OFFERING MEMORANDUM

NOT FOR GENERAL CIRCULATION IN THE UNITED STATES

Magyar Telecom B.V. 80,000,000 9.5% Senior Secured Notes due 2016
Magyar Telecom B.V., a limited liability company (besloten vennootschap met beperkte aansprakelijkheid) organized under the laws of The Netherlands (the Issuer) is offering 80,000,000 aggregate principal amount of its Senior Secured Notes due 2016 (the Additional Notes). The Additional Notes are being offered as additional notes under an indenture dated December 16, 2009, as amended and supplemented from time to time (the Indenture), pursuant to which the Issuer issued 345,000,000 in aggregate principal amount of its 9.5% Senior Secured Notes due 2016 (75,003,000 of which were repurchased by the Issuer on November 10, 2010, resulting in 269,997,000 aggregate principal amount of the original issuance being outstanding) (the Existing Notes and, together with the Additional Notes, the Notes). The Additional Notes will otherwise have identical terms and conditions, are the same series as, and, upon completion of a 40-day distribution compliance period, will be fully fungible with, the Existing Notes. Interest on the Additional Notes will be payable semi-annually in arrear on June 15 and December 15 of each year, beginning on June 15, 2011. The Notes will mature on December 15, 2016. Prior to December 15, 2012, the Issuer will be entitled, at its option, to redeem all or a portion of the Additional Notes by paying the relevant make-whole premium. At any time on or after December 15, 2012, the Issuer will be entitled, at its option, to redeem all or a portion of the Additional Notes by paying a specified premium to you. If the Issuer undergoes a change of control or sells certain of its assets, the Issuer may be required to make an offer to purchase the Additional Notes. In the event of certain developments affecting taxation, the Issuer may redeem all, but not less than all, of the Additional Notes. The Existing Notes are, and the Additional Notes will be, senior obligations of the Issuer. The Existing Notes are, and the Additional Notes will be, guaranteed (each, a Guarantee) on a full and unconditional basis by Invitel Tvkzlsi ZRt. (Invitel ZRt), Invitel Technocom Kft. (Technocom), Invitel International Holdings B.V. (International Holdings), FiberNet Kommunikcis Zrtkren Mkd Rszvnytrsasg (FiberNet Zrt) and FiberNet Hungary Tancsad Kft. (FiberNet Kft and, together with FiberNet Zrt, FiberNet) (each, a Subsidiary Guarantor). The Existing Notes and the Guarantees are, and the Additional Notes will be, secured by (a) a first priority pledge over the shares of the Issuer and the shares of each Subsidiary Guarantor held by the Issuer or a Subsidiary Guarantor, (b) a first priority assignment of certain intra-group loans made by the Issuer and certain of the Subsidiary Guarantors, (c) a first priority pledge of certain bank accounts of the Issuer and certain of the Subsidiary Guarantors and (d) a first priority charge over certain assets of certain of the Subsidiary Guarantors. This Offering Memorandum includes information on the terms of the Notes and the Guarantees, including redemption and repurchase prices, covenants and transfer restrictions. Application has been made to have the Additional Notes admitted to the Official List of the Luxembourg Stock Exchange for trading on the Euro MTF Market (the Euro MTF). The Additional Notes were made ready for delivery in book-entry form through Euroclear and Clearstream on March 30, 2011 against payment in immediately available funds. This Offering Memorandum constitutes a prospectus for the purpose of the Luxembourg law on Prospectuses for Securities dated July 10, 2005. Investing in the Notes involves a high degree of risk. Please see the Risk Factors section of this Offering Memorandum.

Additional Notes Price: 99.000% plus accrued interest from December 16, 2010.

The Notes and the Guarantees have not been, and will not be, registered under the U.S. Securities Act of 1933, as amended (the Securities Act), or the securities laws of any other jurisdiction. Accordingly, the Notes may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons, except to qualified institutional buyers in accordance with Rule 144A under the Securities Act (Rule 144A) and to non-U.S. persons outside the United States in reliance on Regulation S under the Securities Act (Regulation S). Prospective purchasers that are qualified institutional buyers are hereby notified that the seller of the Notes may be relying on the exemption from the provisions of Section 5 of the U.S. Securities Act provided by Rule 144A. For further details about eligible offerees and resale restrictions, see Plan of Distribution and Notice to Investors.

Sole Book-Running Lead Manager

Credit Suisse
The date of this Offering Memorandum is March 30, 2011.

TABLE OF CONTENTS
Page

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS .................................................. CERTAIN DEFINITIONS AND PRESENTATION OF GENERAL INFORMATION................................ PRESENTATION OF FINANCIAL INFORMATION .................................................................................. EXCHANGE RATE INFORMATION ........................................................................................................... SUMMARY..................................................................................................................................................... RISK FACTORS ............................................................................................................................................. USE OF PROCEEDS ...................................................................................................................................... CAPITALIZATION ........................................................................................................................................ SELECTED HISTORICAL FINANCIAL INFORMATION.......................................................................... MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................................................................................................................................ HUNGARIAN TELECOMMUNICATIONS INDUSTRY AND REGULATION ........................................ COMPANY HISTORY ................................................................................................................................... OUR BUSINESS ............................................................................................................................................. THE FIBERNET BUSINESS.......................................................................................................................... OUR DIRECTORS AND SENIOR MANAGEMENT ................................................................................... OUR PRINCIPAL SHAREHOLDERS ........................................................................................................... RELATED PARTY TRANSACTIONS.......................................................................................................... DESCRIPTION OF OTHER INDEBTEDNESS ............................................................................................ DESCRIPTION OF THE NOTES................................................................................................................... BOOK ENTRY, DELIVERY AND FORM .................................................................................................... TAX CONSIDERATIONS.............................................................................................................................. CERTAIN ERISA CONSIDERATIONS ........................................................................................................ PLAN OF DISTRIBUTION............................................................................................................................ NOTICE TO INVESTORS ............................................................................................................................. LEGAL MATTERS......................................................................................................................................... INDEPENDENT AUDITORS ........................................................................................................................ WHERE YOU CAN FIND ADDITIONAL INFORMATION ....................................................................... ENFORCEMENT OF CIVIL LIABILITIES .................................................................................................. LISTING AND GENERAL INFORMATION................................................................................................ GLOSSARY .................................................................................................................................................... INDEX TO FINANCIAL INFORMATION ...................................................................................................

8 10 12 13 14 30 50 51 52 54 70 78 80 97 100 103 104 105 117 168 172 177 178 180 184 185 186 187 188 G-1 F-1

We have not authorized any dealer, salesperson or other person to give any information or represent anything to you other than the information contained in this Offering Memorandum. You must not rely on unauthorized information or representations. The information in this Offering Memorandum is current only as of the date on the cover page, and may change after that date. For any time after the cover date of this Offering Memorandum, we do not represent that our affairs are the same as described or that the information in this Offering Memorandum is correct nor do we imply those things by delivering this Offering Memorandum or selling securities to you. If you purchase the Additional Notes, you will be deemed to have made certain acknowledgments, representations and warranties as detailed under Notice to Investors. You may be required to bear the financial risk of an investment in the Additional Notes for an indefinite period. Neither we nor the Initial Purchaser is making an offer to sell the Additional Notes in any jurisdiction where the offer and sale of the Additional Notes is prohibited. We are not making any representation to you that the Additional Notes are a legal investment for you. No action has been, or will be, taken to permit a public offering in any jurisdiction where action would be required for that purpose. The Issuer and the Initial Purchaser are offering to sell the Additional Notes only in places where offers and sales are permitted.

IN CONNECTION WITH THIS OFFERING OF ADDITIONAL NOTES, CREDIT SUISSE SECURITIES (EUROPE) LTD. (THE STABILIZING MANAGER) (OR PERSONS ACTING ON BEHALF OF THE STABILIZING MANAGER) MAY, TO THE EXTENT PERMITTED BY APPLICABLE LAW, OVER-ALLOT ADDITIONAL NOTES OR EFFECT TRANSACTIONS WITH A VIEW TO STABILIZING OR MAINTAINING THE MARKET PRICE OF THE ADDITIONAL NOTES AT A LEVEL HIGHER THAN THAT WHICH MIGHT OTHERWISE PREVAIL. HOWEVER, THERE IS NO ASSURANCE THAT THE STABILIZING MANAGER WILL UNDERTAKE ANY SUCH STABILIZATION ACTION. SUCH STABILIZATION ACTION, IF COMMENCED, MAY BEGIN ON OR AFTER THE DATE OF ADEQUATE PUBLIC DISCLOSURE OF THE FINAL TERMS OF THE OFFER OF THE ADDITIONAL NOTES AND MAY BE ENDED AT ANY TIME, BUT IT MUST END NO LATER THAN THE EARLIER OF 30 CALENDAR DAYS AFTER THE DATE ON WHICH THE ISSUER RECEIVED THE PROCEEDS OF THE ISSUE AND 60 CALENDAR DAYS AFTER THE DATE OF ALLOTMENT OF THE ADDITIONAL NOTES. The Issuer is offering the Additional Notes, and the Subsidiary Guarantors are issuing the Guarantees, in respect thereof, in reliance on exemptions from the registration requirements of the U.S. Securities Act. These exemptions apply to offers and sales of securities that do not involve a public offering. The Additional Notes have not been registered with, recommended by or approved by the U.S. Securities and Exchange Commission (the SEC) or any other securities commission or regulatory authority, nor has the SEC or any such securities commission or authority passed upon the accuracy or adequacy of this Offering Memorandum. Any representation to the contrary is a criminal offence in the United States. The Additional Notes are subject to restrictions on transferability and resale and may not be transferred or resold except as permitted under the U.S. Securities Act and all other applicable securities laws. See Notice to Investors. You should be aware that you may be required to bear the financial risks of this investment for an indefinite period of time. We have prepared this Offering Memorandum solely for use in connection with this offering. Each prospective purchaser of the Additional Notes must comply with all applicable laws and rules and regulations in force in any jurisdiction in which it purchases, offers or sells the Additional Notes and must obtain any consent, approval or permission required by it for the purchase, offer or sale by it of the Additional Notes under the laws and regulations in force in any jurisdiction to which it is subject or in which it makes such purchases, offers or sales, and neither we nor the Initial Purchaser shall have any responsibility therefor. You are not to construe the contents of this Offering Memorandum as investment, legal or tax advice. You should consult your own counsel, accountant and other advisers as to legal, tax, business, financial and related aspects of a purchase of the Additional Notes. You are responsible for making your own examination of us and your own assessment of the merits and risks of investing in the Additional Notes. We are not, and the Initial Purchaser is not, making any representations to you regarding the legality of an investment in the Additional Notes by you. The information contained in this Offering Memorandum has been furnished by us and other sources we believe to be reliable. No representation or warranty, express or implied, is made by the Initial Purchaser as to the accuracy or completeness of any of the information set out in this Offering Memorandum, and nothing contained in this Offering

Memorandum is or shall be relied upon as a promise or representation by the Initial Purchaser, whether as to the past or the future. This Offering Memorandum contains summaries, believed to be accurate, of some of the terms of specified documents, but reference is made to the actual documents, copies of which will be made available by us upon request, for the complete information contained in those documents. Copies of such documents and other information relating to the issuance of the Additional Notes will also be available for inspection at the specified offices of the Luxembourg Paying Agent. All summaries of the documents contained herein are qualified in their entirety by this reference. You agree to the foregoing by accepting this Offering Memorandum. We accept responsibility for the accuracy of the information contained in this Offering Memorandum. We have made all reasonable inquiries and confirm to the best of our knowledge, information and belief that the information contained in this Offering Memorandum with regard to us, our subsidiaries and affiliates and the Additional Notes is true and accurate in all material respects, that the opinions and intentions expressed in this Offering Memorandum are honestly held and that we are not aware of any other acts the omission of which would make this Offering Memorandum or any statement contained herein misleading in any material respect. No person is authorized in connection with any offering made pursuant to this Offering Memorandum to give any information or to make any representation not contained in this Offering Memorandum, and, if given or made, any other information or representation must not be relied upon as having been authorized by us or the Initial Purchaser. The information contained in this Offering Memorandum is current at the date hereof. Neither the delivery of this Offering Memorandum at any time nor any subsequent commitment to enter into any financing shall, under any circumstances, create any implication that there has been no change in the information set out in this Offering Memorandum or in our affairs since the date of this Offering Memorandum. We reserve the right to withdraw the Offering at any time, and we and the Initial Purchaser reserve the right to reject any commitment to subscribe for the Additional Notes in whole or in part and to allot to you less than the full amount of Additional Notes subscribed for by you. The distribution of this Offering Memorandum and the offer and sale of the Additional Notes may be restricted by law in some jurisdictions. Persons into whose possession this Offering Memorandum or any of the Additional Notes come must inform themselves about, and observe any restrictions on the transfer and exchange of the Additional Notes. See Plan of Distribution and Notice to Investors. Internal Revenue Service Circular 230 Disclosure PURSUANT TO INTERNAL REVENUE SERVICE CIRCULAR 230, WE HEREBY INFORM YOU THAT THE DESCRIPTION SET FORTH HEREIN WITH RESPECT TO U.S. FEDERAL TAX ISSUES WAS NOT INTENDED OR WRITTEN TO BE USED, AND SUCH DESCRIPTION CANNOT BE USED, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED ON THE TAXPAYER UNDER THE U.S. INTERNAL REVENUE CODE. SUCH DESCRIPTION WAS WRITTEN IN CONNECTION WITH THE MARKETING OF THE ADDITIONAL NOTES. TAXPAYERS SHOULD SEEK ADVICE BASED ON THE TAXPAYERS PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR. NOTICE TO NEW HAMPSHIRE RESIDENTS NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER CHAPTER 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE OF NEW HAMPSHIRE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY, OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH. NOTICE TO U.S. INVESTORS Each purchaser of Additional Notes will be deemed to have made the representations, warranties and acknowledgements that are described in this Offering Memorandum under Notice to Investors. The Additional Notes have not been and will not be registered under the U.S. Securities Act or the securities laws of any state of the United States and are subject to

certain restrictions on transfer. Prospective purchasers are hereby notified that the seller of any note may be relying on the exemption from the provisions of Section 5 of the U.S. Securities Act provided by Rule 144A. For a description of certain further restrictions on resale or transfer of the Notes, see Notice to Investors. The Additional Notes may not be offered to the public within any jurisdiction. By accepting delivery of this Offering Memorandum, you agree not to offer, sell, resell, transfer or deliver, directly or indirectly, any note to the public. NOTICE TO CERTAIN EUROPEAN INVESTORS European Economic Area. This Offering Memorandum has been prepared on the basis that any offer of Additional Notes in any Member State of the European Economic Area which has implemented the Prospectus Directive (each, a Relevant Member State) will be made pursuant to an exemption under the Prospectus Directive from the requirement to publish a prospectus for offers of Additional Notes. Accordingly any person making or intending to make an offer in that Relevant Member State of Additional Notes which are the subject of the offering contemplated in this Offering Memorandum may only do so in circumstances in which no obligation arises for the Issuer or any Initial Purchaser to publish a prospectus pursuant to Article 3 of the Prospectus Directive, in each case, in relation to such offer. Neither the Issuer nor the Initial Purchaser has authorized, nor do they authorize, the making of any offer of Additional Notes in circumstances in which an obligation arises for the Issuer or the Initial Purchaser to publish a prospectus for such offer. The expression Prospectus Directive means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in the Relevant Member State and the expression 2010 PD Amending Directive means Directive 2010/73/EU. United Kingdom. This Offering Memorandum is only being distributed to and is only directed at persons who (i) are outside the United Kingdom or (ii) are investment professionals, as such term is defined in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the Financial Promotion Order) or (iii) are persons falling within Article 49(2)(a) to (d) (high net worth companies, unincorporated associations, etc.) of the Financial Promotion Order (all such persons together being referred to as relevant persons). This Offering Memorandum must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this Offering Memorandum relates is available only to relevant persons and will be engaged in only with relevant persons. Any person who is not a relevant person should not act or rely on this Offering Memorandum or any of its contents. Italy. No action has been or will be taken which could allow an offering of the Additional Notes to the public in the Republic of Italy. Accordingly, the Additional Notes may not be offered or sold directly or indirectly in the Republic of Italy, and neither this Offering Memorandum nor any other offering circular, prospectus, form of application, advertisement, other offering material or other information relating to the Issuer, the Subsidiary Guarantors or the Additional Notes may be issued, distributed or published in the Republic of Italy, except under circumstances that will result in compliance with all applicable laws, orders, rules and regulations. The Additional Notes cannot be offered or sold to any natural persons nor to entities other than qualified investors (according to the definition provided for by the Prospectus Directive) either on the primary or on the secondary market. Switzerland. The Additional Notes offered hereby are being offered in Switzerland on the basis of a private placement only. This Offering Memorandum does not constitute a prospectus within the meaning of Art. 652 A of the Swiss Federal Code of Obligations. The Netherlands. The Additional Notes (including rights representing an interest in each global note that represents the Additional Notes) may not be offered or sold to individuals or legal entities in The Netherlands unless a prospectus relating to the offer is available to the public which is approved by the Dutch Authority for the Financial Markets (Autoriteit Financiele Markten) or by a supervisory authority of another member state of the European Union (the E.U.). Article 5:3 of the Dutch Financial Supervision Act (the FSA) provides for several exceptions to the obligation to make a prospectus available, such as an offer to qualified investors within the meaning of article 1:1 of the FSA. Grand Duchy of Luxembourg. The terms and conditions relating to this Offering Memorandum have not been approved by and will not be submitted for approval to the Luxembourg Financial Services Authority (Commission de Surveillance du Secteur Financier) for purposes of public offering or sale in the Grand Duchy of Luxembourg (Luxembourg). Accordingly, the Additional Notes may not be offered or sold to the public in Luxembourg, directly or indirectly, and neither this Offering Memorandum nor any other circular, prospectus, form of application, advertisement or other material may be distributed, or otherwise made available in or from, or published in, Luxembourg except for the sole purpose of the admission to trading and listing of the Additional Notes on the Official List of the Luxembourg Stock Exchange and except in circumstances which do not constitute a public offer of securities to the public, subject to prospectus requirements, in accordance with the Luxembourg Act of July 10, 2005 on prospectuses for securities.

Austria. This Offering Memorandum has not been and will not be approved and/or published pursuant to the Austrian Capital Markets Act (Kapitalmarktgesetz), as amended. Neither this Offering Memorandum nor any other document connected therewith constitutes a prospectus according to the Austrian Capital Markets Act and neither this Offering Memorandum nor any other document connected therewith may be distributed, passed on or disclosed to any other person in Austria. No steps may be taken that would constitute a public offering of the Additional Notes and the offering may note be advertised in Austria. Any offer of the Additional Notes in Austria will only be made in compliance with the provisions of the Austrian Capital Markets Act and all other laws and regulations in Austria applicable to the offer and sale of the Additional Notes in Austria. Germany. The offering of the Additional Notes is not a public offering in the Federal Republic of Germany. The Additional Notes may be offered and sold in the Federal Republic of Germany only in accordance with the provisions of the Securities Prospectus Act of the Federal Republic of Germany (Wertpapierprospektgesetz) (the German Securities Prospectus Act) and any other applicable German law. Consequently, in Germany the Additional Notes will only be available to, and this Offering Memorandum and any other offering material in relation to the Additional Notes is directed only at, persons who are qualified investors (qualifizierte Anleger) within the meaning of Section 2 No. 6 of the German Securities Prospectus Act. Any resale of the Additional Notes in Germany may only be made in accordance with the German Securities Prospectus Act and other applicable laws. The Issuer has not, and does not intend to, file a securities prospectus with the German Federal Financial Supervisory Authority (Bundesanstalt fr Finanzdienstleistungsaufsicht) (BaFin) or obtain a notification to BaFin from another competent authority of a Member State of the European Economic Area, with which a securities prospectus may have been filed, pursuant to Section 17 Para. 3 of the German Securities Prospectus Act. France. This Offering Memorandum has not been prepared in the context of a public offering in France within the meaning of Article L. 411-1 of the Code Monetaire et Financier and Title I of Book II of the Reglement General of the Autorite des marches financiers (the AMF) and therefore has not been submitted for clearance to the AMF. Consequently, the Additional Notes may not be, directly or indirectly, offered or sold to the public in France, and offers and sales of the Additional Notes will only be made in France to providers of investment services relating to portfolio management for the account of third parties (personnes fournissant le service dinvestissement de gestion deportefeuillepour le compte de tiers) and/or to qualified investors (investisseurs qualifies) and/or to a closed circle of investors (cercle restreint ainvestisseurs) acting for their own accounts, as defined in and in accordance with Articles L. 411-2 and D. 411-1 of the Code of Monetaire et Financier. Neither this Offering Memorandum nor any other offering material may be distributed to the public in France. Spain. This offering has not been registered with the Comision Nacional del Mercado de Valores and therefore the Additional Notes may not be offered in Spain by any means, except in circumstances which do not qualify as a public offer of securities in Spain in accordance with article 30 bis of the Securities Market Act (Ley 24/1988, de 28 dejulio del Mercado de Valores) as amended and restated, or pursuant to an exemption from registration in accordance with article 41 of the Royal Decree 1310/2005 (Real Decreto 1310/2005, de 4 de noviembre por el que se desarrolla parcialmente la Ley 24/1988, de 28 dejulio, del Mercado de Valores, en materia de admision a negociacion de valores en mercados secundarios oficiales, de ofertas publicas de venta o suscripcion y del folleto exigible a tales efectos). THIS OFFERING MEMORANDUM CONTAINS IMPORTANT INFORMATION WHICH YOU SHOULD READ BEFORE YOU MAKE ANY DECISION WITH RESPECT TO AN INVESTMENT IN THE ADDITIONAL NOTES.

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS This Offering Memorandum includes forward-looking statements. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms believe, estimate, anticipate, expect, forecast, foresee, intend, may, plan, project, seek, should or will or, in each case, their negative, or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this Offering Memorandum and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that the actual results of our operations, financial condition and liquidity, and the development of the Hungarian telecommunications industry in Central and Eastern Europe, and particularly in Hungary, may differ materially from those made in or suggested by the forward-looking statements contained in this Offering Memorandum. In addition, even if our results of operations, financial condition and liquidity, and the development of the telecommunications industry in Central and Eastern Europe are consistent with the forward-looking statements contained in this Offering Memorandum, those results or developments may not be indicative of results or developments in subsequent periods. Factors that could cause these differences include, but are not limited to:

our inability to execute our business strategy; the continuing effects of the global economic crisis and in particular the effects of the recent macroeconomic issues affecting the Hungarian economy; changes in the growth rate of the overall Hungarian and E.U. economies such that inflation, interest rates, currency exchange rates, business investment and consumer spending are impacted; our ability to effectively manage and otherwise monitor our operations, costs, regulatory compliance and service quality; our ability to effectively implement our hedging strategies to limit our risks attributable to changes in foreign currency exchange rates and interest rates; changes in consumer preferences for different telecommunication technologies, including trends toward mobile and cable substitution; our ability to generate growth or profitable growth; material changes in available technology and the effects of such changes including product substitutions and deployment costs; our ability to retain key employees; effects of, and changes in, laws, regulations or governmental policy affecting our business activities in the markets in which we operate, including changes in tax laws; political changes in Hungary; changes in accounting rules or their application, which could result in an impact on our financial results; our ability to successfully complete the integration of any businesses or companies that we may acquire into our operations, including, in particular, FiberNet; our substantial leverage and debt service obligations; our ability to generate sufficient cash to service our debt, to control and finance our capital expenditures and operations; our ability to raise additional financing;

risks associated with our structure, this Offering, and our other indebtedness; our relationship with our shareholders; and any other factors referred to in Risk Factors.

We urge you to read Risk Factors, Managements Discussion and Analysis of Financial Condition and Results of Operations, Hungarian Telecommunications Industry and Regulation, Company History, Our Business and The FiberNet Business for a more complete discussion of the factors that could affect our future performance, the Hungarian telecommunications industry as well as the telecommunications industry throughout Central and Eastern Europe. In light of these risks, uncertainties and assumptions, the events described or suggested by the forward-looking statements in this Offering Memorandum may not occur. Except as required by law or applicable stock exchange rules or regulations, we undertake no obligation to update or revise publicly any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the cautionary statements referred to above and contained elsewhere in this Offering Memorandum.

CERTAIN DEFINITIONS AND PRESENTATION OF GENERAL INFORMATION In this Offering Memorandum, unless indicated otherwise in this Offering Memorandum or the context requires otherwise: 2006 PIK Notes refers to the Floating Rate Senior PIK Notes due 2013 which were redeemed and cancelled on February 22, 2011; 2007 Notes or FRNs refers to the Issuers Floating Rate Senior Notes due 2013 with aggregate principal amount outstanding on the issue date of the Additional Notes of 68,948,000; Additional Notes refers to the notes being offered pursuant to this Offering Memorandum and to be issued pursuant to the Indenture; E.U. refers to the European Union; Euro, EUR or refers to the lawful currency of the participating member states of the E.U.; Existing Notes refers to the Issuers 345,000,000 aggregate principal amount 9.5% Senior Secured Notes due 2016 issued on December 16, 2009 (of which 269,997,000 were outstanding as of December 31, 2010); FiberNet Acquisition means the acquisition of FiberNet and the simultaneous disposal of certain FiberNet assets to UPC; FiberNet Kft means FiberNet Hungary Tancsad Kft., an entity organized under the laws of Hungary and the direct parent of FiberNet Zrt; FiberNet Zrt means FiberNet Kommunikcis Zrtkren Mkd Rszvnytrsasg, an entity organized under the laws of Hungary; FiberNet refers to FiberNet Kft and FiberNet Zrt; forint or HUF refers to the lawful currency of Hungary; FRN Indenture means the indenture governing the 2007 Notes; Holdco I refers to HTCC Holdco I B.V., a company incorporated under the laws of The Netherlands; HTCC refers to Hungarian Telephone and Cable Corp. with or without its subsidiaries, as the context requires, the predecessor entity to Invitel Holdings; HTFI refers to Hungarian Telecom Finance International Limited, a company controlled by Mid Europa; Hungarian Telecom refers to Hungarian Telecom (Netherlands) Cooperatief U.A., a cooperative association organized under the laws of The Netherlands and a company controlled by Mid Europa; Indenture means the indenture dated as of December 16, 2009 among, inter alios, the Issuer, the Subsidiary Guarantors and the Trustee, as amended from time to time; Indentures refers to the Indenture and the FRN Indenture; International Holdings means Invitel International Holdings B.V., a company incorporated under the laws of The Netherlands; International Hungary means Invitel International Hungary Kft., an entity organized under the laws of Hungary; Invitel Holdings refers to Invitel Holdings A/S, the successor entity to HTCC, the ultimate parent company of the Issuer, with or without its consolidated subsidiaries as the context requires; Invitel ZRt refers to Invitel Tvkzlsi ZRt., also known as Invitel ZRt, a main operating company and a 99.98% owned subsidiary of Matel; Numbers of lines or fixed lines refers to numbers of fixed telecommunications line equivalents;

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Magyar Telekom refers to Magyar Telekom Nyrt., the largest provider of fixed line telecommunications services in Hungary, which is listed on both the Budapest Stock Exchange and the New York Stock Exchange, and whose parent company is Deutsche Telekom AG; Matel or the Issuer refers to Magyar Telecom B.V., the issuer of the Additional Notes, including predecessor entities and with or without its subsidiaries, as the context requires; Matel Holdings refers to Matel Holdings N.V., which directly holds 100% of the issued share capital of Matel; Mid Europa refers to Mid Europa Partners Limited and any investment fund or vehicle advised, sponsored or managed directly or indirectly by Mid Europa Partners Limited, including Hungarian Telecom and HTFI; NMHH refers to the National Media and Infocommunications Authority; Notes refers to the Existing Notes and the Additional Notes; Subsidiary Guarantors refers to Invitel ZRt, Technocom, International Holdings, FiberNet Zrt and FiberNet Kft; Technocom means Invitel Technocom Kft., a limited liability company incorporated under the laws of Hungary; Turk Telecom means Trk Telekomnikasyon A.S.; U.S. dollar or U.S.$ refers to the lawful currency of the United States of America; and we, us and our refer to the Issuer and its consolidated subsidiaries, unless the context otherwise requires. In addition, we have included a glossary of certain technical terms used in this Offering Memorandum under the heading Glossary. The market and macro-economic information contained in this Offering Memorandum was derived from various public sources, including the Hungarian Central Statistical Office and the Ministry of National Development. We believe that the market share information contained in this Offering Memorandum provides fair and adequate estimates of the size of our market and fairly reflects our competitive position within that market. However, our internal company surveys and management estimates have not been verified by any independent expert, and we can provide no assurance that a third party using different methods to assemble, analyze or calculate market data would obtain or generate the same results.

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PRESENTATION OF FINANCIAL INFORMATION The audited consolidated financial statements of Matel as of and for the years ended December 31, 2010 and 2009 included in this Offering Memorandum have been prepared in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board and as adopted by the E.U. (IFRS). Matels consolidated financial statements have been audited by PricewaterhouseCoopers Kft. On October 7, 2010, International Holdings consummated the sale of its international wholesale business (the International Sale) comprising the entire issued share capital of Invitel International AG (including its subsidiaries), Invitel International Hungary Kft and S.C. EuroWeb Romania S.A. (the International Business) to Turk Telecom. See Our Business Recent Developments Sale of the International Wholesale Business. Our consolidated financial statements as of and for the years ended December 31, 2009 and 2010 included in this Offering Memorandum reflect the International Business as a discontinued operation. The financial information for the year ended December 31, 2008 included in our consolidated financial statements for the year ended December 31, 2009 is also restated to reflect the International Business as a discontinued operation and is included for reference purposes. Certain amounts which appear in this Offering Memorandum have been subject to rounding adjustments, and, accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures which precede them. Non-IFRS Financial Measures EBITDA, adjusted EBITDA, pro forma adjusted EBITDA, gross margin and segment gross margin and the related ratios presented in this Offering Memorandum are supplemental measures of performance and liquidity that are not required by, or presented in accordance with, IFRS. We present non-IFRS measures because we believe that they and similar measures are widely used by certain investors, securities analysts and other interested parties as supplemental measures of performance and liquidity. The non-IFRS measures may not be comparable to other similarly titled measures of other companies and have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our operating results as reported under IFRS. Furthermore, EBITDA, adjusted EBITDA, gross margin and segment gross margin and leverage and coverage ratios are not measurements of our financial performance or liquidity under IFRS and should not be considered as an alternative to net profit or any other performance measures derived in accordance with IFRS or as an alternative to cash flow from operating, investing or financing activities as a measure of our liquidity as derived in accordance with IFRS.

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EXCHANGE RATE INFORMATION Forint per Euro The following table sets out, for the periods and dates indicated, the period-end, average, high and low official rates set by the National Bank of Hungary for forint per 1.00. We make no representation that the forint amounts referred to in this Offering Memorandum could have been or could be converted into any currency at any particular rate or at all. As of March 30, 2011, the rate was 267.20:
EUR/HUF Exchange Rates Period End Average High Low (amounts in HUF/1.00)

Year 2006 .............................................................................................................. 2007 .............................................................................................................. 2008 .............................................................................................................. 2009 .............................................................................................................. 2010 .............................................................................................................. Month September 2010 ............................................................................................ October 2010 ................................................................................................ November 2010 ............................................................................................ December 2010............................................................................................. January 2011................................................................................................. February 2011............................................................................................... March 2011 (through March 30)...................................................................

252.30 253.35 264.78 270.84 278.75

264.27 251.31 251.25 280.58 275.41

282.69 261.17 275.79 316.00 290.03

249.55 244.96 229.11 264.17 261.60

277.33 273.69 284.54 278.75 273.30 272.34 267.20

282.25 274.46 275.70 277.47 275.45 271.18 270.98

288.78 276.83 284.54 280.60 279.40 274.28 273.92

276.12 270.53 270.78 273.43 271.93 268.21 266.80

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SUMMARY The following summary highlights significant information contained elsewhere in this Offering Memorandum. This summary is not complete and does not contain all of the information that we recommend you consider before investing in the Additional Notes. We encourage you to read the entire Offering Memorandum carefully, including the financial statements and related notes, before making an investment decision. You also should carefully consider the information set out in Risk Factors. Please see page G-1 of this Offering Memorandum for a glossary of technical terms used in this Offering Memorandum. Our Business We are the second largest fixed line telecommunications services provider in Hungary and the incumbent provider of fixed line telecommunications services in our 14 historical concession areas, where we have a dominant market share of the traditional fixed line market. We are the number one alternative fixed line operator outside our historical concession areas. We also use our network capacity to transport voice, data and internet traffic for other telecommunications service providers and internet service providers on a wholesale basis. Our historical fixed line concession areas are geographically clustered and cover an estimated 2.1 million people, representing approximately 21% of Hungarys population. Outside our historical concession areas, we believe that we are well positioned to continue to grow our revenue and market share, particularly in the Business segment, by taking advantage of our fully owned state of the art backbone network, our experienced sales force and our comprehensive portfolio of services. Our extensive fiber optic backbone network (comprising approximately 8,500 route kilometers in Hungary) provides us with nationwide reach. It allows business and wholesale customers, in particular, to be connected directly to our network to access voice, data and internet services. We operate in the following four market segments in our fixed line business:

Mass Market Voice. We provide a full range of basic and value added voice related services to our residential and small office and home office customers both inside and outside our historical concession areas. These services include local, national and international calling, voicemail, fax, Integrated Services Digital Network (ISDN) and directory assistance services. Mass Market Internet. We provide Digital Subscriber Line (DSL) broadband internet services to our Mass Market customers both in and outside our historical concession areas. We also provide internet protocol television (IPTV) (TV delivered over DSL broadband connections) services to our Mass Market customers in our historical concession areas. Business. We provide fixed line voice, data, internet and server hosting services to our business (comprised of small and medium sized enterprises (SMEs) and larger corporations), government and other institutional customers nationwide. Domestic Wholesale. We provide voice, data and network capacity services on a wholesale basis to a number of other telecommunications and internet service providers within Hungary.

Recent Developments Sale of the International Wholesale Business On October 7, 2010, International Holdings consummated the sale of its international wholesale business comprising the entire issued share capital of Invitel International AG (including its subsidiaries), Invitel International Hungary Kft and S.C. EuroWeb Romania S.A. (the International Business) to Turk Telecom for an enterprise value of approximately 221 million (the International Sale). The International Business included operations in Austria, Bulgaria, the Czech Republic, Hungary, Italy, Romania, Serbia, Slovakia, Slovenia, Turkey and Ukraine, but excluded our Hungarian domestic wholesale business. The purpose of the sale was to deleverage and focus on our core Hungarian domestic markets. For the years ended December 31, 2009 and 2010, we had 5.2 million and 3.6 million, respectively, of transactions with the International Business which were eliminated while the International Business was owned by us and accounted for as a discontinued operation, which is reflected in increases in our pro forma adjusted EBITDA for the respective periods by the corresponding amounts.

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As part of the International Sale, we entered into a series of agreements with Turk Telecom and Pantel International Kft (Pantel International) (formerly known as Invitel International Hungary Kft. and one of the entities sold to Turk Telecom in the International Sale) including: (i) (ii) a Master Services Agreement pursuant to which Invitel ZRt and Pantel International continue to provide each other with fiber lease, bandwidth capacity, IP, access and hosting services; a Transitional Services Agreement, pursuant to which we provide business support services to Pantel International, including accounting, technical equipment operation and maintenance, basic IT services, HR support services and office lease, for a transitional period expiring in November 2011; and an Indefeasible Right of Use Agreement, pursuant to which we provide an optical fiber lease to Pantel International until 2048, with termination only permitted in instances of material breach of the agreement.

(iii)

The FiberNet Acquisition On February 28, 2011, we consummated the acquisition of FiberNet Kft, the direct parent of FiberNet Zrt, Hungarys fourth largest cable network operator, for a purchase price of approximately 44.5 million. In order to meet Hungarian competition office requirements relating to infrastructure competition, we simultaneously sold approximately one-third of the FiberNet network assets to UPC for approximately 22.2 million (the FiberNet Disposal). The acquisition of FiberNet together with the FiberNet Disposal is referred to as the FiberNet Acquisition. The FiberNet network we retained is located outside Invitels historical fixed line concession areas. Management has estimated annualized run-rate pro forma adjusted EBITDA of FiberNet for the year ended December 31, 2010 to be 9.1 million. Estimated run-rate pro forma adjusted EBITDA consists of the EBITDA of the FiberNet assets pro forma for the FiberNet Disposal for the last three months of the year ended December 31, 2010 multiplied by four, plus potential cost synergies identified for 2011 including those arising from cross-functional headcount reduction, network and IT consolidation, sales and marketing content consolidation and financial process consolidation. To achieve these anticipated cost savings we expect to incur one time capital expenditure costs of approximately 2.6 million and operating expenses of approximately 3.5 million. Estimated run-rate pro forma adjusted EBITDA of FiberNet is based on the unaudited monthly accounts of FiberNet and management estimates of future cost savings. Investors are cautioned against placing undue reliance on this unaudited pro forma financial data. We believe that, following the application of the purchase price allocation by our auditors, FiberNet will account for less than 5% of the Issuer and its consolidated subsidiaries. Post Balance Sheet Date Developments Subsequent to December 31, 2010, we used cash to repurchase an aggregate principal amount of 7.2 million of the 2007 Notes at a discount, which led to a 2.5 million reduction in net cash-pay third party debt. Additionally, we used cash in the amount of 20.9 million to repurchase Holdco Is outstanding 2006 PIK Notes and 20.3 million for the FiberNet Acquisition, which led to corresponding increases in our net cash-pay third party debt. Concurrent Transactions Consent Solicitation Concurrently with the Offering, the Issuer has sought and received consent (the Consent Solicitation) from at least a majority in aggregate principal amount of the Existing Notes for certain amendments and waivers (the Proposed Amendments and Waivers) to the Indenture. The Proposed Amendments and Waivers are designed to, among other things, (i) permit the issuance of the Additional Notes, (ii) waive restrictions of the application of asset sale proceeds under the Limitation on Sale of Certain Assets covenant of the Indenture to allow for certain asset sale proceeds from the International Sale and the FiberNet Disposal to be used for general corporate purposes (including acquisitions), (iii) allow for a supplement to the share pledge over the shares of the Issuer benefiting the Notes to allow for the liquidation of the Issuers direct parent companies (to simplify the groups structure) and (iv) amend the definition of Permitted Collateral Liens in the Indenture (and the related provisions of the Intercreditor Deed) such that 25 million of additional Indebtedness currently permitted to be incurred under the Indenture may also benefit from the security over the collateral securing the Notes on a pari passu or junior basis. Repurchase and/or Redemption of the 2007 Notes Concurrently with the Offering, the Issuer has launched an offer (the Offer) for certain of its outstanding 2007 Notes. A portion of the proceeds from the Offering will be used to pay the purchase price for successfully purchased 2007 Notes.

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The Issuer expects that any of the 2007 Notes not successfully purchased in the Offer will be redeemed by the Issuer immediately upon closing of the Offering in accordance with the redemption and satisfaction and discharge provisions of the FRN Indenture. Under those provisions, the Issuer will deposit funds with the principal paying agent sufficient to redeem and discharge the 2007 Notes still outstanding and such redemption is expected to be completed 30 days following the closing of the Offering. Competitive Strengths We are the number one national alternative fixed line telecommunications service provider in Hungary with a track record of increasing our market share. We are the number one alternative fixed line operator in Hungary outside of our historical concession areas. We believe that we are well positioned to continue to grow our market share outside our historical concession areas particularly in our Business market segment through our owned backbone network, our experienced sales force and our comprehensive portfolio of services. Our backbone fiber optic network provides us with nationwide coverage, allowing us to directly connect to a high proportion of our Business customers. We have a strong cash generating incumbent business in Hungary. We are the incumbent provider of fixed line telecommunications services in Hungary in each of our 14 historical concession areas, where we have a leading market share of the residential fixed line market. Our historical concession areas cover a population of approximately 2.1 million, representing 21% of Hungarys population. We believe that we have been able to maintain a leading position in these areas as a result of our incumbent status, high quality network, targeted service offerings and strong customer relationships. Our incumbent status, combined with low capital expenditure requirements and high gross margins, results in strong cash generation. Diversified revenues and earnings base across four segments. We have a diversified revenue and earnings base across four segments. For the year ended December 31, 2010, the Mass Market Voice, Mass Market Internet, Business and Domestic Wholesale segments each account for 33%, 17%, 38% and 12% of revenues and 35%, 16%, 36% and 13% of segment gross margin, respectively. We therefore are not overly dependent upon any one segment, and over time, in line with our strategy, the contribution from the traditional voice business segment has declined, and, we expect, will continue to decline in importance and it has been replaced by high quality data business. We have an extensive, modern and high quality domestic network infrastructure in Hungary. Our backbone network has nationwide reach, provides a high quality of service and does not require major capital investments. The national backbone network comprises over 8,500 kilometers of route fiber connecting our historical concession areas and all of Hungarys urban centers. As the incumbent operator in our historical concession areas, we benefit from an extensive access network in terms of both capacity and reach. We have the capability to provide DSL services on 95% of our copper access lines. In addition, currently we are able to provide IPTV on around 60% of our lines. Outside our historical concession areas, our network allows us to connect our Business customers to our backbone by using our own metropolitan fiber, point-to-point or point-to-multipoint microwave, unbundled local loops or leased circuits. We have a substantial existing customer base, much of which is served by our infrastructure. As of December 31, 2010, we had 327,000 Mass Market customers in our historical concession areas being served by our access network. In addition, we had 298,000 Mass Market customers outside our historical concession areas being served by Magyar Telekoms (the main incumbent operator) infrastructure. Following the FiberNet Acquisition, we now have an additional 88,000 Mass Market customers being served by our own cable access network. Furthermore, we have approximately 13,000 business customers, the majority of whom are connected to our national backbone network or our historical concession access network. This substantial customer base presents an opportunity for cross-selling additional products and services. We have comprehensive and well established national distribution channels and a strong national brand. We have a well established and comprehensive set of effective distribution channels both inside and outside of our historical concession areas which enable us to optimize our customer acquisition costs and to respond quickly to changing market conditions. To market to residential customers, we have our own shops in our historical concession areas, and we also have our own in-house telesales team. In addition, we use independent third party direct sales agents, telesales channels and retail outlet partners. Business customers are addressed by our own national direct sales organization and telesales team.

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We have worked to continuously improve the national brand recognition of Invitel. As a result of these efforts, together with selective marketing communications activity, we now enjoy strong nationwide brand awareness. We have strong management and benefit from the added expertise of our majority shareholder. We benefit from a strong and experienced senior leadership team, most of whom have served the business for over seven years. Management has substantial mobile and fixed line telecommunications experience within the region and a proven track record of cost control and achieving operational efficiency. In addition, the team has extensive experience in both Business and Mass Market business segments. Martin Lea, the Chief Executive Officer of the business since 2004, has more than 28 years of experience in the data communications and telecommunications industries and has previously held positions as chief executive or managing director of telecommunications, managed network services and business support service companies. Robert Bowker, the Chief Financial Officer since 2004, previously served as Chief Financial Officer at Eurotel Praha and has 14 years of experience in the financial services and telecommunications sectors within Eastern Europe. In addition, the Board of Directors has recently been augmented to include Bruno Claude, the former CEO of Cablecom. Further, Mid Europa, the majority shareholder, has extensive experience as an investor in the telecommunications services industry and in infrastructure companies in Central and Eastern Europe. Mid Europa owns, or has owned, ten telecommunications assets in Central and Eastern Europe. Our Strategy Maximizing voice revenue and cash flow in our historical concession areas. We intend to maximize our voice revenue and cash flow derived from the provision of voice services within our historical concession areas through the continued migration of customers from traffic-based to subscription-based packages with higher monthly fees and lower usage charges, the ongoing introduction of targeted, innovative and flexible service offerings and by maintaining the quality of our customer service. In addition, we have focused on, and will continue focusing on, formulating effective strategies to retain customers and defend against churn in our historical concession areas resulting from competition from cable operators and to a lesser extent Carrier Pre-Selection from Magyar Telekom. Examples of these strategies include:

pricing our service offerings to limit the incentive to switch to a competitor; offering new commercial packages with a higher monthly fee but with bundled minutes included in the base subscription or with low call charges in all directions or various combinations thereof; launching win-back activities aimed at cable users and Carrier Pre-selection, Carrier Selection users with new promotional offers; establishing and developing loyalty programs, which will offer exclusive benefits to our customers; offering attractive bundled packages (voice and internet and IPTV) to counter bundled service offerings by cable operators; and conducting programs to proactively migrate existing customers to more attractive packages via our telesales channels in combination with targeted promotional campaigns.

