues at T-Com Crna Gora resulting from tariff rebalancing in September 2007 when subscription fees for residential customers doubled.

        Domestic outgoing traffic revenues.    Domestic outgoing traffic revenues consist of traffic charges for local, domestic long distance and fixed line to mobile calls placed by our subscribers. Domestic outgoing traffic revenues are a function of rates, the total number of telephone calls, the distribution of call duration, the time of day and the mix between more costly domestic long distance or fixed line to mobile calls and less expensive local calls.

        The following table sets forth the total minutes of domestic telephone traffic that our fixed line subscribers generated, including calls from the fixed line network to mobile subscribers:

 
  Year ended December 31,   December 31,  
 
  2006   2007   2008   2007/2006   2008/2007  
 
  (in thousands of minutes)
  (% change)
 

Magyar Telekom Plc. (including Emitel)

    5,037,235     4,518,428     4,020,941     (10.3 )   (11.0 )

Makedonski Telekom

    1,496,758     1,377,659     1,194,717     (8.0 )   (13.3 )

T-Com Crna Gora

    479,620     379,341     324,603     (20.9 )   (14.4 )

        Domestic outgoing fixed line traffic revenues in 2008 amounted to HUF 51,498 million compared to HUF 69,724 million in 2006. Domestic outgoing traffic revenues decreased over the period due to lower average per minute fees, lower usage and loss of fixed line customers mainly due to increasing competition from cable and other fixed line service providers and mobile substitution. We offered several price discounts to customers choosing different price plans. The proportion of flat-rate price plans was 30.0 percent within the total customer base of Magyar Telekom Plc. at December 31, 2008. The most popular of these plans are the Felezö (Halving) and the Favorit plans. Domestic outgoing traffic revenues decreased also at Makedonski Telekom primarily due to lower usage and price discounts as a consequence of increasing mobile substitution. In 2007, lower domestic outgoing traffic revenues at T-Com Crna Gora reflected mainly the reclassification of calls to Serbia to international traffic from the beginning of 2007, while in 2008, the decrease was primarily due to lower traffic volume affected by mobile substitution. In 2008, the decrease in domestic outgoing fixed line traffic revenues was offset by the release of the provision related to fixed to mobile ("F2M") tariffs.

        Pursuant to a decree, we had the obligation to decrease the F2M tariffs of the universal services subscribers by the amount of the decrease in the F2M termination rates. We did not fulfill this obligation because the mobile operators—referring to their lawsuits against the NCA resolutions—did not, from a legal point of view, decrease the F2M termination rates, in their interconnection agreements with us.

        The NCA called upon us to repay the difference to our universal customers regardless of the status of the above legal cases. In August 2008, the negotiations with NCA resulted in a positive conclusion,

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whereby the NCA accepted our arguments that albeit in other forms of compensation, we had already passed on the required discounts to the customers. Even though the NCA conclusion was limited to the year 2005, based on the NCA's reasoning for the relief, we believe that we passed on the required discounts to our customers in the subsequent years of 2006-2008 as well. As a result of the above, we believed that the recognition of the provision was no longer necessary, and released to revenues the total amount of the HUF 8.5 billion provision recorded in prior years.

        International outgoing traffic revenues.    International outgoing traffic revenues are a function of rates and the number, duration and mix of calls to destinations outside Hungary in case of Magyar Telekom Plc., outside Macedonia in case of Makedonski Telekom and outside Montenegro in case of T-Com Crna Gora, placed by our fixed line subscribers.

        The following table sets forth information concerning outgoing international traffic(1):

 
  Year ended December 31,   Year ended
December 31,
 
 
  2006   2007   2008   2007/2006   2008/2007  
 
  (in thousands of minutes)
  (% change)
 

Magyar Telekom Plc. (including Emitel)

    98,723     85,270     73,746     (13.6 )   (13.5 )

Makedonski Telekom

    27,455     24,726     22,481     (9.9 )   (9.1 )

T-Com Crna Gora

    13,138     66,759     53,202     408.1     (20.3 )

(1)
Excludes minutes from calls placed by subscribers of other local telephone operators and mobile service providers. Our revenues relating to these calls are included in revenues from domestic incoming traffic.

        International outgoing fixed line traffic revenues decreased both in 2007 and 2008. The decrease was mainly due to lower outgoing international traffic revenues at both Magyar Telekom Plc. and Makedonski Telekom resulting from lower volume of minutes and decreased prices. In 2007, the decrease was mitigated by a higher amount of outgoing international minutes at T-Com Crna Gora, as after the referendum on independence in May 2006 in Montenegro, calls to Serbia were classified as international traffic. In 2008, the decrease was attributable also to lower outgoing international traffic revenues at T-Com Crna Gora driven by significant drop in outgoing minutes to Serbia and lower prices for international calls after rebalancing in September 2007.

        Value-added and other services.    Revenues from value-added and other services consist of revenues from connection fees, fees for digifon services and directory assistance as well as cable TV voice subscription fees.

        Value-added and other services revenues declined by 16.3 percent in 2007 as compared to 2006 primarily driven by lower amortization of deferred connection fee revenues. Lower other services revenues at Magyar Telekom Plc. T-Systems, Magyar Telekom Plc. T-Home, Makedonski Telekom and T-Com Crna Gora also contributed to the decrease. In 2008, the 17.2 percent decline was mainly due to lower usage of value-added services (e.g., directory assistance, premium rate numbers) and also due to further decrease in deferred connection fee revenues at Magyar Telekom Plc. T-Home. These decreases were partly offset by higher cable voice subscription fee revenues resulting from higher customer number at T-Kábel Hungary both in 2007 and 2008.

        Voice-wholesale revenues.    Voice-wholesale revenues consist of domestic and international incoming traffic revenues.

        Fixed line voice-wholesale revenues increased by 5.7 percent in 2007 compared to 2006 due to higher domestic and international incoming traffic revenues and decreased by 29.1 percent in 2008 compared to 2007 driven by significant decreases both in domestic and international incoming traffic revenues.

        Domestic incoming traffic revenues.    Domestic incoming traffic revenues include amounts related to domestic and international long distance services that we provide to other LTO or mobile customers.

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        Domestic incoming fixed line traffic revenues increased by 14.6 percent in 2007 compared to 2006. The growth in this revenue mainly resulted from higher revenues from LTOs at Magyar Telekom Plc. following the application of the new RIO prices based on NCA's decision from June 2006 and applied retrospectively for the period September 2005-June 2006. Higher revenues from local loop unbundling also contributed to the increase at Magyar Telekom Plc. At Makedonski Telekom, the increase in incoming domestic traffic revenue was driven by new network access contracts with other operators. The increase in T-Com Crna Gora's incoming revenues from mobile operators resulted from higher traffic and higher prices effective from May 2007. These increases were somewhat offset by lower incoming revenues from other fixed line operators at T-Com Crna Gora reflecting the effect of the referendum on independence from Serbia in May 2006.

        Domestic incoming fixed line traffic revenues dropped by 36.0 percent in 2008 compared to 2007. Lower incoming revenues from mobile operators at T-Com Crna Gora resulted from lower revenues from Promonte (the largest mobile service provider in the Montenegrin mobile market) in line with decreased traffic as from the end of January 2008 Promonte has its own direct network connected to Telekom Serbia. In addition, in March 2008 Promonte rerouted its outgoing international traffic over Serbia. Traffic revenues from mobile operators decreased also at Magyar Telekom Plc. mainly due to lower mobile-to-international traffic and lower termination rates. The decrease in incoming traffic revenues from other fixed line operators at Magyar Telekom Plc. resulted mainly from lower interconnection traffic revenues driven by lower average fees. Lower incoming domestic traffic revenues at Makedonski Telekom relate to cancelled network access contracts for the transit of international traffic with mobile operators.

        International incoming traffic revenues.    International incoming traffic revenues consist of amounts paid by foreign carriers for the use of our network to carry calls placed by their customers.

        The following table sets forth information concerning international incoming traffic of Magyar Telekom Plc.:

 
  Year ended December 31,   Year ended
December 31,
 
 
  2006   2007   2008   2007/2006   2008/2007  
 
  (in thousands of minutes)
  (% change)
 

International incoming traffic(1)

    316,183     380,006     455,197     20.2     19.8  

(1)
Includes minutes from calls transited by Magyar Telekom Plc. and terminating with subscribers of Magyar Telekom Plc, other local telephone operators and mobile service providers. Does not include transit traffic and other international services via Hungary.