Capitalizing on growth opportunities for Mass Market DSL services, both in and outside our historical concession areas. We believe that there is potential for further growth of DSL services in Hungary as personal computer and internet penetration levels in Hungary continue to climb towards Western European levels. Broadband internet usage has grown significantly in Hungary with penetration estimated to have increased from 0.7% of the households in Hungary as of 31 December 2002 to an estimated 50% as of December 2010. In comparison, broadband internet penetration in Western European countries was estimated at approximately 60% of households as of December 2010.

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We intend to continue to capitalize on the trend of increasing broadband usage by continuing to grow our DSL customer base both inside and outside our historical concession areas. We grew our DSL subscriber base faster than the market in 2010. The growth in our DSL customer base is a key business priority as we believe it will increase line retention and stimulate fixed line revenue growth. For example, we have acquired the majority of new fixed line contracts through bundled voice/DSL offerings. We intend to continue to grow our DSL business principally through the following initiatives:

the introduction of IPTV (in 2008) to enable us to offer triple play (telephone, broadband internet and TV) and dual play packages (broadband Internet and TV or telephone and TV) in our historical concession areas. As of December 31, 2010, we had 17,300 IPTV customers representing a penetration rate of 14.5% of our ASDL base in our historical concession areas; the launch of our Net and Go combined fixed ADSL and mobile broadband proposition in September 2009. This enables us to offer fixed broadband and mobile broadband in a single package all under the Invitel brand. This product was developed in cooperation with Telenor, the second biggest mobile operator in Hungary. As of December 31, 2010, we had 21,000 Net and Go subscribers; the use of unbundled local loops in Magyar Telekoms area to offer increasingly attractive and profitable higher speed internet and bundled voice/internet services; the use of WiMAX technology (and our existing 3.5 Ghz licences) to provide broadband access in those historical concession areas where there is no copper network today; maintaining a broad mix of distribution channels such as our own and outsourced telesales, owned shops, third party channels and points of sale, and agent networks; quarterly promotions supported by targeted television, radio and billboard advertising campaigns; and developing innovative bundled packages together with progressively increasing broadband access speeds.

Expanding our Business segment revenue and market share nationwide. We will continue to focus on expanding our business customer base and growing our share of the national business to business (B2B) market. We intend to capitalize on our extensive national backbone network, which means that in many cases business customers can be connected directly to our network, resulting in higher margins and more competitive pricing through lower access costs. Business customers can be connected directly to our backbone network mainly through the use of metropolitan fiber, line-of-site microwave, leased circuits or local loop unbundling. Lower value/volume business customers outside our historical concession areas are served through indirect methods such as Carrier Pre-Selection voice, and by buying DSL wholesale capacity from the incumbent. We plan to continue to increase our share in the business market through the following actions:

focusing on new customer acquisitions in the small and medium enterprises market through attractively priced, easily understood, voice, data, internet and value added services, sold through an efficient direct sales organization and complemented by high quality customer care; capitalizing on our traditional strength in the high-end corporate market and utilizing our extensive infrastructure, to sell additional services to existing customers and to selectively pursue new corporate business and government sector customers; retaining existing customers through effective account management, attractive renewal packages and continued customer care enhancement, such as our Top 100 Key Account program; cross selling new services to existing customers in all segments; and the continued development of our service portfolio and the introduction of a broader range of value added services such as we have done with data center services including co-location services, server hosting and server virtualization services, and most recently software as a service.

Continuing to leverage our modern national backbone network and our market reputation to grow our revenue in the Domestic Wholesale data market.

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We will continue to leverage our backbone network in Hungary, and our ability to easily add further capacity where required to sell infrastructure and capacity services to other service providers, including principally mobile operators and cable operators. We believe that the continuing growth in the fixed and mobile broadband markets will result in continued growth in the wholesale capacity market in the foreseeable future. We have developed a strong reputation for the quality of our service, our partnership oriented approach and our speed of execution in the Domestic Wholesale segment. Pursue selective, value enhancing market consolidation driven acquisition opportunities in Hungary. We believe that we are well positioned to participate in the further consolidation of the Hungarian market as a result of our market position as the number one alternative fixed line operator, our significant understanding of the competitive environment, both as an incumbent and as an alternative operator, and our solid track record of improving efficiency, achieving operating cost savings and realizing synergies from bolt-on acquisitions. We intend to identify acquisition opportunities that can strengthen and compliment our existing business, and where we can enjoy the benefit of consolidation related synergies. In particular, we will focus on suitable acquisition opportunities, such as the FiberNet Acquisition, that extend our geographic area and infrastructure footprint in Hungary and which deliver cost synergies and enhance growth potential in TV and broadband particularly through cable outside our historical fixed line concession areas.

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Summary Corporate and Financing Structure The following chart summarizes our corporate and financing structure at December 31, 2010 adjusted to give effect to the issuance of the Additional Notes and the anticipated repurchase and/or redemption and discharge of the 2007 Notes and the expected dissolution or merger of certain parent entities and subsidiaries of the Issuer. See Our Business Concurrent Transactions Repurchase and/or Redemption of the 2007 Notes. See the sections entitled Selected Historical Financial Information, Our Directors and Senior Management, Our Principal Shareholders, Description of Other Indebtedness, and Description of the Notes for more detailed descriptions.

(1) (2)

(3)

(4)

(5)

(6)

Mid Europa, including Hungarian Telecom and HTFI, each a company controlled by Mid Europa. Concurrently with this offering of Additional Notes, the Issuer has launched an offer (the Offer) to repurchase for cash certain of the 2007 Notes. The Issuer expects to redeem any 2007 Notes not purchased in the Offer in accordance with the optional redemption and satisfaction and discharge provisions in the indenture governing the 2007 Notes. See Our Business Concurrent Transactions Repurchase and/or Redemption of the 2007 Notes. The Issuer expects to use the proceeds from this offering of Additional Notes to repurchase or redeem the 2007 Notes. See Use of Proceeds. The Existing Notes are, and the Additional Notes will be secured by first priority liens over: (a) the Capital Stock of the Issuer; (b) all shares of the Capital Stock of each Subsidiary Guarantor held by the Issuer and its subsidiaries; (c) bank accounts, intra group loans (including the Proceeds Loan) and intra group receivables of each of the Issuer, Invitel ZRt, Technocom, FiberNet Zrt and FiberNet Kft as well as floating charges over the assets of each of Invitel ZRt, Technocom, FiberNet Zrt and FiberNet Kft; (d) the Capital Stock and, to the extent required by the Indenture, assets of any Restricted Subsidiary that becomes a Subsidiary Guarantor in the future, and (e) to the extent International Holdings is a subsidiary after June 15, 2011, the bank accounts, intragroup loans and intra-group receivables, as well as the assets of such entity, pursuant to a floating charge (or equivalent security). See Description of the Notes The Security. The Existing Notes are, and the Additional Notes will be, guaranteed by Invitel ZRt, Technocom, International Holdings, FiberNet Zrt and FiberNet Kft. For the year ended December 31, 2010, the Issuer and the Subsidiary Guarantors represented more than 99% of consolidated EBITDA and as of December 31, 2010, represented more than 99% of total assets (excluding goodwill) of the Issuer and its subsidiaries, calculated on a pro forma basis to reflect the FiberNet Acquisition. The Guarantees will be subject to contractual and legal limitations, and may be released under certain circumstances. See Description of the Notes The Guarantees, Description of Other Indebtedness Intercreditor Deed and Risk Factors Fraudulent transfer statutes may limit your rights as a noteholder. Following the consummation of this Offering, and when permitted by law and our existing agreements, the Issuer expects to liquidate Matel Holdings N.V., Invitel Holdings and Invitel Hungary Holdings Kft. (dissolution proceedings for which have commenced), three of its parent companies, after which Holdco I will be the Issuers direct parent. On November 10, 2010, the Issuer redeemed and cancelled approximately 75 million of the Existing Notes with the proceeds from the International Sale. See Our Business Sale of the International Wholesale Business.

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(7)

(8)

The shareholder loan dated December 16, 2009 (the Shareholder Loan) between an affiliate of Mid Europa and Holdco I comes due in December 2024. The Shareholder Loan has two tranches. The interest rate for Tranche A is 20% per annum above EURIBOR and interest will be capitalized semi-annually. The interest rate for Tranche B is 10.25% per annum above EURIBOR and is capitalized quarterly. See Related Party Transactions The Shareholder Loan. HTCC Holdco II B.V. was merged into Holdco I as of January 1, 2011.

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The Offering The summary below describes the principal terms of the offering of the Additional Notes (the Offering). Certain of the terms and conditions described below are subject to important limitations and exceptions. The Description of the Notes section of this Offering Memorandum contains a more detailed description of the terms and conditions of the Notes, including the definitions of certain terms used in this summary. Issuer Magyar Telecom B.V., a limited liability company (besloten vennootschap met beperkte aansprakelijkheid) organized under the laws of The Netherlands (the Issuer or Matel). Additional Notes Offered 80,000,000 aggregate principal amount of additional notes due 2016 issued on March 30, 2011 (the Additional Notes) under the indenture, dated as of December 16, 2009 as amended and supplemented from time to time among, inter alios, the Issuer, the Subsidiary Guarantors named therein and the Trustee (the Indenture) pursuant to which the Issuer issued 345,000,000 in aggregate principal amount of its 9.5% Senior Secured Notes due 2016 (75,003,000 of which were repurchased by the Issuer on November 10, 2010, resulting in 269,997,000 aggregate principal amount of the original issuance being outstanding) (the Existing Notes and, together with the Additional Notes, the Notes). The Additional Notes will otherwise have identical terms and conditions, are the same series as, and, upon completion of a 40day distribution compliance period, will be fully fungible with, the Existing Notes. Issue Price Additional Notes: 99.000% (plus accrued interest from (and including) December 16, 2010). Maturity Date December 15, 2016. Interest Rate and Payment Dates We will pay interest on the Additional Notes semi-annually in arrear on June 15 and December 15, commencing on June 15, 2011 at a rate of 9.5% per annum. Interest on the Additional Notes will accrue from December 16, 2010. Form of Denomination Each Global Note will have a minimum denomination of 50,000 and be in any integral multiple of 1,000 in excess thereof. Notes in denominations of less than 50,000 will not be available. Ranking of the Notes The Existing Notes are and the Additional Notes will be general obligations of the Issuer and:

rank, in respect to the Existing Notes, and will rank, in respect of the Additional Notes, senior in right of payment to any existing and future Debt of the Issuer that is subordinated in right of payment to the Notes; are, in the case of the Existing Notes and will be, in the case of the Additional Notes, guaranteed on a senior basis by the Subsidiary Guarantors;

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rank, in respect to the Existing Notes, and will rank, in respect of the Additional Notes, equally in right of payment with any existing and future Debt of the Issuer (including any 2007 Notes then outstanding) that is not subordinated in right of payment to the Notes; and are, in respect of the Existing Notes, and will be, in respect of the Additional Notes, effectively subordinated in right of payment to any existing and future Debt of the Issuer that is secured by property and assets that do not secure the Notes, to the extent of the value of the property and assets securing such Debt.

Subsidiary Guarantors The Existing Notes are, and the Additional Notes will be, jointly and severally guaranteed (the Guarantees), subject to certain limits imposed by local law and as set forth in the Indenture, on a senior basis by Invitel ZRt, Technocom, International Holdings, FiberNet Zrt and FiberNet Kft (the Subsidiary Guarantors). As of December 31, 2010, after giving pro forma effect to the issuance of the Additional Notes and the subsequent repurchase and/or redemption and discharge of the 2007 Notes:

the Issuer and its subsidiaries would have 350 million of indebtedness (excluding the related party subordinated loan), represented by the Notes; and excluding capital leases, the non-guarantor subsidiaries of the Issuer would have no indebtedness.

For the year ended December 31, 2010, the Issuer and the Subsidiary Guarantors represented more than 99% of consolidated EBITDA and as of December 31, 2010, represented more than 99% of total assets (excluding goodwill) of the Issuer and its subsidiaries calculated on a pro forma basis to reflect the FiberNet Acquisition. The obligations of the Subsidiary Guarantors will be contractually limited under the applicable Guarantees to reflect limitations under applicable law, including but not limited to, with respect to maintenance of share capital, corporate benefit, fraudulent conveyance and other legal restrictions applicable to the Subsidiary Guarantors and their respective shareholders and directors. For a description of certain of such contractual limitations, see Risk Factors Fraudulent transfer statutes may limit your rights as a Noteholder. Ranking of the Note Guarantees Each Guarantee of the Notes by the Subsidiary Guarantors is, in respect of the Existing Notes, and will be, in respect of the Additional Notes, a general obligation of each Subsidiary Guarantor and:

ranks, in respect of the Existing Notes, and will rank, in respect of the Additional Notes, equally in right of payment with any existing and future Debt of the Subsidiary Guarantors that is not subordinated in right of payment to such Guarantee;

23

ranks, in respect of the Existing Notes, and will rank, in respect of the Additional Notes, senior in right of payment to any existing and future Debt of the Subsidiary Guarantor (including any guarantees of the 2007 Notes then outstanding) that is subordinated in right of payment to such Guarantee; and is, in respect of the Existing Notes and will be, in respect of the Additional Notes, effectively subordinated in right of payment to all existing and future Debt of the Subsidiary Guarantors that is secured by property and assets that do not secure the Guarantees, to the extent of the value of the property and assets securing such Debt.

The Security The obligations of the Issuer and the Subsidiary Guarantors under the Indenture, the Notes and the Guarantees are, in respect of the Existing Notes, and will be, in respect of the Additional Notes, secured by first priority Liens over:

the Capital Stock of the Issuer; all shares of the Capital Stock of each Subsidiary Guarantor held by the Issuer and its Subsidiaries; bank accounts, intra-group loans (including the Proceeds Loan) and intra-group receivables of each of the Issuer, Invitel ZRt, Technocom, FiberNet Zrt and FiberNet Kft; the assets of each of Invitel ZRt, Technocom, FiberNet Zrt and FiberNet Kft pursuant to floating charges; the Capital Stock and, to the extent required by the Indenture, assets of any Restricted Subsidiary that becomes a Subsidiary Guarantor in the future; and to the extent that International Holdings is a Subsidiary after June 15, 2011, the bank accounts, intra-group loans and intra-group receivables of such entity as well as the assets of such entity pursuant to a floating charge (or equivalent security).

Although the Indenture contains limitations on the amount of additional Debt that the Issuer and the Subsidiary Guarantors may incur, the amount of such additional Debt could be substantial. Additional Amounts All payments under or with respect to the Notes or the Guarantees will be made free and clear of and without withholding or deduction for or on account of any Taxes in any relevant taxing jurisdiction except to the extent required by law. If withholding or deduction is required by law in any such jurisdiction, the Issuer will pay such additional amounts as may be necessary so that the net amount received by any holder of Notes (including additional amounts) after such withholding or deduction will not be less than the amount such holder would have received if such withholding or deduction had not been required, subject to certain exception. See Description of the Notes Additional Amounts. Optional Redemption

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Prior to December 15, 2012, the Issuer may redeem all or part of the Notes at a redemption price equal to the make-whole amount set forth under the caption Description of the Notes Optional Redemption Optional Redemption prior to December 15, 2012. The Issuer may redeem all or part of the Notes at any time on or after 2012 at the redemption prices set forth under the caption Description of the Notes Optional Redemption Optional Redemption on or after December 15, 2012. The Issuer may redeem the Notes in whole, but not in part, at any time following certain changes in tax laws at a price equal to the principal amount of the Notes plus accrued and unpaid interest and additional amounts, if any, to the date of redemption. See Description of the Notes Redemption Upon Changes in Withholding Taxes. Change of Control In the event of a change of control, the Issuer will be required to offer to repurchase the Notes at a purchase price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of the purchase. See Description of the Notes Purchase of Notes upon a Change of Control. Other Mandatory Offers The Issuer will be required to offer to purchase the Notes with excess proceeds, if any, following certain asset sales at a purchase price equal to 100% of the principal amount of the Notes, plus accrued and unpaid interest to the date of purchase. Certain Covenants The Indenture limits, among other things, our ability to:

incur additional indebtedness and issue preferred shares; make investments and certain other restricted payments; issue or sell shares of the Issuers restricted subsidiaries; agree to restrictions on the payment of dividends or the making of loans to the Issuer by its subsidiaries; enter into transactions with affiliates; create certain liens; transfer or sell assets; enter into sale and leaseback transactions; merge, consolidate, amalgamate or combine with other entities; designate restricted subsidiaries as unrestricted subsidiaries; de-list; impair the security interests; and engage in any business other than specifically enumerated activities.

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Each of the covenants is subject to a number of important exceptions and qualifications. See Description of the Notes Certain Covenants. Use of Proceeds The proceeds of the issuance of the Notes will be used (a) to fund the repurchase and redemption of all of the 2007 Notes and (b) for general corporate purposes. See Use of Proceeds. Transfer Restrictions The Notes and the Guarantees have not been and will not be registered under the U.S. Securities Act or the securities laws of any other jurisdiction. The Notes are subject to restrictions on transferability and resale. See Notice to Investors. Holders of the Notes will not have the benefit of any exchange or registration rights. Listing The Existing Notes have been admitted to the Official List of the Luxembourg Stock Exchange and to trading on the Euro MTF. Application has been made to admit the Additional Notes to listing on the Official List of the Luxembourg Stock Exchange and to trading on the Euro MTF in accordance with its rules. Governing Law for the Notes, Guarantees and the Indenture New York law. Governing Law for the Security Documents English law, Dutch law and Hungarian law, as applicable. Trustee BNY Mellon Corporate Trustee Services Limited. Registrar, Transfer Agent and Principal Payment Agent The Bank of New York Mellon. Luxembourg Paying Agent and Listing Agent The Bank of New York Mellon (Luxembourg) S.A.

Risk Factors Investing in the Notes involves substantial risks. See the Risk Factors section of this Offering Memorandum for a more complete description of risks that you should carefully consider before investing in the Notes. Summary Historical Financial Information The following tables provide a summary of the continued operations of the consolidated financial statements of Matel as of and for the years ended December 31, 2010 and 2009. The summary consolidated financial information presented here as of and for the years ended December 31, 2010 and 2009 should be read in conjunction with the audited consolidated financial statements of Matel as of and for the years ended December 31, 2010 and 2009 and the accompanying notes thereto included elsewhere in this Offering Memorandum. The audited consolidated financial statements and the accompanying notes thereto have been prepared in accordance with IFRS. See Presentation of Financial Information. On October 7, 2010, Invitel International Holdings B.V. consummated the sale (the International Sale) of its international wholesale business comprising the entire issued share capital of Invitel International AG (including its subsidiaries), Invitel International Hungary Kft and S.C. EuroWeb Romania S.A. (the International Business) to Trk Telekomnikasyon A.S. (Turk Telecom). See Our Business Sale of the International Wholesale Business. Our consolidated financial statements as of and for the year ended December 31, 2009 and 2010 included in this Offering Memorandum reflect the International Business as a discontinued operation following the decision of the Board of Directors

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in December 2009 to sell the International Business. The financial information for the year ended December 31, 2008 included in our consolidated financial statements for the year ended December 31, 2009 is also restated to reflect the International Business as a discontinued operation and is included for reference purposes. We encourage you to read the information contained in this section in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Offering Memorandum.
As of and for the year ended December 31, 2009 ( in millions) 2010

Statement of Comprehensive Income Data Operating revenue: Mass Market Voice....................................................................................... Mass Market Internet .................................................................................... Business ........................................................................................................ Domestic Wholesale ..................................................................................... Total operating revenue ................................................................................ Cost of sales exclusive of depreciation ......................................................... Operating expenses....................................................................................... Cost of restructuring(1) ................................................................................... Depreciation and amortization...................................................................... Income from operations ............................................................................. Net financial expense(2) ................................................................................. Income/ (loss) before tax............................................................................. Income tax benefit/(expense)........................................................................ Income/ (loss) from Continuing Operations ............................................. Income/ (loss) from Discontinued Operations .......................................... Income/ (loss) for the Year ......................................................................... Balance Sheet Data (at period end): Cash and cash equivalents ............................................................................ Net working capital(3) .................................................................................... Total assets ................................................................................................... Net liabilities relating to derivative financial instruments ............................ Liabilities relating to finance leases.............................................................. Cash-pay third party debt(4) ........................................................................... Subordinated shareholder loan(5) ................................................................... Shareholders equity(6) ................................................................................... Cash Flow Data: Net cash flow provided by (used in) operating activities.............................. Net cash flow provided by (used in) investing activities .............................. Net cash flow provided by (used in) financing activities.............................. Net increase (decrease) in cash and cash equivalents ................................... Other Data (unaudited): Free cash flow before debt service(7) ............................................................. EBITDA(8) ..................................................................................................... Adjusted EBITDA(9) ...................................................................................... Capital expenditures cash outflows(10) ........................................................... Adjusted EBITDA less capital expenditures cash outflows.......................... Net interest expense(11)................................................................................... Net cash-pay third party debt(12) .................................................................... Net cash-pay third party debt to adjusted EBITDA ...................................... Adjusted EBITDA to net interest expense....................................................

77.0 32.9 79.0 21.1 210.0 (69.1) (40.6) (2.1) (54.8) 43.4 (112.3) (68.9) 4.8 (64.1) 25.8 (38.3) 49.7 (16.7) 722.7 12.5 4.7 470.7 24.6 70.7 68.5 (52.3) 20.9 36.6 64.1 98.2 105.1 43.1 62.0 (38.3) 421.0

63.9 32.7 73.2 23.4 193.2 (62.6) (46.2) (1.2) (53.9) 29.3 (59.7) (30.4) (18.4) (48.8) 60.0 11.2 109.0 (7.4) 485.9 2.2 4.4 348.1 15.2 78.1 36.3 158.0 (150.0) 43.9 232.1 83.1 99.1 30.5 68.6 (34.3) 239.1 2.4x 2.9x

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(1) (2) (3) (4) (5) (6) (7)

Cost of restructuring represents costs related to the reorganizations we have undertaken and mainly includes severance expenses. Net financial expense includes interest income, interest expense, amortization of bond discount, amortization of deferred borrowing costs, net foreign exchange gains / (losses), gains / (losses) on extinguishment of debt, gains / (losses) from fair value changes of derivative financial instruments and net other financial expense. Net working capital is calculated as total current assets (excluding cash and cash equivalents and current assets relating to derivative financial instruments) less current liabilities (excluding short-term borrowings, current liabilities relating to derivative financial instruments and the current portion of borrowings). Cash-pay third party debt includes debt under the 2007 Notes, the Existing Notes and excludes liabilities related to finance leases and deferred borrowing costs. Subordinated shareholder loan includes the loan provided by Matel Holdings N.V. Shareholders equity includes non-controlling interest. Free cash flow before debt service equals net cash flow provided by / (used in) operating activities plus cash interest paid minus net cash flow used in / (provided by) investing activities. The following table sets forth the reconciliation of net cash flow provided by / (used in) operating activities to free cash flow before debt service: As of and for the year ended December 31, 2009 ( in millions) 2010 68.5 47.9 (52.3) 64.1 36.3 37.8 158.0 232.1

Net cash flow provided by operating activities .......................................................................... Cash interest paid ...................................................................................................................... Net cash flow used in (provided by) investing activities............................................................ Free cash flow before debt service............................................................................................. (8)

We define EBITDA as net income / (loss) plus income taxes, financial income, financial expense (including loss on extinguishment of debt) and depreciation and amortization. Other companies in our industry may calculate EBITDA in a different manner. EBITDA is not a measurement of financial performance under IFRS and should not be considered as an alternative to net income / (loss) or to cash flow from operating, investing or financing activities, as a measure of liquidity or an indicator of our operating performance or any other measures of performance derived in accordance with IFRS. Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements. In addition, EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments. Management uses EBITDA as a tool for various purposes including measuring and evaluating financial and operational performance, making compensation decisions, planning and budgeting decisions and financial planning purposes. We believe that the presentation of EBITDA is useful for investors because it reflects managements view of core operations and cash flow generation upon which management bases financial, operational and planning decisions and presents measurements that investors and their lending banks have indicated to management are important in assessing us and our liquidity. Management compensates for the shortcomings of this measure of financial performance by utilizing it in conjunction with financial measures under IFRS. The following table sets forth the reconciliation of net income (loss) from continuing operations to EBITDA: As of and for the year ended December 31, 2009 ( in millions) 2010 (64.1) (4.8) 17.4 15.7 79.2 54.8 98.2 (48.8) 18.4 6.9 7.1 45.6 53.9 83.1

Net loss from continuing operations .......................................................................................... Income taxes (benefit) expense.................................................................................................. Loss on derivatives .................................................................................................................... Foreign exchange loss, net......................................................................................................... Other financing expenses, net .................................................................................................... Depreciation and amortization................................................................................................... EBITDA ....................................................................................................................................

(9)

We define Adjusted EBITDA as EBITDA plus the cost of restructuring, U.S. listing related expenses, non-cash share based compensation, consulting expenses relating to strategic projects, management fees and crisis tax. The same considerations set forth in footnote 9 above with respect to the uses and limitations of EBITDA apply to Adjusted EBITDA. The following table sets forth the reconciliation of EBITDA to Adjusted EBITDA: As of and for the year ended December 31, 2009 ( in millions) 2010 98.2 2.1 0.1 3.4 1.3 105.1 83.1 1.2 11.2 0.6 2.7 0.3 99.1

EBITDA .................................................................................................................................... Cost of restructuring(a) ............................................................................................................... Crisis tax(b) ................................................................................................................................ Management fee(c) ..................................................................................................................... Consulting expenses relating to strategic projects(d)................................................................... U.S. listing related expenses and share based compensation(e) ................................................... Adjusted EBITDA ..................................................................................................................... (a) (b) (c) (d) (e)

Cost of restructuring is related to reorganizations we have undertaken and mainly includes severance expenses. Crisis tax was introduced by the Hungarian government in the fourth quarter of 2010 with retrospective effect to January 1, 2010. Management fee includes costs charged by our trustee as well as management fees paid to Mid Europa from June 30, 2010. Consulting expenses relating to strategic projects mainly include non-recurring financial and legal consulting expenses. In 2010, these expenses related to cable due diligence and in 2009, these expenses related to the redomiciliation project. U.S. listing related expenses and share based compensation in 2010 mainly include tender offer expenses in 2010, the gain from the mark-to-market revaluation of share options and option termination charges. U.S. listing related expenses and share based compensation in 2009 mainly include costs related to being an SEC registrant until February 2009, de-listing expenses and the charge related to the mark-to-market revaluation of share options.

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(10) Capital expenditures cash outflows represent the purchase of intangible assets and the purchase of property, plant and equipment line items relating to our continued operations in our consolidated statements of cash flows. (11) Net interest expense equals third party interest expense (excluding interest on subordinated shareholder loan) less interest income and excludes the amortization of deferred borrowing costs, bond discount and other interest expenses relating to finance leases. (12) Net cash-pay third party debt equals cash-pay third-party debt less cash and cash equivalents.

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RISK FACTORS An investment in the Notes to be issued in this Offering involves a high degree of risk. In addition to the other information contained in this Offering Memorandum, you should carefully consider the following risk factors before purchasing the Notes. The risks and uncertainties that are described below are not the only ones that we face. Additional risks and uncertainties of which we are not aware or that we currently believe are immaterial may also adversely affect our business, financial condition or results of operations. If any of the possible events described below occur, our business, financial condition or results of operations could be materially and adversely affected. If that happens, we may not be able to pay interest or principal on the Notes when due and you could lose all or part of your investment. In this section, we capitalize references to Mass Market Voice, Mass Market Internet, Business and Domestic Wholesale where and to the extent that the references are to our reporting segments in our consolidated financial statements prepared in accordance with IFRS. This Offering Memorandum also contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including the risks described below and elsewhere in this Offering Memorandum. Risks Relating to Our Business We have experienced substantial net losses and may need additional liquidity in the future. During the years ended December 31, 2009 and 2010, we incurred net losses from continuing operations of 64.1 million and 48.8 million, respectively, and used a substantial amount of cash for capital investments. We also may require additional financing in the future to fund our operations. We cannot assure you that we will be able to improve our results of operations or obtain additional financing. See Managements Discussion and Analysis of Financial Condition and Results of Operations. Since the second half of 2008, the global capital and credit markets have experienced extreme volatility and disruptions, which has limited the availability and increased the cost of financing. Our ability to secure additional financing in the future will depend on a variety of factors, such as economic and market conditions, the availability of credit, as well as the possibility that lenders could develop a negative perception of our prospects, the industry generally or the geographic markets in which we operate. It may be difficult or impossible to obtain financing in the event that we need additional liquidity in the near future. Our revenue and cash flow will be adversely affected if the Hungarian fixed line market further declines and our Mass Market Voice business declines at a higher rate than we expect. Our business strategy depends, in part, on our ability to manage our Mass Market Voice operations, in terms of both our revenue and our market share. The Mass Market Voice market in Hungary has continued to decline, in terms of both the number of lines and total voice traffic (i.e. average usage per line). We experienced a decline in the number of Mass Market Voice lines in our historical concession areas from approximately 356,000 lines as at December 31, 2009 to 327,000 lines as at December 31, 2010. We experienced a decline in the number of Mass Market Voice outgoing minutes in our historical concession areas from approximately 441 million minutes in 2009 to 394 million minutes in 2010. We believe that the declines in the number of our fixed lines and voice traffic in the Hungarian fixed line market in general have been caused primarily by competition from mobile operators and cable television operators. Although we believe that the rate of line churn from fixed service to mobile service has slowed since the end of 2007 due to the very high mobile penetration in Hungary (approximately 120% as of December 31, 2010 according to the NMHH). At the same time, we have seen increased competition from, and increased churn to, cable television operators (most significantly UPC Hungary, T-Home and Digi) offering voice services in triple play (combined television, internet and voice service) packages. A decline in our Mass Market Voice business at a rate greater than we anticipate, through a decrease in the number of lines and/or voice traffic could have a material adverse effect on our business, operating results and financial condition. Our failure to increase revenue in the Mass Market Internet market may adversely affect our results of operations and reduce our market share. Our strategy includes increasing our revenue from Mass Market Internet (ADSL) by increasing our market penetration in the growing Mass Market Internet market. We are planning on increasing our revenue from internet services to partially offset our decreased revenue from our Mass Market Voice services. However, our Mass Market Internet services are subject to strong competition from cable television operators in triple play (combined television, internet and voice service) packages, and we have seen cable television operators increase their share of the overall fixed broadband market at the

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expense of ADSL. In addition, we have seen the growth in our Mass Market Internet business slow, reflecting the general slowdown in the Hungarian residential fixed broadband market, in the wake of the recent economic crisis, which has taken a toll on consumer spending. We expect our Mass Market Internet business to grow again in the future as we expect the broadband penetration rate in Hungary to eventually reach Western European levels. However, if Hungarys internet usage does not grow as expected, or if our competitors are more successful at obtaining new customers or place downward pressure on prices to a greater degree than expected, we may not be able to increase our revenue in the Mass Market Internet market as planned, which could have a material adverse effect on our results of operations and reduce our market share. Additionally, outside of our historical concession areas, we rely on the wholesale products of other operators, most importantly Magyar Telekom, in providing our Mass Market Internet services. Currently, these operators are subject to regulatory remedies imposed by the National Media and Infocommunications Authority (the legal successor to the National Communications Authority and the National Radio and Television Board) (the NMHH), pursuant to which we are granted access to such wholesale products on regulated prices and terms. However, subject to the findings of future market analysis procedures conducted by the NMHH, such remedies may be relaxed or lifted, which may affect the profitability of our Mass Market Internet services. Our revenue from the Business segment may be adversely affected due to competition and the economic environment. We believe that we are well positioned to increase our market share in the Business segment. However, our Business segment operations have been negatively impacted by the economy as businesses seek to cut their expenditures and contract renewals become more competitive, resulting in higher price erosion. If the economy continues to negatively impact the expenditures of businesses and competition continues to negatively affect the pricing of existing contracts and the pricing of our new contracts, this could have a material adverse affect on our business, operating results and financial condition. In addition, our Business revenue is impacted by the continued reduction in Business outgoing voice traffic as Business customers rely increasingly on mobile technology. If the decline in voice-related Business revenue occurs faster than we expect, then this too could have an adverse impact on our operating results and financial condition. If we are not able to manage costs while effectively responding to competition and changing market conditions, our cash flow may be reduced and our ability to service our debt or implement our business strategies may be adversely affected. Our business plan is dependent on our ability to effectively manage the costs associated with running our business. If we need to respond to actions by our competitors or unanticipated changes in our markets, we may be required to make capital investments in our business and other expenditures which would reduce our cash flow available for other purposes. This could have a negative impact on our ability to service existing debt and our business, results of operations and financial condition could be adversely affected. We are subject to increased competition due to the business strategies of our competitors, prevailing market conditions and the effect of E.U. regulation on the Hungarian telecommunications market, which may result in the loss of customers and market share. Competition in the Hungarian telecommunications sector has increased as a result of market liberalization measures introduced by Act C of 2003 on Electronic Communications, effective from January 1, 2004 (the 2004 Communications Act). The 2004 Communications Act promotes competition in fixed line and mobile telecommunications services through, among other things, the transposition of relevant E.U. directives and regulations and the imposition of universal service obligations (USO), cost accounting, price controls, Carrier Pre Selection, Carrier Selection, Local Loop Unbundling and number portability. The 2004 Communications Act also grants powers to the NMHH to impose obligations on market participants to remedy competitive deficiencies. As a result, we have faced, and could continue to face, increased competition. Our competitors include mobile and fixed line telecommunications services providers in both the Mass Market and Business markets and cable television operators offering triple play (combined television, internet and voice service packages) specifically in the Mass Market. Competition in any or all of our services has led to, and may continue to lead to:

price erosion; loss of market share; increased customer line churn;

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loss of existing customers and greater difficulty in obtaining new customers; the need for more rapid deployment of new technologies and related capital expenditure as existing technologies are becoming obsolescent at a more rapid pace; and other developments that could have a material adverse effect on our financial condition and results of operations.

The scope of competition and its effect on our business, operating results and financial condition will depend on a variety of factors that we currently cannot assess with precision and that are for the most part outside of our control. Such factors include, in addition to the regulatory measures described above, the business strategies and capabilities of current and potential competitors, prevailing market conditions and the effect of E.U. regulation on the Hungarian telecommunications market, as well as the effectiveness of our efforts to address increased competition. Fixed-to-mobile substitution has increased customer line churn in both the Mass Market and Business markets in the past, although we believe that the rate of fixed-to-mobile line churn has decreased since the end of 2007 as a result of Hungarys very high mobile penetration rate (approximately 120% as of December 31, 2010 according to the NMHH). Although we attempt to control customer line churn by improving our customer service, introducing new customized service offerings, utilizing effective advertising and through other means, if we are unsuccessful in any of these initiatives, our customer line churn could further increase and our business could be materially adversely affected. The ongoing global financial and economic crisis may continue to result in the deterioration of economic conditions in our operating areas, which may continue to impact demand for our services and affect our ability to obtain additional financing. Austerity measures introduced by the Hungarian government may similarly impact demand for our services. Continued concerns about the systemic impact of potential long-term and wide-spread recession, energy costs, the availability and cost of credit, diminished business and consumer confidence and increased unemployment have contributed to increased market volatility and diminished expectations for European and emerging economies, including the jurisdictions in which we operate. Our business is affected by general economic conditions in Hungary and the Central and Eastern European region. There are many factors that influence global and regional economies which are outside of our control. A cautious or negative business outlook may cause our Business customers to delay or cancel investment in information technology and telecommunications systems and services, which may adversely and directly affect our revenue and, in turn, slow the development of new services that could become future revenue sources for us. Our revenue was adversely affected during 2009 and any future deterioration of the global and regional economies could have a material adverse effect on our business, operating results and financial condition. The current global financial and economic crisis may result in the deterioration of economic conditions in our operating areas. The impact of the credit crisis on our customers may adversely impact the overall demand for our products and services. This in turn may result in decreased revenue. In addition, a continued credit crisis may affect our ability to obtain additional financing. In addition, as the global financial system experienced unprecedented credit and liquidity conditions and disruptions, leading to a reduction in liquidity, greater volatility, general widening of credit spreads and, in some cases, lack of transparency in money and capital markets, many lenders have reduced or ceased to provide funding to borrowers. If these conditions continue, or worsen, it could negatively affect our ability to raise funding in the debt capital markets and/or access secured lending markets on financial terms acceptable to us. Budget deficits as a percentage of GDP have remained relatively high for Hungary over the last several years. The Updated Convergence Program, a government plan consisting of austerity measures to redress the Hungarian economy and which was endorsed by the European Commission in September 2006, contemplates a reduction in the general government budget deficit. While the telecommunications sector is one of the industrial segments that has been less affected by the global financial crisis and economic slowdown, the recessionary conditions and uncertainty in the macroeconomic environment nevertheless adversely impacted consumer spending on telecommunications products and services. Customers may decide that they can no longer afford certain of our services that are instrumental in supporting our revenues. For example, there has been a trend among Hungarian customers to disconnect their fixed voice lines, as consumers rely primarily on mobile telecommunications and view fixed-line voice services as an expendable discretionary expense. In addition to a significant budget deficit, in recent years the Hungarian economy has been marked by a large current account deficit, rapid credit growth and a reliance of Hungarian businesses and consumers on foreign currency loans. These factors have left Hungary especially vulnerable to the financial crisis.

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In April 2010, there were general elections in Hungary, following which a new conservative government took power backed by a solid two-thirds majority in the Hungarian Parliament. Recently, markets became highly sensitive to news about Hungary regarding the government budget. The market also took a negative view of aborted negotiations with the International Monetary Fund (the IMF). In late 2010, however, these market tensions eased significantly after the government expressed its commitment to maintain the 3.8% and 3% GDP-proportionate budget deficit targets for 2010 and 2011, respectively. According to the National Bank of Hungarys forecast, economic growth is expected to accelerate in the future. However, there are a number of risks to the pace of growth as the external economic environment remains fragile due to the adverse effects of fiscal austerity efforts by Euro-area governments. In addition, the depreciation of the Hungarian forint against the Swiss franc may substantially worsen the economic outlook in Hungary through a decline in domestic demand. Employment growth and the reduction in personal income tax rates may contribute to an improvement in households creditworthiness and domestic demand, while the cut in the corporate income tax may stimulate investment and borrowing. At the same time, however, the introduction of windfall taxes is likely to reduce the predictability of the tax regime, and may create a less favorable business climate particularly in the effected industries. The continued impact of the global economic and market conditions, including, among others, the events described above could have a material adverse effect on our business, financial condition, results of operations or liquidity. We are subject to a recently enacted special crisis tax and face a potential tax liability which would have a significant impact on our operational results and profitability. In October 2010, the Hungarian Parliament passed a law imposing a special crisis tax on certain sectors, including telecommunications, which was implemented with retrospective effect to January 1, 2010. As a result of this law, we estimate that we will be required to pay 32 million in tax before the end of 2012 (based upon forecasted revenues, excluding FiberNet). In 2010, we incurred additional expense of 11.2 million as a result of this tax. Although this special crisis tax is expected to expire at the end of 2012, there is a risk that the Government will decide to prolong this tax. If extended, we estimate this special crisis tax would significantly adversely affect our operational results and profitability by reducing our yearly cash flow by up to approximately 10 million. For a discussion of the special crisis tax, please see Managements Discussion and Analysis of Financial Condition and Results of Operations Overview of Continued Operations Macroeconomic Factors and Hungarian Telecommunications Industry and Regulation Our Other Statutory Obligations Imposed on us in Hungary Special Crisis Tax. We may not be able to successfully integrate FiberNets business and our business or realize the anticipated benefits of the FiberNet Acquisition. Our decision to pursue the FiberNet Acquisition was partly based on the expected opportunities for cost savings and synergies across the whole business as a result of integrating FiberNet into our existing operations. Our new FiberNet subsidiaries operate in the cable services industry, where we have limited prior experience. Realization of the anticipated benefits, however, will depend on our ability to successfully integrate our businesses and operations with those of FiberNet. FiberNet currently generates losses and is characterized by an above average churn rate and below average financial indicators. FiberNet requires major reorganization and capital investments to ensure that it can compete effectively in the market. No assurance can be given as to the extent the measures we need to implement will prove successful, if at all, and whether and to what extent FiberNet will be able to contribute to the profits of our business in the future. Thus, we cannot assure you that we will achieve the desired benefits as a result of acquiring FiberNet. Any material delays or unexpected costs incurred in connection with the post-acquisition transition of the business under our management could have a material adverse effect on our revenues, results of operations, liquidity or financial condition. The integration process may also result in additional or unforeseen expenses. We will also have to devote significant management attention and resources to integrating the FiberNet business with our business which could cause an interruption of, or loss of momentum in, our business or financial performance. If our management were to fail to manage these and other issues effectively, our financial condition and results of operations could be affected. The provision of cable services is highly competitive, and may become more competitive in the future, which could result in a loss of FiberNets subscribers and revenue. Our new FiberNet subsidiaries provide cable services. The provision of cable services is highly competitive and FiberNet faces competition from established and new competitors. As existing technology develops and new technologies emerge, we believe that competition may intensify. FiberNet faces competition from other cable providers, satellite providers, wireless providers, terrestrial broadcasters, DSL providers, incumbent providers and other providers or delivery systems. Some of FiberNets competitors have substantially greater financial and technical resources than it does. FiberNet may be

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required to reduce its prices if its competitors reduce prices, or as a result of any other downward pressure on prices for cable services, which could result in a decrease of FiberNets average revenue per user, and/or a loss of subscribers. FiberNets competitors may be able to launch products or services with superior capabilities or may be better able to fund development. An increase in competition in the provision of cable services, or activities by FiberNets competitors, including those mentioned above and others, could lead to a decline in sales, renewal rates and/or increase in costs, which could have an adverse effect on FiberNets business, financial condition, results of operations and cash flows. The agreements entered into in relation to the International Sale may result in warranty claims against us. As part of the International Sale, pursuant to the stock purchase agreement we agreed to certain warranties and indemnities with Turk Telecom, some of which do not expire until October 2015. In relation to these warranties, Turk Telecom may bring breach of warranty claims against us for the purchase price of the International Business. In addition, we entered into a master services agreement for the provision of reciprocal telecommunication services with Turk Telecom. Under this agreement, Turk Telecom may bring warranty claims against us for up to 100% of the aggregate of all fees and expenses paid by it and its affiliates to us for a service in that contractual year. If Turk Telecom were to bring a breach of warranty claim in either instance, it could have a material adverse effect on our revenues, results of operations, liquidity or financial condition. We hold insurance against such claims, however there can be no assurance that such insurance will be adequate to cover all losses. The FiberNet Disposal may result in warranty claims. As part of the FiberNet Disposal, we undertook a number of warranties to UPC for a period of 24 months from the date of the FiberNet Disposal. The aggregate amount of our liability towards UPC is limited to the amount of the purchase price paid by UPC for the divested assets, which is approximately 22.2 million. There can be no assurance that such payment under the warranty obligations will not arise during the warranty period. Our acquisition strategy contains risks and uncertainties and will depend on the successful integration of existing and newly acquired businesses. Anticipated synergies may not materialize which may affect our ability to expand our operations successfully. In order to strengthen our business, we intend to pursue expansion opportunities by selectively acquiring and pursuing investment opportunities which will compliment and enhance our existing operations. The ability to carry out this strategy will depend, among other things, on our ability to identify and compete for new opportunities, the availability of financing and regulatory approvals. In addition, our prospects should be considered in light of the risks and transaction costs that are inherent in acquisitions and the development of new activities. While we hope to benefit from integration synergies, there is no assurance that we will be successful in realizing the full extent of anticipated benefits and actual synergies may be materially different which may affect our ability to expand our operations successfully. The loss of key senior management could negatively affect our ability to implement our business strategy and generate revenue. Our performance and continued success depends, in part, on our senior management. In particular, we depend in large part on the knowledge, expertise, reputation and services of our Chief Executive Officer, Martin Lea, and our Chief Financial Officer, Robert Bowker. The familiarity of these individuals with our company and our business, their experience in management and with financial matters, and their combined experience in the telecommunications market generally make them important to our continued success. The loss of our Chief Executive Officer, Chief Financial Officer or any other members of our senior management could negatively affect our ability to implement our business strategy and generate revenue. Technological changes and the shortening life cycles of our services and infrastructure may affect our operating results and financial condition and may require us to make unanticipated capital expenditures. The telecommunications industry is characterized by rapidly changing technology, related changes in customer demands and the need for new services at competitive prices. Technological developments are also shortening life cycles of both services and the business infrastructure on which those services are based, and are facilitating convergence of different segments of the increasingly global information industry. In addition, competition based on alternative technologies, such as cable television networks or voice-over IP, wireless based technologies or radio-based alternative networks in our voice markets, could provide a lower cost solution or render our services obsolete or cost-inefficient in our markets. Our future success will be impacted by our ability to anticipate, invest in and implement new technologies in order to provide services at competitive prices. In addition, we may not receive the necessary licenses to provide services based on these new technologies or may be negatively impacted by unfavorable regulation regarding the usage of these technologies.