        International incoming fixed line traffic revenues increased slightly by 1.5 percent to HUF 19,860 million in 2007 as compared to 2006. International incoming traffic revenues increased mainly at T-Com Crna Gora as interconnection with Telekom Serbia is included in international in 2007. The higher amount of fixed and mobile incoming traffic and higher interconnection fees with Telekom Serbia also contributed to the increase in T-Com Crna Gora's revenues. This increase was partly offset by lower international incoming revenues at Makedonski Telekom resulting from decrease in traffic, lower MKD/SDR exchange rate and lower average settlement rates. At Magyar Telekom Plc., lower international incoming revenues were primarily attributable to decreased circuit lease fees and less circuit lease contracts as international telecommunications operators have been establishing their own points of presence.

        International incoming fixed line traffic revenues decreased to HUF 14,805 million in 2008 compared to HUF 19,860 million in 2007. International incoming revenues decreased primarily at Magyar Telekom Plc. driven by the change in how wholesale transit traffic is settled. From January 1, 2008 Deutsche Telekom became the sole international voice partner of Magyar Telekom and consequently, Magyar Telekom does not have international wholesale transit revenues from other foreign carriers any more. This decrease was partly offset by higher incoming international minutes. Lower international

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incoming traffic revenues at Makedonski Telekom resulted mainly from decreased incoming international traffic. The decrease in international incoming traffic revenues at T-Com Crna Gora was driven by the ceasing of transit traffic from Serbia as from the end of January 2008 Promonte has direct link with Telekom Serbia.

        Internet revenues of the fixed line operations grew both in 2007 and 2008. In 2007, the growth was mainly due to the strong increase in the number of ADSL and Cablenet subscribers in the Hungarian fixed line operations, while in 2008 it was driven by significantly higher broadband customers at our Macedonian and Montenegrin subsidiaries. In Hungary, the increase in ADSL connections has been slowing down, while Cablenet customer base has been increasing continuously in a market environment characterized by strong competition. The number of ADSL connections grew to 633,459 by December 31, 2008 in Hungary and the number of retail Internet subscribers increased to 548,738. Within this, the proportion of higher revenue generating broadband Internet customers reached 98.2 percent on December 31, 2008. By the end of December 2008, the total number of broadband connections was almost 762,000 in our Hungarian fixed line operations. Higher IPTV customer base in Hungary and in Montenegro also positively affected Internet revenues in 2008. These increases were offset in part by lower narrowband Internet revenues driven by decreased narrowband subscriber base and the drop in traffic affected by migration from narrowband to broadband services.

 
  Year ended December 31,   Year ended
December 31,
 
 
  2006   2007   2008   2007/2006   2008/2007  
 
   
   
   
  (% change)
 

ADSL connections in Hungary

    512,810     613,051     633,459     19.5     3.3  

Number of retail Internet subscribers in Hungary

                               
 

Dial-up

    31,401     16,357     9,711     (47.9 )   (40.6 )
 

Leased line

    656     652     617     (0.6 )   (5.4 )
 

DSL

    336,181     398,265     430,433     18.5     8.1  
 

W-LAN

    1,175     598     208     (49.1 )   (65.2 )
 

Cable broadband

    57,587     89,853     107,769     56.0     19.9  
                           

Total

    427,000     505,725     548,738     18.4     8.5  
                           

IPTV customers in Hungary

   
n.a.
   
9,225
   
28,496
   
n.a.
   
208.9
 

ADSL connections

                               
 

Makedonski Telekom

    16,462     48,214     98,866     192.9     105.1  

T-Com Crna Gora

    6,639     16,106     38,956     142.6     141.9  

Number of Internet subscribers

                               
 

Makedonski Telekom

    47,669     66,822     104,905     40.2     57.0  
 

T-Com Crna Gora

    32,429     44,653     56,599     37.7     26.8  

Number of IPTV customers

                               
 

Makedonski Telekom

    n.a.     n.a.     1,952     n.a.     n.a.  
 