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Technological advances may also affect our operating results and financial condition by shortening the useful life of some of our assets or by requiring us to make additional unanticipated capital expenditures, particularly in connection with our network. If we need to respond to actions by our competitors or unanticipated changes in our markets or market conditions, we may be required to make investments in our business and other expenditures which would reduce our cash flow available for other purposes, including servicing our debt. Network or system failures could result in reduced revenue, or require unanticipated capital or operating expenditures, and could harm our reputation. Our technical infrastructure (including our network infrastructure for fixed-network services and our data center for hosting services) is vulnerable to damage or interruption from information technology failures, power loss, floods, windstorms, fires, intentional wrongdoing and similar events. Unanticipated problems at our facilities, network or 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 revenue, or require unanticipated capital or operating expenditures, and could harm our reputation. We depend on our ability to store, retrieve, process and manage a significant amount of information. If our IT systems fail to perform as expected, or if we suffer an interruption, malfunction or loss of information processing capabilities, it could negatively affect our ability to service our customers. Our business depends on continuously upgrading our existing networks. Any unanticipated investments required due to external or internal factors would require additional unplanned capital expenditure. We must continue to upgrade our existing fixed-line networks in a timely manner in order to retain and expand our customer base in each of our markets and to successfully implement our strategy. Among other things, the needs of our business could require us to:

upgrade the functionality and capacity of our networks; increase our network coverage in some of our markets; expand or upgrade our customer service, network management and administrative systems; and upgrade older systems and networks to adapt them to new technologies.

Many of these tasks, which could create additional financial strain on our business and financial condition, are not entirely under our control and may be affected by applicable regulation. If we fail to execute them successfully, our services and products may be less attractive to new customers and we may lose existing customers to our competitors, which would adversely affect our business, financial condition and results of operations. We are dependent on third party vendors for our information, billing and network systems as well as IPTV service. Any significant disruption in our relationship with these vendors could increase our costs and affect our operating efficiencies. Sophisticated information and billing systems are vital to our ability to monitor and control costs, bill customers, process customer orders, provide customer service and achieve operating efficiencies. We currently rely on internal systems and third party vendors to provide some of our information and processing systems as well as applications that support our IP services, including IPTV. Some of our billing, customer service and management information systems have been developed by third parties for us and may not perform as anticipated. In addition, our plans for developing our information systems, billing systems, network systems and IPTV service rely on the delivery of products and services by third party vendors. Our right to use these systems is dependent upon license agreements with third party vendors. Some of these agreements are cancelable by the vendor and the cancellation of these agreements could impair our ability to process orders or bill our customers. Since we rely on third party vendors to provide some of these services, any switch in vendors could be costly and affect operating efficiencies. We do not have direct operational or financial control over our key suppliers and have limited influence with respect to the manner in which these key suppliers conduct their businesses. Our reliance on these suppliers exposes us to risks related to delays in the delivery of their services. We depend on third party telecommunications providers over which we have no direct control for the provision of certain of our services. Our ability to provide high quality fixed-line telecommunications services depends on our ability to interconnect with the telecommunications networks and services of other fixed-line operators and mobile operators, particularly those of our

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competitors. While we have interconnection agreements in place with other operators, we do not have direct control over the quality of their networks and the interconnection services they provide. Any difficulties or delays in interconnecting with other networks and services, or the failure of any operator to provide reliable interconnection services to us on a consistent basis, could result in our loss of subscribers or a decrease in voice traffic, which would reduce our revenues and adversely affect our business, financial condition and results of operations. Our operations require substantial capital expenditures, which we may not be able to fund from cash generated from operations or financing facilities. We require substantial capital to maintain, upgrade and enhance our network facilities and operations. While we have historically been able to fund capital expenditures from cash generated from operations and financing facilities, this may not be possible in the future and the other risks described in this section could materially reduce cash available from operations or significantly increase our capital expenditure requirements, and these outcomes could cause capital not to be available when needed. In addition, costs associated with the licenses that we need to operate our existing networks and technologies and those that we may develop in the future, and costs and rental expenses related to their deployment, could be significant. The amount and timing of our future capital requirements may differ materially from our current estimates due to various factors, many of which are beyond our control. We may also be required to raise additional debt or equity financing in amounts that could be substantial. The type, timing and terms of any future financing will depend on our cash needs and the prevailing conditions in the financial markets. We cannot assure you that we would be able to accomplish any of these measures on a timely basis or on commercially reasonable terms, if at all. Further, we cannot assure you that we will generate sufficient cash flows in the future to meet our capital expenditure needs, sustain our operations or meet our other capital requirements, which may have a material adverse effect on our business, financial condition and results of operations. See Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources. This could adversely affect our ability to implement our business strategy and result in a reduction of revenue. Legal contingencies and liabilities could have a substantial negative impact on our financial condition, cash flows and profitability. We are subject, in the ordinary course of business, to litigation and other legal, civil, tax, stamp duty, regulatory and competition claims. We cannot be certain that we will have a successful outcome in any proceedings or that our cash flow will be sufficient to cover all future claims against us. Any increase in the frequency and size of these claims, may adversely impact our profitability and cash flow and have a material adverse effect on our results of operations and financial condition. In addition, if these claims rise to a level of frequency or size that is significantly higher than similar claims made against our competitors, our reputation and business will likely be harmed. See Our Business Legal Proceedings. Our financial conditions and prospects may be materially adversely affected by ratings downgrades. Moodys Investors Services (Moodys) announced on March 10, 2011 that it has placed the rating on the Notes on review for a possible alignment with the Issuers Corporate Family Rating. Such alignment in the ratings of the Notes or other adverse actions by rating agencies could increase our borrowing costs for future financings and signal an increase in the risk of investment in the Notes. Risks Relating to Regulatory Matters The changing regulatory environment, the difficulty to predict the result of certain market analyses by the regulator, price regulations, and other regulatory initiatives and investigations could affect the results of our operations, our financial condition and the success and profitability of our business. The 2004 Communications Act has resulted in significant changes to the Hungarian telecommunications sector and the regulatory environment is constantly changing. The NMHH was established in 2010 and is now the sole agency responsible for oversight and monitoring of the Hungarian telecommunications industry, with the power to impose regulatory remedies. In 2006, the Ministry of Information Technology and Communications (the government department formerly responsible for legislation relating to the Hungarian telecommunications industry) was incorporated into the Ministry of Economics and Transport. In mid-2008, the industrial parts were carved out into a new Ministry of Transport, Telecommunications and Energy. As of January 1, 2009, all relevant legislative and supervisory competences concerning telecommunications were taken over by the Prime Ministers Office, while the Ministry of Transport, Telecommunications and Energy remained the official department responsible for the postal sector only. Following the 2010 elections in Hungary, the structure of the central administration has changed substantially and currently the Ministry of National Development is responsible for all matters related to audiovisual policy, public administration IT, electronic communication of information, frequency management, information society and postal services. For a more detailed discussion of Hungarys telecommunications

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industry regulation, please see Hungarian Telecommunications Industry and Regulation Hungarian Regulatory Environment. This regulatory regime entails a number of risks that may adversely impact our business:

The frequent changes in the telecommunications regulatory regime (including the 2010 general elections in Hungary that led to changes in the government, in the ministerial structure, the personnel in the ministries, creation of a convergent regulatory authority (i.e., the NMHH and the president of the NMHH), combined with the recent increased activity in the telecommunications industry by the Hungarian Competition Office (the GVH) and the National Consumer Protection Authority (the NFH), as well as the recent adoption of a new media legislation and the transposition of recent E.U. directives governing electronic communications until May 2011, could cause or lead to inconsistent implementation and interpretation of laws governing the electronic communications industry, thereby hampering the stability of the regulatory environment. Such uncertainties in the regulatory environment could, in turn, negatively impact our future growth and profitability. In October 2010, the Hungarian Parliament passed a law imposing a special crisis tax on certain sectors, including telecommunications. As a result of this law, we estimate that we will be required to pay 32 million in tax before the end of 2012 (based upon forecasted revenues, excluding FiberNet). Although this special crisis tax is expected to expire at the end of 2012, there is a risk that the Government will decide to prolong this tax. If extended, we estimate this special crisis tax would significantly adversely affect our operational results and profitability by reducing our yearly cash flow by up to approximately 10 million. For a discussion of the special crisis tax, please see Managements Discussion and Analysis of Financial Condition and Results of Operations Overview of Continued Operations Macroeconomic Factors and Hungarian Telecommunications Industry and Regulation Other Statutory Obligations Imposed on us in Hungary Special Crisis Tax. The NMHH conducts, on a periodical basis, market analysis exercises in order to determine the competitiveness of the market. However, the results of such analyses are often difficult to predict and the process is constantly being reviewed and modified both on the national and the international level pursuant to the inputs generated by public consultations and policy driven interventions of the European Commission. If we are unable to respond effectively to the evolving regulatory policies implemented by the NMHH, our ability to compete and the profitability of our business may be impaired. Although the regulatory findings of the NMHH may be challenged before the courts, the resolutions imposed by the NMHH are immediately enforceable unless injunctive relief is granted by the courts. Due to the lengthy nature of Hungarian court proceedings, therefore, even if a court decision is ultimately favorable to us, our business may already be adversely affected. If the NMHH does not respond effectively to changes in the market environment by changing the regulatory obligations imposed on us or on other incumbents in step with changes in the market, our ability to operate competitively in our industry may be adversely affected. The NMHH has designated us as a service provider with significant market power (SMP). As a result, the NMHH issued resolutions forcing us to adopt changes in our pricing models. As an operator with SMP, we have been required to submit to the NMHH and publish a Reference Interconnection Offer (RIO) and a Reference Unbundling Offer (RUO). The NMHH reviews the cost based models submitted by us, and evaluates them by comparison to a hypothetical efficient company. On the basis of such review, the NMHH may intervene and regulate the wholesale prices included in our RIO and RUO. The wholesale prices fixed in our RIO and RUO (as adjusted by the NMHH) may not be changed without the NMHHs approval. These powers of the NMHH may adversely affect our business and results of operations. Our universal service fees and our residential and non-residential access fees are subject to price regulation such as price caps, which have previously been applied with retroactive effect. As a result, we cannot predict with certainty that our current pricing strategy will not result in penalties or in adverse changes to our price caps. Any such changes in the price caps could restrict our ability to determine our retail voice tariffs and could thereby reduce our profitability. Both the NMHH and the GVH regularly conduct investigations regarding market participants compliance with applicable laws and regulations, whereby both the NMHH and the GVH may simultaneously sanction the same or similar market practices or behavior, as well as impose severe fines (in case of the NMHH, various percentages of the annual revenue, depending upon the nature of breach, and, in case of the GVH, up to 10% of the companys

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annual revenue) and other sanctions on market players. In addition, both regulatory authorities have increased their consumer protection efforts. Therefore, given the overlapping authority of the NMHH and the GVH, the increasing complexity of regulatory investigations and the indeterminate amounts at stake, regulatory disputes could have a material adverse effect on our operating results or cash flows.

The power of the NFH has been increased due to the adoption of the Unfair Commercial Practices Directive (the UCP), which created a new regulatory environment in which the authority of the NFH and the GVH may overlap under certain circumstances, the applications of which may be unpredictable. The NFH may impose a penalty of up to HUF 2 billion or initiate litigation on behalf of consumers. Since 2004, the NMHH has published a series of resolutions regarding the regulation of the wholesale market for call termination in individual mobile networks, as a result of which all the mobile carriers in Hungary (T-Mobile, Telenor and Vodafone) were required to decrease their termination fees annually through December 1, 2010 (with no decrease required for 2006) to cost level plus a reasonable return above cost. Virtually all mobile operators have challenged such resolutions of the NMHH before the court. Although the NMHH has an improving track record of winning litigation initiated by the mobile operators challenging such termination fee decreases, the decisions of the court regarding more of the underlying decisions of the NMHH concerning termination rates are still pending and there is no guarantee that the NMHH will succeed with respect to such decisions in the courts. The mobile termination fee (i.e., the fees we pay to mobile operators for calls terminated on their networks) is an important element of our business model and uncertainties or retro-active changes in this area could adversely affect our business. The NMHH may introduce new regulatory policies in the future (for example, next generation network regulation, functional separation, or geographic segmentation) that may have a negative impact on our business and affect our profitability. Currently, in Hungary as well as in other E.U. member states, the cable television industry is subject to light touch regulation, resulting effectively in the absence of the type of wholesale regulation imposed on fixed line operators, such as wholesale access and cost control obligation. Whether or not the NMHH, either due to any future shift in European policy or any other reason, ultimately decides to regulate the cable television industry or continues to refrain from such regulation could affect our market share and pricing in the future. There is also a risk that either the NMHH or the GVH will stop us from using certain defensive marketing strategies with respect to the cable television industry, which could similarly affect our market share and pricing in the future. Due to a new rights-of-way approval process by the Hungarian state and state-owned enterprises, our construction projects could be delayed which could have a negative impact on our revenue. The Hungarian government plans to build, with E.U. funding, a Digital Public Utility in order to achieve 100% broadband internet penetration. Presently, it is not clear whether this proposed infrastructure project will cover rural areas where no broadband coverage exists or expand beyond such areas of Hungary where an existing broadband internet provider (or multiple providers) already provide service. Any competition from the Hungarian government in the provision of internet services could have a material adverse effect on our business, operating results and cash flows. The Hungarian government plans to issue frequency licenses to existing mobile operators enabling the roll-out out of fourth generation (LTE) networks. Although the timing of such licensing procedure and the deployment of such networks is unclear at the moment, the increased broadband speeds made available by the LTE technology will have the potential to pose significant threat to our internet business.

Changes in E.U. law and implementation thereof could result in adverse consequences for our business, results of operations and financial condition. Before joining the E.U. in 2004, Hungary revised its telecommunications laws to further promote competition and harmonize its telecommunications laws with the current E.U. framework. The present E.U. regulatory framework is currently subject to a European legislative process providing major updates to the relevant Directives. The updates, primarily aim to further increase the consistency of remedies imposed by national regulatory authorities in the E.U. member states and consumer benefits. Hungary and all other E.U. member states are required to transpose the updated rules into national legislation by May 2011. Our business, results of operations and financial condition could be adversely affected by these and any future changes in E.U. laws and regulations which may require Hungary to revise its telecommunications laws in a manner that increases competition, decreases revenue or requires us to expend additional resources.

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Risks Relating to Our Reported Financial Results We are subject to risks resulting from fluctuations in interest rates, which could adversely affect our ability to service our debt. Some of our indebtedness bears interest at variable rates tied to current market interest rates. An increase in market interest rates could adversely affect our ability to service our debt. We have, however, entered into certain derivative transactions designed to limit our interest rate risks from changes in interest rates. Our hedging strategies and other risk management techniques may not be fully effective in mitigating our risk exposure. We evaluate and review our risk management policies and procedures on a regular basis and expect to continue to do so in the future. Nonetheless, our hedging strategies and other risk management techniques may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk, including risks that are unidentified or unanticipated. Some of our methods of managing risk are based upon our use of observed historical market behavior. As a result, these methods may not predict future risk exposures, which could be significantly greater than the historical measures indicate. Our hedging strategies and other risk management techniques may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk. We are subject to fluctuations in currency exchange rates which could have an adverse effect on our reported financial results. We report our financial results in Euro, and we expect that a substantial portion of our revenue, expenses and liabilities will be in currencies other than the Euro, mainly Hungarian forint.

Effect on Revenue and Expense Translation in Our Statement of Comprehensive Income. Changes in the Hungarian forint/Euro exchange rate will have an impact on the amounts reported by us in our financial statements when we translate such Hungarian forint amounts into Euro for reporting purposes. For example, if we have the same amount of revenue in Hungarian forint during two consecutive financial reporting periods and the value of the Hungarian forint appreciates against the Euro during the second financial reporting period as compared to the first financial reporting period, we would report higher revenue in Euro during the second financial reporting period even though the amount of revenue in Hungarian forint remained the same during each of the two financial reporting periods. Conversely, if the Hungarian forint weakened against the Euro during the second financial reporting period as compared to the first financial reporting period, we would report lower revenue in Euro during the second financial reporting period even though the amount of revenue in Hungarian forint remained the same during each of the two financial reporting periods. Subsidiary Debt Denominated in a Currency Other than the Hungarian Forint Effect on Statement of Comprehensive Income Our Hungarian subsidiaries functional currency for accounting purposes is the Hungarian forint. Invitel ZRt, our operating subsidiary, for example, has debt denominated in a currency other than the Hungarian forint (Euro). When Invitel ZRt prepares its balance sheet, it must re-value debt amounts denominated in currencies other than the Hungarian forint into Hungarian forint at the exchange rate in effect at the balance sheet date. Therefore, if Invitel ZRt were to hold the same amount of Euro-denominated debt on two consecutive balance sheet reporting dates, and if the Hungarian forint appreciated against the Euro on the second balance sheet reporting date as compared to the first balance sheet reporting date, Invitel ZRt would report less debt in Hungarian forint on its balance sheet, with respect to the Euro-denominated debt, even though the amount of Euro-denominated debt was the same on both balance sheet reporting dates. The difference in the amount of Hungarian forint reported for the Euro-denominated debt for the two periods would now be translated back into Euro at the average Hungarian forint/Euro exchange rate for the second period and be recorded as a foreign exchange gain for the period on our Consolidated Statement of Comprehensive Income with the compensating amounts being recorded as change in cumulative translation reserve. Conversely, if the Hungarian forint depreciated against the Euro on the second balance sheet reporting date as compared to the first balance sheet reporting date, Invitel ZRt would report more debt in Hungarian forint on its balance sheet, with respect to the Euro-denominated debt, even though the amount of Euro-denominated debt was the same on both balance sheet reporting dates. In this case, the difference in the amount of Hungarian forint reported for the Euro-denominated debt for the two periods would be translated back into Euro at the average Hungarian forint/Euro exchange rate for the second period and be recorded as a foreign exchange loss for the period on our Consolidated Statement of Comprehensive Income with the compensating amounts being recorded as change in cumulative translation reserve.

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As a result of the above, while our reported financial performance may change, a significant portion of such change may be due to currency fluctuations. Changes in foreign laws, including tax law changes, could adversely affect us, our subsidiaries and our shareholders. Changes in tax laws, treaties or regulations or the interpretation or enforcement thereof could have adverse tax consequences for our business. In addition, the SKAT, NAV, the local Hungarian tax authorities or other taxing authorities may not agree with our assessment of the effects of such laws, treaties and regulations, which could have a material adverse effect on our business, financial condition or results of operations. We are subject to currency exchange rate risks. Because we generate a substantial amount of our revenue in Hungarian forint, our ability to repay debt and other liabilities denominated in Euro may be adversely affected by the weakening of the Hungarian forint against the Euro. Substantially all of our debt is denominated in Euro. If the Hungarian forint were to weaken against the Euro, we would be required to use a greater amount of Hungarian forint to meet our payment obligations under our Euro-denominated debt. Therefore, fluctuations in the exchange rate of the Hungarian forint to the Euro could adversely affect our ability to service our debt. We have, however, entered into certain derivative transactions to limit our currency exchange rate risk. See Managements Discussion and Analysis of Financial Condition and Results of Operations. The failure of our internal control over financial reporting could harm our business and financial results. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with IFRS. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of the financial statements; providing reasonable assurance that receipts and expenditures of our assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud. Other Risks We are subject to periodic audits and reviews by government agencies. We are subject to periodic audits or other reviews by governmental agencies in Hungary. Any such examination or review requires managements time and a diversion of internal resources and, in the event of an unfavorable outcome, may result in additional liabilities or adjustments to our historical financial results. We have a controlling shareholder whose interests may be different from the holders of Notes. Mid Europa has, directly or indirectly, the power to affect our business through its ability to control actions that require shareholder approval and through its representatives on our board of directors. The interests of Mid Europa and those of the holders of Notes may differ with respect to some matters. Conflicts between Mid Europa and holders of Notes may arise with respect to, among other things, our strategic direction and significant corporate transactions, conflicts related to corporate opportunities that could be pursued by us on the one hand, or by Mid Europa, on the other hand, or other contractual relationships between us and Mid Europa or its affiliates. We cannot anticipate in what form such differing interests may arise. Pro forma financial data may not be representative of our financial results. The unaudited pro forma financial data included within this Offering Memorandum has been included for illustrative purposes only. Certain adjustments were based on the unaudited monthly accounts of FiberNet, which were not prepared in accordance with IFRS, and management estimates of future cost savings. This information does not purport to represent what our results of operations or consolidated financial position would have been had these transactions actually occurred on the dates assumed, nor is it indicative of future results of operations or financial position. Investors are cautioned against placing undue reliance on this unaudited pro forma financial data.

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Risks Relating to the Notes and Our Existing Debt Our substantial debt could adversely affect our financial position and may limit our ability to take certain actions. Our debt also requires us to dedicate a large portion of our cash flow from operations to fund debt payments, reducing our ability to use such cash flows to fund working capital or capital expenditures. We have a significant amount of debt and significant debt service obligations. As of December 31, 2010, the total thirdparty cash pay debt of Matel and its subsidiaries (related to continued operations) was 348.1 million. Our substantial debt could have important adverse consequences for us. For example, our substantial debt:

will require us to dedicate a large portion of our cash flows from operations to fund payments on our debt, thereby reducing the availability of our cash flows to fund working capital, capital expenditures and other general corporate needs; will increase our vulnerability to adverse general economic or industry conditions; could limit our flexibility in planning for, or reacting to, changes in our business or the industry in which we operate; could limit our ability to raise additional debt or equity capital in the future; could restrict us from making strategic acquisitions or exploiting business opportunities; could make it more difficult for us to satisfy our obligations with respect to our debt; and could place us at a competitive disadvantage compared to competitors that have less debt.

We may be able to incur substantially more debt in the future which would increase our leverage risks. We may be able to incur substantial additional debt in the future. Although the Indentures and the agreements governing our other debt contain restrictions as to the incurrence of additional debt, these restrictions are subject to a number of significant qualifications and exceptions and additional debt incurred, albeit in compliance with these restrictions, could be substantial. To the extent new debt is added to our current debt level, the substantial leverage risks described above would increase. Our ability to generate cash depends on many factors beyond our control, and we may not be able to generate sufficient cash to service our debt. Our ability to make principal or interest payments when due or refinance our debt will depend upon our future operating performance and our ability to generate cash, which will be affected by general economic, financial, competitive, regulatory and business factors, as well as other factors discussed in Risk Factors some of which may be beyond our control. We anticipate that our operating cash flows will be sufficient to meet anticipated future operating expenses and to fund capital expenditures. However, we cannot assure you that our business will generate sufficient cash flows from operations, that currently anticipated revenue growth and operating improvements will be realized, or that future borrowings will be available to us in amounts sufficient to enable us to pay our debt or to fund our other liquidity needs. If we are unable to meet our debt service obligations or fund our other liquidity needs, we may be required to:

reduce or delay capital expenditures; limit our growth; seek additional debt financing or equity capital; sell assets; or restructure or refinance our debt.

If we are required to reduce or delay capital expenditures, limit our growth, seek additional debt or equity capital, forego opportunities, sell assets or restructure or refinance our debt in order to meet our debt service obligations or fund our other liquidity needs, we cannot assure you that any of these actions could be effected on favorable terms or at all.

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The Indentures and the agreements governing our other debt impose restrictions on our ability to take certain actions. We cannot assure you that the operating and financial restrictions and covenants in our debt instruments, including the Indentures, will not adversely affect our ability to finance our future operations or capital needs, or engage in other business activities that may be in our best interest. The Indentures and the agreements governing our other debt contain restrictions that substantially limit the financial and operational flexibility of our subsidiaries. In particular, these agreements place limits on our ability to incur additional debt, grant security interests to third persons, dispose of material assets, undertake organizational measures such as mergers, changes of corporate form, joint ventures or similar transactions and enter into transactions with related parties. Other limitations in the Indentures and such agreements restrict our ability to pay dividends. Our ability to comply with these provisions may be affected by changes in economic or business conditions or other events beyond our control. If we do not comply with the covenants and restrictions in the Indentures, we could be in default under those agreements. Any default under the Indentures could lead to an acceleration of debt under other debt instruments that contain cross acceleration or cross default provisions. If our obligations under the Notes were to be accelerated, it is possible that the collateral would not be sufficient to repay such debt in full. Rights of holders of the Notes in the collateral may be adversely affected by the failure to perfect security interests in certain collateral. The security interests in the shares and certain other assets of the Issuer and the Subsidiary Guarantors are granted to the security agent for the benefit of the trustee for the Notes and the holders of Notes. However, perfection of certain of such security interests may be subject to delays due to legal procedural requirements that can only be initiated following the date on which such security interests were granted. In addition, security interests in share capital and other assets of future Subsidiary Guarantors that are required to be pledged to secure the Notes can be perfected only at the time of, or following acquisition of, such property. For so long as any such security interest is not perfected, the holders of Notes would not have the full measure of legal protection that could be afforded by such security interest. The ranking of certain Hungarian security interests benefiting the Additional Notes will be effected through the Intercreditor Deed rather than the underlying security documents. The Notes benefit from security over substantially all of the assets of the Issuer and its subsidiaries (and a share pledge over the shares of the Issuer). In connection with the Offering, to the extent necessary, the security documents will be amended to provide that the Additional Notes will benefit from the identical security granted to holders of the Existing Notes, and the hardening periods for the Existing Notes will not restart in connection with these new arrangements. With respect to the floating charges over the Hungarian assets of Invitel ZRt and Technocom and the quota pledge over the quotas held by the Issuer in Technocom, the security arrangements benefiting the Additional Notes will be created through a new quota pledge or floating charge agreement for Invitel ZRt and Technocom, respectively. Therefore, the pari passu treatment of Existing Notes and the Additional Notes will be effected through the Intercreditor Deed with respect to these security interests rather than the underlying security documents. The security interests granted by or over the FiberNet companies are relatively new and thus subject to applicable hardening periods. Given that the FiberNet Acquisition was completed and closed on February 28, 2011 and the FiberNet entities have provided guarantees for the Notes on February 28, 2011 and asset security on March 11, 2011, the Hungarian hardening period rules of general application may be applicable at the time of the issue of the Additional Notes. Matel is a holding company and conducts no business operations of its own and depends on payments from its subsidiaries to make payments on the Notes; Matels subsidiaries are subject to restrictions on making any such payments. Matel is a holding company that conducts no business operations of its own. Matel has no significant assets other than the shares it holds in its direct subsidiaries. You will not have any direct claim on the cash flows or assets of any of Matels direct or indirect subsidiaries that are not Subsidiary Guarantors. Such subsidiaries have no obligation, contingent or otherwise, to pay amounts due under the Notes or to make funds available to us for these payments. The Indentures and the agreements governing our other debt contain, and future borrowings by Matel and its subsidiaries may contain, restrictions or prohibitions on the payment of dividends by its subsidiaries to Matel. In addition, provisions of applicable law, such as those requiring dividends be paid only from distributable reserves, could limit the amounts Matels subsidiaries are permitted to pay as dividends on their capital stock. Fraudulent transfer statutes may limit your rights as a Noteholder.

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The Subsidiary Guarantors will guarantee the payment of the Notes on a senior basis. The Guarantees provide the holders of the Notes with a direct claim against the relevant Subsidiary Guarantor. The Guarantees will be limited to the maximum amount that can be guaranteed by the relevant Subsidiary Guarantor without rendering the Guarantee, as it relates to that Subsidiary Guarantor, voidable or otherwise ineffective under applicable laws, and enforcement of the Guarantee would be subject to certain generally available defenses. These laws and defenses include those that relate to fraudulent conveyance or transfer, voidable preference, financial assistance, corporate benefit, conflict of interest capital maintenance, rules of avoidance under insolvency laws, laws on the non-insolvency avoidance of transactions by a debtor or similar laws, regulations or defenses affecting the rights of creditors generally. Each of the Subsidiary Guarantors is organized under the laws of Hungary or The Netherlands. Any additional guarantors may be incorporated in these or other jurisdictions. Although laws differ among various jurisdictions, in general, under fraudulent conveyance and other laws, a court could:

avoid all or a portion of a Subsidiary Guarantors obligations under its Guarantee; direct that holders of the Notes return any amounts paid under the Guarantee to the Subsidiary Guarantor or to a fund for the benefit of its creditors; or take other action detrimental to you, including invalidating the Guarantees.

Under such bankruptcy and fraudulent transfer laws, in order to take any of those actions, courts will typically need to find that, at the time the Guarantees were issued, the Subsidiary Guarantor:

issued its Guarantee with the intent of hindering, delaying or defrauding current or future creditors; or received less than fair consideration or reasonably equivalent value for incurring the debt represented by its Guarantee on the basis that its Guarantee was incurred for Matels benefit, and only indirectly for the benefit of the Subsidiary Guarantor, or some other basis and that the relevant Subsidiary Guarantor either:

was insolvent or was rendered insolvent by reason of the issuance of its Guarantee; was engaged, or about to engage, in a business or transaction for which the Subsidiary Guarantors assets were unreasonably small; or intended to incur, or should have believed it would incur, debts beyond its ability to pay such debts as they mature.

Many of the foregoing terms are defined in or interpreted under those fraudulent transfer statutes. The Netherlands Under Dutch laws, if the granting of security or the issue of a Guarantee by a Subsidiary Guarantor incorporated under Dutch law (a Dutch Guarantor) is not in its corporate interest, that security or the Guarantee may be voidable pursuant to section 2:7 of the Dutch Civil Code if the beneficiary knew or should have known that the Guarantee or security was not in the Dutch Guarantors corporate interest. Furthermore, in relation to any Guarantee or security granted by any Dutch Guarantor, no such Guarantee or security includes obligations or liabilities to the extent that (if it were included) would result in that Guarantee or security contravening sections 2:98c or 2:207c of the Dutch Civil Code or any other law on financial assistance. See Local insolvency laws may not be as favorable to you as those of another jurisdiction with which you may be familiar The Netherlands below for a description of Dutch fraudulent conveyance legislation. Hungary Section 203 of the Civil Code of the Republic of Hungary prescribes that a contract, by which the cover for satisfying a third party creditors claims has been deprived in whole or in part, shall not be effective vis--vis such third party creditor, if the beneficiary of the contract gave no adequate consideration or acted in bad faith. This provision of the Civil Code creates the risk that the guarantee undertaking of/third party security interest granted by any Subsidiary Guarantor incorporated under Hungarian law (a Hungarian Subsidiary Guarantor) in relation to the Notes might be challenged by any of the existing third party creditors of the Hungarian Subsidiary Guarantor claiming that as such Hungarian Subsidiary Guarantor does not receive adequate consideration for the guarantee undertaking/security interest provided by it, it has no genuine business interest in providing such guarantee/security interest. Such claim, however, can only be made by the third party creditors if the remaining assets of the Hungarian Subsidiary Guarantor were insufficient to satisfy the existing third party creditors. If a third party creditor is successful in challenging the guarantee undertaking/security interest, the court may declare that the

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enforcement of the guarantee/security interest is not effective vis--vis the Hungarian Subsidiary Guarantor and it can be disregarded by such third party creditor, who therefore can claim an amount from the holders of the Notes equal to such creditors existing claim against the Hungarian Subsidiary Guarantor, but not exceeding the amount received by the relevant holder of the Notes. In the absence of case law it is uncertain whether such guarantee or security interest can be successfully challenged based on the above. In any event, even if the challenge is successful, it will not result in the guarantee or security provided by the Hungarian Subsidiary Guarantor being held null and void, as it is only ineffective vis--vis the third party creditors concerned. The value of the collateral securing the Notes may not be sufficient to satisfy our obligations under the Notes, and the collateral securing the Notes may be reduced or diluted in certain circumstances. The Notes and the Guarantees will be secured by first priority liens on the collateral described in this Offering Memorandum, which collateral is permitted under the terms of the Indenture to secure on a super-senior priority basis our and our subsidiaries obligations under certain hedging obligations and certain future borrowings under revolving credit facilities permitted to be incurred under the Indenture. The collateral also secures, on a second priority basis, our and our subsidiaries obligations under the 2007 Notes which we expect will be repurchased with the proceeds of this Offering. The collateral may also secure additional debt to the extent permitted by the terms of the Indentures and the agreements governing our other debt. Your rights to the collateral would be diluted by any increase in the debt secured by the collateral. In the event of foreclosure on the collateral, the proceeds from the sale of the collateral securing debt under the Notes may not be sufficient to satisfy the Notes because proceeds from a sale of collateral would be distributed to satisfy debt and all other obligations under any debt secured by a super-senior priority lien on the collateral before any such proceeds are distributed in respect of the Notes. To the extent that holders of other secured debt or third parties enjoy liens (including statutory liens), whether or not permitted by the Indentures, such holders or third parties may have rights and remedies with respect to the collateral securing the Notes that, if exercised, could further reduce the proceeds available to satisfy the obligations under the Notes. The ability of the security agent to enforce the collateral is subject to uncertainties under the laws of the jurisdictions in which our Subsidiary Guarantors are incorporated. There is uncertainty under the laws of the jurisdictions in which our Subsidiary Guarantors are incorporated as to whether obligations to beneficial owners of the Notes that are not identified as registered holders in a security document will be validly secured by accessory security such as pledges over shares, partnership interests or receivables, including bank accounts. Therefore, there are risks regarding the enforceability of such pledges. In this connection, the Intercreditor Deed contains a provision pursuant to which the Issuer and the Subsidiary Guarantors will be obliged to pay to the security agent as joint and several creditors any amount owed by them under the Notes and the Indenture (so-called parallel debt). However, courts in the jurisdictions in which our Subsidiary Guarantors are incorporated have not yet ruled in respect of such a parallel debt structure. As a result, we cannot assure holders of the Notes that such structure will eliminate or mitigate the risk of unenforceability of such pledges posed by such law. If any challenge to the validity of such pledges or the parallel debt structure was successful, holders of the Notes may not be able to recover any amounts under such pledges. It may be difficult to realize the value of the collateral securing the Notes. The collateral securing the Notes will be subject to any and all exceptions, defects, encumbrances, liens and other imperfections permitted under the Indenture and accepted by other creditors that will have the benefit of first-priority security interests in the collateral securing the Notes from time to time, whether on or after the date the Notes are first issued. The existence of any such exceptions, defects, encumbrances, liens and other imperfections could adversely affect the value of the collateral securing the Notes as well as the ability of the security agent to realize or foreclose on such collateral. Furthermore, the first-priority ranking of security interests can be affected by a variety of factors, including, among others, the timely satisfaction of perfection requirements, statutory liens or re-characterization under the laws of certain jurisdictions. The security interests of the security agent will be subject to practical problems generally associated with the realization of security interests in collateral. For example, the security agent may need to obtain the consent of a third party to enforce a security interest. We cannot assure you that the security agent will be able to obtain any such consents. We also cannot assure you that the consents of any third parties will be given when required to facilitate a foreclosure on such assets. Accordingly, the security agent may not have the ability to foreclose upon those assets and the value of the collateral may significantly decrease. In addition, our business requires a variety of national and local permits and licenses. The continued operation of properties that comprise part of the collateral and which depend on the maintenance of such permits and licenses may be

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prohibited. Our business is subject to regulations and permitting requirements and may be adversely affected if we are unable to comply with existing regulations or requirements or changes in applicable regulations or requirements. In the event of foreclosure, the transfer of such permits and licenses may be prohibited or may require us to incur significant cost and expense. Further, we cannot assure you that the applicable governmental authorities will consent to the transfer of all such permits. If the regulatory approvals required for such transfers are not obtained or are delayed, the foreclosure may be delayed, a temporary shutdown of operations may result and the value of the collateral may be significantly decreased. The rights of the Noteholders to enforce remedies with respect to the collateral are subject to the Intercreditor Deed. The security interests in our assets that secure the Notes and the guarantees thereof are also granted as collateral in favor of certain hedging counterparties for hedging. The Intercreditor Deed and the Indenture governing the Notes also permit a security interest in such collateral to be granted to lenders of certain additional indebtedness and to hedging counterparties under certain of our hedging obligations. The Intercreditor Deed provides that a common security agent, who will also serve as the security agent for our hedging obligations and any additional secured debt, will act only as provided for in the Intercreditor Deed. The Intercreditor Deed provides that the security agent may release the collateral securing the Notes in connection with sales of assets pursuant to a permitted disposal or enforcement sale and in other circumstances permitted by the Indenture. Therefore, the collateral available to secure the Notes could be reduced in connection with the sales of assets or otherwise, subject to the requirements of the Indenture governing the Notes. In addition, the Intercreditor Deed provides that the enforcement sale of certain collateral will be subject to, as a condition to the release of any claims of any other indebtedness secured by such collateral under the Intercreditor Deed, certain protections intended to maximize the recovery from an enforcement sale. Furthermore, the Indenture permits certain additional indebtedness and certain of our hedging obligations to benefit from a priority over the Notes in the allocation of proceeds of enforcement of the security interests securing such debt and the Notes. See Description of Other Indebtedness Intercreditor Deed. The Issuer may not be able to finance the change of control offer required by the Indenture. Upon a change of control, as defined under the Indenture, the Issuer will be required to offer to repurchase all outstanding Notes at a purchase price equal to 101% of their principal amount plus accrued and unpaid interest and additional amounts, if any, to the date of repurchase. If a change of control were to occur, we cannot assure you that the Issuer would have sufficient funds available at the time to pay the purchase price of the outstanding Notes or that the restrictions in the agreements governing our other borrowing arrangements would allow us to make such required repurchases. A change of control may result in an event of default under our other borrowing arrangements, may require us to offer to repurchase the Notes and may cause the acceleration of other indebtedness. In any case, we expect that we would require third-party financing to make a change of control offer. We cannot assure you that we would be able to obtain this financing. See Description of the Notes Purchase of the Notes upon a Change of Control. Enforcing your rights as a Noteholder may prove difficult. The Notes are issued by Matel, which is incorporated under the laws of The Netherlands. In addition, the Notes and the Indenture are governed by the laws of the State of New York. In the event of a bankruptcy, insolvency or a similar event, proceedings could be initiated in The Netherlands, Hungary and the United States. Such multi-jurisdictional proceedings are likely to be complex and costly for creditors and otherwise may result in greater uncertainty and delay regarding the enforcement of your rights. Your rights under the Notes will be subject to the insolvency and administrative laws of several jurisdictions, and there can be no assurance that you will be able to effectively enforce your rights in such complex multiple bankruptcy, insolvency or similar proceedings. In addition, the bankruptcy, insolvency, administrative and other laws of the Issuer and its subsidiaries jurisdictions of incorporation or organization may be materially different from, or be in conflict with, each other and those with which you may be familiar, including in the areas of the rights of creditors, the priority of governmental and other creditors, the ability to obtain post-petition interest and the duration of the proceeding. The application of these laws, or any conflict among them, could call into question whether any particular jurisdictions laws should apply, adversely affect your ability to enforce your rights under the Notes in the relevant jurisdictions or limit any amounts that you may receive. Local insolvency laws may not be as favorable to you as those of another jurisdiction with which you may be familiar.

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Matel is incorporated under the laws of The Netherlands and its principal subsidiaries are incorporated under Hungarian law. The insolvency laws of these jurisdictions may not be as favorable to your interests as the laws of the United States or other jurisdictions with which you may be familiar. The following is a brief description of certain aspects of insolvency law in The Netherlands and Hungary. In the event that any one or more of our subsidiaries experience financial difficulty, it is not possible to predict with certainty the jurisdiction or jurisdictions in which insolvency or similar proceedings would be commenced, or the outcome of such proceedings. The Netherlands As Matel is incorporated under the laws of The Netherlands, any insolvency proceedings with respect to Matel or any Dutch Guarantor would be likely to proceed under, and be governed by, the insolvency laws of The Netherlands, provided that the centre of main interest of these companies as referred to in European Council Regulation (EC) No. 1346/2000 of May 29, 2000 on insolvency proceedings (the European Insolvency Regulation) is located in The Netherlands at the time of opening of any insolvency proceedings. Dutch insolvency laws may make it difficult or impossible for holders of the Notes to recover amounts owing under the Notes in an insolvency proceeding involving Matel or a Dutch Guarantor. There are two primary insolvency regimes under Dutch law: the first, suspension of payment or moratorium (sursance van betaling), is intended to grant temporary relief from a debtors payment obligations and may be used to facilitate the reorganization of a debtors obligations and enable the debtor to continue as a going concern. The second, bankruptcy (faillissement), is designed to liquidate the assets of a debtor. Upon commencement of moratorium proceedings by way of filing by the debtor, the court will grant a provisional moratorium. A definitive moratorium will generally be granted thereafter. In both cases, creditors are barred from recovering their claims from the assets of the debtor. The moratorium is subject to exceptions, the most important of which excludes secured creditors and preferential creditors (such as tax and social security authorities) from the application of the moratorium, although conditions and restrictions apply. During moratorium proceedings, secured creditors may proceed against the assets that secure their claims to satisfy their claims, and preferential creditors are also not barred from seeking to recover their claims, although conditions and restrictions apply. A definitive or provisional moratorium may be converted into a bankruptcy proceeding if the court concludes that it is undesirable to continue the moratorium in effect or if it appears unlikely that the debtor will be able in the course of time to satisfy its liabilities. In Dutch bankruptcy proceedings the assets of a debtor are generally liquidated and the proceeds distributed to the debtors creditors on a pro rata basis. However, preferential creditors (such as tax and social security authorities) have a right to have their claims paid before those of unsecured creditors. In addition, secured creditors can generally proceed against the assets that secure their claims without any restriction, regardless of the pending bankruptcy proceedings, although only insofar as their claims can be satisfied out of the proceeds of the relevant collateral. Claims of unsecured creditors would have to be submitted to Matels receiver to be verified by the receiver. Verification under Dutch law means that the receiver determines the value of the claim and whether and to what extent it will be admitted in the bankruptcy proceedings. Creditors that wish to dispute the rejection or valuation of their claims by the receiver would need to commence a proceeding before the Dutch court. These verification procedures, and the fact that claims under the Notes will be subordinated in bankruptcy to the claims of secured creditors and preferential creditors, could cause holders of the Notes to recover less under the Notes than the principal amount of their Notes. A debtor which has been granted a suspension of payments or which has been declared bankrupt may petition the court for a freezing period (afkoelingsperiode). During such period secured creditors or preferred creditors are prohibited from enforcing their security over assets without the prior approval of the court or the supervising judge. A freezing period can be granted for the duration of 2 months, and be extended only once for another 2 months. A debtor which has been granted a suspension of payment or which has been declared bankrupt can offer its ordinary (unsecured and non-preferential) creditors a composition of its debts. If (i) more than half of such creditors (whose claims are accepted as valid by the receiver or the Dutch courts) representing at least half of the total non-preferential and unsecured debt cast their votes in favor of the composition and (ii) the court approves the composition, the composition is accepted and binding upon the debtor and the unsecured and non-preferential creditors. These composition procedures could cause holders of the Notes to recover less under the Notes than the amount due under their Notes and could result in certain Noteholders receiving a greater portion of the amount owed to them under the Notes than other Noteholders. Fraudulent conveyance legislation is in force in The Netherlands. This legislation provides generally that certain transactions with a creditor entered into voluntarily by the debtor are subject to avoidance if both parties to the transaction

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knew or should have known that the transaction would prejudice other creditors. In addition, the guarantee of the Notes by a Dutch Guarantor would be subject to avoidance if the Dutch Guarantor at the time of entering into the transaction knew or should have known that the transaction would prejudice other creditors. Knowledge that the transaction would prejudice other creditors is presumed by law for all transactions performed within the year preceding the adjudication of bankruptcy, if it is also established that one of the conditions mentioned in Article 43 of the Dutch Bankruptcy Act is fulfilled. These conditions include, but are not limited to, situations in which (1) the value of the obligation of the debtor materially exceeds the value of the obligation of the creditor, (2) the debtor pays or grants security for debts which are not yet due, (3) an agreement is made between legal entities having common directors or an obligation arises from one legal entity towards another if a director of one of those legal entities is also a director of the other or (4) an agreement is made with or an obligation is created in favor of a group company of the debtor. Hungary Under Hungarian law, insolvency is governed by the provisions of the Bankruptcy Act, as amended. The Bankruptcy Act distinguishes between (i) a bankruptcy procedure in which a borrower having financial difficulties attempts to reach an agreement with its creditors as to the restructuring of its debts (Bankruptcy Procedure) and (ii) an insolvency procedure in which an insolvent debtor is dissolved and its assets are distributed among its creditors and, if any assets remain, its owners (Liquidation Procedure). In a Bankruptcy Procedure, which may be initiated by the debtor or any of its creditors, the creditors and debtor are aiming to agree upon the settlement of all the debtors obligations. The relevant court will decide (in co-operation with the debtor, if initiated by a creditor) on the commencement of the Bankruptcy Procedure and grants a moratorium although if the Bankruptcy Procedure initiated by the debtor, a temporary moratorium is also granted for the period from the next business day immediately following the submission of an application up to the relevant decision of the court. Upon the decision of the court, the moratorium will last at least 90 days, but it may extend to (with the consent of certain proportions of the creditors) 180 or even 365 days. During a moratorium granted in connection with the Bankruptcy Procedure, the debtor may not make payments to creditors, except with regard to certain liabilities specified by the Bankruptcy Act. In a Bankruptcy Procedure, an asset manager is appointed by the court to monitor and supervise the business activities of the debtor. The asset managers approval needs to be obtained to make financial commitments. If no such settlement is agreed upon, then the Liquidation Procedure will begin. In a Liquidation Procedure, which may be initiated by, inter alia, the debtor, the receiver (appointed in any voluntary winding-up proceedings) or any of its creditors, a liquidator appointed by the court is charged with satisfying the claims of the creditors by way of the borrowers assets. A court will establish a debtor is insolvent if, inter alia, (i) it does not perform its non-disputed or acknowledged payment obligations neither upon its due date, nor within 15 days of the receipt of a written notification that such payment obligation has matured; (ii) it does not fulfill its payment obligation within the deadline set forth in an applicable final and non-appealable court ruling; (iii) a foreclosure procedure remained unsuccessful against the debtor; or (iv) it does not comply with its payment obligation, as stated in the negotiated bankruptcy moratorium. Only the liquidator can make statements on behalf of the debtor with respect to the debtors property. However, the liquidator or any of the creditors may request that the relevant court establish that for the period up to three years prior to the commencement of the Liquidation Procedure, any of the executive officers of the debtor did not fulfill their respective obligations in accordance with the interest of the debtor or any of its creditors, provided that the relevant court finds that such failure resulted in a reduction of the value of the assets of the debtor and the executive officer did not, upon becoming aware of the circumstances, make all appropriate efforts to mitigate such reduction in value of the assets. Most secured creditors are satisfied immediately upon the sale of the encumbered assets (irrespectively of when the Liquidation Procedure is closed). Beneficiaries of floating charges, however, receive only 50% of the proceeds of such sale up-front. In the ultimate distribution of the assets of the debtor at the final state of the Liquidation Procedure, priority is, generally, given to the costs of the liquidation, the remaining 50% of floating charge proceeds, certain claims of individuals arising from non-business activities, outstanding and enforceable social security contributions, taxes and public charges over other claims, other unsecured claims, default interest and penalties, and claims of the members, executive officers and senior employees (including their close relatives) of the debtor and any company under the direct control of the debtor. In addition, the Bankruptcy Act sets out certain hardening periods; the liquidator may challenge the following arrangements of the debtor: (i) agreements of the debtor concluded within five years prior to the filing of the claim with the relevant court, with respect to which agreements the debtors intention was to frustrate the fulfillment of the claims of certain

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creditors, provided that the other party was (or should have been) aware of the debtors intention; and/or (ii) agreements of the debtor concluded within two years prior to the filing of the claim with the relevant court, where the subject of the agreement in question was the transfer of assets free of charge, where the subject of the agreement in question was the undertaking by the debtor of an obligation without the debtor being provided with compensation in return or where the value of the subject of the agreement in question was significantly discounted; and/or (iii) agreements of the debtor concluded within 90 days prior to the filing of the claim with the relevant court, the purpose of which was to favor certain creditors to the detriment of others (especially the amendment of an existing agreement in favor of the creditor or the provision of collateral to a creditor who was not previously provided with any collateral). Furthermore, the liquidator may reclaim (on behalf of the debtor) payments (or services) made by the debtor within sixty days prior to the filing of the claim with the relevant court, if the payments (or services) in question were to the benefit of certain creditors and if the payments (or services) in question were not in the course of the normal business activities of the debtor. Pursuant to the relevant rules, the liquidator must reclaim the payments or services (as outlined above) in the case of the repayment of loans prior to their maturity. Finally, the liquidator may also terminate, with immediate effect, any of the agreements entered into by the debtor, subject to the creditors right to register and enforce any claim it may have in the course of the Liquidation Procedure. In addition, the liquidator may rescind any other agreement of the debtor, to the extent any of the contracting parties have not yet performed its obligations. Other Jurisdictions In addition, it is possible that we may be subject to the insolvency laws of other jurisdictions. Any insolvency proceedings with respect to Matel would be subject to the insolvency laws of the jurisdiction where such proceeding is commenced. The provisions of such insolvency laws may substantially differ from each other and those described above, including with regard to the rights of debtors, priority claims and procedures, and may contain provisions that are unfavorable to the holders of the Notes. In addition, there can be no assurance as to how the insolvency laws of any jurisdiction will be applied in an insolvency proceeding relating to several jurisdictions. An active trading market may not develop for the Additional Notes, in which case you may not be able to resell the Additional Notes. Application has been made to list the Additional Notes on the Official List of the Luxembourg Stock Exchange and to trade the Additional Notes on the Euro MTF. However, an active market may not develop, in which case the market price and liquidity of the Additional Notes may be adversely affected. In addition, the liquidity of the trading market in the Additional Notes, and the market price quoted for the Additional Notes, may be adversely affected by changes in the overall market for these types of Additional Notes and by changes in our financial performance or prospects or in the prospects for companies in our industry generally. Historically, the market for non-investment grade debt, such as the Additional Notes, has been subject to disruptions that have caused substantial price volatility. There can be no assurance that if a market for the Additional Notes were to develop, such a market would not be subject to similar disruptions. In addition, market-making activity will be subject to limits imposed by applicable laws and regulations. As a result, we cannot assure you that an active trading market will develop for the Additional Notes. The Notes are subject to restrictions on transfer. The Notes have not been and will not be registered under the U.S. Securities Act or any state securities laws and, unless so registered, may not be offered or sold except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the U.S. Securities Act and applicable state securities laws. See Notice to Investors. The Notes will initially be held in book-entry form and therefore you must rely on the procedures of the relevant clearing systems to exercise any rights and remedies. Unless and until the Notes in definitive registered form, or definitive registered Notes, are issued in exchange for bookentry interests, owners of book-entry interests will not be considered owners or holders of Notes. The common depositary (or its nominee) for the accounts of Euroclear and Clearstream will be the registered holder of the global notes representing the Notes. After payment to the registered holder, we will have no responsibility or liability for the payment of interest, principal or other amounts to the owners of book-entry interests. Accordingly, if you own a book-entry interest, you must rely on the procedures of Euroclear and Clearstream, and if you are not a participant in Euroclear and Clearstream, on the procedures of

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the participant through which you own your interest, to exercise any rights and obligations of a holder under the Indenture. See Book Entry, Delivery and Form. Unlike the holders of the Notes themselves, owners of book-entry interests will not have any direct rights to act upon our solicitations for consents, requests for waivers or other actions from holders of the Notes. Instead, if you own a book-entry interest, you will be permitted to act only to the extent you have received appropriate proxies to do so from Euroclear or Clearstream. There can be no assurance that procedures implemented for the granting of such proxies will be sufficient to enable you to vote on any matters on a timely basis. Similarly, upon the occurrence of an event of default under the Indenture, unless and until definitive registered Notes are issued in respect of all book-entry interests, if you own a book-entry interest, you will be restricted to acting through Euroclear or Clearstream. We cannot assure you that the procedures to be implemented through Euroclear or Clearstream will be adequate to ensure the timely exercise of rights under the Notes. See Book Entry, Delivery and Form.

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USE OF PROCEEDS The estimated net proceeds from the Offering are expected to be approximately 79.2 million after deducting estimated offering expenses. We intend to use the net proceeds of the Offering (i) to fund the repurchase or redemption of all of the 2007 Notes and (ii) for general corporate purposes. See Business Concurrent Transactions Repurchase and/or Redemption of the 2007 Notes.

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CAPITALIZATION The following table sets forth on a consolidated basis as of December 31, 2010, our consolidated capitalization (i) on an actual basis, (ii) as adjusted to give effect to the subsequent repurchase and/or redemption and discharge of the 2007 Notes, and the issuance and sale of the Additional Notes and the application of the proceeds therefrom. You should also read this section in conjunction with Description of Other Indebtedness, Managements Discussion and Analysis of Financial Condition and Results of Operations and our audited consolidated financial statements including the notes thereto, included elsewhere in this Offering Memorandum.
As of December 31, 2010 Actual As adjusted ( in millions)

Long term debt 2007 Notes(1) .............................................................................................................. Existing Notes(2) ......................................................................................................... Additional Notes(3) ..................................................................................................... Cash pay third-party debt ...................................................................................... Less unamortized discount and deferred borrowing costs......................................... Related party subordinated loan ................................................................................ Total debt(5) ........................................................................................................................ Shareholders Equity ........................................................................................................ Total Capitalization ..........................................................................................................

78.1 270.0 348.1 (12.3) 15.2 351.0 78.1 429.1

270.0 80.0 350.0 (12.3)(4) 15.2 352.9 78.1(6) 431.0

(1) We repurchased and subsequently cancelled 7.2 million of the 2007 Notes in January 2011. In 2011, as a result of the cancellation on March 7, 2011 of certain 2007 Notes purchased in 2010, we realized a gain of 2.0 million. We anticipate that the outstanding 2007 Notes will be repurchased or called for redemption and discharged concurrently with the consummation of the issuance of the Additional Notes. (2) Does not reflect original issue discount of 2.9 million on the aggregate principal amount of 270.0 million outstanding as of December 31, 2010, which is deducted together with deferred borrowing costs below. (3) Does not reflect original issue discount of 0.8 million on the aggregate principal amount of 80 million of Additional Notes. (4) The adjusted unamortized discount and deferred borrowing costs do not reflect changes arising from cancellation of the 2007 Notes and premium discounts or cost associated with the Additional Notes. (5) Excludes net current and non-current obligation from financial instruments of 1.3 million and 0.9 million, respectively, and obligations under capital leases of 4.4 million as of December 31, 2010. (6) Does not include any charges arising on cancellation of 2007 Notes.

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SELECTED HISTORICAL FINANCIAL INFORMATION The following tables provide a summary of the continued operations of the consolidated financial statements of Matel as of and for the years ended December 31, 2010 and 2009. The summary consolidated financial information presented here as of and for the years ended December 31, 2010 and 2009 should be read in conjunction with the audited consolidated financial statements of Matel as of and for the years ended December 31, 2010 and 2009 and the accompanying notes thereto included elsewhere in this Offering Memorandum. The audited consolidated financial statements and the accompanying notes thereto have been prepared in accordance with IFRS. See Presentation of Financial Information. On October 7, 2010, International Holdings consummated the sale of its international wholesale business (the International Sale) comprising the entire issued share capital of Invitel International AG (including its subsidiaries), Invitel International Hungary Kft and S.C. EuroWeb Romania S.A. (the International Business) to Turk Telecom. See Our Business Sale of the International Wholesale Business. Our consolidated financial statements as of and for the years ended December 31, 2009 and 2010 included in this Offering Memorandum reflect the International Business as a discontinued operation. The financial information for the year ended December 31, 2008 included in our consolidated financial statements for the year ended December 31, 2009 is also restated to reflect the International Business as a discontinued operation and is included for reference purposes. We encourage you to read the information contained in this section in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Offering Memorandum.
As of and for the year ended December 31, 2009 ( in millions) 2010

Statement of Comprehensive Income Data Operating revenue: Mass Market Voice....................................................................................... Mass Market Internet .................................................................................... Business ........................................................................................................ Domestic Wholesale ..................................................................................... Total operating revenue ................................................................................ Cost of sales exclusive of depreciation ......................................................... Operating expenses....................................................................................... Cost of restructuring(1) ................................................................................... Depreciation and amortization...................................................................... Income from operations ............................................................................. Net financial expense(2) ................................................................................. Income/ (loss) before tax............................................................................. Income tax benefit/(expense)........................................................................ Income/ (loss) from Continuing Operations ............................................. Income/ (loss) from Discontinued Operations .......................................... Income/ (loss) for the Year ......................................................................... Balance Sheet Data (at period end): Cash and cash equivalents ............................................................................ Net working capital(3) .................................................................................... Total assets ................................................................................................... Net liabilities relating to derivative financial instruments ............................ Liabilities relating to finance leases.............................................................. Cash-pay third party debt(4) ........................................................................... Subordinated shareholder loan(5) ................................................................... Shareholders equity(6) ................................................................................... Cash Flow Data: Net cash flow provided by (used in) operating activities.............................. Net cash flow provided by (used in) investing activities ..............................

77.0 32.9 79.0 21.1 210.0 (69.1) (40.6) (2.1) (54.8) 43.4 (112.3) (68.9) 4.8 (64.1) 25.8 (38.3) 49.7 (16.7) 722.7 12.5 4.7 470.7 24.6 70.7 68.5 (52.3)

63.9 32.7 73.2 23.4 193.2 (62.6) (46.2) (1.2) (53.9) 29.3 (59.7) (30.4) (18.4) (48.8) 60.0 11.2 109.0 (7.4) 485.9 2.2 4.4 348.1 15.2 78.1 36.3 158.0

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As of and for the year ended December 31, 2009 ( in millions) 2010

Net cash flow provided by (used in) financing activities.............................. Net increase (decrease) in cash and cash equivalents ................................... Free cash flow before debt service(7) .............................................................

20.9 36.6 64.1

(150.0) 43.9 232.1

(1) Cost of restructuring represents costs related to the reorganizations we have undertaken and mainly includes severance expenses. (2) Net financial expense includes interest income, interest expense, amortization of bond discount, amortization of deferred borrowing costs, net foreign exchange gains / (losses), gains / (losses) on extinguishment of debt, gains / (losses) from fair value changes of derivative financial instruments and net other financial expense. (3) Net working capital is calculated as total current assets (excluding cash and cash equivalents and current assets relating to derivative financial instruments) less current liabilities (excluding short-term borrowings, current liabilities relating to derivative financial instruments and the current portion of borrowings). (4) Cash-pay third party debt includes debt under the 2007 Notes, the Existing Notes and excludes liabilities related to finance leases and deferred borrowing costs. (5) Subordinated shareholder loan includes the loan provided by Matel Holdings N.V. (6) Shareholders equity includes non-controlling interest. (7) Free cash flow before debt service equals net cash flow provided by / (used in) operating activities plus cash interest paid minus net cash flow used in / (provided by) investing activities. The following table sets forth the reconciliation of net cash flow provided by / (used in) operating activities to free cash flow before debt service:
As of and for the year ended December 31, 2009 ( in millions) 2010

Net cash flow provided by (used in) operating activities.............................. Cash interest paid ......................................................................................... Net cash flow used in (provided by) investing activities .............................. Free cash flow before debt service................................................................

68.5 47.9 (52.3) 64.1

36.3 37.8 158.0 232.1

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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is based upon the audited consolidated financial statements of Matel as of and for the years ended December 31, 2009 and 2010 prepared in accordance with IFRS. In this Managements Discussion and Analysis of Financial Condition and Results of Operations, we, our and other similar terms are generally used to refer to Matels business and its consolidated subsidiaries. In this section, we capitalize references to Mass Market Voice, Mass Market Internet, Business and Domestic Wholesale where and to the extent that the references are to our reporting segments in our consolidated financial statements. You should read this discussion in conjunction with the consolidated financial statements and the accompanying notes included elsewhere in this Offering Memorandum. A summary of the critical accounting policies and estimates that have been applied to our consolidated financial statements is set forth below in Critical Accounting Policies. You should also review the information in the section Presentation of Financial Information. Some of the information in the discussion and analysis set forth below and elsewhere in this Offering Memorandum includes forward-looking statements that involve risks and uncertainties. See Risk Factors for a discussion of important factors that could cause actual results to differ materially from the results described in the forward-looking statements contained in this Offering Memorandum. Overview We are the second largest fixed line telecommunications services provider in Hungary and the incumbent provider of fixed line telecommunications services to residential and business customers in our 14 historical concession areas, where we have a dominant market share. We are the number one alternative fixed line operator outside our historical concession areas in Hungary. Our historical concession areas are geographically clustered and cover an estimated 2.1 million people, representing approximately 21% of Hungarys population. Outside our historical concession areas, we believe that we are well positioned to continue to grow our revenue and market share using our owned state-of-the-art backbone network, our experienced sales force and our comprehensive portfolio of services. Our extensive backbone network (comprising approximately 8,500 route km in Hungary) provides us with nationwide and international reach. It allows business customers to be connected directly to our network to access voice, data and internet services. We have a diversified revenue and cash flow base, making us less susceptible to market pressures in any particular market segment. For the year ended December 31, 2010, we derived approximately 33% of our revenue from Mass Market Voice, 17% from Mass Market Internet, 38% from Business and 12% from Domestic Wholesale. As of December 31, 2010, we had approximately 327,000 telephone lines connected to our network within our historical concession areas to service Mass Market Voice customers and we had approximately 298,000 active Mass Market Voice customers outside our historical concession areas connected through Carrier Pre-Selection (CPS), Carrier Selection (CS) or Local Loop Unbundling (LLU). This is compared to December 31, 2009 when we had approximately 356,000 telephone lines in service within our historical concession areas to service Mass Market Voice customers and approximately 365,000 active Mass Market Voice customers connected through indirect access outside our historical concession areas. The number of our Mass Market broadband DSL customers has increased from approximately 147,000 as of December 31, 2009 to approximately 151,000 as of December 31, 2010. In the Business segment, as of December 31, 2010, we had approximately 42,000 voice telephone lines within our historical concession areas compared to approximately 44,000 lines as of December 31, 2009. Outside our historical concession areas, we had approximately 43,000 direct access voice telephone lines and approximately 8,000 indirect access voice telephone lines as of December 31, 2010, compared to approximately 47,000 direct access voice telephone lines and approximately 9,000 indirect access voice telephone lines as of December 31, 2009. We had approximately 15,000 DSL lines and approximately 16,000 leased lines as of December 31, 2010 compared to approximately 17,000 DSL lines and approximately 16,000 leased lines as of December 31, 2009. In the Domestic Wholesale market, we had over 250 customers as of December 31, 2010, which customers include incumbent telecommunications services providers, alternative fixed line telecommunications services providers, mobile operators, cable television operators and internet service providers in Hungary. On October 7, 2010, Invitel International Holdings B.V. consummated the International Sale of its International Business to Turk Telecom for an enterprise value of approximately 221 million. The International Business included operations in Austria, Bulgaria, the Czech Republic, Hungary, Italy, Romania, Serbia, Slovakia, Slovenia, Turkey and Ukraine, but

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excluded our Hungarian domestic wholesale business. The purpose of the sale was to deleverage and focus on our core Hungarian domestic markets. Accordingly, the International Business was classified as discontinued operations our consolidated income statement for the years ended December 31, 2009 and 2010. On February 28, 2011, we consummated the acquisition of FiberNet Kft, the direct parent of FiberNet Zrt, Hungarys fourth largest cable network operator, for a purchase price of approximately 44.5 million. In order to meet Hungarian competition office requirements relating to infrastructure competition, we simultaneously sold approximately one-third of the FiberNet network assets to UPC Magyarorszg Kft (UPC) for approximately 22.2 million (the FiberNet Disposal). The acquisition of FiberNet together with the FiberNet Disposal is referred to as the FiberNet Acquisition. The FiberNet network we retained is located outside Invitels historical fixed line concession areas. Macroeconomic Factors In addition to the factors noted in Risk Factors, over the past three years there have been significant fluctuations in the global economy and financial markets, including within the Hungarian economy and financial markets. From 2001 to 2006, the Republic of Hungary was negatively impacted by inadequate governmental monetary and fiscal policies, which resulted in a state budget deficit that peaked at 10% of gross domestic product (GDP) in 2006. Starting in 2006, the Hungarian government introduced austerity measures, including reduced state spending and increased taxes, which were intended to reduce the state budget deficit. Hungary also held back consumption in Hungarian forint by keeping the Hungarian forint interest rate relatively high. These state cutbacks have resulted in lower economic growth (Hungarys GDP rose by 0.8% in 2007, 0.8 % in 2008 and decreased by 6.7% in 2009). The high domestic interest rates did, however, lead Hungarian consumers and businesses to take out a majority of their recent loans in foreign currencies, mainly Euro and Swiss francs. These factors have contributed to Hungarys current trade deficit and large current account deficit (the current account deficit is generally the trade deficit plus interest payments on what the country borrows from foreigners to finance the trade deficit). Hungarys current account deficit is highly dependent on borrowings in foreign currencies. With lower interest rates on foreign currency loans and a strengthening Hungarian forint, Hungarian businesses and consumers were able to manage their debt repayments. However, with a large current account deficit, a budget deficit, rapid credit growth and a reliance on foreign currency loans, Hungary left itself vulnerable to a financial crisis. During the recent global financial crisis, risk-averse investors fled riskier debt-laden countries such as Hungary for alternative countries, which resulted in a significant decrease in the value of the Hungarian forint. The Hungarian forint depreciated against the Euro from a rate of 243.17 as of September 30, 2008 to as high as 316.00 as of March 6, 2009. The decreased value of the Hungarian forint made it more difficult for the Hungarian government to raise funds in the government debt market. With a weakened Hungarian forint, new foreign currency loans to Hungarian businesses and consumers declined and Hungarian businesses and consumers had a more difficult time repaying their existing loans denominated in foreign currencies since they need more Hungarian forint to cover their repayments. With credit squeezed, the Hungarian government, as well as Hungarian businesses and consumers have significantly reduced their investments and spending, which in turn is expected to slow economic growth in Hungary. The Hungarian GDP decreased by 4.4% in the fourth quarter of 2009 as compared to the fourth quarter of 2008 and increased by 1.7% in the fourth quarter of 2010 as compared to the fourth quarter of 2009. Hungary has taken several measures to combat its financial crisis. Hungary reduced its debt issuances and lowered its government budget deficit target and in October 2008, the European Central Bank (the ECB) agreed to lend the National Bank of Hungary up to 6.5 billion to help support liquidity. This has enabled Hungary to provide Euro to Hungarian commercial banks, which can swap Hungarian forint for Euro, which enables Hungarian banks to fund their foreign currency loans. In addition, in October 2008, in an effort to defend its currency and prevent an investment outflow, the National Bank of Hungary raised its base rate from 8.5% to 11.5%. In October 2008, the International Monetary Fund (the IMF) announced a funding package pursuant to which the IMF would loan Hungary U.S.$12.3 billion in addition to an E.U. loan of U.S.$8.1 billion and a World Bank loan of U.S.$1.4 billion. The IMF package includes measures to maintain liquidity as well as sufficient capital for the banking system. In April 2009, at the G-20 Summit in London, the G-20 Nations agreed to fund the IMF with an additional U.S.$750 billion to combat the global economic downturn. These actions have stabilized the Euro/Hungarian forint exchange rate which is currently trading in to the 260 to 270 range. The National Bank of Hungary has gradually lowered its base rate to 5.25% as of the end of April 2010.

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In early 2010, Greeces large deficit became unsustainable which drove the country into a fiscal crisis. The leaders of the European Union developed a 45 billion rescue plan for Greece in April 2010, however, the crisis caused negative pressure to the Hungarian forint that significantly increased the Hungarian forint/euro exchange rate to the level of 280-290 in the second quarter of 2010. In April 2010, Hungarys center-right party, Fidesz won a two-third legislative majority in the Hungarian Parliament which allows Fidesz to adopt structural reforms. In June 2010, the current government confirmed it will continue to maintain the 3.8% public sector deficit target set by the previous administration for 2010. In mid July 2010, the IMF and the EU Delegation suspended the review of Hungarys funding program as the Hungarian government was reluctant to give clarification on open issues. Due to the uncertainty created by the suspension of negotiations, the Hungarian forint weakened against the Euro up to 290 HUF/EUR levels. However, Hungary is able to get financing through government bonds and treasury bills, moreover the country has foreign exchange reserves because of previous drawdowns from the credit facility. At the end of July 2010, the Hungarian Parliament passed the law on extraordinary bank tax, which was meant to bring in an extra HUF 200 billion of budget revenue in 2010. In October 2010, the Hungarian Parliament passed the law on the crisis tax in order to bring in an extra HUF 161 billion of budget revenue in 2010. The government expects to collect crisis tax levied on each of the energy, retail and telecommunication sectors for three years: HUF 61 billion per year is expected to be collected from telecom companies, HUF 70 billion per year is targeted to be collected from energy companies and HUF 30 billion per year is targeted to be collected from retail chains. The government also stopped the transfer of pension contributions to private pension funds in order to raise an extra HUF 60 billion to the budget revenue in 2010. Revenues from the crisis tax and the pension transfer freeze totaled HUF 221 billion in 2010 and met the 3.8% deficit goal. The government has submitted its 2011 budget plan to the Hungarian Parliament. Analysts main criticism was that the 2011 budget plan relies heavily on extra taxes, diverted pension transfers and a reduction in public sector employment, while it lacks structural measures. For 2011, the Hungarian Government introduced major changes to the tax regime including a 16% flat rate personal income tax and a reduction of corporate income tax rates. In December 2010, Moodys and Fitch downgraded Hungarys rating: Moodys: from Baa1 to Baa3 and Fitch: from BBB to BBB-, both with a negative outlook. The key drivers for the downgrades were increased concerns about Hungarys medium to long-term fiscal sustainability and higher external vulnerabilities than most of Hungarys rated peers. The negative outlook reflected the uncertainties regarding the Hungarian Governments financial strength due to the fact that the structural budget deficit is set to increase and external vulnerabilities make Hungary susceptible to event risk. In December 2010, the Hungarian Government launched a pension system reform, which reduced the role of the second pillar. Analysts say the broader motivation for the pension reform reversal seemed to be to create a fiscal space for the cut in income taxes, which instead should have been financed by reducing public expenditure. Even though the decision to abolish the second pillar should also help to reduce the public debt and temporarily alleviate funding needs in international markets, it reduces the incentives for the Hungarian Government to pursue long-lasting structural fiscal consolidation efforts. Between November 2010 and January 2011 the National Bank of Hungary has gradually increased its base rate to 6.00% Effect of Economic and Financial Crisis on Business and Financial Covenant Compliance The economic crisis has had an impact on all of our business segments, particularly our Mass Market segments. Our Mass Market Voice business continues to be impacted by a decreasing number of telephone lines and customers migrating to lower cost packages in our historical concession areas as well as reduced usage both in and outside our historical concession areas. In addition, we have seen the growth in our Mass Market Internet business slow reflecting the slowdown in the whole residential fixed broadband market, as the economy takes a toll on consumer spending. While we expect our Mass Market Internet business to grow again in the future as we expect the broadband penetration rate in Hungary to converge to that of Western Europe, we cannot predict when such growth will begin or the affect that competition, particularly from cable television operators providing broadband internet service, will have on our DSL broadband business. Our Business segment operations have also been impacted by the economy as businesses look to cut expenditures and contract renewals become more competitive. While we continue to carefully manage our operating costs and capital expenditure, we cannot at this time predict with certainty the impact such economic conditions will continue to have on our business, both in Hungary and the Central and Eastern European region, with respect to consumer and business spending on our services or on our ability to repay our debt obligations. We do, however, believe that cash provided by our operating

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activities and our financing activities will provide adequate resources to satisfy our working capital requirements, scheduled principal and interest payments on our debt and our anticipated capital expenditure requirements for the next 12 months. However, in light of the unpredictable economic trends, our ability to generate cash sufficient to meet our existing indebtedness obligations could be adversely affected, and we could be required either to find alternate sources of liquidity or to refinance our existing indebtedness in order to avoid defaulting on our debt obligations. In order to limit our risk of foreign exchange rate fluctuations and changes in interest rates, we have entered into various hedging arrangements to hedge our interest rate and foreign exchange rate risks, which arrangements include interest rate swaps, foreign exchange forward agreements and cross-currency interest rate swaps. Explanation of Statement of Comprehensive Income Items Revenue Revenue is generated by four principal areas of activity as follows: Mass Market Voice The revenue generated from the fixed line voice and voice-related services provided to Mass Market customers within our historical concession areas and outside our historical concession areas in Hungary. Mass Market Voice revenue comprises monthly fees charged for accessing the network, time based fixed-to-mobile, local, long distance and international call charges, interconnect charges on calls terminated in our network, monthly fees for value added services, subsidies, one-time connection and new service fees, as well as monthly fees for packages with built-in call minutes. Mass Market Internet The revenue generated from DSL internet connections provided to Mass Market customers in Hungary both inside and outside the historical concession areas. Mass Market Internet revenue comprises DSL revenue, which is generated through a variety of monthly packages. Business The revenue generated from the fixed line voice, data and internet services provided to business, government and other institutional customers nationwide. Business revenue comprises access charges, monthly fees, time based fixed-to-mobile, local, long distance and international call charges, interconnect charges on calls terminated in our network, monthly fees for value added services, internet access packages and regular data transmission services. In addition, Business revenue includes revenue from leased line, internet and data transmission services which is comprised of fixed monthly rental fees based on the capacity/bandwidth of the service and the distance between the endpoints of the customers. Domestic Wholesale The revenue generated from voice and data services is provided on a wholesale basis to resellers to use excess network capacity. Domestic Wholesale revenue comprises rental payments for high bandwidth leased line services, which are based on the bandwidth of the service and the distance between the endpoints of the customers, and voice transit charges from other Hungarian and international telecommunications service providers, which are based on the number of minutes transited. Cost of sales exclusive of depreciation Cost of sales exclusive of depreciation consist of cost directly attributable to operations of segments such as interconnect expenses, access type charges, direct sales commissions (segment cost of sales) and expenses which are attributable to all segments such as network operating expenses and direct personnel expenses. Operating Expenses Principal operating expenses consist of:

indirect personnel expenses, including salaries, social security and other contributions, personnel related expenses, contracted employees and expatriate costs and bonuses and charges; headcount related costs, including office, building rental and maintenance, car related and training costs; advertising and marketing costs, including the costs of advertising campaigns and other publicity and market research; local operating and other taxes and crisis tax, which was introduced by the Hungarian Government in the fourth quarter of 2010 with retrospective effect to January 1, 2010; IT costs including IT maintenance, software license and other IT related costs;

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bad debt expenses, including provisions for doubtful debts from customers; collection costs, including bank charges in respect of collecting payments from customers; legal and audit fees including fees paid to legal advisors and to auditors; consultant expenses including fees paid to other advisors; management fee including fees paid to our trustees and Mid Europa; other non-recurring expenses including share based compensation charges and gains; non-recurring consulting expenses, which are fees paid to legal and financial advisors relating to our strategic projects; and other overhead costs, net including other miscellaneous expenses and revenues.

Network expense and personnel expense are included as part of cost of sales and are not an operating expense attributable to any segment in our segment reporting. Therefore, we present general operating expense, which includes network expense and personnel expense in our year on year comparison included in this Offering Memorandum to present a complete view of our expenses. Depreciation and Amortization We charge depreciation to our income statement on a straight-line basis over the estimated useful lives of items of property, plant and equipment, and major components that are accounted for separately. Assets leased under finance leases are depreciated over the shorter of the lease term or their useful lives. Land and capital work in progress are not depreciated. Intangible assets with a finite useful life are amortized on a straight-line basis over the period in which the asset is expected to be available for use. Intangible assets with an indefinite useful life are reviewed for impairment at least annually or when there are indicators for impairment. Historically, we amortized the amounts paid for the right to provide fixed line telecommunications services in our historical concession areas over the 25-year term provided for in concession contracts. As of January 1, 2008, due to the changes in customer churn rates, we completed a review of the estimated amortization period of such concession rights and as a result of this review the remaining useful life of concession rights was reduced to 3 years, which was accounted for prospectively from January 1, 2008. Concession rights were amortized to zero by December 31, 2010. Net Financial Expenses Our net financial expenses comprise interest income, interest expense, amortization of bond discounts, amortization of deferred borrowing costs calculated using the effective interest rate method, foreign exchange gains and losses, gains and losses resulting from the changes in the fair values of derivative financial instruments and net other financial expense. Our net finance expense also included charges on extinguishment of debt incurred in 2009. Income Taxes Income tax expense comprises current and deferred taxes. Income tax expense is recognized in the income statement except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity. Current tax is the expected corporate income tax and Hungarian local business tax payable on taxable income for the year, using tax rates enacted at the balance sheet date and any adjustment to tax payable in respect of previous years. During the fourth quarter of 2010, the Hungarian government introduced a crisis tax, which was implemented with retrospective effect to January 1, 2010. Such crisis tax is accounted for among operating expenses in our consolidated statement of comprehensive income. Deferred tax assets and liabilities, net of valuation allowances, are recognized for the future tax consequences attributable to tax loss carry-forwards, and differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The

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effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. Deferred tax assets have only been recognized to the extent it offsets deferred tax liabilities recognized. Critical Accounting Policies We believe the following accounting policies are critical to understanding our results of operations and the effect of the more significant judgments and estimates used in the preparation of our consolidated financial statements: Revenue Recognition Revenues are primarily earned from providing access to and usage of our networks and facilities. Access revenue is billed one month in advance and recognized the following month when earned. Revenues based on measured traffic are recognized when the service is rendered. Revenue from connection fees are recognized upon service activation. Wholesale data revenue from leased lines is based on the bandwidth of the service and the particular route involved and is recognized in the period of usage or when the service is available to the customer. From time to time, we sell fiber optical assets to other telecommunications companies. Revenue is recognized as and when the transfer of ownership is complete. For further details about revenue recognition, see note 2.17 to the consolidated financial statements for the year ended December 31, 2010. Subscriber Acquisition Costs Subscriber acquisition costs are fees paid to our internal sales force and fees paid to third party sales agents. We capitalize subscriber acquisition costs that relate to fixed term subscriber contracts. Such capitalized subscriber acquisition costs are amortized over the period of the related subscriber contracts. Goodwill Goodwill is calculated as the amount of the fair value of the purchase price paid over the fair value of the net assets acquired in a business combination. The fair values of the assets are determined using different valuation techniques depending on the nature of the assets. Goodwill is allocated to operating segments for the purposes of impairment testing. The allocation is made to those operating segments that were expected to benefit from business combinations in which goodwill arose. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the goodwill maybe impaired, in accordance with IAS 36 Impairment of Assets. Our segments are as follows: Mass Market Voice In-Concession, Mass Market Voice Out-of-Concession, Mass Market Internet (including IPTV), Business Voice In-Concession, Business Voice Out-of-Concession, Business Data and Internet and Domestic Wholesale. Property, Plant and Equipment Property, plant and equipment comprise a significant portion of our total assets. Changes in technology, changes in our intended use of these assets and/or changes in the regulatory environment may cause the estimated period of use or the value of these assets to change. These assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Estimates and assumptions used in both setting depreciable lives and reviewing recoverability require both judgment and estimation by management. Impairment is deemed to have occurred if projected undiscounted cash flows related to the asset are less than its carrying value. If impairment is deemed to have occurred, the carrying values of the assets are written down to their fair value, through a charge against earnings. Intangible Assets Intangible assets that have finite useful lives (whether or not acquired in a business combination) are amortized over their estimated useful lives. Intangible assets with finite lives consist of software, property rights and other intangible assets, mainly capitalized subscriber acquisition costs. Property rights represent the amounts paid for the right to use third party property for the placement of telecommunication equipment and the amounts paid for the usage of networks owned by third parties. The estimated useful lives of other intangible assets are as follows: Property rights ....................................................................................................................... Software................................................................................................................................. Other ...................................................................................................................................... 1-43 years 3 years 1 to 16 years

We evaluate the carrying value of intangible assets to be held and used whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The carrying value of an intangible asset is considered impaired when the projected undiscounted future cash flows related to the asset are less than its carrying value. We measure impairment based on the amount by which the carrying value of the respective asset exceeds its fair value. Fair value is determined primarily using the projected future cash flows discounted at a rate commensurate with the risk involved. For further details on the accounting policies of intangible assets, see note 2.11 to the consolidated financial statements for the year ended December 31, 2010. Contingent Liabilities We establish accruals for estimated loss contingencies when we determine that a loss is probable and the amount of the loss can be reasonably estimated. Revisions to contingent liabilities are reflected in income in

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the period in which different facts or information become known or circumstances change that affect our previous assessments as to the likelihood of and estimated amount of loss. Accruals for contingent liabilities are based upon our assumptions and estimates, after giving consideration to the advice of the legal department and other information relevant to the assessment of the probable outcome of the matter. Derivative Financial Instruments We use derivative financial instruments to manage our exposure to foreign exchange and interest rate risks arising from operational, financing and investing activities. In accordance with our treasury policy, we do not hold or issue derivative financial instruments for trading purposes. The derivative financial instruments held do not qualify for hedge accounting and are therefore designated as fair value through profit and loss. The gains or losses resulting from the changes in the fair value of financial instruments are recorded in the consolidated income statement for the period to which they relate. The fair value of interest rate swaps is the estimated amount that we would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates. The fair value of forward exchange contracts is their estimated market price at the balance sheet date, being the present value of the quoted forward price. The fair value of cross currency interest rate swaps is the estimated amount that we would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and, foreign exchange rates. For further details on the accounting policies relating to derivative financial instruments, see note 2.7 to the consolidated financial statements for the year ended December 31, 2010. Income Taxes Deferred tax assets and liabilities, net of valuation allowances, are recognized for the future tax consequences attributable to tax loss carry-forwards, and differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. In assessing the realization of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider projected future taxable income and tax planning in making these assessments. Actual income taxes could vary from these estimates due to future changes in the income tax laws or the results from reviews of our tax returns by taxing authorities. For further details on the accounting policies relating to income taxes, see note 2.22 to the consolidated financial statements for the year ended December 31, 2010. Critical Accounting Estimates and Judgements Impairment provision for doubtful accounts The group maintains an impairment provision for doubtful accounts for estimated losses resulting from customers or carriers failure to make payments on amounts due. These estimates are based on a number of factors including: (a) historical experience; (b) aging of trade accounts receivable; (c) amounts disputed and the nature of dispute; (d) bankruptcy; (e) general economic, industry or business information; and (f) specific information that we obtain on the financial condition and current credit worthiness of customers or carriers. The estimates used in evaluating the adequacy of the impairment provision for doubtful accounts receivable are based on the aging of the accounts receivable balances and historical write-off experience, customer credit-worthiness, payment defaults and changes in customer payment terms. Depreciation and amortization Property, plant and equipment and intangible assets are recorded at cost and are depreciated or amortized on a straightline basis over their estimated useful lives. The determination of the useful lives of assets is based on historical experience with similar assets as well as any anticipated technology evolution and changes in broad economic or industry factors. The appropriateness of the estimated useful lives is received annually. Comparison of Continued Operations for the Year Ended December 31, 2010 and the Year Ended December 31, 2009 The functional currency of our continued operations is the HUF. The average EUR/HUF exchange rate for the year ended December 31, 2010 was 275.41, compared to an average EUR/HUF exchange rate for the year ended December 31, 2009 of 280.58. When comparing the year ended December 31, 2010 to the year ended December 31, 2009, you should note that EUR reported amounts have been affected by this 2% appreciation of the HUF against the EUR. Revenue

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The following table presents a breakdown of our revenue by segment for the year ended December 31, 2009 and 2010:
Year Ended December 31, 2009 2010 % change ( in millions)

Mass Market Voice.................................................................................................. Business ................................................................................................................... Mass Market Internet ............................................................................................... Domestic Wholesale ................................................................................................ Total Revenue.........................................................................................................

77.0 79.0 32.9 21.1 210.0

63.9 73.2 32.7 23.4 193.2

(17%) (7%) (1%) 11% (8%)

Our revenue decreased by 16.8 million, or 8% for the year ended December 31, 2010 compared to year ended December 31, 2009. The decrease is attributable to the factors described below. Mass Market Voice Our Mass Market Voice revenue was 63.9 million for the year ended December 31, 2010 compared to 77.0 million for the year ended December 31, 2009, representing a decrease of 13.1 million or 17%. This decrease is mainly due to the decrease in the number of our Mass Market Voice customers and the decrease in higher value fixed to mobile and international traffic partially offset by the 2% appreciation of the HUF against the EUR during the year ended December 31, 2010 compared to the prior year. The number of Mass Market Voice telephone lines within our historical concession areas was approximately 327,000 as of December 31, 2010 compared to 356,000 as of December 31, 2009 and the number of Carrier Selection (CS), Carrier Pre-Selection (CPS) and LLU customers that represents our customer base outside our historical concession areas was approximately 298,000 as of December 31, 2010 compared to 365,000 as of December 31, 2009. Business Our Business revenue was 73.2 million for the year ended December 31, 2010 compared to 79.0 million for the year ended December 31, 2009, representing a 5.8 million or 7% decrease. This decrease was primarily due to lower voice traffic and loss of lines as well as price erosion due to competition and lower data and internet endpoints reflecting economic conditions partially offset by the 2% appreciation of the HUF against the EUR during the year ended December 31, 2010 compared to the prior year. The number of Business voice telephone lines inside our historical concession areas was approximately 42,000 as of December 31, 2010 compared to 44,000 as of December 31, 2009. The number of direct access Business voice telephone lines outside our historical concession areas was approximately 43,000 as of December 31, 2010 compared to 47,000 as of December 31, 2009 and the number of indirect access Business voice telephone lines outside our historical concession areas was approximately 8,000 as of December 31, 2010 compared to approximately 9,000 as of December 31, 2009. In addition, we had approximately 15,000 DSL lines and approximately 16,000 leased lines as of December 31, 2010 compared to approximately 17,000 DSL lines and approximately 16,000 leased lines as of December 31, 2009. Mass Market Internet Our Mass Market Internet revenue was 32.7 million for the year ended December 31, 2010 compared to 32.9 million for the year ended December 31, 2009, representing a 0.2 million or 1% decrease. Although our broadband DSL customer base increased, the decline was due to lower prices as a result of competition partially offset by the 2% appreciation of the HUF against the EUR during the year ended December 31, 2010 compared to the prior year. As of December 31, 2010, we had approximately 151,000 broadband DSL customers compared to approximately 147,000 broadband DSL customers as of December 31, 2009, which represents a 3% increase. Domestic Wholesale Our Domestic Wholesale revenue was 23.4 million for the year ended December 31, 2010 compared to 21.1 million for the year ended December 31, 2009, representing a 2.3 million or 11% increase. This increase is primarily attributable to two significant fiber sales during 2010 and the 2% appreciation of the HUF against the EUR during the year ended December 31, 2010 compared to the prior year.