T-Com Crna Gora

    n.a.     2,397     17,531     n.a.     631.4  

        Data revenues increased by 1.2 percent in 2007 and by 5.1 percent in 2008. The continuous migration of narrowband to broadband data products resulted in lower narrowband revenues and higher broadband retail revenues mainly at Magyar Telekom Plc. T-Systems. The increase in 2008 at Magyar Telekom Plc. T-Systems was due to new IP-VPN contracts. The increase in Makedonski Telekom's broadband data revenues was attributable to the increased number of IP subscribers and new contracts for leased lines. Higher revenues at Combridge (Romania) also positively affected broadband data revenues in 2008.

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        Multimedia revenues showed an increase both in 2007 and 2008 mainly due to the growth in cable TV revenues resulting from price increases and the increase in average number of our cable TV subscribers in Hungary.

 
  Year ended December 31,   Year ended
December 31,
 
 
  2006   2007   2008   2007/2006   2008/2007  
 
   
   
   
  (% change)
 

Cable television customers in Hungary

    414,286     418,517     422,936     1.0     1.1  

        Revenues from fixed line equipment increased by 27.0 percent to HUF 5,395 million in 2007 as compared to 2006 and by 30.8 percent to HUF 7,058 million in 2008 as compared to 2007. The increase was mainly driven by higher revenues at Makedonski Telekom due to more phones, ADSL modems, personal computers and TV sets sold. In 2007, higher EKG-related rental revenues and higher rental revenues at Magyar Telekom Plc. as well as sale of network in the second half of 2007 at Combridge also increased equipment revenues. These increases were somewhat offset by the decrease at Magyar Telekom Plc. in line with less phones and ADSL modems sold.

        Other fixed line revenues.    Other fixed line revenues include construction, maintenance, rental, wholesale infrastructure service and miscellaneous revenues.

        Other fixed line revenues increased by 9.4 percent to HUF 10,509 million in 2007 as compared to 2006 and increased by 22.0 percent and amounted to HUF 12,818 million in 2008 as compared to 2007. In 2007, the increase in this revenue line was the result of higher revenues from services provided by the Real Estate Management area for Magyar Posta and other companies and higher human resources revenues from educational and holiday services at Magyar Telekom Plc. HQ. In 2008, higher other fixed line revenues mainly resulted from increased revenues related to customer care service at Magyar Telekom Plc. T-Home and higher revenues at Combridge.

Mobile Revenues

        The following table sets forth information regarding our mobile revenues:

 
  Year ended December 31,   Year ended
December 31,
 
 
  2006   2007   2008   2007/2006   2008/2007  
 
  (in HUF millions)
  (% change)
 
   

Voice-retail

    189,418     195,718     196,983     3.3     0.6  
   

Voice-wholesale

    45,859     46,244     46,241     0.8     0.0  
   

Visitor

    5,008     6,632     5,995     32.4     (9.6 )
                           
 

Voice

    240,285     248,594     249,219     3.5     0.3  
 

Non-voice

    40,258     45,068     50,936     11.9     13.0  
 

Equipment and activation

    25,280     23,121     21,169     (8.5 )   (8.4 )
 

Other mobile revenues

    21,507     8,984     10,441     (58.2 )   16.2  
                           

Total mobile revenues

    327,330     325,767     331,765     (0.5 )   1.8  
                           

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        The following table provides information concerning TMH, T-Mobile Macedonia and T-Mobile Crna Gora:

 
  Year ended December 31,   Year ended
December 31,
 
 
  2006   2007   2008   2007/2006   2008/2007  
 
   
   
   
  (% change)
 

TMH

                               

Total number of subscribers

    4,431,136     4,853,492     5,361,792     9.5     10.5  

Average monthly usage per subscriber (minutes)

    142     149     152     4.9     2.0  

ARPU in HUF

                               
 

Total subscriber

    4,800     4,542     4,087     (5.4 )   (10.0 )
 

Postpaid subscriber

    9,849     8,635     7,720     (12.3 )   (10.6 )
 

Prepaid subscriber

    2,300     2,205     1,890     (4.1 )   (14.3 )

Enhanced services within ARPU in HUF

    667     679     702     1.8     3.4  

Average subscriber acquisition cost ("SAC") per customer in HUF

    6,234     6,554     7,376     5.1     12.5  

T-Mobile Macedonia

                               

Total number of subscribers

    944,530     1,212,539     1,379,191     28.4     13.7  

Average monthly usage per subscriber (minutes)