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Cost of Sales The following table presents segment cost of sales for the year ended December 31, 2009 and 2010:
Year Ended December 31, 2009 2010 ( in millions)

Segment cost of sales.........................................................................................................................

38.6

32.3

Cost of sales, at the segment level, totaled 32.3 million for the year ended December 31, 2010 compared to 38.6 million for the year ended December 31, 2009, representing a decrease of 6.3 million or 16%. This decrease is due to the decrease in interconnect expenses attributable to the decrease in voice traffic partially offset by the 2% appreciation of the HUF against the EUR during the year ended December 31, 2010 compared to the prior year. The following table presents a reconciliation of segment cost of sales to total cost of sales for the year ended December 31, 2009 and 2010:
Year Ended December 31, 2009 2010 ( in millions)

Segment cost of sales......................................................................................................................... Network operating expenses .............................................................................................................. Direct personnel expenses ................................................................................................................. Total cost of sales, exclusive of depreciation.................................................................................. Segment Gross Margin

38.6 19.6 10.9 69.1

32.3 19.5 10.8 62.6

We define segment gross margin as segment revenue minus segment cost of sales for each of our operating segments. Segment gross margin is not a measurement of financial performance under IFRS and should not be considered as an alternative to net income or to cash flow from operating, investing or financing activities, as a measure of liquidity or an indicator of our operating performance or any other measures of performance derived in accordance with IFRS. Management uses segment gross margin as a tool for various purposes including measuring and evaluating our financial and operational performance, making compensation decisions, planning and budgeting decisions and financial planning purposes. We believe that the presentation of segment gross margin is useful for investors because it reflects managements view of core operations and cash flow generation upon which management bases financial, operational and planning decisions and presents measurements that investors and their lending banks have indicated to management are important in assessing us and our liquidity. The following table presents a reconciliation of segment gross margin to income from operations for the year ended December 31, 2009 and 2010:
Year Ended December 31, 2009 2010 % change ( in millions)

Mass Market Voice gross margin ..................................................................................... Business gross margin ...................................................................................................... Mass Market Internet gross margin .................................................................................. Domestic Wholesale gross margin.................................................................................... Total segment gross margin ........................................................................................... Network operating expenses ............................................................................................. Direct personnel expenses ................................................................................................ Operating expenses........................................................................................................... Depreciation and amortization.......................................................................................... Cost of restructuring ......................................................................................................... Income from operations .................................................................................................

64.2 60.9 26.6 19.7 171.4 (19.6) (10.9) (40.6) (54.8) (2.1) 43.4

55.5 58.4 26.2 20.8 160.9 (19.5) (10.8) (46.2) (53.9) (1.2) 29.3

14% 4% 2% 6% 6%

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Our segment gross margin changed from 171.4 million for the year ended December 31, 2009 to 160.9 million for the year ended December 31, 2010, representing a decrease of 10.5 million or 6%. This decrease is attributable to the factors below. Mass Market Voice Our Mass Market Voice gross margin was 55.5 million for the year ended December 31, 2010 compared to 64.2 million for the year ended December 31, 2009, representing a decrease of 8.7 million or 14%. This decrease is mainly due to the decrease in our Mass Market Voice revenue as a result of the decrease in the number of customers and traffic partially offset by the 2% appreciation of the HUF against the EUR during the year ended December 31, 2010 compared to the prior year. Business Our Business gross margin was 58.4 million for the year ended December 31, 2010 compared to 60.9 million for the year ended December 31, 2009, representing a decrease of 2.5 million or 4%. This decrease is mainly due to the decrease in Business voice revenue as a result of loss of lines and price erosion due to competition partially offset by the 2% appreciation of the HUF against the EUR during the year ended December 31, 2010 compared to the prior year. Mass Market Internet Our Mass Market Internet gross margin was 26.2 million for the year ended December 31, 2010 compared to 26.6 million for the year ended December 31, 2009, representing a decrease of 0.4 million or 2%. Although our number of DSL lines has increased, this decrease is mainly due to the decrease in prices due to competition partially offset by the 2% appreciation of the HUF against the EUR during the year ended December 31, 2010 compared to the prior year. Domestic Wholesale Our Domestic Wholesale gross margin was 20.8 million for the year ended December 31, 2010 compared to 19.7 million for the year ended December 31, 2009, representing an increase of 1.1 million or 6%. This increase is primarily attributable to two large fiber sales during 2010 and the 2% appreciation of the HUF against the EUR during the year ended December 31, 2010 compared to the prior year. General Operating Expense The general operating expense consists of operating expense as included in our statement of comprehensive income and the cost of sales which are not allocated to individual segments. The following table presents the general operating expense for the year ended December 31, 2009 and 2010:
Year Ended December 31, 2009 ( in millions) 2010

General operating expense..................................................................................................

71.1

76.5

Our general operating expense increased by 5.4 million or 8% from 71.1 million for the year ended December 31, 2009 to 76.5 million for the year ended December 31, 2010. This increase is mainly the result of the crisis tax that was levied during the year in the amount of 11.2 million and the 2% appreciation of the HUF against the EUR offset by the decreasing impact of general cost control activities during the year. The following table presents a reconciliation of general operating expenses to operating expenses for the year ended December 31, 2009 and 2010:
Year Ended December 31, 2009 ( in millions) 2010

General operating expense.................................................................................................. Network operating expense ................................................................................................ Direct personnel expense .................................................................................................... Operating Expense............................................................................................................

71.1 (19.6) (10.9) 40.6

76.5 (19.5) (10.8) 46.2

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Depreciation and Amortization The following table presents our depreciation and amortization for the year ended December 31, 2009 and 2010:
Year Ended December 31, 2009 ( in millions) 2010

Depreciation and amortization............................................................................................

54.8

53.9

Depreciation and amortization decreased by 0.9 million from 54.8 million for the year ended December 31, 2009 to 53.9 million for the year ended December 31, 2010. This decrease is mainly due to lower average book value of intangible assets and lower capital expenditures during the year ended December 31, 2010. Cost of Restructuring The following table presents our cost of restructuring for the year ended December 31, 2009 and 2010:
Year Ended December 31, 2009 ( in millions) 2010

Cost of restructuring ...........................................................................................................

2.1

1.2

Cost of Restructuring decreased by 0.9 million from 2.1 million for the year ended December 31, 2009 to 1.2 million for the year ended December 31, 2010, and mainly includes severance expenses for both years. Income from Operations The following table presents our income from operations for the year ended December 31, 2009 and 2010:
Year Ended December 31, 2009 ( in millions) 2010

Income from operations ......................................................................................................

43.4

29.3

As a result of the factors described above, income from operations decreased by 14.1 million from 43.4 million for the year ended December 31, 2009 to 29.3 million for the year ended December 31, 2010. Foreign Exchange Gains / (Losses), Net The following table presents our net foreign exchange gains/(losses) for the year ended December 31, 2009 and 2010:
Year Ended December 31, 2009 ( in millions) 2010

Foreign exchange gains / (losses), net .................................................................................

(15.7)

(7.1)

Our foreign exchange losses of 7.1 million for the year ended December 31, 2010 resulted primarily from realized foreign exchange losses of 5.1 million on the repayments of our debt during the year partially offset by realized gains on our receivables of 2.0 million and net unrealized losses of 4.0 million due to the revaluation of our EUR denominated debt and receivables at period end. Our foreign exchange losses of 15.7 million for the year ended December 31, 2009 resulted primarily from foreign exchange losses of 22.2 million mainly relating to realized foreign exchange losses on repayments of our debt during the year offset by unrealized gains due to the revaluation of our EUR denominated debt at period end. Interest Expense The following table presents our interest expense for the year ended December 31, 2009 and 2010:

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Year Ended December 31, 2009 ( in millions) 2010

Interest expense ................................................................................................................

55.6

46.2

Our interest expense decreased by 9.4 million from 55.6 million for the year ended December 31, 2009 to 46.2 million for the year ended December 31, 2010. This decrease is mainly due to the repurchases of certain of our notes during the year and the impact of the December 2009 refinancing. See Note 18 Borrowings in the notes to the consolidated financial statements for the year ended December 31, 2010. Interest Income The following table presents our interest income for the year ended December 31, 2009 and 2010:
Year Ended December 31, 2009 ( in millions) 2010

Interest income..................................................................................................................

0.9

1.5

Our interest income was 0.9 million for the year ended December 31, 2009 and 1.5 million for the year ended December 31, 2010. Interest income was realized on our cash balances during these periods. Net Fair Value Change of Derivative Financial Instruments The following table presents any losses from net fair value changes of derivative financial instruments for the year ended December 31, 2009 and 2010:
Year Ended December 31, 2009 ( in millions) 2010

Net fair value change of derivative financial instruments ..................................................

(17.4)

(6.9)

The 6.9 million loss on the net fair value change of derivative financial instruments for the year ended December 31, 2010 includes realized losses in the amount of 17.4 million related to the settlement of our open positions and unrealized gains in the amount of 10.5 million related to the mark-to-market revaluation of our open positions at period end. The 17.4 million loss on the net fair value change of derivative financial instruments for the year ended December 31, 2009 includes realized losses in the amount of 11.8 million related to the settlement of our open positions and unrealized losses in the amount of 5.6 million related to the mark-to-market revaluation of our open positions at period end. Loss on Extinguishment of Debt The following table presents the loss on extinguishment of debt for the year ended December 31, 2009 and 2010:
Year Ended December 31, 2009 ( in millions) 2010

Loss on extinguishment of debt ..........................................................................................

(24.5)

Loss on extinguishment of debt of 24.5 million for the year ended December 31, 2009 relates to the loss of the three refinancings that were undertaken during the year ended December 31, 2009 including the write-down of deferred borrowing costs in the amount of 10.5 million and transaction expenses in the amount of 26.6 million partially offset by gains on the repurchase of certain notes issued by Matel in the amount of 12.6 million. Income Tax Benefit / (Expense) The following table presents our income tax benefit/(expense) for the year ended December 31, 2009 and 2010:

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Year Ended December 31, 2009 ( in millions) 2010

Corporate tax ...................................................................................................................... Local business tax............................................................................................................... Current tax benefit / (expense)............................................................................................ Deferred tax benefit / (expense).......................................................................................... Total income tax benefit / (expense) ................................................................................

(0.1) (3.7) (3.8) 8.6 4.8

(0.0) (3.6) (3.6) (14.8) (18.4)

Our income tax changed from a benefit of 4.8 million for the year ended December 31, 2009 to an expense of 18.4 million for the year ended December 31, 2010, primarily due to the change in our deferred tax from a benefit of 8.6 million for the year ended December 31, 2009 to an expense of 14.8 million for the year ended December 31, 2010. The deferred tax expense of 14.8 million for the year ended December 31, 2010 relates to the decrease in our deferred tax assets as a result of the decrease of our effective income tax rate relating to our Hungarian operations from 16% in 2009 to 10% in 2010 and the write down of our tax loss carry forwards. The deferred tax benefit of 8.6 million for the year ended December 31, 2009 relates to (i) the decrease in the tax rate in Hungary from 20% (corporate tax rate of 16% plus a solidarity tax of (4%) to the enacted tax rate of 19% (effective from January 1, 2010), which resulted in a deferred tax benefit of 2.1 million and (ii) the increase in our deferred tax assets relating to tax loss carry forwards. We have not recognized any deferred tax benefit in respect of tax loss carried forwards as a result of the impact on taxable profits of the special crisis tax introduced by the Hungarian government in October 2010 and the uncertainty as to its possible date of repeal. Income/(Loss) from Continuing Operations The following table presents our loss from continuing operations for the year ended December 31, 2009 and 2010:
Year Ended December 31, 2009 ( millions) 2010

Income / (loss) from continuing operations ..........................................................................

(64.1)

(48.8)

As a result of the factors discussed above, we recorded a loss from continuing operations of 48.8 million for the year ended December 31, 2010 compared to a loss from continuing operations of 64.1 million for the year ended December 31, 2009. Income from Discontinued Operations The following table presents our income from discontinued operations for the year ended December 31, 2009 and 2010:
Year Ended December 31, 2009 ( millions) 2010

Income from discontinued operations.................................................................................

25.8

60.0

The results of the International Business have been presented as discontinued operations following the approval of the plan by the Board of Directors, on December 18, 2009, to sell the International Business. The sale of the International Business was completed on October 7, 2010, the gain of which of 42.0 million which is recorded as part of discontinued operations for the year ended December 31, 2010. Liquidity and Capital Resources The table below summarizes our cash flow for the years ended December 31, 2009 and 2010:
For the year ended December 31, 2009 ( millions) 2010 ( millions)

Cash Flow Data: Net cash flow provided by (used in) operating activities................................ Net cash flow provided by (used in) investing activities ................................ Net cash flow provided by (used in) financing activities................................

68.5 (52.3) 20.9

36.3 158.0 (150.0)

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Our net cash provided by continued and discontinued operating activities was 36.3 million and 68.5 million for the year ended December 31, 2010 and 2009, respectively. Our net cash provided by investing activities of continued and discontinued operations was 158.0 million for the year ended December 31, 2010, which mainly included net proceeds from the sale of the International Business in the amount of 191.0 million and proceeds from the sale of tangible and intangible assets of 7.4 million decreased by net capital expenditure of 41.6 million. Our net cash outflow from investing activities of 52.3 million for the year ended December 31, 2009, mainly consisted of proceeds from the sale of tangible and intangible assets of 10.5 million decreased by capital expenditure of 66.4 million. Financing activities of continued and discontinued operations used 150.0 million of cash for the year ended December 31, 2010 compared to 20.9 million cash provided by financing activities for the year ended December 31, 2009. Cash flows used in financing activities for the year ended December 31, 2010 mainly included the repurchase of our 2007 Notes in the amount of 47.6 million, the repurchase of our Existing Notes in the amount of 75.0 million, principal payments under capital leases in the amount of 2.5 million and the settlement of our derivative financial instruments in the amount of 17.0 million. Cash flows from financing activities for the year ended December 31, 2009 included proceeds from the issuance of the Existing Notes of 340.7 million, net repayment of our borrowings in the amount of 265.9 million and related transaction expenses of 33.7 million as well as settlement of our derivative financial instruments in the amount of 18.6 million. We have historically funded our capital requirements primarily through a combination of debt financing and cash flow from operations. We invested 30.5 million in 2010 relating to continuing operations and expect to invest approximately 30 million in capital expenditures relating to continuing operations in 2011, which we expect to fund from our cash flow from operations. For a description of our financing arrangements and current debt structure, see note 18 Borrowings in the notes to the consolidated financial statements for the year ended December 31, 2010. The table below presents our other major contractual cash obligations as of December 31, 2010 (at December 31, 2010 exchange rates) adjusted to reflect the issuance of the Additional Notes and the subsequent repurchases of the 2007 Notes:
Cash Payments Due by Period Obligation Total 1 Year or Less 2-3 Years ( thousands) 4-5 Years After 5 Years

Long Term Debt Principal Payment ............................................ Long Term Debt Interest(1) ........................................................... Derivative Financial Instruments................................................. Lease Commitments to Telecommunication Providers ............... Other Operating Leases ............................................................... Capital Leases.............................................................................. Total ............................................................................................

349,997 197,600 2,236 28,775 31,293 4,410 614,311

31,350 1,332 4,010 4,263 200 41,155

66,500 904 7,726 7,231 449 82,810

66,500 6,966 6,000 537 80,003

349,997 33,250 10,073 13,799 3,224 410,343

(1) Long-term debt interest payment obligations are calculated by rates of interest for the debt arrangements as follows: 9.50% for the Notes. Liquidity risk represents the risk that we are unable to meet our payment obligations when those become due. We monitor our liquidity position on an ongoing basis by forecasting and monitoring revenue, capital and operating expenditures, investments and debt service. The global financial crisis has affected the whole Central and South Eastern European economy. In addition, Hungarys monetary and fiscal policies have had a significant impact on the Hungarian economy, which has resulted in a recent significant devaluation of the Hungarian forint. We cannot at this time predict with certainty the impact such conditions will have on our business both in Hungary and the Central and South Eastern European region with respect to consumer and business spending on our services or on our ability to repay our debt obligations. We do, however, believe that cash provided by our operating activities and our financing activities will provide adequate resources to satisfy our working capital requirements, scheduled principal and interest payments on our debt and our anticipated capital expenditure requirements. The 2007 Notes mature in 2013 and the Notes mature in 2016. We will continue to evaluate our capital structure and the capital markets in the future in making our capital financing decisions. For a detailed description of our debt agreements, see note 18 in the notes to the consolidated financial statements for the year ended December 31, 2010.

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We may, subject to the terms of our debt instruments, from time to time purchase or otherwise acquire or retire our subsidiaries debt and take other steps to reduce our consolidated debt or otherwise change our capital structure. These actions may include open market purchases, negotiated transactions, tender offers, exchange offers or other transactions. The timing and amount of any debt purchases or acquisitions would depend on market conditions, trading levels of the debt from time to time, our cash position and the availability and terms of cash financing from other sources, and other considerations. In January 2011, we repurchased 2007 Notes in the aggregate principal amount of 7.2 million at an average purchase price equal to 93.1% of the principal amount thereof plus accrued interest up to, but excluding, the date of settlement. Following the cancellation of these and certain other 2007 Notes we repurchased, the aggregate principal amount outstanding of the 2007 Notes was 68.9 million. On February 22, 2011 (the Redemption Date) all of Holdco Is 2006 PIK Notes were redeemed for cancellation. The redemption price was 101% of the principal amount thereof plus accrued and unpaid interest thereon, from the most recent interest payment date for which interest of the Notes has been paid to the Redemption Date. Inflation and Foreign Currency The EUR/HUF exchange rate changed from 270.84 as of December 31, 2009 to 278.75 as of December 31, 2010, an approximate 3% depreciation in the value of the HUF against the EUR. Overall, this resulted in a net foreign exchange loss of 7.1 million for the year ended December 31, 2010 compared to a net foreign exchange loss of 15.7 million for the year ended December 31, 2009. Approximately all of the revenue of our continued operations is denominated in HUF and our operating and other expenses, including capital expenditures, are predominantly in HUF but also in EUR. In addition, certain items in the balance sheet accounts are denominated in currencies other than the functional currencies of the operating subsidiaries. Accordingly, when such accounts are translated into the functional currency, we are subject to foreign exchange gains and losses which are reflected as a component of earnings. When the subsidiaries financial statements are translated into EUR for financial reporting purposes, we are subject to translation adjustments, the effect of which is reflected as a component of equity. Quantitative and Qualitative Disclosures about Market Risk Market Risk Exposure Foreign Currency Exchange Rate Risks We are exposed to various types of risk in the normal course of our business, including the risk from foreign currency exchange rate fluctuations. Approximately all of our revenue and operating expenses of our continuing operations are HUF based. Therefore, we are subject to currency exchange rate risk with respect to our non-HUF denominated expenses, primarily EUR, due to the variability between the HUF and the EUR. Due to our limited exposure with respect to non-HUF denominated expenses, we have not entered into any agreements to manage our foreign currency risks related to such expenses but we continue to monitor the currency exchange rate risk related to such expenses. We are also exposed to exchange rate risk since all of our debt obligations are in EUR. The EUR/HUF exchange rate changed from 270.84 as of December 31, 2009 to 278.75 as of December 31, 2010, an approximate 3% depreciation in the value of the HUF versus the EUR. Given our EUR denominated debt obligations, exchange rate fluctuations can have a significant impact on our consolidated financial statements in connection with foreign exchange gains/losses and the resulting debt balances. The sensitivity of our future cash-flows to foreign exchange rate changes related to our debt service, including all hedging in place, is detailed in note 19 Financial Instruments and Risk Management in the notes to the consolidated financial statements for the year ended December 31, 2010. Interest Rate Risks We are exposed to modest interest rate risks because the 2007 Notes accrue interest at variable rates tied to market interest rates. The interest rates on the floating rate EUR denominated obligations are based on EURIBOR. We evaluate market interest rates and the costs of interest rate hedging instruments by reviewing historical variances between market rates and rates offered by third parties on hedging instruments, as well as market expectations of future interest rates. The sensitivity of our future cash-flows to interest rate changes related to our debt service, including all hedging in place, is detailed in note 19 Financial Instruments and Risk Management in the notes to the consolidated financial statements for the year ended December 31, 2010.

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Derivative Financial Instruments The following table summarizes the notional amounts and respective fair values of our derivative financial instruments, which mature at varying dates, as of December 31, 2010:
Fair Value Change Year ended December 31, 2010

Asset / (Liability)

Notional Amount

Fair Market Value ( in thousands)

Cross currency interest rate swaps................................................................... Foreign currency forward agreements ............................................................. Interest rate swaps............................................................................................

16,833 100,675

(111) (2,125)

7,284 2,989 (36)

The notional principal amount provides one measure of the transaction volume outstanding as of the end of the period, and does not represent the amount of our exposure to market loss. The estimated fair market values represent the estimated amounts that we would pay or receive to terminate the contracts as of December 31, 2010. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments. Sensitivity Analysis The following table shows the sensitivity of our debt instruments and related derivatives, factoring in the related hedging positions, to potential foreign currency exchange rate and interest rate changes as of December 31, 2010:
Instrument Notional amount 1%p.a. increase in EURIBOR ( in thousands) 5% increase in HUF/EUR rate

Debt 2007 Notes(1)................................................................................... Existing Notes(2) ............................................................................. Total Debt ..................................................................................... Derivatives Forward deals ................................................................................ SWAP deals ................................................................................... Total Derivates .............................................................................

76,130 269,997 346,127 16,833 100,675 117,508

(761) (761) (75) 1,707 1,632

(154) (1,282) (1,436) 802 802

(1) Calculation based on notional amounts outstanding and hedging in place at December 31, 2010. (2) The Existing Notes pay fixed rate interest therefore it is not affected by changes in interest rates. The above table shows the impact of a 1% increase in interest rates (e.g. BUBOR and EURIBOR) and a 5% increase in the Euro/forint exchange rate on our debt service related cash flow due in the next 12 months.

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HUNGARIAN TELECOMMUNICATIONS INDUSTRY AND REGULATION Certain of the projections and other information set forth in this section have been derived from external sources, including the Hungarian Central Statistical Office, the former Hungarian Ministry of Economy and Transport and the National Media and Infocommunications Authority. Industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. We believe that these industry publications, surveys and forecasts are reliable but we have not independently verified them and cannot guarantee their accuracy or completeness. The projections and forward looking statements in this section are not guarantees of future performance and actual events and circumstances could differ materially from current expectations. Numerous factors could cause or contribute to such differences. See Risk Factors and Information Regarding Forward-Looking Statements. Hungary and its Telecommunications Industry Hungary Hungary is located in Central Europe bordering on Austria, Slovenia, Croatia, Serbia, Romania, Ukraine and Slovakia. It has approximately 10.0 million inhabitants, approximately 1.7 million of whom reside in Hungarys capital, Budapest. Since 1990, foreign direct investment into Hungary has been approximately 58.8 billion as of June 30, 2009. Hungary, Poland and the Czech Republic are the recipients of more than 50% of the total foreign direct investment into the former Communist countries in the region. Since 1995, the Hungarian government has embarked on an economic stabilization effort aimed at putting the economy on a sustainable path of low inflation growth. The unemployment rate decreased from 10.3% in 1995 to 8.0% at December 31, 2008; however, due primarily to the global economic crisis, the unemployment rate climbed back to 10.8% in December 2010, and is still growing. On May 1, 2004, Hungary joined the E.U., together with nine other countries. After several delays, currently no official deadline has been declared by the government regarding the adoption of the Euro as the currency of Hungary. Hungary joined the North Atlantic Treaty Organization in 1999. Hungary is also a member of the Organization for Economic Cooperation and Development and the World Trade Organization. The following table sets out Hungarys annual GDP growth and inflation rates since 2006 according to the Hungarian Central Statistical Office.
Annual GDP Growth Rate % Annual Inflation Rate %

2006 ............................................................................................................................... 2007 ............................................................................................................................... 2008 ............................................................................................................................... 2009 ............................................................................................................................... 2010 ............................................................................................................................... History

3.6 0.8 0.8 (6.7) 1.2

3.9 8.0 6.1 4.2 4.9

In 1989, the Hungarian state owned Post, Telegraph and Telephone Company was divided into three separate companies: the Hungarian Broadcasting Company, the Hungarian Post Office and Magyar Tvkzlsi Vllalat (the former Hungarian Telecommunications Operator which was privatized in 1992 and currently comprises Magyar Telekom). Pursuant to Act LXXII of 1992 on Telecommunications (the 1992 Telecommunications Act), the Hungarian government divided Hungary in 1993 into 54 geographically defined concession areas for local public fixed line voice telephony services (each, a historical concession area). Although the concession regime of the 1992 Telecommunications Act was repealed by Act XL of 2001 on Communications (the 2001 Communications Act), the currently operating telecommunications service providers are still the primary operators in those geographic areas of Hungary, which previously constituted their historical concession areas as defined by the 1992 Telecommunications Act. In August 1993, the Ministry of Transport, Telecommunications and Water Management announced an international tender for the exclusive right to provide international and domestic long distance telephony services throughout Hungary and to provide local public fixed line voice telephony services in 29 out of the 54 historical concession areas, including Budapest. The Ministry selected Magyar Telekom as the winner of this tender.

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In September 1993, the Ministry announced a second competitive bid for the exclusive right to provide local public fixed line voice telephony services in the remaining 25 of the 54 historical concession areas. The Ministry awarded 23 out of the 25 concession areas offered in the second tender. The right to operate 15 of those historical concession areas were distributed among 12 local telephone operators (each a Local Telephone Operator or LTO). Magyar Telekom, either directly or through predecessor companies, was awarded eight historical concession areas and was additionally chosen as the default provider in two areas where there was no successful bidder. Each of the LTOs (including HTCC and the predecessors of Invitel ZRt and HTCC) received 25 year licenses to provide local basic telephony services with exclusive rights in their respective concession areas until 2002. Each of the LTOs other than Magyar Telekom negotiated a separate asset purchase agreement with Magyar Telekom to acquire each historical concession areas existing telephony plant and equipment. The liberalization of the fixed line telecommunications market in Hungary could only be launched following the expiration of Magyar Telekoms exclusive right to provide national long distance and international telephony services in December 2001 and the expiration of each LTOs exclusive concession rights in their respective historical concession areas in 2002. In line with the E.U. regulatory framework on electronic communications, the 2004 Communications Act restructured the regulatory authorities responsible for the supervision of the liberalized telecommunications market, with the primary supervisory authority being the National Media and Infocommunications Authority (the legal successor to the National Communications Authority and the National Radio and Television Board) (the NMHH). Hungarian Fixed Line Telecommunications Industry We are the second largest incumbent fixed line telecommunications operator with 14 of the above mentioned historical concession areas. In addition to us, the two other incumbent fixed line telecommunications services providers operating in Hungary today are Magyar Telekom and UPC Hungary:

Magyar Telekom: Magyar Telekom is the largest provider of fixed line telecommunications services in Hungary. Magyar Telekom is the successor company of the former monopoly provider of long distance and international telephony services in Hungary, and the provider of local telephony services in 39 historical concession areas. Magyar Telekom has an estimated 56% national residential fixed voice and internet market share and an estimated 61% national business market share. Magyar Telekom is listed on the Budapest Stock Exchange. UPC Hungary: UPC Hungary is a wholly owned subsidiary of Liberty Group, Inc., a global cable operator that operates within 15 countries, principally in Europe. UPC Hungary provides local telephony services in one historical concession area and through its cable network covers approximately 1.2 million homes where it provides internet and fixed voice services in addition to cable television.

Hungarian Telecommunications Market Fixed Line Voice The fixed line telecommunications market in Hungary has been characterized by a decline in the number of subscriber lines in recent years. The penetration of fixed lines has fallen from a peak of approximately 38% in 2000 to approximately 29.79% as of December 2010 (expressed as a proportion of the overall population), primarily as a result of the rapid increase in mobile penetration from approximately 10% of the population in 1998 to approximately 120% in December 2010 (and the resulting migration of both residential and Business traffic from fixed to mobile networks) as well as increased competition from cable television operators (offering triple play packages comprised of television, internet and voice services). The fixed line penetration per household was approximately 60.8% in December 2010. However, in terms of subscribers, the contraction of the fixed line market has slowed as the mobile penetration growth has also slowed and broadband penetration has increased. The number of fixed lines decreased by 3.5% between December 2008 and December 2010, while the decrease in the mobile penetration rate was only 1.6% during the same period. Internet The most significant internet service providers in Hungary in addition to us are Magyar Telekom (through the T Home brand), GTS Datanet, and Enternet, each providing both residential (both dial up and DSL) and Business (DSL or leased line) internet services. Incumbent fixed line operators also benefit from the DSL wholesale services to reseller internet service providers. The importance of telecommunications traffic generated by dial up customers is marginal. As an alternative to DSL based broadband service, cable television based broadband access offers substantially the same speed and quality as the DSL technology, for a price comparable to DSL prices, and the number of cable internet subscriptions is only 60,000 lower than the number of DSL subscriptions. Both Magyar Telekom (through its cable television business unit) and UPC, the two

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largest cable operators, offer broadband internet access services in certain parts of our historical concession areas. Although mobile internet services are often inferior to DSL technology in both speed and quality, these services are also rapidly gaining popularity in Hungary, reaching a subscriber base of over 1.3 million subscriptions in December 2010. Data The provision of data services has been liberalized in Hungary since 1992, with no regulatory barriers to entering into the market. This factor, together with Hungarys expected economic growth and central location, attracted significant investment into the data communications sector. Not only did incumbent fixed line operators expand their existing networks but alternative service providers emerged and established backbone and access networks, providing both wholesale broadband data transmission and data services (including voice over IP) primarily targeting the lucrative Business market in Budapest and in other large business centers in Hungary. Alternative service providers typically benefit from the combined use of existing third party networks and state of the art new networks (typically optical fiber based) and agreements with international communications operators ensuring international traffic. Currently, the most important providers of data transmission services in Hungary other than Invitel ZRt are Magyar Telekom, Antenna Hungria (a broadcasting company having a digital microwave backbone network), MVM Informatika ZRt (a subsidiary of the market leader in the energy sector) and GTS-Datanet (an operator recently acquired by the Menatep group). Mobile Hungary was the first country in Central and Eastern Europe to introduce public mobile telecommunications services. Currently there are three primary mobile operators providing mobile voice telephone services in Hungary, T-Mobile (a Deutsche Telekom affiliate operating since 1993, and consolidated into Magyar Telekom in 2005), Telenor Magyarorszg Zrt. (a Telenor affiliate operating since 1993, formerly Pannon GSM), and Vodafone (operating since 1999). These mobile operators provide GSM services in both the 900 and 1800 MHz band and, pursuant to licenses awarded by the government in 2004, 3G (UMTS) services. The mobile communications market in Hungary is highly competitive and characterized by successive promotional campaigns and price competition. Historically, mobile telephony, due in part to limited fixed line penetration in the 1980s and early 1990s, increased rapidly in penetration in Hungary which has led to a mobile penetration rate which is significantly higher than that of fixed lines. Around 2006, mobile operators also introduced new tariff structures for voice (such as prepayment) which proved to be successful with customers. The financial success of mobile operators has been further supported by the relatively high prices which they have been able to charge to fixed line operators for terminating voice calls originated on fixed line networks on their own networks. As of December 2010, mobile penetration was approximately 120% as compared with a fixed line penetration of 60.8%, each according to the NMHH. Until November 2009, mobile virtual network operator (MVNO) services were wholly absent from the Hungarian market. Magyar Posta ZRt, the Hungarian incumbent postal services provider, became the first MVNO in Hungary in November 2009, with the introduction of its Postafon mobile service through its MVNO cooperation with Vodafone. Mobile internet and data services are becoming popular with Hungarian subscribers, generating further competition among the mobile service providers and pushing the prices of mobile data services down. We also try to benefit from mobile services by cooperating with both Telenor and Vodafone, in the form of resale services and not as an MVNO. Hungarian Regulatory Environment Hungarian Regulatory Framework The current regulation of the telecommunications services in Hungary is based on the 2004 Communications Act, which entered into force on January 1, 2004 and resulted in far reaching changes within the Hungarian telecommunications sector. The 2004 Communications Act was enacted in line with, and so as to implement, the E.U. electronic communications regulatory framework and to promote competition regarding the internet, universal service obligations, cost accounting, pricing, Carrier Selection, unbundling and number portability and to sufficiently address specific local issues. The 2004 Communications Act fundamentally changed the structure of the regulatory authorities responsible for the supervision of the liberalized telecommunications market and designated the NMHH as the top supervisory authority in Hungary. The Act CLXXXV of 2010 on Media Services and Mass Media (the Media Act) established NMHH as being

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responsible for overseeing both the telecommunications and media sector. The NMHH is an autonomous administrative body which reports to the Hungarian Parliament. Since 2010, the Ministry of National Development handles all matters related to audiovisual policy, public administration IT, electronic communication of information, frequency management, information society and postal services. Unlike the previous laws, the 2004 Communications Act adopted the general principle, accepted throughout the E.U. that the NMHH may only intervene into the telecommunications sector by way of issuing certain ex ante (forward looking) regulations, if competition in a specific telecommunications market was and was likely to remain ineffective in the absence of a direct regulatory intervention. Further, pursuant to the 2004 Communications Act, the right of imposing certain obligations upon telecommunications service providers on the retail market, such as price caps (except for Universal Service) has also been assigned to the NMHH. The 2004 Communications Act has vested significant regulatory powers into the NMHH to efficiently regulate the Hungarian telecommunications market. The current rules governing the telecommunications sector in the E.U. were put in place in 2002. In November 2007, the European Commission published a proposal package regarding the amendment of the 2002 regulatory framework, with the aim to further promote the single European market, modernize existing regulation and increase consumer benefits. The proposal has since been adopted and the new framework is in place. The revised rules must be incorporated into national law by May 25, 2011 before taking effect. Market Analysis and Obligations Pursuant to the 2004 Communications Act, the NMHH is required to conduct periodic market analyses to determine, in line with conventional competition law principles, whether a certain market is effectively competitive and, if not, to designate operators with SMP and impose certain forward looking obligations on them. The 2004 Communications Act provides a list of obligations out of which at least one must be imposed on operators defined as having SMP by the NMHH. Such obligations refer to:

transparency; non-discrimination; accounting separation; access to specific network facilities; and cost orientation and price control.

The NMHH completed several rounds of market analysis with respect to 17 out of the former 18 electronic communication markets as defined originally in Decree 16/2004 issued by the Ministry of Informatics and Communications. According to the changes in the list of markets to be regulated, NMHH now conducts market analyses in respect of seven markets. We were found to have SMP in our respective historical concession areas and, as such, subject to certain obligations in the following markets: Retail markets:

Access to the public telephone network at a fixed location for residential and non-residential customers;

With respect to the markets regarding access to the public telephone network at a fixed location for residential and non residential customers, in September 2010, the NMHH imposed:

a price cap on our services, which seeks to prohibit unreasonably high price increases; a non-discrimination obligation in respect of subscribers, in particular in respect of fixed term subscriptions; and Carrier Selection and Carrier Pre Selection obligations on us. The same obligations have been imposed on Magyar Telekom and UPC.

According to the work plans of NMHH, a launch of new market analysis is expected during 2011 in relation to the retail market for access to the public telephone network at a fixed location for residential and non residential customers.

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Wholesale markets:

Call origination on the public telephone network provided at a fixed location; Call termination on individual public telephone networks provided at a fixed location; Wholesale unbundled access to metallic loops and sub-loops for the purpose of providing broadband and voice services; and Wholesale broadband access.

The NMHH has imposed an obligation for us to implement accounting separation (in order to enable the assessment of cross-financing between service lines) with respect to all the wholesale markets listed above. With respect to the markets regarding call origination on the public telephone network provided at a fixed location and call termination on the public telephone network provided at a fixed location, the NMHH also imposed transparency (including the submission to the NMHH and publication of reference interconnection offers, (RIO)), cost orientation, and access and interconnection related obligations. With respect to the market regarding call termination on the public telephone network provided at a fixed location, we are also subject to non-discrimination obligations. With respect to the markets regarding wholesale unbundled access to metallic loops and sub-loops for the purpose of providing broadband and voice services and wholesale broadband access, the obligations imposed on us include transparency (requiring us to prepare and publish to the NMHH a reference unbundling offer (RUO)), cost orientation, access related and non-discrimination obligations. During the course of November and December of 2009, the NMHH launched proceedings to re-analyze the above wholesale markets and such proceedings are still pending. Although we will take all efforts to minimize the burdensome regulatory effects on our businesses, we expect that regulatory obligations similar to the ones mentioned above and outlined below will be imposed upon us in the respective markets. Regulatory Obligations Imposed on us in Hungary by the NMHH as a Result of the Market Analysis Reference Interconnection Offer The terms of our RIO are used whenever a telecommunications operator wants to interconnect with our telephone network in order to provide telephone service to our subscribers through Carrier Selection or Carrier Pre-Selection, or to terminate calls on our network. The parties may agree on the terms of the interconnection services that are not covered by the RIO. Tariffs on interconnection traffic services (origination and termination) offered in the RIO must be based on cost plus a reasonable profit. The cost is calculated by a Long Run Incremental Cost (LRIC) model with a current cost accounting approach. The reasonable profit is defined by a weighted average cost of capital figure of which the regulated percentage is 18%. The cost calculation must be approved by the NMHH, which has the right to overrule it if it finds that the calculation does not reflect the costs of an efficient operator. In such a case the NMHH may define the appropriate interconnection tariffs by benchmarking or using a bottom-up cost model. Auxiliary services (such as interconnect link and co-location) offered in the RIO are also required to be based on cost plus a reasonable profit (based on a bottom-up cost model). Our currently approved RIOs have been in place since April 1, 2009. Accounting Separation The NMHH requires us to implement accounting separation on several wholesale markets (call origination, call termination, wholesale unbundled access and wholesale broadband access). We are required to prepare separate income statements, balance sheets and profitability calculations for both our retail and wholesale arms, and within the retail arm for certain retail services. Service transfers between the different business lines are required to be settled at the regulated price.

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The approval of our accounting separation model for 2009 is still pending, but a positive final decision of the NMHH is expected in the near future. The procedure concerning the approval of our accounting separation model for 2010 is due to commence later this year. Reference Unbundling Offer and Wholesale Bitstream-access General Terms and Conditions The terms of our RUO are used when another operator wants to rent the last mile of our network which connects the subscribers to the telephone network (Local Loop Unbundling (LLU)). By renting the last mile of our network, alternative operators are able to provide telephone and broadband internet access services without the need for significant investment in an access network. In addition, by using RUO services, alternative operators may develop complete telephone packages which subscribers are able to pay for through a single bill issued by the alternative operators. In this case the incumbent operator does not have a direct contact with the subscriber. The RUO is required to include contractual terms for full and partial unbundling of the local loop and local bitstream access. The terms of the RUO must be approved by the NMHH. The tariff on access services offered in the RUO must be based on cost plus a reasonable profit. The cost of the monthly fee for the LLU is calculated using a Long Run Incremental Cost (LRIC) model with a current cost accounting approach. The reasonable profit is defined by a weighted average cost of capital figure, of which the regulated percentage is 18%. The cost calculation must be approved by the NMHH, which has the right to overrule the results if the cost calculation applied by the operator does not comply with the related regulations. In such a case, the NMHH may define the appropriate access prices. Auxiliary services offered in the RUO are also required to be based on cost plus a reasonable profit (based on a bottomup cost model). Our currently approved RUOs have been in place since April 1, 2009. In the market for wholesale broadband access, the NMHH has also imposed on us the obligations of non discrimination, pricing regulation and transparency. In order to comply with these obligations, we must apply equivalent conditions to others in relation to the provision of wholesale broadband services as we do for our own retail services, or those of our subsidiaries or partners. Furthermore, we must provide national bitstream access, meaning that we must offer at least one access point through which all DSL subscribers of the alternative operators can be served. The tariff of single point bitstream service is calculated by a retail minus method whereby the NMHH defines the applicable retail margin, whereas we calculate our average retail prices. The wholesale tariffs are recalculated twice a year and, therefore, closely follow the retail price trends. The current tariffs were set by the NMHH based on market data for the first half of 2010, being effective as of October 1, 2010, until the next respective NMHH decision. The terms and conditions of contracts for the provision of local and single point bitstream access must be disclosed on our website in the form of wholesale bitstream access general terms and conditions. Retail Price Regulation In the retail markets for access, the NMHH imposed price caps on us, because, according to the NMHH, in the absence of competition only a safeguard cap over the subscription fee can avoid excessive price increases. The permitted price increase is the historical consumer price index minus 0%, which prohibits us from increasing our subscription fees over the rate of inflation. The historical consumer price index minus 0% price cap applies to all residential and business packages. Retail Non-discriminatory Obligation The NMHH imposed an obligation on us not to discriminate against subscribers without an economically justified reason. In particular, we are prohibited from applying conditions which restrict customers with fixed term subscriptions contracts to terminate such contracts or to change to other subscriptions before the expiry of such fixed term if such conditions are not justified or economically not proportional to the costs born or the benefits offered by us. Call-by-Call Carrier Selection and Carrier Pre-selection According to these obligations, we are to provide wholesale Carrier Selection and Carrier Pre-Selection services to any telecommunications provider who is eligible to sign an interconnection agreement with us based on our RIO, which sets the fees we are entitled to bill for such services. The calculation of such fees is part of the LRIC model and thus such fees are cost based and subject to the authorization of the NMHH. Other Statutory Obligations Imposed on us in Hungary

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Special Crisis Tax In October 2010, the Hungarian Parliament passed a law imposing a special crisis tax on each of the retail, energy and telecommunications sectors, with the aim of restoring balance to the national budget. The special crisis tax was introduced with retrospective effect to January 1, 2010. The Government intended the special crisis tax to be a temporary measure only with the payment liability limited to the tax years 2010 to 2012, however, there is a possibility that this tax may be extended. Telecommunications companies are liable to pay special crisis tax on their net sales revenue realized from providing electronic communicational services. The rate of special crisis tax payable is staggered with 0% payable on the part of the tax base between zero and HUF 100 million, 2.5% payable on the part of the tax base between HUF 100 million and HUF 500 million, 4.5% payable on the part of the tax base between HUF 500 million and HUF 5 billion and 6.5% payable on the part of the tax base exceeding HUF 5 billion. There are special rules regarding the calculation of the tax liability of related parties. The taxable net sales revenue of related parties is added and the special crisis tax calculated on that consolidated amount. The total special crisis tax payment liability is borne by the related parties in line with the proportion of their net sales revenue in the total sales revenue. The taxpayer must assess its tax liability and file a tax return with the tax authority within 150 days of the end of the tax year. Taxpayers must make advance special crisis tax payments in two installments, by July 20th and October 20th of the given tax year, based on the net turnover figures of their previous tax year. Invitel ZRt and Technocom are subject to the special crisis tax. In 2010, Invitel ZRt and Technocom had a combined special crisis tax payment obligation of 11.2 million. Number Portability Since January 2004, all fixed line telephone service providers are required to ensure that their subscribers can keep their existing fixed telephone numbers when they change fixed line service providers. Porting may only be refused if an outstanding debt is associated with the users account. Universal Service Obligation The 2004 Communications Act defines universal service as a set of basic communications services which must be made available to all customers at an affordable price. Universal service includes providing access to the fixed line telephone network at a specified minimum quality, operating public payphones with regulated density, issuing a public directory of subscribers, providing operator services, and providing free emergency calls. We became a universal service provider in our historical concession areas on the basis of the universal service agreements (the Universal Service Agreements) concluded by our legal predecessors with the legal predecessor of the Minister of National Development in 2002, which agreements were later revised to comply with the current E.U. regulatory regime. The Universal Service Agreements were concluded for a definite term expiring on December 31, 2008. On December 19, 2008, the then active Minister heading the Prime Ministers Office unilaterally terminated negotiations on the extension of the Universal Service Agreements. At the same time, Government Decree No. 352/2008. (XII.31.) (Government Decree) was adopted, under which the current universal service providers are obliged to provide universal services under unchanged terms and conditions for one year following the expiration of the Universal Service Agreements (i.e., until December 31, 2009). On April 21, 2009, we submitted a petition to the Constitutional Court requesting that the Constitutional Court review the provisions of the above decree and declare them as void and thus not applicable. On December 29, 2009, we executed a pre-contract outlining certain amended terms and conditions to the Universal Services Agreements. In July 2010, the Constitutional Court declared the Government Decree to be void with an effective date of December 31, 2010 and negotiations on the Universal Service Agreements were suspended. In March 2011, we agreed with the Ministry of National Development offered to conclude the Universal Service Agreement, valid until December 31, 2011 with an option to extend. The execution of the Universal Service Agreement is now in progress. The Ministry of National Development acknowledge that we are entitled to request the reimbursement of our costs relating to the Universal Services Agreements for 2010 (approximately 85,500). Price Regulation Pursuant to regulatory burdens imposed by the NMHH and applicable law, we are currently subject to two retail pricing restrictions; (i) a price cap under the Universal Service Tariff Decree on universal service packages, and (ii) a price cap over retail fixed line access services.

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We have been making significant efforts to comply with the above requirements, however, uncertainties in the calculation of the price caps, as well as the developing practice of the NMHH, often makes compliance difficult. Although we are periodically subject to NMHH investigations of our compliance with the above requirements, we believe that the risks that the NMHH finds us as non compliant are relatively low due to (i) our internal calculations and analyses, (ii) our efforts and the efforts of the NMHH in 2007 to define a common and acknowledged calculation methodology, and (iii) the recent and planned retail tariff changes remaining within the boundaries of the retail price cap.

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COMPANY HISTORY In this section, we capitalize references to Mass Market Voice, Mass Market Internet, Business and Domestic Wholesale where and to the extent that the references are to our reporting segments in our consolidated financial statements prepared in accordance with IFRS. Our predecessor company, Hungarian Telephone and Cable Corp. (HTCC), was incorporated in Delaware in 1992 as a holding company to acquire concessions from the government of the Republic of Hungary to own and operate local fixed line telecommunications networks in Hungary as Hungary privatized its telecommunications industry. HTCC acquired the right to operate fixed line telecommunications networks in five historical concession areas from the Hungarian government and purchased the existing telecommunications infrastructure, including 61,400 telephone lines, from Magyar Telekom in 1995 and 1996. The acquired telecommunications infrastructure was outdated (manual exchanges and analog lines). HTCC overhauled the existing infrastructure with a major capital expenditures program. HTCC owned and operated all public telephone exchanges and local loop telecommunications network facilities in these five historical concession areas and were, until the expiration of its exclusivity rights in 2002, the sole provider of non-cellular local voice telephone services in such areas. Until 2007, HTCC operated and marketed this business through its Hungarian subsidiary Hungarotel Tvkozlsi ZRt (Hungarotel) which was merged into Invitel ZRt as of January 1, 2008. The five Hungarotel historical concession areas cover a population of approximately 668,000 with approximately 280,000 residences. The PanTel Acquisition HTCC purchased an initial 25% interest in PanTel Tvkzlsi Kft. (PanTel) in November 2004 and acquired the remaining 75% from Royal KPN NV, the Dutch telecommunications provider (KPN), on February 28, 2005. PanTel was Hungarys leading alternative telecommunications provider with a nationwide fiber optic backbone telecommunications network linking every county in Hungary. PanTel provided voice, data and internet services to businesses throughout Hungary in competition with other telecommunications service providers including Magyar Telekom (the formerly State controlled monopoly telephone company). PanTels subsidiary, PanTel Technocom Kft. (currently, Invitel Technocom Kft. (Invitel Technocom)), provided telecommunications services to MOL (a Hungarian oil company) and operated and maintained various parts of MOLs telecommunications network. As of January 1, 2008, we merged PanTel into Invitel ZRt and changed PanTel Technocom Kft.s name to Invitel Technocom Kft. (Invitel Technocom). PanTel was founded in 1998 by KPN, MV Rt. (MAV), the Hungarian state railroad company and KFKI Investment Ltd. (a Hungarian entity) to compete with Magyar Telekom. Following a tender process, the Hungarian government awarded PanTel licenses to provide data transmission and other services that were not subject to Magyar Telekoms government protected monopoly rights for long distance voice services. In 1999, PanTel began building, along MAVs railroad rights-ofway, a 3,700 kilometer-long state-of-the-art fiber optic backbone telecommunications network. PanTel also built metropolitan area networks, including a metropolitan area network covering Budapest, which networks connected to PanTels backbone network. The Invitel ZRt Acquisition In 2007, HTCC combined its operations with Invitel ZRt following the acquisition of Invitel ZRt, on April 27, 2007, by way of the acquisition of the shares of Invitel ZRts parent company, Matel Holdings (the Invitel ZRt Acquisition). Invitel ZRt began its operations in Hungary in 1994. Invitel ZRt initially owned and operated two Hungarian telecommunication companies which had the right to operate in four historical concession areas in the Csongrd and Pest counties (Szeged, Szentes, Gdll and Vc). In 1996 and 1997, Invitel ZRt developed its network infrastructure within those areas and in 1998 established a joint venture for the provision of data services in and out of its historical concession areas, especially in Budapest. In 1999, Invitel ZRt acquired Jsztel ZRt., a regional telephone operating company operating in the Jszberny historical concession area (east of Budapest). In the same year, Invitel ZRt also acquired Corvin Telecom Tvkzlesi ZRt., an optical network operator specializing in data transmission which allowed Invitel ZRt to further the development of its Budapest joint venture. In 2000, Invitel ZRt acquired four additional historical concession areas (Dunajvros, Esztergom, Veszprm and Szigetszentmikls) through the acquisition of United Telecom International B.V. from Alcatel of France. In 2000 and 2001, Invitel ZRt developed the national coverage for its telephone network in Budapest and more generally outside its historical concession areas. In 2001, Invitel ZRt was granted one of five national 3.5 GHz licenses over which it has deployed its point-to-multipoint (PMP) network. In the same year, Invitel ZRt also began its internet access activity nationwide.

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During 2002, the exclusivity period ended in Invitel ZRts concession areas. At this time, Invitel ZRt simplified its complex group legal structure. In May 2003, Emerging Europe Infrastructure Fund LP (EEIF) and funds managed by GMT Communications Partner III LLP (GMT) acquired individually the entire share capital of Invitel ZRt from Vivendi Telecom International S.A., and was subsequently renamed Invitel Tvkzlesi Szolgltat ZRt. On May 23, 2006, Invitel ZRt completed the acquisition of Euroweb International Corporations two, internet and telecom related operating subsidiaries, Euroweb Hungary and Euroweb Romania (collectively, Euroweb) which provided internet access and additional value added services including international/national leased line and voice services primarily to Business customers. Euroweb Hungary was merged with Invitel ZRt in December 2007. The Tele2 Hungary Acquisition On October 18, 2007 HTCC purchased the Hungarian business of Tele2, the Swedish-based alternative telecom operator, by purchasing the entire equity interests in Tele2s Hungarian subsidiary for 4 million in cash. Tele2 Hungary provided Carrier Selection and Carrier Pre-Selection fixed line telecommunications services to the Mass Market as a reseller using the network facilities of other operators pursuant to regulated resale agreements. Tele2 Hungary merged with Invitel ZRt in June 2009. The Invitel International Acquisition On March 5, 2008, HTCC acquired 95.7% of the outstanding equity in Austrian-based Memorex Telex Communications AG (now known as Invitel International AG, Invitel International). On August 28, 2008, HTCC acquired the remaining 4.3% stake of Invitel International from the minority shareholders in Invitel International, which gave us 100% ownership of the equity in Invitel International. Invitel International was one of the leading alternative telecommunications providers in the Central and South Eastern European region. Invitel International provided wholesale data and capacity services to leading global telecommunications providers and internet companies between 14 countries in the region including Austria, Bulgaria, the Czech Republic, Italy, Romania, Slovakia, Turkey, and Ukraine. Invitel International operated over 12,500 route kilometers of fiber optic cable in the region which enabled it to provide high quality wholesale services to large international carriers. Invitel International and its subsidiaries were sold on October 7, 2010. See Sale of the International Wholesale Business. Sale of the International Business On October 7, 2010, Invitel International Holdings B.V. consummated the sale of its international wholesale business, comprising the entire issued share capital of Invitel International AG (including its subsidiaries), Invitel International Hungary Kft and S.C. EuroWeb Romania S.A., (the International Business) to Trk Telekomnikasyon a.s. (Turk Telecom) for an enterprise value of approximately 221 million (the International Sale). The International Business included operations in Austria, Bulgaria, the Czech Republic, Hungary, Italy, Romania, Serbia, Slovakia, Slovenia, Turkey and Ukraine, but excluded our Hungarian domestic wholesale business. The purpose of the sale was to deleverage and focus on our core Hungarian domestic markets. See Our Business Sale of the International Wholesale Business. Acquisition of the FiberNet Business On February 28, 2011, we consummated the acquisition of FiberNet Kft, the direct parent of FiberNet Zrt, Hungarys fourth largest cable network operator, for a purchase price of approximately 44.5 million. In order to meet Hungarian competition office requirements relating to infrastructure competition, we simultaneously sold approximately one-third of the FiberNet network assets to UPC for approximately 22.2 million. The acquisition of FiberNet together with the FiberNet Disposal is referred to as the FiberNet Acquisition. The FiberNet network we retained is located outside Invitels historical fixed line concession areas. See The FiberNet Acquisition.

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OUR BUSINESS In this section, we capitalize references to Mass Market Voice, Mass Market Internet, Business and Domestic Wholesale where and to the extent that the references are to our reporting segments in our consolidated financial statements prepared in accordance with IFRS. Overview We are the second largest fixed line telecommunications services provider in Hungary and the incumbent provider of fixed line telecommunications services in our 14 historical concession areas, where we have a dominant market share of the traditional fixed line market. We are the number one alternative fixed line operator outside our historical concession areas. We also use our network capacity to transport voice, data and internet traffic for other telecommunications service providers and internet service providers on a wholesale basis. Our historical fixed line concession areas are geographically clustered and cover an estimated 2.1 million people, representing approximately 21% of Hungarys population. Outside our historical concession areas, we believe that we are well positioned to continue to grow our revenue and market share, particularly in the Business segment, by taking advantage of our fully owned state of the art backbone network, our experienced sales force and our comprehensive portfolio of services. Our extensive fiber optic backbone network (comprising approximately 8,500 route kilometers in Hungary) provides us with nationwide reach. It allows business and wholesale customers, in particular, to be connected directly to our network to access voice, data and internet services. We operate in the following four market segments in our fixed line business:

Mass Market Voice. We provide a full range of basic and value added voice related services to our residential and small office and home office customers both inside and outside our historical concession areas. These services include local, national and international calling, voicemail, fax, Integrated Services Digital Network (ISDN) and directory assistance services. Mass Market Internet. We provide Digital Subscriber Line (DSL) broadband internet services to our Mass Market customers both in and outside our historical concession areas. We also provide IPTV (TV delivered over DSL broadband connections) services to our Mass Market customers in our historical concession areas. Business. We provide fixed line voice, data, internet and server hosting services to our business (comprised of small and medium sized enterprises (SMEs) and larger corporations), government and other institutional customers nationwide. Domestic Wholesale. We provide voice, data and network capacity services on a wholesale basis to a number of other telecommunications and internet service providers within Hungary.

Competitive Strengths We are the number one national alternative fixed line telecommunications service provider in Hungary with a track record of increasing our market share. We are the number one alternative fixed line operator in Hungary outside of our historical concession areas. We believe that we are well positioned to continue to grow our market share outside our historical concession areas particularly in our Business market segment through our owned backbone network, our experienced sales force and our comprehensive portfolio of services. Our backbone fiber optic network provides us with nationwide coverage, allowing us to directly connect to a high proportion of our Business customers. We have a strong cash generating incumbent business in Hungary. We are the incumbent provider of fixed line telecommunications services in Hungary in each of our 14 historical concession areas, where we have a leading market share of the residential fixed line market. Our historical concession areas cover a population of approximately 2.1 million, representing 21% of Hungarys population. We believe that we have been able to maintain a leading position in these areas as a result of our incumbent status, high quality network, targeted service offerings and strong customer relationships. Our incumbent status, combined with low capital expenditure requirements and high gross margins, results in strong cash generation. Diversified revenues and earnings base across four segments.

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We have a diversified revenue and earnings base across four segments. For the year ended December 31, 2010, the Mass Market Voice, Mass Market Internet, Business and Domestic Wholesale segments each account for 33%, 17%, 38% and 12% of revenues and 35%, 16%, 36% and 13% of segment gross margin, respectively. We therefore are not overly dependent upon any one segment, and over time, in line with our strategy, the contribution from the traditional voice business segment has declined, and, we expect, will continue to decline in importance and it has been replaced by high quality data business. We have an extensive, modern and high quality domestic network infrastructure in Hungary. Our backbone network has nationwide reach, provides a high quality of service and does not require major capital investments. The national backbone network comprises over 8,500 kilometers of route fiber connecting our historical concession areas and all of Hungarys urban centers. As the incumbent operator in our historical concession areas, we benefit from an extensive access network in terms of both capacity and reach. We have the capability to provide DSL services on 95% of our copper access lines. In addition, currently we are able to provide IPTV on around 60% of our lines. Outside our historical concession areas, our network allows us to connect our Business customers to our backbone by using our own metropolitan fiber, point-to-point or point-to-multipoint microwave, unbundled local loops or leased circuits. We have a substantial existing customer base, much of which is served by our infrastructure. As of December 31, 2010, we had 327,000 Mass Market customers in our historical concession areas being served by our access network. In addition, we had 298,000 Mass Market customers outside our historical concession areas being served by Magyar Telekoms (the main incumbent operator) infrastructure. Following the FiberNet Acquisition, we now have an additional 88,000 Mass Market customers being served by our own cable access network. Furthermore, we have approximately 13,000 business customers, the majority of whom are connected to our national backbone network or our historical concession access network. This substantial customer base presents an opportunity for cross-selling additional products and services. We have comprehensive and well established national distribution channels and a strong national brand. We have a well established and comprehensive set of effective distribution channels both inside and outside of our historical concession areas which enable us to optimize our customer acquisition costs and to respond quickly to changing market conditions. To market to residential customers, we have our own shops in our historical concession areas, and we also have our own in-house telesales team. In addition, we use independent third party direct sales agents, telesales channels and retail outlet partners. Business customers are addressed by our own national direct sales organization and telesales team. We have worked to continuously improve the national brand recognition of Invitel. As a result of these efforts, together with selective marketing communications activity, we now enjoy strong nationwide brand awareness. We have strong management and benefit from the added expertise of our majority shareholder. We benefit from a strong and experienced senior leadership team, most of whom have served the business for over seven years. Management has substantial mobile and fixed line telecommunications experience within the region and a proven track record of cost control and achieving operational efficiency. In addition, the team has extensive experience in both Business and Mass Market business segments. Martin Lea, the Chief Executive Officer of the business since 2004, has more than 28 years of experience in the data communications and telecommunications industries and has previously held positions as chief executive or managing director of telecommunications, managed network services and business support service companies. Robert Bowker, the Chief Financial Officer since 2004, previously served as Chief Financial Officer at Eurotel Praha and has 14 years of experience in the financial services and telecommunications sectors within Eastern Europe. In addition, the Board of Directors has recently been augmented to include Bruno Claude, the former CEO of Cablecom. Further, Mid Europa, the majority shareholder, has extensive experience as an investor in the telecommunications services industry and in infrastructure companies in Central and Eastern Europe. Mid Europa owns, or has owned, ten telecommunications assets in Central and Eastern Europe. Our Strategy Maximizing voice revenue and cash flow in our historical concession areas. We intend to maximize our voice revenue and cash flow derived from the provision of voice services within our historical concession areas through the continued migration of customers from traffic-based to subscription-based packages with higher monthly fees and lower usage charges, the ongoing introduction of targeted, innovative and flexible service offerings and by maintaining the quality of our customer service. In addition, we have focused on, and will continue focusing on, formulating effective strategies to retain customers and defend against churn in our historical concession areas resulting

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from competition from cable operators and to a lesser extent Carrier Pre-Selection from Magyar Telekom. Examples of these strategies include:

pricing our service offerings to limit the incentive to switch to a competitor; offering new commercial packages with a higher monthly fee but with bundled minutes included in the base subscription or with low call charges in all directions or various combinations thereof; launching win-back activities aimed at cable users and Carrier Pre-selection, Carrier Selection users with new promotional offers; establishing and developing loyalty programs, which will offer exclusive benefits to our customers; offering attractive bundled packages (voice and internet and IPTV) to counter bundled service offerings by cable operators; and conducting programs to proactively migrate existing customers to more attractive packages via our telesales channels in combination with targeted promotional campaigns.

Capitalizing on growth opportunities for Mass Market DSL services, both in and outside our historical concession areas. We believe that there is potential for further growth of DSL services in Hungary as personal computer and internet penetration levels in Hungary continue to climb towards Western European levels. Broadband internet usage has grown significantly in Hungary with penetration estimated to have increased from 0.7% of the households in Hungary as of 31 December 2002 to an estimated 50% as of December 2010. In comparison, broadband internet penetration in Western European countries was estimated at approximately 60% of households as of December 2010. We intend to continue to capitalize on the trend of increasing broadband usage by continuing to grow our DSL customer base both inside and outside our historical concession areas. We grew our DSL subscriber base faster than the market in 2010. The growth in our DSL customer base is a key business priority as we believe it will increase line retention and stimulate fixed line revenue growth. For example, we have acquired the majority of new fixed line contracts through bundled voice/DSL offerings. We intend to continue to grow our DSL business principally through the following initiatives:

the introduction of IPTV (in 2008) to enable us to offer triple play (telephone, broadband internet and TV) and dual play packages (broadband Internet and TV or telephone and TV) in our historical concession areas. As of December 31, 2010, we had 17,300 IPTV customers representing a penetration rate of 14.5% of our ASDL base in our historical concession areas; the launch of our Net and Go combined fixed ADSL and mobile broadband proposition in September 2009. This enables us to offer fixed broadband and mobile broadband in a single package all under the Invitel brand. This product was developed in cooperation with Telenor, the second biggest mobile operator in Hungary. As of December 31, 2010, we had 21,000 Net and Go subscribers; the use of unbundled local loops in Magyar Telekoms area to offer increasingly attractive and profitable higher speed internet and bundled voice/internet services; the use of WiMAX technology (and our existing 3.5 Ghz licences) to provide broadband access in those historical concession areas where there is no copper network today; maintaining a broad mix of distribution channels such as our own and outsourced telesales, owned shops, third party channels and points of sale, and agent networks; quarterly promotions supported by targeted television, radio and billboard advertising campaigns; and developing innovative bundled packages together with progressively increasing broadband access speeds.

Expanding our Business segment revenue and market share nationwide. We will continue to focus on expanding our business customer base and growing our share of the national business to business (B2B) market. We intend to capitalize on our extensive national backbone network, which means that in many cases business customers can be connected directly to our network, resulting in higher margins and more competitive pricing

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through lower access costs. Business customers can be connected directly to our backbone network mainly through the use of metropolitan fiber, line-of-site microwave, leased circuits or local loop unbundling. Lower value/volume business customers outside our historical concession areas are served through indirect methods such as Carrier Pre-Selection voice, and by buying DSL wholesale capacity from the incumbent. We plan to continue to increase our share in the business market through the following actions:

focusing on new customer acquisitions in the small and medium enterprises market through attractively priced, easily understood, voice, data, internet and value added services, sold through an efficient direct sales organization and complemented by high quality customer care; capitalizing on our traditional strength in the high-end corporate market and utilizing our extensive infrastructure, to sell additional services to existing customers and to selectively pursue new corporate business and government sector customers; retaining existing customers through effective account management, attractive renewal packages and continued customer care enhancement, such as our Top 100 Key Account program; cross selling new services to existing customers in all segments; and the continued development of our service portfolio and the introduction of a broader range of value added services such as we have done with data center services including co-location services, server hosting and server virtualization services, and most recently software as a service.

Continuing to leverage our modern national backbone network and our market reputation to grow our revenue in the Domestic Wholesale data market. We will continue to leverage our backbone network in Hungary, and our ability to easily add further capacity where required to sell infrastructure and capacity services to other service providers, including principally mobile operators and cable operators. We believe that the continuing growth in the fixed and mobile broadband markets will result in continued growth in the wholesale capacity market in the foreseeable future. We have developed a strong reputation for the quality of our service, our partnership oriented approach and our speed of execution in the Domestic Wholesale segment. Pursue selective, value enhancing market consolidation driven acquisition opportunities in Hungary. We believe that we are well positioned to participate in the further consolidation of the Hungarian market as a result of our market position as the number one alternative fixed line operator, our significant understanding of the competitive environment, both as an incumbent and as an alternative operator, and our solid track record of improving efficiency, achieving operating cost savings and realizing synergies from bolt-on acquisitions. We intend to identify acquisition opportunities that can strengthen and compliment our existing business, and where we can enjoy the benefit of consolidation related synergies. In particular, we will focus on suitable acquisition opportunities, such as the FiberNet Acquisition, that extend our geographic area and infrastructure footprint in Hungary and which deliver cost synergies and enhance growth potential in TV and broadband particularly through cable outside our historical fixed line concession areas. Historical Concession Areas Through the Hungarian governments tender process and as a result of subsequent acquisitions, we acquired exclusive licenses to provide local fixed line voice telephony services within our 14 historical concession areas which were valid until the end of 2002. Since 2002, the provision of fixed line voice services has become liberalized, and while we can therefore no longer rely on legal exclusivity we continue to benefit from our extensive copper network that we had already constructed in our historical concession areas. Our historical concession areas are geographically clustered and cover an estimated 2.1 million people, representing approximately 21% of Hungarys population. We have developed a full range of telecommunications services in our historical concession areas where we have a strong presence in the Mass Market Voice, Mass Market Internet, Business and Domestic Wholesale markets. Outside our historical concession areas, we have a national network which provides Business customers in Budapest and all other major urban centers with the ability to be connected directly to our network, enabling us to deliver voice, data and internet services, primarily through our PMP microwave networks and metropolitan fiber, or through unbundled local loops and leased lines. We also provided voice and internet services to Mass Market customers and lower-value Business

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customers outside our historical concession areas using Carrier Pre Selection, Carrier Selection, Wholesale DSL services and Unbundled Local Loop. Business In our traditional fixed line business, we operate in four market segments: Mass Market Voice, Mass Market Internet, Business and Domestic Wholesale. We are continually seeking to develop and improve our overall service through improving the quality of our customer care and developing new service packages and offerings. Mass Market Voice We offer our Mass Market Voice customers a full range of basic and value-added voice services, both inside and outside our historical concession areas. Our basic services in our historical concession areas include access to analog and ISDN2 lines for local, long distance, fixed to mobile and international calling, a full set of operator services, directory services and public telephones. Our value-added services include voicemail, a variety of special calling features such as call waiting, call forwarding and caller ID. New services include a variety of bundled voice, internet and IPTV packages. Outside our historical concession areas, we provide a full range of basic and value added voice services to Mass Market Voice customers. We have been offering Carrier Pre-Selection based voice services since early 2002, after Hungarys telecommunications market was liberalized. We also have some Carrier Selection customers, mainly as a result of the Tele2 Hungary acquisition, but have focused primarily on Carrier Pre-Selection outside our historical concession areas, as we believe that Carrier Pre-Selection ensures a higher quality and sustainability of revenue than Carrier Selection. These services enable customers who have fixed line voice access provided by other operators (primarily Magyar Telekom) to use our voice services. Carrier Pre-Selection and Carrier Selection packages include call charges only, since the monthly access fees are paid to the incumbent provider. The acquisition of Tele2 Hungary in 2007 has added significantly to our Mass Market Voice customer base outside our historical concession areas. Outside our historical concession areas, we have focused principally on retaining and developing our higher value Mass Market Voice customers. Mass Market Internet We generate Mass Market Internet revenue inside our historical concession areas by providing DSL broadband access, internet and IPTV services over our own network. Outside our historical concession areas, we provide broadband internet services mainly by purchasing DSL services on a wholesale basis from the incumbent operator and acting as a third party internet service provider. Outside our historical concession areas, we also offer high speed internet access services using Local Loop Unbundling, in which case we rent the basic copper telephone line from the incumbent operator. We provide this service on a flat fee basis at four different standard bandwidths (2 Mbps, 5 Mbps, 10 Mbps and 15 Mbps) inside and outside our historical concession areas. In our historical concession areas we offer DSL through our own network. Substantially all of our network is already capable of providing DSL services. We expect revenue from DSL services to grow as the result of a number of factors, including:

a gradual increase in personal computer penetration and demand for internet access in Hungary; continuous DSL development in new residential housing and other areas; and focused marketing campaigns that have previously proved successful.

In September 2009, we also introduced our Net and Go, a combined fixed ADSL and mobile broadband proposition in our historical concession areas. This enables us to offer fixed broadband and mobile broadband in a single package all under the Invitel brand. This product was developed in cooperation with Telenor, the second biggest mobile operator in Hungary. As of December 31, 2010, we had 21,000 Net and Go customers. Although we still have some dial-up access internet customers, we have stopped actively marketing dial-up access services. The number of our dial-up access internet customers has declined sharply since the beginning of 2005 and we expect that this product will continue to be used by only a small number of customers in the future. As of December 31, 2010, we had 9,000 remaining dial-up internet customers. Business

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We offer fixed line voice, data, internet, server hosting and other data center services to SME businesses, larger corporations and governmental and other institutional customers nationwide. Our Business customers are defined as enterprises with over five employees. Inside our historical concession areas, we provide these services directly through our incumbent network. Outside our historical concession areas, we provide Business customers throughout Hungary with access to our voice, data and internet services by directly connecting them to our national backbone network by using our own PP and PMP microwave network, by metropolitan fiber or by using unbundled local loops or through leased lines. Outside our historical concession areas, we also provide lower-volume Business customers with voice services using Carrier PreSelection and DSL internet services by purchasing and reselling wholesale DSL services from the incumbent local telephone operator. Our nationwide voice services include a full range of basic and value added voice services, including operator services, call waiting, call forwarding and toll-free numbers through analog PSTN, ISDN2, and ISDN30 connections both on TDM and IP technology. Our nationwide Business data services include managed leased line services, IP-Virtual Private Network (VPN) services, and national frame relay Asynchronous Transfer Mode (ATM) services, which is a broadband, network transport service that provides an efficient means of moving large quantities of information. Our managed leased line service consists of PP leased lines which businesses and institutions can use to establish direct digital connections between each other on a closed network, enabling the exchange of audio, data and multimedia files. We provide nationwide IP-VPN services from 64 Kbps to 1 Gbps. Our IP-VPN network uses Multiprotocol Label Switching (MPLS) technology that allows unified, flexible, secure and value added voice, data and internet services. Our national frame relay service enables high-speed switched digital data communication and can transport voice and data at the same time. Our nationwide Business internet services consist primarily of internet access services. Our internet access services are provided primarily through leased lines and DSL services nationwide. In addition, we have also started to bundle a mobile internet proposition using a re-sell model. Business DSL services are available in four standard bandwidths (2 Mbps, 5 Mbps, 10 Mbps and 15Mbps). We also offer Business customers the IP Sec feature, which allows Business customers to work from home via secure broadband internet access. We also offer server hosting and server virtualization services. We offer these services individually or on a bundled basis to Business customers nationwide, including voice and internet packages for smaller enterprises and voice, data and internet packages for larger businesses. We have introduced business loyalty programs under which we offer discounts on either the full portfolio or certain designated services, according to individual user profiles. We believe that these loyalty programs increase usage, decrease churn, and enable us to capture a higher proportion of our Business customers expenditure on telecommunications services. As part of our strategy of extending our service portfolio for Business customers, we also now provide a range of colocation, server hosting and rental, server virtualization, and data center outsourcing services based at our two flagship data centers in Budapest (which together comprise approximately 1,800 square meters). Domestic Wholesale We provide data bandwidth capacity, dark fiber and, to a small extent, voice services on a wholesale basis to other operators and service providers. These services typically generate revenue in the form of rental payments for capacity or managed bandwidth services (based on the bandwidth of the service and the distance between the endpoints of the customers), occasionally one-time payments for infrastructure sales, and traffic-based charges for voice transit services to and from other Hungarian and international telecommunication service providers. Our Domestic Wholesale business consists of four product lines: providing managed bandwidth services; providing dark fiber; providing IP capacity; and providing wholesale voice services. We provide managed bandwidth services with speeds up to 10 Gbps. This means, for example, that for a large telecommunications company based outside of Hungary, we can provide and manage the leased line connections to the endpoints of a network that they are providing to their corporate clients. We also provide lateral support services such as colocation and managed router services. Providing dark fiber entails renting or selling fiber optic cables to cable television operators, mobile operators and government institutions, which enables these customers to manage their own networks. We provide co-location facilities in addition to repair and maintenance services to these customers.

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Providing IP capacity entails providing connectivity to the internet at a guaranteed minimum bandwidth to internet service providers and cable television operators that provide internet services. The service provided is normally fully protected and routed on two independent routes back to Tier 1 providers points-of-presence in Frankfurt. Our wholesale voice services involve routing voice calls to worldwide destinations. Through our international partner (Invitel International Hungary Kft., now renamed Pantel International Kft following its sale to Turk Telecom) we have access to over 120 international connections to incumbent telecommunications services providers, alternative fixed line telecommunications services providers and mobile operators, enabling us to route calls for such providers globally. While wholesale voice routing is a somewhat commoditized service (and accordingly less profitable), by providing this service to new operators in developing countries, we are able to establish relationships that often lead to more profitable mandates. Pricing and Tariffs Mass Market in Concession We charge our Mass Market Voice customers a monthly subscription fee and measured service fees for local, mobile, long distance and international calls. We generally charge our Mass Market Internet customers a monthly subscription fee. Competition in the Mass Market Voice market in our historical concession areas from mobile operators and cable television companies, and to a lesser extent, the main incumbent (T-Home), has driven down the pricing of our Mass Market Voice service packages. We provide our customers with a variety of voice packages that provide customers with the flexibility to choose between different price options. For example, our customers can choose between packages with a higher monthly subscription fee bundled with cheaper off-peak calls or minutes included in the monthly subscription fee or more favorable tariffs in particular call directions. In order to ensure that our service offerings remain highly competitive, we introduce new packages for all markets on a regular basis. The overall effect has been to generally increase the proportion of revenue derived from monthly subscription fees, as opposed to revenue from individual call charges. In addition to developing new pricing structures, we have initiated a bundling strategy. Our bundled offerings include extra voice minutes and internet access and/or usage in voice package monthly fees. These packages range from offers including dial-up minutes for entry level or low-end internet users to high-end packages with unlimited DSL access. Our sales strategies emphasize our new commercial packages with higher monthly fees but with local and off-peak calls included in the base monthly subscription fee or with low call charges. We often run retention programs with DSL access to keep our customers from switching to cable television operators. We also target residences that would perhaps not otherwise use our voice service by offering bundled voice and internet packages. We estimate that we currently achieve the majority of our new line subscriptions through bundled voice/DSL offerings. Since June 2008, we have also been offering IPTV services to customers in most of our historical concession areas, and have sold these services in all our historical concession areas since February 2009. InviTV is offered bundled with voice service and internet access as a triple play package, or with internet access as a dual play package. In September 2009, we also introduced our Net and Go bundled Fixed and Mobile broadband product package. Mass Market Out-of-Concession Outside our historical concession areas, we offer Carrier Pre-Selection based voice services. While we have a limited number of Carrier Selection customers (principally as a result of the Tele2 Hungary Acquisition), we are not actively marketing that service and are attempting to convert those higher value Carrier Selection customers to Carrier Pre-Selection based services. For such services, we bill on the basis of usage (i.e. minutes), since the monthly subscription fees are paid by the customer to the incumbent provider to whose access network the customer is directly connected. Our pricing packages outside of our historical concession areas tend to be simpler, with less differentiation among types of calls. With respect to the Mass Market Internet market outside of our historical concession areas, we charge a fixed monthly fee with no usage fee. We use different pricing points and promote bundled voice with internet services both in propositions on a wholesale basis (WS ADSL and CPS) and using unbundled local loop (ULL) We face stronger competition in the Mass Market Internet market outside our historical concession areas, and accordingly, re-evaluate the pricing of our services on a regular basis to ensure they remain competitive by creating customized packages to differentiate ourselves from our competitors in categories and segments where we intend to increase market share. Business In the Business market, we price voice, internet and data services individually or on a bundled basis driven by competition in the specific customer segment and access technology available to provide the required service.

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We have been very successful in increasing our market share in the SME segment in the last few years by using targeted direct sales with tailored pricing and bundling data/internet access with voice services. With respect to large accounts, we compete with Magyar Telekom for a relatively low number of new customers in selected projects where pricing is determined by tenders. Our recently expanded server related services provides us with increased pricing flexibility in both standard bundled packages for small enterprises and customized solutions for larger customers. We regularly adjust our pricing schemes and tools by monitoring our competition (mainly Magyar Telekom, GTS and UPC in the lower market segment). We price data, data related services and fixed line access on the basis of fixed monthly fees, with variable call charges for voice usage. Business voice tariffs have decreased significantly since the beginning of 2004 as a result of increased competition from both fixed and mobile operators. While monthly fees for business data and internet services show a year-on-year decline, higher usage in terms of data and associated increased bandwidth requirements present opportunities of pricing new service features in bundled offers. Domestic Wholesale For managed bandwidth services, we charge our customers a fixed monthly fee for a guaranteed minimum bandwidth along with a service agreement. To the extent we provide dark fiber, we generally charge either a monthly fee on a per kilometer basis, or alternatively, a one-off outright sale charge. Customers often require us to extend our backbone network directly to their premises or to another city or, in the case of mobile operators, to one of their central switching locations. We generally charge our customers a one-time fee for extending our network to meet such requirements. For IP capacity services, we generally charge a monthly fee based on a guaranteed minimum bandwidth along with a service agreement. Customers can also pay for a committed amount of bandwidth and purchase supplemental bandwidth, if available, as needed. For wholesale voice services, we generally charge our customers a variable amount based on the length of the call, the time of day and the destination. In certain cases, we enter into bi-lateral agreements with other parties, pursuant to which we agree to send and receive a specified amount of voice traffic to each other. This reduces the variability in the wholesale voice business overall, but the percentage of business that may be traded on this basis is limited because the traffic flows can not be predicted with certainty. Interconnection A small portion of our revenue and a substantial portion of our cost of sales are made up of interconnection fees. Interconnection fees were introduced to ensure widespread provision and interoperability of telecommunications services. Operators of public telecommunications networks have a right and, when requested by other operators, an obligation to interconnect their networks to each other. This interoperability enables customers to choose any telecommunications services provider and place and receive calls from all other service providers. The telecommunications services provider that provides the initial connection and the telecommunications services provider that terminates the call, as well as any telecommunications services provider that transports the traffic between the two, share in the revenue collected from the call. Interconnection charges, like retail voice tariffs, are often dependent on the time of day that the call is placed, the length of the call and the distance covered. The settlements are coordinated through wholesale arrangements and the fees are largely regulated. See Our Network Interconnection Agreements with Other Operators. We receive per minute call termination fees for completing calls to our customers who are directly connected to our network. These fees are passed to us from other telecom operators (fixed line, mobile, cable television operators, whether within or outside Hungary). We receive fees with respect to all of our directly connected customers, whether within, or outside, our historical concession areas. In our historical concession areas, our customers are directly connected to our network. Outside our historical concession areas, customers are connected to our network through a PP or PMP wireless connection, metropolitan fiber, a leased line, Local Loop Unbundling or over WiMAX. We pay per minute call termination fees to other telecom operators for completing calls originating from our customers (including any of our directly connected voice customers, our customers using Carrier Pre-Selection and Carrier Selection services outside our historical concession areas and our wholesale carrier customers) to customers who are directly connected to the network of other telecom operators (fixed line, mobile or cable television operators, whether within or outside Hungary).

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We receive per minute call origination fees when any customer who is directly connected to our network elects to use a competing fixed line telecommunications services provider to make outgoing calls through the use of either Carrier PreSelection or Carrier Selection (in these cases we still collect a monthly subscription fee from the customer for the use of our fixed line connection). We pay per minute call origination fees when a customer who is directly connected to another Hungarian fixed operators network, elects to use our service to make outgoing calls through the use of either Carrier Pre-Selection or Carrier Selection (in these cases, the operator to whose network the customer is directly connected still collects a monthly subscription fee from the customer, for the use of the fixed connection). See Hungarian Telecommunications Industry and Regulation Hungarian Regulatory Environment. Local Loop Unbundling Fees When we connect a customer to our network through a Local Loop Unbundling arrangement, we rent the connection to the customer from the incumbent local operator for a monthly fee. We then collect from our customer a monthly subscription fee and a traffic fee for service or a bundled fee. The incumbent operator loses the billing relationship with the customer. Conversely, when a competitor comes into one of our historical concession areas and connects a subscriber to their network through a Local Loop Unbundling arrangement with us, we receive a monthly fee for allowing the competitor to use the telephone line that we own and we loose the direct billing relationship with the customer. See Hungarian Telecommunications Industry and Regulation Hungarian Regulatory Environment. Our Customers As of December 31, 2010, we had approximately 327,000 Mass Market Voice telephone lines within our historical concession areas and we had approximately 298,000 Mass Market Voice telephone lines outside our historical concession areas connected primarily through Carrier Pre-Selection and Carrier Selection. As of December 31, 2009 we had approximately 356,000 telephone lines in service within our historical concession areas to service Mass Market Voice customers, and approximately 365,000 active Mass Market Voice customers connected through indirect access and LLU outside our historical concession areas, respectively. This decrease in the number of active Mass Market Voice customers both in and outside our historical concession areas is due to the gradual decline in the overall fixed voice market. The rate of decline is lower in our historical concession areas as we provide service on our own infrastructure, face less competition and are able, in many cases, to offer triple play bundles. The rate of decline has increased slightly during the last two years as a result of general economic conditions. As of December 31, 2010, we had approximately 151,000 Mass Market broadband DSL customers, of which approximately 121,000 were connected directly to our networks within our historical concession areas and 30,000 were outside our historical concession areas and serviced principally by our purchasing wholesale DSL services from the incumbent local telephone operator (primarily Magyar Telekom). This compares to December 31, 2009 when we had 147,000 broadband DSL customers. The lower growth reflects the fact that during the last year, as a result of the economic conditions, there has been no growth in the ADSL market. The number of IPTV customers has increased to approximately 17,000 as of December 31, 2010. Since the FiberNet Acquisition, we have an additional 88,000 mass market customers being served on our cable access network. As of December 31, 2010, we had approximately 13,000 business customers. We had approximately 42,000 voice telephone lines within our historical concession areas serving business customers compared to approximately 44,000 lines as of December 31, 2009. Outside our historical concession areas, we had approximately 43,000 direct access voice telephone lines and approximately 8,000 indirect access voice telephone lines as of December 31, 2010, compared to approximately 47,000 direct access voice telephone lines and approximately 9,000 indirect access voice telephone lines as of December 31, 2009. We had approximately 15,000 DSL lines and approximately 16,000 leased lines as of December 31, 2010 compared to approximately 17,000 DSL lines and approximately 16,000 leased lines as of December 31, 2009. In the Domestic Wholesale market, we had approximately 250 customers as of December 31, 2010 which was consistent with our customer base as of December 31, 2009. Customers include fixed line telecommunications services providers, mobile operators, cable television operators and internet service providers. Our Sales and Distribution Channels Mass Market

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In our historical concession areas, our Mass Market sales channels include walk-in shops, point-of-sale reseller and partner shops, independent third-party sales agents, our own telesales operations and our internet web site. We manage 18 walk-in shops in our historical concession areas. Our services are sold to Mass Market customers outside our historical concession areas through a non-exclusive network of agents and point-of-sale reseller and partner shops and our own and outsourced third-party telesales operations. Business Our direct sales force of 45 direct sales executives and approximately six key account managers is our primary Business sales channel. Key account managers are responsible for managing the relationship with and developing business with our top 100 larger corporate customers. Our sales executives are responsible for successful contract renewals, selling new services to our existing customers and for driving new business acquisition primarily in the SME market. This group also works with a specialized telesales group for contract renewals, appointment setting, and sales to lower-end SME customers. We also use agents and resellers as indirect sales channels, which allows us to expand the geographical range of our Business sales and improve our coverage of the small enterprise market. In the case of contracts originated by our resellers and strategic partners, we become the contracting party and the exclusive owner of the customer in respect of the telecommunication services. Wholesale We have a dedicated business development and sales staff that focuses primarily on marketing our managed bandwidth IP capacity and dark fiber services throughout Hungary to mobile operators, cable television operators and internet service providers. Our Network Overview Our telecommunications network is comprised of our original network in the Hungarotel historical concession areas, the national backbone network and access networks that we added when we acquired PanTel in 2005, the network we added through the Invitel ZRt Acquisition in 2007 (which consisted of the network covering the Invitel ZRt historical concession areas as well as a national backbone network) and access networks covering many of Hungarys urban centers. Today, our telecommunications network consists of a national backbone network and access networks throughout Hungary. Backbone Network Our national fiber network comprises approximately 10,000 route kilometers of fiber (8,500 route kilometers in the backbone and 1,500 route kilometers of access network) with points of presence in Budapest and more than 40 urban centers across Hungary. Our network carries traffic between the major cities of Hungary, provides connectivity to and within our historical concession areas, connects major urban business centers outside our historical concession areas and provides international connectivity. Our backbone network consists of fiber rings that management believes are on par with Western European digital network standards and has been designed for an open architecture using Synchronous Digital Hierarchy (SDH), IP and DWDM technologies. Access Networks Inside Our Historical Concession Areas Within our historical concession area (which covers approximately 21% of Hungarys population), we have versatile modern telecommunications networks. The networks are designed to offer voice and broadband (DSL, GPON) services to substantially all of our customers as well as data services to our Business customers. The network is based on a combination of copper lines, wireless technologies and fiber optic cable for certain major customers. Access Networks Outside Our Historical Concession Areas Point-to-Multipoint Networks. We have developed the largest PMP radio system in Hungary in the licensed 3.5 GHz frequency band. By covering Budapest, all major urban centers and ten other smaller cities outside our historical concession areas, we have gained a competitive advantage by creating an alternative access network independent of Magyar Telekoms local loops. These networks enable us to deliver a full complement of managed voice, data and internet services to our Business customers. Point-to-Point Networks. We use PP microwave radio to provide high bandwidth connections to corporate clients and, to a lesser extent, for backhaul transmission (connecting our core network with small sub-networks) to interconnect PMP