    72     90     96     25.0     6.7  

ARPU in HUF

    3,206     3,054     2,586     (4.7 )   (15.3 )

T-Mobile Crna Gora

                               

Total number of subscribers

    331,616     408,941     506,519     23.3     23.9  

Average monthly usage per subscriber (minutes)

    127     120     105     (5.5 )   (12.5 )

ARPU in HUF

    3,858     3,252     2,886     (15.7 )   (11.3 )

        Revenues from mobile telecommunications services slightly decreased compared to 2006 and amounted to HUF 325,767 million in 2007. The decrease in mobile revenues resulted from the significant decline in other revenues primarily due to Pro-M's lower TETRA-related revenue in 2007, which was almost offset by higher voice revenue primarily at our foreign mobile operators and higher non-voice revenues at each mobile operator.

        Revenues from mobile telecommunications services amounted to HUF 331,765 million for the year ended December 31, 2008 compared to HUF 325,767 million in 2007. The small increase in mobile revenues resulted from higher non-voice revenues mainly at TMH, higher voice revenues at our foreign mobile subsidiaries and higher TETRA-related revenues at Pro-M, largely offset by decreased voice revenues and lower equipment revenues at TMH.

        Voice-retail revenues.    Voice-retail revenues consist of revenues from subscriptions and voice-retail traffic revenues.

        Within mobile telecommunications services, voice traffic revenues represent the largest portion of revenues. In 2007, the increase in voice-retail revenues for T-Mobile Macedonia was due to higher MOU and higher average customer base, while revenues of T-Mobile Crna Gora resulted from increased customer base, partly offset by lower MOU and lower per minute rates. Higher voice-retail revenues in 2007 at TMH resulted from increased average customer base and higher MOU, partly offset by lower ARPU driven by lower average per minute fees and termination rates.

        In 2008, higher voice-retail revenues at T-Mobile Macedonia were mainly driven by the strong increase in subscription fee revenues reflecting the significant increase in the postpaid customer base,

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partly offset by lower subscription fees. The positive effect of higher average number of mobile customers and higher MOU was partly offset by lower per minute rates. The small increase in voice-retail revenues at T-Mobile Crna Gora was due to the higher customer base, somewhat compensated by lower MOU and lower per minute fees. At TMH, the continuously growing customer base and higher MOU could not fully compensate the decline in revenues resulting from lower per minute fees forced by strong competition.

        Mobile penetration at December 31, 2008 reached 121.8 percent in Hungary and TMH accounted for 43.9 percent market share on the basis of total subscribers. TMH's customer base increased by 21.0 percent from 4,431,136 at December 31, 2006 to 5,361,792 at December 31, 2008. The proportion of postpaid customers increased to 38.5 percent at December 31, 2008 from 34.9 percent at the end of 2006. TMH's average usage per customer per month measured in MOU increased by 7.0 percent from 142 minutes in 2006 to 152 minutes in 2008. TMH's monthly average revenue per user expressed in ARPU decreased by 14.9 percent from HUF 4,800 in 2006 to HUF 4,087 in 2008.

        Higher voice revenues for T-Mobile Macedonia were driven by higher MOU and higher average number of mobile customers, partly offset by lower per minute rates both in 2007 and 2008. The number of T-Mobile Macedonia customers increased by 46.0 percent from 944,530 at December 31, 2006 to 1,379,191 at December 31, 2008. T-Mobile Macedonia's average usage per customer per month measured in MOU increased by 33.3 percent from 72 minutes in 2006 to 96 minutes in 2008. ARPU decreased from HUF 3,206 in 2006 to HUF 2,586 in 2008.

        As of December 31, 2008, T-Mobile Crna Gora had 506,519 customers compared to 331,616 at the end of 2006. The strong increase in the customer base in 2007 compared to 2006 was mainly influenced by the extended repaid voucher lifecycle from three to 11 months effective from October 2006. Both in 2007 and 2008, the increase in the customer base was partly offset by lower MOU and lower per minute fees.

        Voice-wholesale revenues.    Voice-wholesale revenues consist of domestic and international incoming traffic revenues.