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sites to our network. The majority of our PP sites have been deployed in Budapest. We have installed more than 2,791 PP links to date for connection to corporate clients and approximately 20 links to provide connections between PMP and PP sites. Metropolitan Areas Networks (MANs). In addition to the PMP and PP networks, we operate approximately 1,500 route kilometers of MANs in Budapest and eight of the urban centers outside our historical concessions areas. Our MANs provide a direct link between our backbone network and access network (e.g. radio (PP and PMP) base stations and xDSL). This allows the city rings to be fully integrated in a seamless manner with our overall network. Each MAN is built with fiber cable technology which is essentially the same as that used for our backbone network. Our Budapest MAN consists of more than 1,000 route kilometers and passes through areas of the capital with significant business potential. The networks which we operate outside our historical concession areas also include network lines which we lease from other telecommunications operators and unbundled local loops (Local Loop Unbundling). This enables us to reach a wider geographical area beyond the coverage of our PMP and PP networks and MANs over which we have control. Local Loop Unbundling also provides us with a lower cost option for directly connecting smaller business customers. We have approximately 11,000 customers connected through Local Loop Unbundling, with 13 Local Loop Unbundling sites in Budapest and 10 Local Loop Unbundling sites outside of Budapest. In addition, we have 30 WiMAX base stations in Hungary to provide alternative low cost access methodology to directly connect principally smaller business and residential customers. Switched Voice Network We have deployed a fully digital switching network hierarchy. A total of 19 exchanges have been deployed in a hierarchical network. Local Exchanges handle the interconnection of customer lines and the switching of local traffic while the Primary Exchanges handle traffic for other areas. Secondary Exchanges provide the transit functionality for switching traffic between different regions. Secondary Exchanges also handle the interconnection of Business voice traffic from outside our historical concession areas. The International Gateway Exchange is the point of interconnection for all international traffic, secondary exchanges and is the point of interconnection for all national and mobile traffic in our network. Data and Leased Line Network Multi-service network. We have deployed an extensive multi-service network to provide advanced IP based services to corporate, SME and internet service provider clients. The range of services includes IP and Ethernet based VPN, Layer 2 Ethernet (L2E), virtual dial-up networks, VoIP, internet access, VLAN and Extranet services. This enables us to provide tailored services to meet the customers needs. This multi-service network has been deployed throughout Budapest, our historical concession areas and major cities in Hungary. There are 28 main nodes that are interconnected by a 10 Gigabit Ethernet network which also extends nationally to the main centers in our historical concession areas. The smaller nodes are connected in a star or mesh configuration. Managed leased line network. The managed leased line network provides last mile access to leased line customers. The extensive network provides multiple points of presence for managed leased line services. It also provides cross-connect capabilities to enable leased line networks to be remotely reconfigured. Leased Line services are provided through fiber, PP and PMP networks in more than 40 cities outside our historical concession areas. Both the multi-service and the leased line networks are designed to offer capacity and flexibility for the positioning of advanced data and leased line services. Datacenter In the first quarter of 2009 we opened a new datacenter in Budapest which services an area of 1,500 square meters. This datacenter has large telecommunication capacities and resilience with multiple, independent optical connections to both the national and the Budapest regional backbone network and also direct connections to the bigger internet junctions such as the Invitel Ilka Datacenter, BIX, Infopark and Dataplex. The datacenter is able to provide services including rented server, virtualization, collocation, server hosting services. Interconnection Agreements with Other Operators We have interconnection agreements with each of the major Hungarian fixed line, mobile and alternative operators, including, among others, Magyar Telekom, UPC Hungary, T-Mobile, Telenor, Vodafone and GTS. The objective of these interconnection agreements is to enable the parties to access each others networks and terminate traffic originated in the other partys network, which enables the two operators customers to connect with each other. These interconnection agreements are typically for indefinite terms and are based on, or incorporate the terms of, our reference interconnection

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offers (RIOs). If the other interconnection party is considered to have significant market power, then typically the terms of the other partys RIO are also incorporated. See Hungarian Telecommunications Industry and Regulation Hungarian Regulatory Environment and Pricing and Tariffs Interconnection. We also have an interconnection agreement for international traffic with Pantel International. This voice interconnection agreement relates to the interoperability of the networks and the provision of mainly reciprocal international voice carrier services. Under this agreement, we are purchasing from and providing for other telephone operators voice hubbing (i.e. collection of voice traffic), transit and call termination services in the most favorable directions at the best possible fees. Network Access Agreements with Internet Service Providers We have wholesale agreements with various internet service providers under network management agreements enabling them to provide Mass Market Internet and Business Internet services. These agreements provide for DSL broadband Internet access through our networks. See Hungarian Telecommunications Industry and Regulation Hungarian Regulatory Environment. We have been a DSL services provider in our historical concession areas since 2001. We offer DSL services in our historical concession areas on a wholesale basis, mainly to Magyar Telekom (for the sale of products under its T-Home brand) and Enternet. Outside our historical concession areas, we have network access agreements with Magyar Telekom and UPC Hungary for DSL services and dial-up access. Additionally, in the Domestic Wholesale market, we act as a nationwide internet service provider and purchase international peering services primarily through Pantel International. We also have direct peering with Magyar Telekom, DIGI and Google to exchange direct traffic. Network Management We monitor our voice network with continuously running systems, which has enabled us to improve our quality of service to an average fault rate per month which was below 0.0054% in 2010, which we believe is comparable to European benchmark operators and is significantly better than the threshold imposed by the Hungarian regulatory authorities. Monitoring provides us with the proactive management ability of network/service failures, allowing us to provide a high, guaranteed level of service availability, which is particularly important to and valued by our Business customers. The backbone and access networks are monitored via various management systems (including Alcatel NM, Tellabs Network Manager and Newbridge NMS). We also constantly monitor our IP network using the IBM Tivoli Netcool//OMNIBUS network management system. This platform provides integrated management of our operation and maintenance processes by our centralized network management staff and significantly reduces our network operating costs. These network monitoring systems, which also have back-up facilities, are located at our Service Management Center near our corporate headquarters in Budars near Budapest and can be accessed from other locations on our network. In addition, we monitor customer service level agreements to ensure that we apply the appropriate priority and escalation levels to customer service calls logged. Our Competition In Hungary our most significant fixed line competitor is Magyar Telekom, the largest provider of fixed line telecommunications services in Hungary, with its historical concession areas covering an estimated 77% of Hungarys population. We also compete with Hungarian cable TV operators, and to a lesser extent, with Hungarian alternative fixed telecommunications services providers such as GTS. Mass Market Voice In the Mass Market Voice market in our historical concession areas, the competitive positioning is mainly based on perceived value added of bundled product offerings and price. Outside our historical concession areas, price is the main basis for competition. We compete with mobile network operators, both in and out of our historic concession areas. The mobile subscriber base in Hungary has grown rapidly since the 1990s, partly due to low pre-existing levels of fixed line penetration. As a result, the mobile penetration rate in Hungary is approximately 120% of the population as of December 31, 2010, according to the

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NMHH and the number of mobile subscriptions is more than three times the number of fixed lines (2.97 million fixed line voice channels including copper and cable as of December 31, 2010 according to the National Communications Authority report). Mobile telecommunications services have contributed to the decline of the fixed line subscriber base and have led to fixed-to-mobile churn. Whilst fixed to mobile line churn has slowed in recent years, there is still traffic churn to mobile. We have seen increased competition from cable television operators both in and out of our historic concession areas. Cable companies can effectively cross-finance services (TV, internet and voice services) in product offers, enabling them to aggressively price and market the voice portion of their product offering. The cable television operators unique selling points are their low monthly fees for voice and free calls inside their own network. However, the Hungarian cable market is still rather fragmented and cable competitors impact our business differently in each of our historical concession areas. The principal cable television operators we compete with in our Mass Market Voice market are UPC Hungary, Magyar Telekom (through the T-Home brand) and Digi, each of which have introduced triple play solutions in our historical concession areas, and which collectively cover around 55% in our historical concession areas. In total, cable accounts for around 20% of all voice channels in Hungary. In our historical concession areas, our fixed line competitors may offer voice services on a Carrier Selection basis or on a Carrier Pre-Selection basis although this has significantly reduced as a competitive threat during the last few years. Outside our historical concession areas, we compete with the main incumbent network operator as well as with other cable and mobile operators. In the past, we have focused mainly on providing Carrier Pre-Selection based voice services outside our historical concession areas. We also acquired a significant Carrier Select customer base at the time we acquired Tele-2 in Hungary. However, we now mainly focus on selling CPS voice bundled with broadband internet access, and, where possible, migrating higher value dual play customers onto ULL access. We also face some competition from providers of VoIP services such as Skype although this constitutes a very small part of the market. We are also marketing a VoIP service. Mass Market Internet In our historical concession areas, we principally compete with cable television network operators such as UPC Hungary, Magyar Telekom (through the T-Home brand) and Digi, which utilize their cable networks to provide broadband internet services and VoIP bundled together with analogue or digital TV. Competition in this market is primarily on the basis of price, speed of access and brand. We also compete to a lesser extent with internet service providers which buy ADSL wholesale from us. However, this source of competition is declining. In our historical concession areas, we are able to offer DSL broadband services to substantially all of our fixed line customers, which gives us a strong competitive position in these areas. Since February 2009, we have been offering IPTV services over broadband DSL to customers in approximately 60% of our historical concession areas as part of triple play and dual play offerings. In September 2009, we also introduced Net and Go, a combined fixed ADSL and mobile broadband proposition in our historical concession areas. This enables us to offer fixed broadband and mobile broadband in a single package all under the Invitel brand. This product was developed in cooperation with Telenor, the second biggest mobile operator in Hungary. Outside of our historical concession areas, we are competing with cable operators and the main incumbent fixed line operator (Magyar Telekom). We provide DSL based broadband internet services principally by buying the service on a wholesale basis from the incumbent operator and bundling it with CPS voice. In some cases, we provide this service through Local Loop Unbundling (LLU) and we expect our use of this technology to continue to increase in the future. Business Our main fixed line competitors in the Business market is Magyar Telekom, T-Systems and to a lesser extent, GTS. The basis of competition includes network reach, proximity to customer premises, price and customer service. Operators who rent networks from the incumbent provider cannot compete as effectively as those with direct network presence in the area. Margin per customer is closely correlated with how much capacity is provided or how much traffic is carried on our own network infrastructure. We believe that our national network, as well as our modern data center facilities, give us a strong competitive position when selling voice, data, internet access, and data center services like server hosting to Business customers throughout Hungary. In most urban centers, we have a point of presence on our own fiber optic backbone network and, therefore, are able to connect customers directly to our backbone network using our metropolitan fiber, line of sight microwave, Local Loop Unbundling or leased lines. We are also deploying WiMAX technology in certain areas as another method of directly connecting business customers to our backbone network.

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We also compete with the mobile operators who target business customers, which has led to substantial fixed-to-mobile traffic substitution in the Business voice market. Wholesale Inside our historical concession areas, we currently experience limited competition for Wholesale services because these services are typically provided by the primary incumbent local telephone operator. Outside our historical concession areas in Hungary, our competition is comprised primarily of the incumbent operators, mainly Magyar Telekom as well as Antenna Hungaria (the national broadcast company) which provides smaller bandwidth services over microwave, MVM (the national power company which provides primarily large bandwidth services between cities) and GTS. Billing and Customer Care Software Systems We currently operate on a single monthly billing period. At the end of each billing period, our external systems transfer metered data to the billing systems and an update is prepared for the general ledger. The majority of billing files are sent to a third party for printing and distribution. The vast majority of our residential customers pay their bills through the Hungarian Post Offices third party payment system. Under this system, customers fill out a payment order and pay the amount due to the Hungarian Post Office, which in turn transfers all amounts paid by our customers promptly to our account. The Hungarian Post Offices third party payment system has traditionally been the main means of bill payment for service providers in Hungary. A minority of our customers pay their bills through direct debit and bank transfers. We currently operate three different billing systems:

CosmOSS, a post-paid billing system that provides billing services to Mass Market and Business customers. CosmOSS bills for both voice and data services. CosmOSS is operated by Euromacc Kft. FusionR, a post-paid billing system that provides billing services for certain important Business customers, Wholesale services and Carrier Pre-Selection and Carrier Selection services.

We also operate four different customer administration systems:

Contract Management (CM) is an order management application that provides a consolidated platform for the entire Business customer market. It also supports the entire sales cycle from prospect to disconnection. Network Management Tool (NMT) is an order management system serving Mass Market customers with voice services and automatic provisioning support for Mass Market and Business customers in our historical concession areas. Internet Administrator (IA) is an order management system serving Mass Market customers with internet and bundled (voice and IP) services with automatic provisioning support and also with long distance voice services. VITRIN is a workflow application providing provisioning and fault handling workflow support for Business data services.

We believe that our billing and customer care systems are adequate to meet the current functional requirements for invoicing our customer base. Employees As of December 31, 2010, we had approximately 1,102 active employees, all of which were located in Hungary. As of December 31, 2009 and 2008, we had approximately 1,399 and 1,508 employees, respectively, of which approximately 1,181 and 1,271 were located in Hungary, respectively. A breakdown by job function as of December 31, 2010 is set forth in the table below:
Function Number of Employees

B2B and Mass Market Sales & Marketing .............................................................................................. Wholesale ................................................................................................................................................ Customer Care ......................................................................................................................................... Technical Operations ...............................................................................................................................

203 12 297 396

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Function

Number of Employees

Finance..................................................................................................................................................... IT Human Resources .................................................................................................................................... Legal ........................................................................................................................................................ General Management and Administration ............................................................................................... Total ........................................................................................................................................................

92 66 22 9 5 1,102

We believe that we have satisfactory working relationships with our employees and have not experienced any significant labor disputes or work stoppages. Property, Plant and Equipment Our Property We lease our principal executive offices in Budars, Hungary. In addition, we own and lease properties throughout Hungary and other countries in Central and Eastern Europe. We have secured all the necessary rights-of-way with respect to our telecommunications networks. We believe that our leased and owned office space and real property are adequate for our present needs but we periodically review our future needs. In Hungary, our material properties include properties that we own that comprise part of our telecommunications infrastructure (telecom freehold properties), properties that we lease that comprise part of our telecommunications infrastructure (telecom leasehold properties) and properties we lease in connection with the day-to-day operations of our business (other leasehold properties), each of which is summarized below: Telecom Freehold. Of our 473 telecom freehold properties, we own the land and infrastructure for 190 properties, we own the infrastructure only for an additional 253, we have joint ownership with third parties over 26 properties, and we have free rights of use, although the Hungarian Post Office has title, over four. All of our telecom freehold properties are located in our historical concession areas. Telecom Leasehold. We have 644 telecom leasehold properties that comprise part of our telecommunication network. The total annual rental fees for our telecom leasehold properties are approximately 5.9 million, with various durations; approximately 59% of these leases are of an indefinite duration, approximately 41% of these leases are for a period of one to 10 years and the remainder are for 10 to 25 year periods. Other Leasehold Facilities. We lease an additional 30 properties, comprising 10 office buildings, one sales offices and 17 customer services offices. The total annual rental fees for these other leasehold properties are approximately 2.6 million, with various durations; approximately 47% of these leases are of an indefinite duration and approximately 20% of these leases are for five to 10 year periods. Rights of Use. Under the Hungarian Civil Code, we are authorized to obtain rights of use over real property owned by third parties in exchange for a lump sum of compensation. Furthermore, the 2004 Communications Act re-enforced existing rights to construct buildings and install telecommunications equipment, wires and antennas on real property owned by third parties. In keeping with standard market practice among Hungarian telecommunications network operators, we have historically commenced operations based on a landowners consent granted during the construction permitting process but before reaching formal written agreements. In connection with our national backbone network, we have successfully concluded agreements with affected landowners for the most part. However, in connection with certain portions of our national backbone network constructed from 1996 through to 1998, we initiated formal contractual negotiations to reach agreements with the affected landowners at the beginning of 2001, and these contractual negotiations, along with the related registration of rights of use, are still ongoing. Insurance We maintain the types and amounts of third party insurance coverage customary in the industry in which we operate, including coverage for business interruption, property damage, liability and employee related accidents and injuries above specified self-insured amounts for each type of risk. We are current with all of our premium payments and have made no material claims under our insurance policies in the past three years. We also maintain directors, supervisory board members and officers insurance. We consider our insurance coverage to be adequate for our business, as to both the nature of the risks and the amounts insured.

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Environmental Our operations are subject to a variety of laws and regulations relating to land use and environmental protection. We have a good relationship with the environmental authorities. The internal environmental protection activities are governed by certain internal rules on environmental protection issued by us, for the purpose of educating our employees about environmental protection and requiring them to be environmentally conscious. In the past five years, no environmental fines have been imposed on us. We believe that we are in substantial compliance with the applicable requirements. Legal Proceedings Local Business Tax Three Hungarian municipalities (Oroshza, Battonya and Bkscsaba) initiated a court proceeding against us in the Metropolitan Court of Budapest seeking payment in connection with an ambiguous provision in some of our concession contracts regarding the payment of local municipal taxes. In March 2009, we reached a final settlement and paid a total of approximately 7.6 million to the local municipalities of Battonya, Oroshza and Bkscsaba in March and June 2010. During February 2009, one additional municipality, Ttkomls, made claims against us. We reached a final settlement and paid approximately 0.1 million in January and March 2010. Further municipalities may not make claims in connection with the local business tax issue, as the court established in one of its judgments that our local business tax payment obligation (and that of Hungarotel, our legal predecessor) expired on November 1, 2002, and therefore actions filed after November 2, 2007, would be barred by the statute of limitations. However, in the case of Ttkomls, the claims did not lapse as the statute of limitations was interrupted by Ttkomls in 2005. Postal Cash Payments Litigation On September 1, 2008, the NFH sent a letter to us in connection with our practice of charging customers an extra fee if they pay their invoices to us by way of a cash payment at post offices. The NFH requested that we modify our general contracting terms and conditions according to the NFHs request and pay back the collected sums to the relevant customers. We refused to comply with the requests of the NFH since we believe that such requests lack merit. The NFH initiated court proceedings and requested that the court order us to change our general contracting terms and conditions and to reimburse the relevant customers all extra fees imposed on them. According to our management, monthly revenues from extra fees charged on postal cash payments since the introduction of such extra fees amount to approximately 0.2 million. As a result, the original amount of the claim (approximately 1.7 million) has increased to approximately 4.7 million as of March 1, 2011 due to the ongoing billing of the disputed recharge. Please note that, before May 2008, only the historical customers of Hungarotel were required to pay such extra fees. The court proceeding in the matter is ongoing. The current court procedure has been suspended as the court has initiated a preliminary ruling procedure before the European Court of Justice. Although, in our assessment, the risk of losing the litigation and being required to repay the claimed amount (approximately 4.7 million) or any increased amount depending on the date of the final judgment) to customers is remote, we are not in a position to predict the final judgment of the court. Universal Service Agreements We became a universal service provider in our historical concession areas on the basis of the Universal Service Agreements concluded by our legal predecessors with the legal predecessor of the Minister in 2002, which agreements were later revised to comply with the current E.U. regulatory regime. See Hungarian Telecommunications and Regulation Hungary and its Telecommunications Industry. The Universal Service Agreements were concluded for a definite term expiring on December 31, 2008. On December 19, 2008, the then active Minister heading the Prime Ministers Office unilaterally closed the negotiations on the extension of the Universal Service Agreements. At the same time, a Government Decree (Government Decree No. 352/2008. (XII.31.)) was adopted, under which the universal service providers were obliged to provide universal services under unchanged terms and conditions for one year following the expiration of the Universal Service Agreements (i.e., until December 31, 2009). On April 21, 2009, we submitted a petition to the Constitutional Court requesting that the Constitutional Court review the provisions of the above decree and declare them as void and thus not applicable. On December 29, 2009, we executed a pre-contract in relation to the Universal Services Agreements under which we undertook to execute the Universal Services Agreements on the amended terms and conditions as set out in the precontract. Negotiations on the Universal Service Agreements commenced. In July 2010, the Constitutional Court declared the above decree to be void with an effective date of December 31, 2010 and negotiations on the Universal Service Agreements were suspended. At the start of March 2011, the Ministry of National Development made an offer to us to conclude a Universal Service Agreement valid until December 31, 2011 with an option to extend and we agreed to such terms. The execution of the Universal Service Agreement is now in progress. The Ministry of National Development acknowledges that we are entitled to request the reimbursement of our costs relating to the Universal Services Agreements for the year 2010 (approximately EUR 85,500).

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GVH proceeding On December 5, 2006, the GVH imposed a penalty of HUF 150 million on Hungarotel (which has since been merged into Invitel ZRt), claiming that Hungarotel abused its dominant position by inhibiting Carrier Selection in the voice services market. Invitel ZRt appealed the GVHs decision before the Metropolitan Court, requesting the suspension of its enforcement. The Metropolitan Court suspended the enforcement of the fine and subsequently overturned the decision of the GVH on procedural grounds and ordered the GVH to repeat the administrative procedure against Invitel ZRt. The GVH subsequently appealed the decision of the Metropolitan Court before the Metropolitan Court of Appeal. On November 21, 2008, the Metropolitan Court of Appeal confirmed the ruling of the Metropolitan Court, and accordingly the GVH decision was annulled with final effect. The GVH commenced the repeat administrative procedure against Invitel ZRt with respect to the same alleged violations on September 24, 2009. In September 2010, the GVH extended the deadline for GVH to complete its investigation. The Competition Council, the forum bringing the decisions of GVH, held a hearing in March 2011 where it adopted a resolution imposing a fine of HUF 200 million (approximately EUR 727,200) on Invitel ZRt which Invitel ZRt must pay in April 2011. Invitel ZRt intends to appeal the GVHs decision. Other We are involved in various other legal actions arising in the ordinary course of business. We are contesting these legal actions in addition to the actions noted above; however, the outcome of individual matters is not predictable with assurance. Although the ultimate resolution of these actions (including the actions discussed above) is not presently determinable, we believe that any liability resulting from the current pending legal actions involving us, in excess of amounts provided therefore, will not have a material effect on our consolidated financial position, results of operations or liquidity.

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THE FIBERNET BUSINESS The FiberNet Acquisition On February 28, 2011, we consummated the acquisition of FiberNet Kft, the direct parent of FiberNet Zrt, Hungarys fourth largest cable network operator, for a purchase price of approximately 44.5 million. In order to meet Hungarian competition office requirements relating to infrastructure competition, we simultaneously sold approximately one-third of the FiberNet network assets to UPC for approximately 22.2 million (the FiberNet Disposal). The acquisition of FiberNet together with the FiberNet Disposal is referred to as the FiberNet Acquisition. The FiberNet network we retained is located outside our historical fixed line concession areas. Agreements Related to the FiberNet Disposal Transitional Services Agreement In connection with the FiberNet Disposal, we entered into a Transitional Services Agreement (TSA) with UPC. As part of the TSA, FiberNet is providing technical services to UPC pursuant to which it will support the technical migration of former FiberNet subscribers resident in the geographical areas where FiberNets cable network has been sold to UPC. The TSA expires after 12 months from the full completion of the migration of the subscribers, which is expected to be in the third quarter of 2011 at the latest. Instead of a fee for services under the TSA, the parties have agreed to share, during the migration period, the revenue collected by FiberNet from those subscribers which are due to be migrated. FiberNet will retain an amount covering its costs associated with providing the transitional services and UPC will receive the surplus profit, consisting of HUF 500 per each migrating customer per month. Indefeasible Rights of Use Agreement In connection with the FiberNet Disposal, Invitel ZRt entered into an Indefeasible Rights of Use Agreement (IRU) with UPC. Pursuant to the IRU, Invitel ZRt is providing a right to use optical fiber segments in certain geographical locations to UPC for a 20 year term, for a total one-time fee of 500,000. The FiberNet Business According to NMHH, FiberNet is the fourth largest cable television and broadband provider in Hungary in terms of number of customers, with an extensive national footprint. FiberNet was originally established in Hungary in 1999 with a goal to acquire and integrate small local cable networks. Dunaweb Tvkzlsi Kft (Dunaweb) and Donet-Info Kft (Donet) are wholly owned subsidiaries of FiberNet Zrt, which together comprise less than 1% of the total assets of the Issuer and its subsidiaries. FiberNet Services FiberNet principally addresses the Mass Market segment. It provides TV, broadband internet access and voice services. It offers the following analogue TV packages: Social (9 channels), Basic (30 channels) and Extended Basic Service (EBS) (57 channels). It offers the following digital packages: Midi (26 channels), Base (33 channels), EBS (74 channels), and Extra (98 channels): in addition it offers the option of various premium channels. Its broadband internet packages include 1Mbs, 6Mbs, and 10 Mbs options. In addition, it offers low-cost voice services. FiberNet Customers FiberNets customer base consists primarily of residential subscribers and, to a significantly lesser extent, commercial subscribers. Subscribers per product in analogue and digital cable television services, internet services and voice telephony services are 88,000, 61,000 and 13,200, respectively. The part of the FiberNet network we have retained covers approximately 307,000 homes, approximately 8% of homes in Hungary, and serves 88,000 customers and 162,000 revenue generating units (RGUs). Network FiberNets network consists of head-end stations, local access networks and backbone segments. Backbone segments, which typically utilize optical cables or leased lines provided by third parties, connect the smaller settlements to a nearby head-end station or to each other, as well as the head-end stations with the Budapest main head-end station. FiberNets network, like other cable networks in Hungary, relies heavily on public electricity utility providers, from which FiberNet leases poles to lay its cables. Historically, FiberNets network has expanded as a result of existing cable distribution network acquisitions and internal expansion. Due to recent overhauls in the network, approximately 80% of FiberNets network is

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capable of delivering triple play services. The network currently covers approximately 307,000 homes. We are currently in the process of integrating our network with the FiberNet network in order to benefit from prospective synergies. Employees FiberNet had approximately 278 employees at December 31, 2010, all of which are located in Hungary. None of FiberNets employees are members of any unions. A breakdown by job function as of December 31, 2010 is set forth in the table below:
Function / Number of employees FiberNet

Marketing.................................................................................................................................................... Sales and Customer Care ............................................................................................................................ Technical Operations .................................................................................................................................. Finance........................................................................................................................................................ General Management.................................................................................................................................. Total ........................................................................................................................................................... Regulation General regulation governing cable companies

7 112 111 41 7 278

Cable television services are categorized as electronic communications services, and as such, are governed by essentially the same laws and regulations as fixed line telephone operators. For a detailed discussion of the regulatory environment, please see Hungarian Telecommunications Industry and Regulation. Light touch regulation of cable companies Currently, it is the consensus in the E.U. that the national regulatory authorities (including the NMHH), when conducting market analysis procedure and deciding on the regulatory remedies, should apply a light touch approach to the cable television industry. This approach has so far resulted effectively in the absence of the type of wholesale regulation imposed on fixed line operators, such as wholesale access and cost control obligation. However, due to the convergence of technical capabilities of traditional fixed line and cable networks, future market analyses may either relax burdens on fixed line operators or introduce burdens on cable operators, decreasing the currently existing differences in the regulatory remedies applied to the two sectors. The Media Act Recently the Hungarian Parliament adopted a new media legislation (Act CLXXXV of 2010, the Media Act) effective from January 1, 2011. Although the Media Act focuses primarily on media services providers (such as television or radio entities), it contains rules affecting the business of distribution network operators (i.e., cable, DTH and IPTV operators), as follows:

under the must carry rules of the Media Act, distribution network operators are obliged to include a certain number of public purpose and community channels in the channel offerings; channels of any one media service provider or group may occupy a maximum of one fourth of any programming distribution networks; under the must offer rules, distribution network operators can benefit from the requirement that channels with significant influential power (that is, having an audience reach of 15%) or any channels of a media service provider affiliated with a significant distribution network operator (that is, having more than 100,000 subscribers) must be offered, under non-discriminatory terms, for distribution in any third party distribution networks; and in the event that a media service provider repeatedly breaches the Media Act, the NMHH, as an ultimate measure, may require the distribution network operators to suspend the transmission of the programming of such media service provider. The exact mechanism of such measure and cost implications (which may be significant, if technical developments become necessary in the distribution networks to be able to comply with such measures) are unclear.

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The NMHH may impose a penalty on distribution network operators in the event of breach of the Media Act. The amount of the penalty applicable to distribution network operators is limited to approximately EUR 18,200, however, such penalty may be imposed on a repeated basis.

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OUR DIRECTORS AND SENIOR MANAGEMENT Matel The directors of Matel are Tradman Netherlands B.V. and Tradman Management B.V. (collectively Tradman), trust companies which are subsidiaries of TMF Netherlands B.V. The business address of Tradman is Parnassustoren, Locatellikade 1, 1076 AZ Amsterdam, The Netherlands. Tradman is not related to the ultimate shareholders of Matel and, as a trust company, Tradman is an independent service provider engaged in the management of Dutch special purpose vehicles. Tradman exercises its voting rights on the Board of Matel in accordance with the terms of a service agreement with us. Invitel Holdings A/S The following table sets out certain information concerning the directors of Invitel Holdings A/S (Invitel Holdings), our parent company. The business address of each of the directors is the address of Invitel Holdings.
Name Age Position

Board of Directors Ole Steen Andersen ........................................................... Craig Butcher..................................................................... Bruno Claude ..................................................................... Nikolaus Bethlen ............................................................... Thierry Baudon.................................................................. Michael Krammer .............................................................. Biographies

64 Chairman of the Board 47 Vice-Chairman of the Board 52 Member of the Board 33 Member of the Board 56 Member of the Board 50 Member of the Board

Certain information relating to Invitel Holdings directors is set out below. Members of the Board of Directors Ole Steen Andersen has been a member of the board since November 2008 and a member of the board of HTCC, our predecessor, from September 2006 until the completion of the Reorganization in February 2009. Until his retirement in June 2007, Mr. Andersen was the Chief Financial Officer and a member of the Executive Committee of Danfoss A/S. Danfoss is a privately held global company which develops and produces mechanical and electronic products and controls used to heat and cool homes and offices, refrigerate food and control production lines. Mr. Andersen currently serves on several boards of directors. He is the Chairman of the Board of Directors of several companies including BB Electronics A/S, a Denmark-based private equity-held company which provides electronic subassemblies, Sanistaal A/S, a public listed wholesale company and Hedge Corp. A/S, an IT financial resources company. Mr. Andersen is also the Chairman of the Danish Private Equity and Venture Capital Association. In addition, Mr. Andersen is the Nordic advisor for CVC Capital Partners, a Luxembourg-based private equity company, and a member of the Advisory Board of Danish Merchant Capital, a financial services company. He holds a B.Econ. from the Copenhagen Business School and a M.Sc. from Denmarks Technical University. Craig Butcher has been a member of the board since November 2009. Mr. Butcher is a Senior Partner of Mid Europa and has been with Mid Europa since 2001. He is responsible for deal origination, execution, and monitoring across the Central and Eastern European region. While with Mid Europa, Mr. Butcher has been responsible for investments in five telecommunications operators and has served or is serving on the boards of directors of Invitel, Karneval, T-Mobile Czech Republic, Bit and Wheelabrator. From 1995 to 2000, Mr. Butcher worked with the EBRD. From 1991 to 1993 he worked with the Boston Consulting Group. He holds a B.Sc. (Hons) in Mathematics from Canterbury University, New Zealand, and an MBA from INSEAD. Bruno Claude has been a member of the Board of Directors since October 1, 2010. Mr. Claude served as President and CEO of Cablecom, the largest Cable Television provider in Switzerland, from 2001 to 2005 when the company was successfully sold to Liberty Global. During his tenure, he was responsible for the turn-around and strategic re-direction of the company, building a dynamic and successful triple play provider out of a candidate for bankruptcy. From October 2000 to July 2003 he was Senior Vice President and COO of NTLs continental European operations. While with NTL, Mr. Claude was also appointed CEO of iEsy, a large German Cable operator which he led through a successful financial and operational restructuring. Prior to joining NTL, he was managing director of CEA Capital Advisor where he was responsible for the turn around and successful exit of a number of businesses in the media and communications industries. Prior to this, he held various positions with Prime Cable, which he joined in 1985, most recently as deputy to the President. Prime Cable was a highly successful private equity backed US cable television operator focusing on the turn around of under performing cable

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television systems across the United States. Mr. Claude graduated from the University of Louvain with a Masters degree in engineering in 1983 and from Cornell University with an MBA in 1985. Nikolaus Bethlen has been a member of the board since November 2009. Mr. Bethlen is a Director of Mid Europa. Prior to joining Mid Europa, he worked for Kohlberg, Kravis, Roberts & Co. (KKR) in London. Prior to joining KKR, he was with Morgan Stanley & Co. in its European Mergers and Acquisitions and Capital Markets Departments. Mr. Bethlen serves on the Board of Orange Austria. He holds a B.A. in Business Economics from Durham University, England. Thierry Baudon has been a member of the board since November 2009. Mr. Baudon is the Managing Partner of Mid Europa and has been with Mid Europa since its inception in 1998. He chairs the Investment and Management Committees of the firm and has been responsible for investments in seven telecommunications operators. Mr. Baudon has served or is serving on several boards of directors including Invitel Holdings, Luxmed, Orange Austria, Aster, SBB Telemach, and Calucem. Prior to joining Mid Europa, he headed the International Finance division of the Suez Group and held senior positions with the European Bank for Reconstruction and Development (EBRD) and the World Bank/IFC Group. He holds a B.Sc. and a M.Sc. in Engineering from the Paris Institute of Technology (AgroParisTech), an AMP from INSEAD and a M.A. in Economics and Finance from the Paris-Sorbonne University. Michael Krammer has been a member of the board since November 2009. Mr. Krammer is the Chief Executive Officer of Orange in Austria, a position he has held since October 2007. After graduating from Theresian Military Academy, he has worked for three telecommunications operators serving as: CEO of E-Plus Service GmbH, Germany; CCO and later CEO of tele.ring telekom GmbH; and Director of Customer Care and Executive Director, Business Unit, Business Customers for max.mobile. Mr. Krammer started his professional career in 1991 at the automobile association AMTC, where he held several positions, most recently serving as departmental head Emergency and Information Services. Executive Officers Martin Lea is the CEO and Robert Bowker is the CFO of Invitel Holdings, and their respective biographies are as follows: Martin Lea has been President and Chief Executive Officer since April 2007. Mr. Lea served on the Board of Directors and as the Chief Executive Officer of Invitel Holdings N.V. (before it was acquired in the Invitel ZRt Acquisition in April 2007) since 2004. Prior to that, he served as Executive Vice President of Intertek Group plc., where he was Chief Executive of its ETL-SEMKO division. He has also been as a member of the managing director of Racal Telecom and President of Global Crossings integrated UK operations. He holds a Business Studies degree from Kingston University. Robert Bowker has been Chief Financial Officer since April 2007. Mr. Bowker has served as a member of our Board of Directors and the Chief Financial Officer of Invitel Holdings N.V. (before it was acquired in the Invitel ZRt Acquisition in April 2007) since 2004. Prior to that, he served as Chief Financial Officer at Eurotel Praha between 2000 and 2004 and at EuroTel Slovakia and PricewaterhouseCoopers before that. He holds a Bachelor of Commerce from Rhodes University. Mr. Bowker is a South African Chartered Accountant and a Chartered Financial Analyst. Audit Committee The Audit Committee, a committee under the Board of Directors, consists of Ole Steen Andersen, Craig Butcher and Nikolaus Bethlen. The Audit Committee members are appointed by, and serve at the discretion of, the Board of Directors. The Board of Directors appoints a chairman of the Audit Committee. The purpose of the Audit Committee is to:

oversee the accounting and financial reporting processes of Invitel Holdings and audits of its financial statements; assist the Board in oversight and monitoring of (i) the quality and integrity of the financial statements of Invitel Holdings and related disclosure, (ii) preparation of the annual reports and the audit of the annual reports, (iii) compliance with legal and regulatory requirements, (iv) the independent auditors qualifications, independence and performance, and (v) internal control system and any internal auditing and risk management systems; provide the Board of Directors with the results of its monitoring and recommendations derived therefrom; and provide to the Board of Directors such additional information and materials as it may deem necessary to make it aware of significant financial matters that require its attention.

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The Audit Committee meets regularly and also holds meetings with the Registered Managers and internal and external auditors of Invitel Holdings in order to discuss a variety of topics relating to its duties. Compensation of Management Director Compensation The compensation of the Board of Directors is determined by the Board of Directors and approved at Invitel Holdings annual general meeting and is based on prevailing market rates. Craig Butcher, Nikolaus Bethlen, Thierry Baudon and Michael Krammer do not receive compensation for serving as directors of Invitel Holdings. In 2010, the aggregate compensation of the Board of Directors and Executive Officers was EUR 1.6 million. Employment arrangements Invitel Holdings has agreed to management service agreements with the companies providing the services of Mr. Lea and Mr. Bowker, the Chief Executive Officer and Chief Financial Officer, respectively. These arrangements provide that Invitel Holdings will compensate the service companies with annual service fees (paid monthly) with an annual bonus of up to 50% of such service fees. Management long-term incentive plan In May 2010, Mid Europa, our ultimate parent and 100% owner of our shares, signed a term sheet for a long-term incentive plan applying to Mr. Lea and Mr. Bowker and such other members of management as Mid Europa and Mr. Lea may from time to time agree (the Participants). Pursuant to the incentive plan, the Participants will be entitled to an equity value bonus, an interest in Hungarian Telecom LP and a share in all distributions made by Hungarian Telecom LP if, at some point in the future, (i) Mid Europa sells more than 50% of its shares in Invitel Holdings or (ii) the sale by Invitel Holdings of all or substantially all of its assets occurs. The final agreement for such plan has not yet been executed.

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OUR PRINCIPAL SHAREHOLDERS Hungarian Telecom, a company controlled by Mid Europa, is the ultimate parent company of the Issuer and 100% owner of our shares. Mid Europa Partners Limited is a private equity firm focused on Central and Eastern Europe. Operating from London, Budapest and Warsaw, Mid Europa Partners Limited advises and manages funds with asset value of approximately 3.2 billion. Mid Europa Partners Limited has been investing in Central and Eastern Europe since 1999.

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RELATED PARTY TRANSACTIONS In November 2009, Hungarian Telecom, a company controlled by Mid Europa, acquired a 74.4% equity stake in our shares in two separate transactions which resulted in Mid Europa indirectly becoming a controlling shareholder. As a result of an equity tender offer on January 22, 2010, Mid Europa increased its ownership in Invitel Holdings to 91.78%. Mid Europa then acquired all remaining shares not owned by it in a compulsory acquisition procedure under Danish law. The Shareholder Loan Concurrently with the offering of the Existing Notes, all of the PIK Notes held by Mid Europa and the 34.1 million subordinated PIK loan were converted into the Shareholder Loan between Mid Europa and Holdco I. The Shareholder Loan will mature on a date that is 15 years from the Issue Date of the Notes and has a Tranche A and a Tranche B with each tranche representing the conversion of the 34.1 million subordinated PIK loan and the PIK Notes held by Mid Europa, respectively. The interest rate for Tranche A is 20% per annum above EURIBOR and is capitalized semi-annually. The principal amount of the Tranche A Loan may be repaid at Holdco Is option in whole or in part at any time together with any accrued and un-capitalized interest to the date of such repayment plus a fee equal to 4.5% of the sum of (i) the principal amount of the Tranche A Loan being repaid, less (ii) the interest capitalized over the term of the Loan on that portion of the Tranche A Loan being repaid. The interest rate for Tranche B is 10.25% per annum above EURIBOR and is capitalized quarterly. The principal amount of the Tranche B Loan may be repaid at the Borrowers option in whole or in part at the following repayment prices, together with any accrued and un-capitalized interest to the date of such repayment, if repaid during the following periods:

July 15, 2009 July 14, 2010: 102%; July 15, 2010 July 14, 2011: 101%; and July 15, 2011 and thereafter: 100%.

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DESCRIPTION OF OTHER INDEBTEDNESS The following summary of certain provisions of our other indebtedness does not purport to be complete and is subject to, and qualified in its entirety by reference to, the underlying documents. General We completed the sale of our International Business on October 7, 2010. Following consummation of the International Sale, the following entities are no longer subsidiaries of the Issuer: Invitel International, International Hungary, Memorex Turkey and Euroweb Romania (the Disposed Entities). References to any Disposed Entity in this section should be disregarded. We completed the FiberNet Acquisition on February 28, 2011. Upon completion of the FiberNet Acquisition and the subsequent sale of non-core FiberNet assets, the following Hungarian entities became Subsidiary Guarantors under the Indenture: FiberNet Zrt and FiberNet Kft (the New Subsidiary Guarantors) and agreed to pledge their assets to the extent required by the Indenture. References to the Subsidiary Guarantors and related references in this section should also apply to the New Subsidiary Guarantors. We anticipate that the Floating Rate Notes due 2013 (the 2007 Notes or the FRNs) described below will be repurchased or called for redemption and discharged upon the consummation of the issuance of the Additional Notes, in which case the provisions described below relating to the 2007 Notes will not apply. Floating Rate Senior Notes due 2013 (the 2007 Notes or FRNs) This description of the 2007 Notes should be read in connection with the section entitled Intercreditor Deed. General HTCC Holdco II B.V. (Holdco II) issued 200 million in aggregate principal amount of Floating Rate Senior Notes due 2013 pursuant to the FRN Indenture. Holdco IIs obligations under the 2007 Notes have been assumed by Matel and Holdco II has been merged into Holdco I. In October 2009, the Issuer purchased 74.3 million of the 2007 Notes pursuant to a tender offer. Upon consummation of the tender offer 125.7 million of the 2007 Notes remained outstanding. In January 2010, the Issuer purchased 25.0 million of the 2007 Notes pursuant to an asset sale tender offer from the proceeds of the International Sale. See Business Sale of International Wholesale Business. The Issuer has also purchased 31.8 million of the 2007 Notes on the open market, at an average purchase price equal to 92.3% of the principal amount thereof plus accrued interest up to but excluding the date of settlement. All of the 2007 Notes purchased by the Issuer have been cancelled. The aggregate principal amount outstanding of the 2007 Notes following the cancellation was 68.9 million. We intend to use a portion of the proceeds from the Offering to fund the repurchase or redemption of the remaining 2007 Notes. See Use of Proceeds. Intercreditor Deed The Issuer, the Subsidiary Guarantors, BNP Paribas Trust Corporation UK Limited, as security trustee for the Notes (the Security Trustee), the Trustee (the FRN Trustee) and the other parties thereto entered into the Intercreditor Deed, dated December 16, 2009, as amended or supplemented from time to time, (the Intercreditor Deed), which established the relative rights of certain of our creditors under our finance arrangements. The following description is a summary of certain provisions, among others, contained in the Intercreditor Deed that relate to the rights and obligations of holders of the Notes. It does not restate the Intercreditor Deed in its entirety nor does it describe provisions relating to the rights and obligations of holders of other classes of our debt and our parents debt. As such, we urge you to read that document because it, and not the discussion that follows, defines certain rights of the holders of the Notes. Ranking of Indebtedness The Intercreditor Deed provides that Debt of the Issuer and each Subsidiary Guarantor governed by the Intercreditor Deed ranks as a contractual claim as follows: First: Debt under any Senior Credit Facility, the Notes, the Guarantees, any Senior Hedging Debt, any other Debt permitted to be incurred on a senior basis under the Issuers financings from time to time (together, the Senior Debt), and the Debt of the Issuer under the FRNs;

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Second: any Debt of any Subsidiary Guarantor under its guarantee of the FRNs (FRN Guarantee) or under the proceeds loan for the FRNs (the FRN Funding Loan); and Third: certain debt of the Issuer and Subsidiary Guarantors to certain other Subsidiary Guarantors and certain direct or indirect shareholders of the Issuer (the Subordinated Intra-Group Debt). The Intercreditor Deed provides that all repayments and prepayments of Senior Debt (including the Notes) may be made at any time, subject to certain limitations in respect of repayments and prepayments of Senior Hedging Debt set out in the Intercreditor Deed. The Indenture permits up to 18 million in aggregate outstanding principal amount of Debt to be incurred pursuant to a Senior Credit Facility that, together with any Senior Hedging Debt, benefit from a priority over the Notes in the allocation of proceeds of enforcement of the Liens securing it and the Notes, as described in greater detail in Application of Enforcement Proceeds below. The Debt of the Subsidiary Guarantors with respect to the FRNs ranks junior to the Senior Debt as described in Guarantees of the FRNs below. Guarantees of the Senior Credit Facility and Notes Each of the Guarantees is a senior and unconditional guarantee, subject to customary limitations required under local law in relation to the Subsidiary Guarantors or their directors. The Guarantees will be joint and several obligations of the Subsidiary Guarantors. However, the obligations of the Subsidiary Guarantors under their Guarantee will be limited to an amount not to exceed the maximum amount that can be guaranteed by the Subsidiary Guarantors without resulting in its obligations under their Guarantees being voidable or unenforceable under applicable laws relating to fraudulent transfer, or under similar laws affecting the rights of creditors generally. Release of Guarantees and Security for the Notes and other Senior Debt (not including the FRNs) The Intercreditor Deed provides that the Security Trustee may refrain from enforcing the Security for the Notes and other Senior Debt unless and until instructed by the holders of a majority of the outstanding principal amount of the following, taken as one class (the Majority Senior Creditors): (a) (b) Senior Debt (other than Senior Hedging Debt); and undrawn commitments under the documentation for such Senior Debt.