        Voice-wholesale traffic revenues slightly increased in 2007 as compared to 2006 partly due to increased incoming international traffic and higher interconnection prices at T-Mobile Macedonia as well as higher interconnection traffic with Cosmofon and VIP. At T-Mobile Crna Gora, the growth resulted from increased interconnection fees with Promonte from May 2007. These increases were almost offset by lower interconnection revenues at TMH in line with decrease in termination rates effective from February 2007.

        Voice-wholesale traffic revenues reached the same level both in 2007 and 2008. Higher interconnection revenues at T-Mobile Macedonia derived from increased incoming international traffic as well as higher interconnection traffic with Cosmofon and VIP. In addition, higher MVNO wholesale revenues from national roaming based on the agreement with VIP also contributed to the increase. These increases were partially offset by decreased interconnection prices applied from August 2008. At T-Mobile Crna Gora, the growth resulted mainly from the increased interconnection fees with Promonte. These increases were offset by lower interconnection revenues at TMH due to lower termination rates from January 2008.

        Visitor revenues.    Visitor revenues increased in 2007 as compared to 2006 driven a strong increase at T-Mobile Crna Gora in line with higher volume of visitor minutes due to more intense tourism in Montenegro. The 9.6 percent decline in visitor revenues in 2008 over 2007 resulted mainly from decreased traffic at T-Mobile Crna Gora.

        Non-voice revenues.    Within the mobile telecommunications services, non-voice revenues grew by 11.9 percent in 2007 and by 13.0 percent in 2008. Non-voice revenues consist of Internet, content and data revenues and represented 15.4 percent of our mobile revenues in 2008. Higher non-voice revenues both in 2007 and 2008 reflect the increase primarily at TMH due to higher access revenues boosted by the

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expansion of mobile Internet usage. The increase at T-Mobile Macedonia resulted also from larger customer base and higher number of SMSs.

        Equipment and activation.    Mobile equipment revenues declined in 2007 compared to 2006 because of the decrease in TMH's revenues as a result of lower average handset prices and lower equipment sales ratio, partially offset by more gross additions to customers. This decrease was somewhat offset by higher equipment revenues at T-Mobile Macedonia and at T-Mobile Crna Gora mainly as a result of higher number of gross additions.

        Mobile equipment and activation revenues decreased in 2008 compared to 2007 due to lower revenue from handset upgrades and also because the higher number of gross additions to customers could not fully offset the decrease in average handset prices at TMH. Mobile equipment revenues also declined at our foreign mobile operators.

        Average acquisition cost per customer grew by 18.3 percent to HUF 7,376 in 2008 from HUF 6,234 in 2006 at TMH primarily as a result of higher subsidies. When calculating subscriber acquisition cost, TMH includes the connection margin (activation fee less the SIM card cost), the sales related equipment subsidy and agent fee.

        Other mobile revenues.    The decrease in other mobile revenues reflected Pro-M's lower revenues in 2007 compared to 2006 as the main part of EDR network was completed in 2006. In 2008, increasing other mobile revenues was in line with higher TETRA-related revenues at Pro-M.

SI/IT Revenues

 
  Year ended December 31,   Year ended
December 31,
 
 
  2006   2007   2008   2007/2006   2008/2007  
 
  (in HUF millions)
  (% change)
 

SI and IT revenues

    24,679     41,561     41,396     68.4     (0.4 )

        SI and IT revenues reached HUF 41,561 million in 2007 compared to HUF 24,679 million in 2006 mainly due to the consolidation of Dataplex and KFKI revenues after their acquisition (in the second and the third quarter of 2006, respectively), and the consolidation of T-Systems Hungary from January 2007. The increased number of SI/IT service projects at Magyar Telekom Plc. and BCN also had positive effects on revenues. The most significant projects were the outsourcing services provided to E.ON, Budapest Bank and Erste Bank and the set-up of low current systems as well as SI and IT solutions provided to the Hungarian government (E-Közmü).

        SI and IT revenues remained stable and amounted to HUF 41,396 million in 2008 as lower performance of IQSYS was offset by the increase at Magyar Telekom Plc. T-Systems. The increase at Magyar Telekom Plc. T-Systems resulted from more projects realized compared to 2007 including also new managed service and operating projects.

Operating Expenses

        Our total operating expenses increased by 2.6 percent in 2007 and decreased by 6.8 percent in 2008. Operating expenses amounted to HUF 538,380 million in 2006, HUF 552,350 million in 2007 and HUF 515,047 million in 2008. Our total operating expenses as a percentage of total revenues decreased from 80.2 percent in 2006 to 76.5 percent in 2008.

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        The following table sets forth information regarding our operating expenses:

 
  Year ended December 31,   Year ended
December 31,
 
 
  2006   2007   2008   2007/2006   2008/2007  
 
  (in HUF millions)
  (% change)
 
   

Voice, data and Internet-elated payments

    91,102     86,244     79,076     (5.3 )   (8.3 )
   

Material cost of equipment sold

    59,714     41,957     45,061     (29.7 )   7.4  
   

Payments to agents and other subcontractors

                               

    31,257     49,064     43,421     57.0     (11.5 )
                           
 

Expenses directly related to revenues

    182,073     177,265     167,558     (2.6 )   (5.5 )
 

Employee-elated expenses

    95,253     120,176     100,320     26.2     (16.5 )
 

Depreciation and amortization

    122,249     115,595     106,120     (5.4 )   (8.2 )
 

Other operating expenses

    138,805     139,314     141,049     0.4     1.2  
                           

Total operating expenses

    538,380     552,350     515,047     2.6     (6.8 )
                           

        Voice-, data- and Internet-related payments decreased from HUF 91,102 million in 2006 to HUF 86,244 million in 2007. Lower mobile outpayments at Magyar Telekom Plc. T-Home were due to lower traffic and lower fixed to mobile termination rates effective from February 2, 2007. Lower outpayments at TMH were driven by the decreases in termination fees, partly offset by increased traffic. These decreases were somewhat offset by the increase in mobile outpayments at T-Mobile Crna Gora due to increased interconnection fees with Promonte from May 2007. Higher voice-related payments at T-Com Crna Gora resulted from increased mobile traffic transited and higher interconnection fees from May 2007.

        Voice-, data- and Internet-related payments decreased by 8.3 percent in 2008 compared to 2007. Lower outpayments at TMH were driven by lower mobile termination fees applied from January 2008 and by lower wholesale roaming fees, only partly offset by increased traffic. Lower mobile outpayments at Magyar Telekom Plc. T-Home were due to the decreases in termination fees and lower volume of traffic. Payments to international operators decreased at Magyar Telekom Plc. T-Home resulting mainly from the previously mentioned change in the settlement of wholesale transit traffic. As from January 1, 2008 Deutsche Telekom became our sole international voice partner, and accordingly, we do not have outpayments for international wholesale transit traffic to other foreign carriers. Voice-related payments dropped also at T-Com Crna Gora as Promonte and Telekom Serbia established their own direct link. These decreases were somewhat offset by the increase in mobile outpayments at T-Mobile Crna Gora due to increased interconnection fees and higher traffic volume.

        The material cost of equipment sold in 2007 was HUF 41,957 million compared to HUF 59,714 million in 2006. The strong decrease is mainly due to the significantly lower material cost of equipment sold at Pro-M as the main part of EDR network was completed in 2006. At T-Mobile Macedonia, material cost of equipment sold increased driven by higher gross addition of customers and higher average cost of phonesets.

        In 2008, the material cost of equipment sold reached HUF 45,061 million increasing by 7.4 percent compared to 2007. The increase is partly due to higher cost at TMH resulting from higher gross addition to customers with higher equipment sales ratio, somewhat offset by lower average cost of handsets. The increase at Pro-M is in line with the significantly higher TETRA-related revenues in 2008. The material cost of equipment increased also at Makedonski Telekom due to increased sales volume of personal computers, ADSL modems, TV sets and other equipment.

        Payments to agents and other subcontractors strongly increased in 2007 compared to 2006 mainly related to higher SI/IT-related payments due to the inclusion of KFKI Group's and T-Systems Hungary's expenses from September 15, 2006 and from January 1, 2007, respectively. Payments to agents and other

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subcontractors decreased in 2008 compared to 2007. The decline mainly resulted from lower SI/IT-related payments at IQSYS parallel with lower SI/IT revenues in 2008.

        Employee-related expenses increased in 2007 primarily driven by higher severance provisions and payments in connection with headcount reduction. Employee-related expenses include headcount reduction-elated expenses of HUF 27,505 million in 2007. Employee-related expenses increased also because of the inclusion of new subsidiaries (such as T-Systems Hungary and M Factory) in 2007. Despite these acquisitions, the Group headcount number decreased from 12,341 on December 31, 2006 to 11,723 on December 31, 2007.

        Employee-related expenses decreased to HUF 100,320 million in 2008 from HUF 120,176 million in 2007. The decrease in employee-related expenses was mainly attributable to lower severance-related provisions and payments in relation to the headcount reduction at Magyar Telekom Plc. in 2008. Employee-related expenses include headcount reduction related expenses of HUF 8,472 million in 2008. Lower group headcount number, which further declined to 10,439 by December 31, 2008, also contributed to the decrease. These decreases were partly offset by higher severance-related provisions and payments at Makedonski Telekom, T-Com Crna Gora and KFKI in 2008.

        Depreciation and amortization decreased by 5.4 percent from HUF 122,249 million to HUF 115,595 million in 2007 as compared to 2006. Lower amount of depreciation is mainly driven by the lower asset base at Magyar Telekom Plc., T-Mobile Macedonia, T-Com Crna Gora and Makedonski Telekom. Higher depreciation at TMH owing to shorter depreciation period of UMTS-related assets and the inclusion of new subsidiaries partly offset this decrease. As a result of the annual review of the useful life of our assets, the lives of certain assets were changed as of January 1, 2007 due to technical obsolescence. These assets mainly included software, and the change in the useful life resulted in HUF 132 million higher depreciation expense in 2007.

        Depreciation and amortization decreased by 8.2 percent to HUF 106,120 million in 2008 as compared to 2007 as a result of the decrease at TMH and also at Magyar Telekom Plc. T-Home due to change in the useful life of certain group of assets. The reviews of the useful lives of intangible assets during 2008 affected the lives of a large number of assets including primarily the billing and other operation support systems of both the fixed line and mobile operations.

        Other operating expenses include materials, maintenance, marketing, service fees, fees and levies, outsourcing expenses, provisions, energy and consultancy. Other operating expenses remained broadly stable in 2007 as compared to 2006. The increase in consultancy fees and the effect of the consolidation of new subsidiaries such as KFKI and T-Systems Hungary was mostly offset by lower marketing expenses mainly at Magyar Telekom Plc. and T-Mobile Macedonia due to less intensive advertising activity in 2007.

        Other operating expenses in 2007 also included a HUF 1.5 billion bad debt expense reflecting the likely loss to be incurred as a result of the early termination of a long-term IT outsourcing contract by a large T-Systems customer which was entered into with a subsidiary which the Company acquired control of in 2007.

        Other operating expenses increased by 1.2 percent in 2008 compared to 2007. The slight increase was mainly driven by higher price of energy and higher rental fees at Magyar Telekom Plc. HQ deriving from higher rented area of major offices. Higher fees and levies show the provision made for litigations at Makedonski Telekom in 2008. The increase in marketing expenses at T-Mobile Macedonia related to intensive advertising activities responding to strong competition after the entrance of VIP in the Macedonian mobile market in September 2007. The provision made for the legal cases in relation to leaving employees in 2007 at T-Com Crna Gora and lower consultancy fees primarily at Magyar Telekom Plc. HQ mostly offset these increases.

        In the course of conducting their audit of our 2005 financial statements, PwC identified certain contracts the nature and business purposes of which were not readily apparent. PwC notified the Audit

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Committee and advised them to retain independent counsel to conduct an investigation into these contracts. Our Audit Committee retained White & Case, as its independent legal counsel, to conduct the investigation. See "Item 3—Risk Factors" and "Item 15—Controls and Procedures."

        Magyar Telekom incurred HUF 4.1 billion in expenses relating to the investigation in 2006, HUF 5.7 billion in 2007 and HUF 5.4 billion in 2008, which are included in other operating expenses in the GHS segment.

Other Operating Income

        The following table sets forth information concerning other operating income:

 
  Year ended December 31,   Year ended
December 31,
 
 
  2006   2007   2008   2007/2006   2008/2007  
 
  (in HUF millions)
  (% change)
 

Compensation for renaming

    1,435     229     676