The Intercreditor Deed further provides that if any assets are sold or otherwise disposed of (i) by (or on behalf of) the Security Trustee (or any person appointed by the Security Trustee) in connection with any Enforcement Action in relation to any of the Security, (ii) as a result of a sale by an administrator or liquidator or similar person, or (iii) by the Issuer or any Subsidiary Guarantor (together the Obligors) at the request of the Security Trustee (acting on the instructions of or with the consent of the representatives of the Majority Senior Creditors) after an Event of Default under (and as defined in) any Senior Debt (a Senior Default) has occurred that is then continuing, the Security Trustee shall be authorized (at the cost of the Obligors) to execute or enter into, on behalf of and without the need for any further authority from any holder of Senior Debt or Obligors: (a) any release of the First Priority Liens or any other claim over that asset to any of the holders of Senior Debt and to issue any certificates of non-crystallization of any floating charge that may, in the absolute discretion of the Security Trustee, be considered necessary or desirable; if the asset which is disposed of consists of all of the shares (which are either held by an Obligor or otherwise form part of the Collateral) in the capital of an Obligor or any direct or indirect holding company or subsidiary of that Obligor, any release of that Obligor or holding company or subsidiary from all liabilities it may have to any holder of Senior Debt (including under the Guarantees) or other Obligor, both actual and contingent in its capacity as a guarantor or borrower (including any liability to any other Obligor by way of guarantee, contribution, subrogation or indemnity and including any guarantee or liability arising under or in respect of the Senior Debt documentation) and a release of any First Priority Liens granted by that Obligor or holding company or subsidiary over any of its assets; and

(b)

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(c)

if the asset which is disposed of consists of all of the shares (which are either held by an Obligor or otherwise form part of the Collateral) in the capital of an Obligor or any holding company or subsidiary of that Obligor and if the Security Trustee wishes to dispose of any Debt owed by that Obligor or any of its subsidiaries, any agreement to dispose of all or part of that Debt on behalf of the relevant holders of Senior Debt, Obligors or agents or trustees for the Senior Debt (the Senior Agents) (with the proceeds thereof being applied as if they were the proceeds of enforcement of the First Priority Liens) provided that the Security Trustee shall take reasonable care to obtain a fair market price in the prevailing market conditions (though the Security Trustee shall have no obligation to postpone any disposal in order to achieve a higher price),

provided that: (i) (ii) (iii) (iv) no liabilities of the Issuer in its capacity as a borrower or issuer of any of the Senior Debt, may be disposed of or released pursuant to the foregoing; any asset which is disposed of is released from the claims of all holders of Senior Debt; the proceeds of such disposal are applied in accordance with Application of Enforcement Proceeds below; and no guarantees of any notes issued by the Issuer under an indenture may be disposed of pursuant to paragraph (c) above but may, to the extent applicable, be released pursuant to paragraph (b) above.

Release of guarantees and security for the FRNs are subject to release under different conditions described in Release of Liens and Security below. Guarantees of the FRNs and Obligations under the FRN Funding Loan Senior Subordinated Guarantees Each of the guarantees by the Subsidiary Guarantors of the FRNs (each a FRN Guarantee) is a senior subordinated guarantee, which means that each FRN Guarantee ranks behind, and is expressly subordinated to, all existing and future Senior Debt of each Subsidiary Guarantor, including any obligations owed by such Subsidiary Guarantor under any Senior Credit Facilities, the Notes and any Senior Hedging Debt. Payment Blockage Limitations on Paying the FRN Funding Loan The Issuer is not prohibited from making payments on the FRNs, including by way of purchase, redemption, defeasance or other acquisition or retirement for value and the Subsidiary Guarantors are permitted to make payments (i) in respect of amounts then due and owing in respect of the FRNs, but not otherwise, until the date on which the Senior Debt has been irrevocably paid and discharged and all commitments for Senior Debt terminated or cancelled (the Senior Discharge Date) or (ii) on the FRN Funding Loan in order to finance any of the forgoing. However, no Subsidiary Guarantor may make any payment on the FRN Guarantee nor may Invitel make any payment to the Issuer in respect of the FRN Funding Loan if: (a) (b) a payment default on any Senior Debt has occurred (after giving effect to any applicable grace period) and is continuing uncured and unwaived; or any other event of default (other than a payment default) on any Senior Debt has occurred and is continuing, and any Senior Agent serves a written notice of such default (a Payment Blockage Notice) on the FRN Trustee,

although an exception is made to permit payment of certain amounts to the extent owing to the FRN Trustee for its own account. Payments on the FRN Funding Loan may and will be resumed (including making any missed payments): (a) (b) in the case of a payment default, when such default is cured or waived; or in the case of a non-payment default, when one of the following applies (whichever is earlier): (i) (ii) 179 days have elapsed since the service of the applicable Payment Blockage Notice; where a Standstill Period is in effect at any time during the 179 day period since the service of the applicable Payment Blockage Notice, that Standstill Period expires;

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(iii) (iv) (v)

such non-payment default is cured or waived by the Majority Senior Creditors in writing or has ceased to exist; each Senior Agent agrees to cancel the Payment Blockage Notice; or the Senior Discharge Date occurs.

No new Payment Blockage Notice may be delivered unless and until 360 days have elapsed since the delivery of the immediately prior Payment Blockage Notice. Only one Payment Blockage Notice may be served with respect to the same event or circumstance. A Payment Blockage Notice may only be served on or before the date falling 75 days after the date on which the relevant Senior Agent receives actual written notice of the relevant non-payment default. The FRN Indenture contains substantially similar restrictions on payments by Subsidiary Guarantors under the FRN Guarantees, as described in Floating Rate Senior Notes due 2013 Payment Blockage Limitations on Paying the FRN Funding Loan. Standstill Restrictions on Enforcement of Claims under the FRN Guarantees and Enforcement of Collateral Neither the holders of the FRNs nor the FRN Trustee may take any Enforcement Action with respect to the FRN Guarantees or the security documents in respect of the FRNs (the FRN Security Documents) prior to the Senior Discharge Date without the prior written consent of the Majority Senior Creditors, unless: (a) certain insolvency events have occurred in relation to the applicable Subsidiary Guarantor; provided that such insolvency or reorganization events are not the result of actions by the holders of the FRNs or the FRN Trustee and provided further that, in these circumstances, the holders of the FRNs and the FRN Trustee may only take Enforcement Action against the applicable Subsidiary Guarantor; or any Senior Debt has been declared prematurely to be due and payable or payable on demand (and demand has been made) by reason of the occurrence of an event of default on such Debt; provided that in these circumstances, the holders of the FRNs and the FRN Trustee may only demand payment, declare prematurely due and payable or otherwise seek to accelerate payment of or place on demand all or any part of the FRN Guarantees; or any enforcement of, or an instruction by the Majority Senior Creditors to enforce, the First Priority Liens (a Security Enforcement Action) occurs; provided that in these circumstances, the holders of the FRNs and the FRN Trustee may only take Enforcement Action with respect to the Collateral for the FRNs with respect to which the Security Trustee is taking such Security Enforcement Action; or an Event of Default under (and as defined in) the FRN Indenture (a FRN Default) has occurred and is continuing (otherwise than solely pursuant to any cross-default provision by reason of a default under any Senior Debt that permits the lenders thereunder to accelerate its maturity); and (i) (ii) (iii) the FRN Trustee has notified each Senior Agent in writing; and a period of not less than 179 days has passed from the date the Senior Agents received notice of the relevant FRN Default (a Standstill Period); and at the end of the Standstill Period, the relevant FRN Default is continuing and has not been cured or waived,

(b)

(c)

(d)

in which case the holders of more than 50% in aggregate principal amount of the FRNs then outstanding may direct the FRN Trustee to take Enforcement Action in respect of the FRN Guarantees and may direct the Security Trustee to take Enforcement Action in respect of the FRN Security Documents, and the FRN Guarantees will become due on demand for payment in accordance therewith or, in the case of certain insolvency events, automatically and without a demand for payment if the insolvency laws of the relevant jurisdiction bar the making of a demand for payment under the FRN Guarantees. These restrictions are set out in the FRN Indenture, and in addition these restrictions in relation to Enforcement Action and the security documents (the Security Documents) are also set out in the Intercreditor Deed. Pursuant to the Intercreditor Deed, if the Security Trustee (or any lender or other finance party under any Senior Debt) is taking all reasonable commercial efforts, having regard to the circumstances, to implement Enforcement Action against a Subsidiary Guarantor or in respect of any Lien conferred by a Subsidiary Guarantor (or in respect of its shares), neither the holders of the FRNs nor the FRN Trustee may take any Enforcement Action that would be reasonably likely to adversely

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affect such Enforcement Action or the amount of proceeds to be derived therefrom. The foregoing limitation shall not, however, prejudice any other rights of the holders of the FRNs or the FRN Trustee to take Enforcement Action permitted under the Intercreditor Deed against any other Subsidiary Guarantor, and the exercise of any such rights shall be deemed not to adversely affect such Enforcement Action or such amount of proceeds. Any amounts received by the Security Trustee, the FRN Trustee or the holders of the FRNs as a result of such Enforcement Action will be subject to the provisions of the Intercreditor Deed described in Turnover below. The Issuer and its obligations with respect to the FRNs are not subject to any of the payment and enforcement limitations described above (other than, in the case of the Issuer, with respect to the receipt of payments under or in respect of the Funding Loan). The FRN Indenture also contains similar provisions in relation to the FRN Guarantees, as described in Senior Notes due 2013 Standstill Restrictions on Enforcement of Claims under the FRN Guarantees and Enforcement of Collateral. Subordination on Insolvency The Intercreditor Deed provides that, in the event of any distribution to the creditors of a subsidiary Guarantor after: (a) (b) (c) (d) (e) (f) it enters into a moratorium or a composition, assignment or similar arrangement with any of its creditors; any resolution is passed or order is made for its winding-up, administration, examinership or dissolution; an order for its winding-up, administration, examinership or dissolution is made; any marshalling of its assets and liabilities; any liquidator, trustee in bankruptcy, judicial custodian, compulsory manager, receiver, administrative receiver, examiner, administrator or similar officer is appointed in respect of if or an of its assets; or any other analogous step or procedure is taken in any jurisdiction,

then the holders of Senior Debt of such Subsidiary Guarantor will be entitled to receive payment in full in cash of all obligations in respect of such Senior Debt (including interest after the commencement of any proceeding at the rate specified in the applicable Senior Debt whether or not allowed or allowable in any such proceeding) before the holders of FRNs will be entitled to receive any payment with respect to the FRN Guarantees. Shareholder Subordinated Debt Until and including the Senior Discharge Date, so long as no Senior Default or FRN Default is continuing or would result from any such payment or receipt, the Obligors may pay and the holders of the Subordinated Intra-Group Loans may receive and retain payments permitted to be paid thereon under the covenants imposed by the Senior Debt. The FRN Funding Loan is not however subject to the restriction described in this paragraph. Commencing after the Senior Discharge Date until and including the date the FRN Notes are discharged in full, the Obligors may pay and the holders of the Subordinated Intra-Group Loans may receive and retain payments permitted to be paid thereon under the covenants imposed by the FRN Indenture. Security Collateral The obligations of the borrowers and the guarantors under the Senior Debt (not including the FRNs) are, or will be, secured by first priority Liens (the First Priority Liens) on the following assets (the Collateral): (a) (b) (c) (d) the FRN Funding Loan and any other loan by the Issuer of the proceeds of Senior Debt (the FRN Funding Loan and such other loans, the Proceeds Loans); the Subordinated Intra-Group Loans under which the Issuer or any Subsidiary Guarantor is the lender; the Capital Stock of the Issuer; all shares of the Capital Stock of each Subsidiary Guarantor held by the Issuer and its subsidiaries;

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(e)

bank accounts, intra-group loans and intra-group receivables of each of the Issuer, Invitel ZRt, Technocom, FiberNet Zrt and FiberNet Kft as well as floating charges over the assets of each of Invitel ZRt, Technocom, FiberNet Zrt. and FiberNet Kft; the Capital Stock and, to the extent required by the Indenture, assets of any Restricted Subsidiary that becomes a Subsidiary Guarantor in the future; and to the extent that International Holdings is a Subsidiary after June 15, 2011, substantially all of the assets of such entity.

(f) (g)

On the Issue Date, Notes will constitute substantially all of our indebtedness secured by First Priority Liens other than permitted hedging arrangements (Senior Hedging Debt). The Indenture allows such indebtedness to be replaced or refinanced or supplemented or increased by other senior Credit Facilities which will also be entitled to the benefit of First Priority Liens, in each case to the extent permitted under the covenants described in Description of the Notes Certain Covenants Limitation on Indebtedness and Description of the Notes Certain Covenants Limitation on Liens. The discussions of the Collateral described herein and the rights of various parties with respect thereto are applicable to all such Credit Facilities. The obligations of the Issuer and the Subsidiary Guarantors under the FRN Indenture, the FRN Guarantees will be secured by second priority Liens over: (a) (b) (c) (d) the existing Proceeds Loans; the intra-group receivables of each of the Issuer and Invitel ZRt; the Capital Stock of the Issuer, Invitel ZRt, Technocom, FiberNet Zrt, FiberNet Kft and International Holdings; and the Capital Stock of any other Subsidiary Guarantor the shares of which are pledged to secure Debt of the Issuer or any Restricted Subsidiary in the future.

The second priority liens securing the Obligations of the Issuer and the Subsidiary Guarantors under the FRN Indenture, the FRNs and the FRN Guarantees are hereinafter collectively referred to as the Second Priority Liens, and all assets subject to the Second Priority Liens are hereinafter collectively referred to as the FRN Collateral. The Second Priority Liens will be junior to the First Priority Liens and to any other liens having priority or otherwise ranking senior to the Second Priority Liens. Applicable Hungarian law does not recognize the concept of second priority Liens with respect to certain assets located in Hungary, and as a result the Intercreditor Deed and any security agreements entered into relating to the Capital Stock of Hungarian companies will provide, among other things, with respect to such shares, that the holders of FRNs and other creditors secured by a Lien on such shares will have pari passu security interests as a matter of Hungarian law. However, the right to receive distributions upon any foreclosure or other disposition of such assets will be structured so as to give effect to the subordination of the Liens securing the FRNs as described in this section. Security Trustee The Collateral has been or will be pledged to the Security Trustee for the benefit of the holders of the Senior Debt, as holders of the First Priority Liens and (in the case of the FRN Collateral) for the benefit of the FRN Trustee on behalf of the holders of the FRNs, as holders of the Second Priority Liens, in each case in accordance with the terms of any Senior Credit Facilities, the Indenture, the FRN Indenture and the Security Documents. Enforcement of Security for FRNs The affirmative vote of the holders of more than 50% in aggregate principal amount of the FRNs then outstanding will be required in order to enforce the FRN Guarantees and/or the FRN Security Documents. The FRN Trustee will not be entitled to instruct the Security Trustee to take any Enforcement Action under the FRN Security Documents after the occurrence of a FRN Default or any other event which would cause the FRNs to become due and payable unless: (a) (b) the Senior Discharge Date has occurred; the Standstill Period has expired (as described above); or

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(c)

the FRN Trustee is otherwise entitled by the terms of the Intercreditor Deed to instruct the Security Trustee to take enforcement action under the FRN Security Documents.

Under any of these circumstances, the FRN Trustee may require the Security Trustee to take Enforcement Action with respect to the FRN Collateral if, at that time, the lenders and other finance parties under the Senior Debt have not commenced Enforcement Action with respect to such Collateral or have taken such Enforcement Action but are not pursuing such action diligently or reasonably, having regard to the fact (provided that there is no undue delay in pursuing such Enforcement Action once proceedings have been commenced) that the lenders and other finance parties under the Senior Debt are entitled to maximize the proceeds for their own benefit. Any instruction to the Security Trustee by holders of the FRNs in respect of enforcement of share security must be given by the holders of more than 50% of the FRNs. If the FRN Trustee or any holder of a FRN receives proceeds of any enforcement of the FRN Guarantees and/or the Second Priority Liens while the Senior Debt is outstanding, then the FRN Trustee or the holder, as applicable, will hold the payment on trust for the benefit of the holders of the relevant Senior Debt and will be required to turn over such amounts to the Security Trustee to be applied in the order described under Turnover. Release The Intercreditor Deed provides detailed requirements for the release of the FRN Liens in connection with Enforcement Action taken in relation to Senior Debt. Release in connection with Enforcement Action under certain Senior Debt Security Documents If: (a) in connection with any Enforcement Action of any of the Security Documents for the Senior Debt (the Senior Security Documents) (other than the Hungarian law share pledges over the share of Invitel, Technocom and International Hungary (the Hungarian Security Deposit Deeds), the Hungarian law assignments of receivables by Invitel, Technocom and International Hungary (the Hungarian Assignment Agreements), the Dutch law share pledges over the shares of the Issuer and International Holdings (the Dutch Share Securities), the Romanian law pledges of shares of Euroweb (the Euroweb Romania Share Pledges), the Austrian law pledges of shares of International Austria (the Austrian Share Pledges), the Turkish law pledge of shares in Memorex Turkey (the Turkish Subsidiary Share Security)), and the Dutch law assignments of receivables granted by the Issuer (the Issuer Pledges of Receivables), the Security Trustee or any person appointed by the Security Trustee, sells or otherwise disposes of any asset on the instructions or with the consent of the Majority Senior Creditors; or the Issuer or a Subsidiary Guarantor (each an Obligor) sells or otherwise disposes of an asset the subject of the Senior Security Documents at the request of the Security Trustee on the instructions or with the consent of the Majority Senior Creditors after a Senior Default has occurred (other than the assets the subject of the Hungarian Security Deposit Deeds, the Hungarian Assignment Agreements, the Dutch Share Securities, the Euroweb Romania Share Pledges, the Austrian Share Pledges, the Turkish Subsidiary Share Security, and the Issuer Pledges of Receivables),

(b)

the Security Trustee may execute on behalf of each holder of Senior Debt (Senior Creditor), each holder of the FRNs (FRN Creditor), each Obligor, each creditor of Subordinated Intra-Group Debt (Subordinated Intra-Group Creditor) and Matel Holdings N.V. without the need for any further referral to or authority from any of them, any release of any Lien created by such Senior Security Documents and the FRN Security Documents over that asset, provided that the net cash proceeds of sale or disposal are applied in the order described in Application of Enforcement Proceeds. Each Senior Agent (on behalf of all the Senior Creditors represented by it), the FRN Trustee (on behalf of all the FRN Creditors), each Obligor, each Subordinated Intra-Group Creditor and Matel Holdings N.V. will promptly execute such releases as the Security Trustee may reasonably require to give effect to the foregoing. No such release will affect the obligations and liabilities of any other Obligor or Subordinated Intra-Group Creditor, or Matel Holdings N.V. under the documentation for the Senior Debt or the FRNs. Additional release in Connection with Enforcement Action under certain Senior Debt Security Documents If: (a) in connection with any Enforcement Action of any of the Issuer Pledges of Receivables, the Dutch Share Securities, the Euroweb Romania Share Pledges and the Austrian Share Pledges, the Security Trustee or any

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person appointed by the Security Trustee, sells or otherwise disposes of any asset on the instructions or with the consent of the Majority Senior Creditors; or (b) an Obligor sells or otherwise disposes of an asset the subject of the Issuer Pledges of Receivables, the Dutch Share Securities, the Euroweb Romania Share Pledges or the Austrian Share Pledges at the request of the Security Trustee on the instructions or with the consent of the Majority Senior Creditors after a Senior Default has occurred,

the Security Trustee may execute on behalf of each Senior Creditor, each FRN Creditor, each Obligor and each Subordinated Intra-Group Creditor without the need for any further referral to or authority from such Senior Creditor, such FRN Creditor, such Obligor or such Subordinated Intra-Group Creditor: (i) any release of the security created by the Issuer Pledges of Receivables or the Dutch Share Securities, the Euroweb Romania Issuer Share Pledges, the Austrian Share Pledges or the junior pledge of FRN Funding Loan, over that asset; if such asset companies shares in the capital of the Issuer, a release of the Issuer from all present and future liabilities (both actual and contingent and including, without limitation, any liability to any other Obligor by way of contribution or indemnity) in its capacity as a guarantor under the Senior Debt and in its capacity as a borrower or guarantor under the Subordinated Intra-Group Debt and a release of any Lien granted by the Issuer over any of its assets under the Issuer Pledges of Receivables or the Dutch Share Securities; if such asset comprises shares in the capital of Euroweb Romania, a release of Euroweb Romania from all present and future liabilities (both actual and contingent and including, without limitation, any liability to any other Obligor by way of contribution or indemnity) in its capacity as a guarantor under the Senior Debt and in its capacity as a borrower or guarantor under the Subordinated Intra-Group Debt and a release of any Lien granted by Euroweb Romania over any of its assets under the Euroweb Romania Share Pledges; and if such asset comprises shares in the capital of International Austria, a release of International Austria from all present and future liabilities (both actual and contingent and including, its capacity as a guarantor under the Senior Debt and in its capacity as a borrower or guarantor under the Subordinated Intra-Group Debt in relation to Senior Debt and/or FRN Debt and a release of any Lien granted by International Austria over any of its assets under the Austrian Share Pledges;

(ii)

(iii)

(iv)

provided that the net cash proceeds of sale or disposal are applied in the order described in Application of Enforcement Proceeds and provided further that such sale or disposal is a sale or disposition of (as the case may be) the FRN Funding Loan or all or substantially all of the equity interests in the relevant Obligor where: (A) (B) such sale is for consideration all or substantially all of which is in the form of cash or cash equivalents; concurrently with the completion of such sale or disposal, (1) in the case of a sale or disposal of equity interests in an Obligor, the claims and security interests of the Senior Creditors and the claims of any other provider of pari passu or subordinated Public Debt against such Obligor and its subsidiaries are irrevocably and unconditionally released (and not assumed by the relevant purchaser or any affiliate thereof), or, as the case may be, in the case of a sale or disposal of the FRN Funding Loan, the security interests of the Senior Creditors over the FRN Funding Loan are irrevocably and unconditionally released (and not assumed by the relevant purchaser or any affiliate thereof);

(2)

(C)

the sale is either made pursuant to a public auction (in which the FRN Creditors (in the case of a disposal pursuant to any Enforcement Action on the instructions of the Majority Senior Creditors) or the holders of Senior Debt (in the case of a disposal pursuant to any Enforcement Action on the instructions of the FRN Trustee) have the right to participate) or is otherwise made for fair market value, taking into account the circumstances giving rise to the sale, as certified by an independent internationally recognized investment bank selected by the Security Trustee; and the sale is made in compliance with all applicable laws.

(D)

A sale or disposal meeting these requirements is referred to below as a Qualified Sale.

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Nothing in the above paragraphs authorizes the Security Trustee (or obliges the FRN Creditors) to release the FRN Creditors Second Priority Liens over the shares in the capital of the Issuer, Euroweb Romania or International Austria. Each Senior Agent (on behalf of all the Senior Creditors represented by it) and the FRN Trustee (on behalf of all the FRN Creditors) and each of the Subordinated Intra-Group Creditors and Obligors will promptly execute such releases as the Security Trustee may reasonably require to give effect to the foregoing. No such release will affect the obligations and liabilities of any other Obligor under the documentation for the Senior Debt or the FRNs. Release in connection with Enforcement Action under the Hungarian Security Deposit Deeds, the Turkish Subsidiary Share Security and the FRN Security Documents (other than the Hungarian Assignment Agreements and the Turkish Asset Security) and release of Debt If: (a) in connection with any Enforcement Action of any of the Hungarian Security Deposit Deeds or of the Turkish Subsidiary Share Security or any of the other FRN Security Documents, the Security Trustee or any person appointed by the Security Trustee, sells or otherwise disposes of all or substantially all of the shares of a Subsidiary Guarantor or (as the case may be) assets of an Obligor subject to any Hungarian Security Deposit Deed or the Turkish Subsidiary Share Security or any FRN Security Document until (and including) the date the Senior Debt is irrevocably discharged in full and all commitments of the Senior Creditors in relation thereto have been terminated (the Senior Discharge Date), on the instructions or with the consent of the Majority Senior Creditors or, pursuant to and in accordance with the restrictions described in Enforcement of Security for FRNs above, on the instructions of the FRN Trustee and, after the Senior Discharge Date, on the instructions of the FRN Trustee; or an Obligor sells or otherwise disposes of an asset the subject of the Hungarian Security Deposit Deeds or the Turkish Subsidiary Share Security or any of the other FRN Security Documents, at the request of the Security Trustee on the instructions or with the consent of the Majority Senior Creditors after a Senior Default has occurred;

(b)

the Security Trustee may execute on behalf of each Senior Creditor, each Obligor, each Subordinated Shareholder Creditor and each FRN Creditor without the need for any further referral to or authority from such Senior Creditor, such FRN Creditor, such Subordinated Intra-Group Creditor or such Obligor: (i) any release of the security created by (A) (B) in the case of a sale of all or substantially all of the shares of Invitel, the Hungarian Security Deposit Deeds, the junior pledge of FRN Funding Loan; in the case of a sale of all or substantially all of the shares of any other Obligor (other than the Issuer), the relevant Hungarian Security Deposit Deed or the Turkish Subsidiary Share Security or (as the case may be) FRN Security Document; in the case of a sale of the FRN Funding Loan, the junior pledge of the FRN Funding Loan; in the case of a sale or disposal under paragraph (b) immediately above, the relevant Hungarian Security Deposit Deed or the Turkish Subsidiary Share Security or, as the case may be, the FRN Security Document, over that asset; and

(C) (D)

(ii)

if such asset comprises shares in the capital of a Subsidiary Guarantor (or any holding company of it), a release of the Subsidiary Guarantor from all present and future liabilities (both actual and contingent) and/or the obligations in its capacity as a guarantor or borrower of the whole or any part of the FRN Guarantees, the FRN Funding Loan and the Subordinated Intra-Group Debt and a release of any Lien granted by such Obligor and any of its Subsidiaries over any of its assets under any Security Documents;

provided that (1) each Senior Agent or, as applicable, the FRN Trustee has approved the release or (2) such sale or disposal is a Qualified Sale and the proceeds of such Qualified Sale are concurrently with the completion of such Qualified Sale delivered to the Security Trustee for application in accordance with Application of Enforcement Proceeds. Each Senior Agent (on behalf of all the Senior Creditors represented by it), the FRN Trustee (on behalf of the FRN Creditors), each Subordinated Intra-Group Creditor and, where necessary, each Obligor, will execute promptly such releases

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as the Security Trustee may reasonably require to give effect to the foregoing. No such release will affect the obligations and liabilities of any other Obligor under the documentation for the Senior Debt or the FRNs. Release in connection with Enforcement Action under the Hungarian Assignment Agreements and the Turkish Asset Security and release of Debt If: (a) in connection with any Enforcement Action of any of the Hungarian Assignment Agreements, the Security Trustee or any person appointed by the Security Trustee, sells or otherwise disposes of all or substantially all of the assets of an Obligor subject to any Hungarian Assignment Agreement until (and including) the Senior Discharge Date, on the instructions or with the consent of the Majority Senior Creditors; or an Obligor sells or otherwise disposes of an asset the subject of the Hungarian Assignment Agreements at the request of the Security Trustee on the instructions or with the consent of the Majority Senior Creditors after a Senior Default has occurred,

(b)

the Security Trustee may execute on behalf of each Senior Creditor and each Obligor without the need for any further referral to or authority from such Senior Creditor or such Obligor, any release of the security created by such Hungarian Assignment Agreements; provided that such sale or disposal is a Qualified Sale and the proceeds of such Qualified Sale are concurrently with the completion of such Qualified Sale delivered to the Security Trustee for application in accordance with Application of Enforcement Proceeds. Each Senior Agent (on behalf of all the Senior Creditors represented by it) and, where necessary, each Obligor, will execute promptly such releases as the Security Trustee may reasonably require to give effect to the foregoing. No such release will affect the obligations and liabilities of any other Obligor under the documentation for the Senior Debt. Disposals Generally Each Senior Creditor, FRN Creditor, each Subordinated Intra-Group Creditor and each Obligor authorize the Security Trustee and, to the extent applicable, each Senior Agent (including the Trustee) and the FRN Trustee to release in any manner whatsoever any Encumbrance and any guarantee (including any Guarantee or FRN Guarantee) upon the sale or disposal of any asset (including shares) otherwise than pursuant to an Enforcement Action provided that: (a) (b) Turnover If, at any time on or before the Senior Discharge Date, the FRN Trustee or any holder of the FRNs receives or recovers a payment or distribution of, or on account of: (a) (b) (c) (d) the FRN Guarantees which is prohibited by the Intercreditor Deed; proceeds pursuant to any Enforcement Action against a Subsidiary Guarantor or with respect to the Collateral; the FRN Funding Loan or other Proceeds Loan which is prohibited by the Intercreditor Deed; or the FRNs which is made as a result of the Issuer in turn receiving or recovering that amount from a Subsidiary Guarantor in contravention of the Intercreditor Deed; no Default shall have occurred and be continuing; and such sale is in compliance with the terms of the documents evidencing the Senior Debt, the FRN Debt and the Subordinated Intra-Group Debt.

(provided that the FRN Trustee at the time it made such payment had actual knowledge thereof and, on the date on which it acquires this actual knowledge, has not distributed to the holders of the FRN Notes any such amount) then the FRN Trustee or the holder, as applicable, will hold the payment on trust for the benefit of the holders of the relevant Senior Debt (after deducting from such amount the costs, liabilities and expenses incurred in recovering such amounts) and will be required to turn over such amounts to the Security Trustee to be applied in the order described under Security Application of Enforcement Proceeds. Application of Enforcement Proceeds

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Subject to the rights of any creditor with prior security or preferential claims, the Security Trustee will apply all proceeds of the enforcement of the security conferred by the documents creating the First Priority Liens and the Security Documents, all recoveries by the secured parties under guarantees of the relevant debt and all amounts paid to the Security Trustee or the FRN Trustee pursuant to the provisions of the Intercreditor Deed (whether under the turnover provisions described under Security Turnover or otherwise) in the following order: (a) first, pro rata (i) in payment of all unpaid fees, costs, charges, expenses and liabilities (and interest thereon) incurred by or on behalf of the Security Trustee and any receiver, attorney or agent in connection with carrying out its duties and exercising its powers and discretion under the documents that create the First Priority Liens and the Security Documents and the remuneration of the Security Trustee and every receiver under such documents, (ii) in payment of all reasonable unpaid fees, costs, charges, expenses and liabilities (and interest thereon) incurred by or on behalf of the Trustee and any receiver, attorney or agent (up to 100,000) which are incurred in connection with the enforcement or recovery of payment in carrying out its duties and exercising its power and discretion under the Indenture (subject to certain exclusions), and (iii) in payment of all reasonable unpaid fees, costs, charges, expenses and liabilities (and interest thereon) incurred by or on behalf of the FRN Trustee and any receiver, attorney or agent thereunder (up to 100,000) which are incurred in connection with the enforcement or recovery of payment in carrying out its duties and exercising its power and discretion under the indenture governing the FRNs (subject to certain exclusions); second, in payment of all unpaid costs and expenses incurred by or on behalf of any lender or other finance party under the Senior Debt or certain hedge counterparties in connection with such enforcement; third, if a Senior Credit Facility is in full force and effect at such time, in payment to the Senior Agent therefore for application towards the Debt thereunder and the Senior Hedging Debt, pari passu between them; fourth, pro rata in payment (i) to the applicable Senior Agent for application towards (A) Senior Debt and (B) Senior Hedging Debt to the extent not discharged under the preceding clause (c), pari passu, between themselves, and (ii) of all reasonable unpaid fees, costs, charges, expenses and liabilities incurred by or on behalf of (A) the Trustee and any receiver, attorney or agent (over and above the amounts set out in paragraph (a)(ii) above) in connection with carrying out its duties and exercising its powers and discretions under the Notes, the Indenture, the Security Documents, the agreements governing the Proceeds Loans, the Intercreditor Deed and certain other related documents and the reasonable remuneration of the Trustee (subject to certain exclusions), and (B) the FRN Trustee and any receiver, attorney or agent (over and above the amounts set out in paragraph (a)(iii) above) in connection with carrying out its duties and exercising its powers and discretions under the FRNs, the FRN Indenture, the Security FRN Documents, the agreement governing the FRN Funding Loan, the agreements governing the Proceeds Loans, the Intercreditor Deed and certain other related documents and the reasonable remuneration of the FRN Trustee (subject to certain exclusions); fifth, pro rata in payment to the FRN Trustee for application towards indebtedness under the FRNs; and sixth, in payment of the surplus (if any) to the relevant Subsidiary Guarantor or other person entitled to it.

(b) (c)

(d)

(e) (f) Other

The Intercreditor Deed provides that the holders of the First Priority Liens will be able to change, waive, modify or vary the Security Documents (other than the Hungarian Security Deposit Deeds, the Turkish Subsidiary Share Security and Hungarian Assignment Agreements) without the consent of the FRN Trustee or the holders of the FRNs; provided that any such changes, waivers, modifications or variances made apply equally to the holders of the First Priority Liens and the holders of the Second Priority Liens. In relation to the Hungarian Security Deposit Deeds and the Turkish Subsidiary Share Security, the holders of the First Priority Liens will be able to change, waive, modify or vary them without the consent of the FRN Trustee or the holders of the FRNs; provided that if the result is the FRN Trustee (on behalf of the holders of the FRN Notes) ceasing to be beneficiaries of such security, the Senior Creditors must also cease to be such beneficiaries. The Intercreditor Deed obligates the Trustee and the FRN Trustee (among others) to execute any amendment to the Intercreditor Deed and the Security Documents from time to time, without any requirement for consent of the holders of the Notes or the FRNs, to allow the Issuer and Subsidiary Guarantors to incur any Debt and grant any guarantee and Liens that are permitted to be incurred in accordance with the Indenture, in any such ranking that is permitted. This includes Debt that is pari passu to the Notes and Guarantees and Liens that are pari passu to the First Priority Liens as the case may be.

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The Indenture will also provide that each holder of a Note, by accepting such Note, will be deemed to have: (a) (b) (c) appointed and authorized the Trustee to give effect to such ranking, subordination, enforcement, release and turnover provisions; authorized the Trustee to become a party to any future intercreditor arrangements described above; agreed to be bound by such ranking, subordination, enforcement, release and turnover provisions and the provisions of any future intercreditor arrangements described above that do not materially adversely affect the rights of holders of the Notes; and irrevocably appointed the Trustee to act on its behalf to enter into and comply with such ranking, subordination, enforcement, release and turnover provisions and the provisions of any future intercreditor arrangements described above.

(d)

No appraisals of any of the Collateral have been prepared by or on behalf of the Issuer or the Trustee in connection with the issuance of the Notes. There can be no assurance that the proceeds from the sale of the Collateral would be sufficient to satisfy the obligations owed to the holders of the Notes. By its nature, some or all of the Collateral will be illiquid and may have no readily ascertainable market value. Accordingly, there can be no assurance that the Collateral will be able to be sold in a short period of time, if at all. See Risk Factors Local insolvency laws may not be as favorable to you as those of another jurisdiction with which you may be familiar. Amendments to the Intercreditor Deed Each Senior Agent, the Trustee, the FRN Trustee and each agent or trustee for any other Debt (together, the Relevant Agents) may, from time to time, agree with the Issuer to amend the Intercreditor Deed and any amendments so made shall be binding on all the parties to the Intercreditor Deed, provided that any amendment which would: (a) (b) materially and adversely affect any rights of any holders of any Debt may not be made without the prior written consent of the Relevant Agent for such Debt acting in accordance with the terms of such Debt; or impose or vary any obligation of the holders of any Debt may not be made without the prior written consent of the Relevant Agent for such Debt.

In addition, the Relevant Agents may, from time to time agree with the Issuer and determine administrative matters and make technical amendments arising out of a manifest error on the face of the Intercreditor Deed, where such amendments would not prejudice or otherwise be adverse to the position of the holders of any Debt (other than Debt held by the Issuer or subsidiaries of the Issuer), without the consent of any holder of Debt. In addition, the Relevant Agents may, from time to time agree with the Issuer and determine administrative matters and make technical amendments arising out of a manifest error on the face of the Intercreditor Deed, where such amendments would not prejudice or otherwise be adverse to the position of the holders of any Debt (other than Debt held by the Issuer or subsidiaries of the Issuer), without the consent of any holder of Debt.

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DESCRIPTION OF THE NOTES The definitions of certain terms used in this description are set forth under the sub-heading Certain Definitions. In this Description of the Notes, the word Issuer refers only to Magyar Telecom B.V. (and not its subsidiaries) and the words Subsidiary Guarantors refer initially to Invitel ZRt, Technocom, International Holdings, FiberNet Zrt and FiberNet Kft and, thereafter, each Restricted Subsidiary that provides a Guarantee of the Notes. The word Notes refers also to book-entry interests in the Notes, as defined herein. The Issuer will issue and the Subsidiary Guarantors will guarantee the 80 million aggregate principal amount of additional Notes offered hereby (the Additional Notes) under an indenture dated December 16, 2009 among the Issuer, the Subsidiary Guarantors and BNY Mellon Corporate Trustee Services Limited, as trustee (together with any successor Trustee, the Trustee), transfer agent, registrar and principal paying agent, and The Bank of New York Mellon (Luxembourg) S.A., as Luxembourg paying agent (as supplemented by the supplemental indenture dated March 3, 2010, the second supplemental indenture dated February 28, 2011 and the third supplemental indenture dated March 16, 2011, which will become operative upon the consummation of the Consent Solicitation) (the Indenture) pursuant to which the Issuer issued on December 16, 2009 345,000,000 in aggregate principal amount of its 9.5% Senior Secured Notes due 2016 (75,003,000 of which were repurchased by the Issuer on November 10, 2010, resulting in 269,997,000 aggregate principal amount of the original issuance being outstanding) (the Existing Notes and, together with the Additional Notes, the Notes). The terms of the Notes include those set forth in the Indenture. The Additional Notes will otherwise have identical terms and conditions, are the same series as, and, upon completion of a 40 day distribution compliance period, will be fully fungible with, the Existing Notes. Unless the context requires otherwise, references in this Description of the Notes to the Notes include the Existing Notes and will include, upon completion of this offering or upon issuance, the Additional Notes and any subsequent additional notes. The Indenture does not incorporate or include any of the provisions of the U.S. Trust Indenture Act of 1939. The following description is a summary of the material terms of the Indenture, and the Security Documents (including the Intercreditor Agreement). It does not, however, restate such documents in their entirety and, where reference is made to particular provisions of such documents, such provisions, including the definitions of certain terms, are qualified in their entirety by reference to all of the provisions of the Notes, the Indenture and the Security Documents (including the Intercreditor Agreement). You should read the Indenture and the Security Documents (including the Intercreditor Agreement) because they contain additional information and because it and not this description defines your rights as a holder of the Notes. A copy of the form of the Indenture and the Security Documents (including the Intercreditor Agreement) may be obtained from the Issuer upon request or, if and so long as the Notes are listed on the Euro MTF, and the rules of the Luxembourg Stock Exchange so require, from the specified office of the paying agent in Luxembourg. We anticipate that any outstanding 2007 Notes will be repurchased or called for redemption and discharged upon the consummation of the issuance of the Additional Notes. References to the Existing High Yield Notes and related references included in this Description of the Notes should be read in that context. In addition, as of the date of this Offering Memorandum, all of the PIK Notes have been repurchased and/or redeemed by HTCC Holdco I B.V. References to the PIK Notes and related references included in this Description of the Notes should be read in that context. Description of the Notes, the Guarantees and the Security The Notes The Notes are general obligations of the Issuer and: (a) rank senior in right of payment to any existing and future Debt of the Issuer that is subordinated in right of payment to the Notes; (b) are guaranteed on a senior basis by the Subsidiary Guarantors; (c) rank equally in right of payment with any existing and future Debt of the Issuer (including any Existing High Yield Notes then outstanding) that is not subordinated in right of payment to the Notes; and (d) are effectively subordinated in right of payment to any existing and future Debt of the Issuer that is secured by property and assets that do not secure the Notes, to the extent of the value of the property and assets securing such Debt. The Guarantees The Notes are guaranteed by the Subsidiary Guarantors held by the Issuer and its subsidiaries.

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Each Guarantee of the Notes by the Subsidiary Guarantors is a general obligation of each Subsidiary Guarantor and: (a) ranks equally in right of payment with any existing and future Debt of the Subsidiary Guarantors that is not subordinated in right of payment to such Guarantee; (b) ranks senior in right of payment to any existing and future Debt of the Subsidiary Guarantor (including any guarantees of the Existing High Yield Notes then outstanding) that is subordinated in right of payment to such Guarantee; and (c) is effectively subordinated in right of payment to all existing and future Debt of the Subsidiary Guarantors that is secured by property and assets that do not secure the Guarantees, to the extent of the value of the property and assets securing such Debt. As of December 31, 2010, after giving pro forma effect to the issuance of the Additional Notes and the subsequent repurchase and/or redemption and discharge of the 2007 Notes:

the Issuer and its subsidiaries would have 350 million of indebtedness (excluding the related party subordinated loan), represented by the Notes (including the Additional Notes); and excluding capital leases, the non guarantor subsidiaries of the Issuer have no indebtedness.

For the year ended December 31, 2010, the Issuer and the Subsidiary Guarantors represented more than 99% of consolidated EBITDA and as of December 31, 2010, more than 99% of total assets (excluding goodwill) of the Issuer and its Subsidiaries calculated on a pro forma basis to reflect the FiberNet Acquisition. The Security The obligations of the Issuer and the Subsidiary Guarantors under the Indenture, the Notes and the Guarantees are secured by first priority Liens over: (a) the Capital Stock of the Issuer; (b) all shares of the Capital Stock of each Subsidiary Guarantor held by the Issuer and its Subsidiaries; (c) bank accounts, intra-group loans (including the Proceeds Loan) and intra-group receivables of each of the Issuer, Invitel ZRt, Technocom, FiberNet Zrt and FiberNet Kft; (d) the assets of each of Invitel ZRt, Technocom, FiberNet Zrt and FiberNet Kft pursuant to floating charges; (e) the Capital Stock and, to the extent required by the Indenture, assets of any Restricted Subsidiary that becomes a Subsidiary Guarantor in the future; and (f) to the extent that International Holdings is a Subsidiary after June 15, 2011, the bank accounts, intra-group loans and intra-group receivables of such entity as well as the assets of such entity pursuant to a floating charge (or equivalent security). Although the Indenture contains limitations on the amount of additional Debt that the Issuer and the Subsidiary Guarantors may incur, the amount of such additional Debt could be substantial. Listing of the Notes The Existing Notes are admitted to listing on the Official List of the Luxembourg Stock Exchange and for trading on the Euro MTF. The Issuer has made an application to list the Additional Notes on the Official List of the Luxembourg Stock Exchange and for trading on the Euro MTF. If and so long as the Notes are listed on the Luxembourg Stock Exchange, the Issuer will maintain a paying or transfer agent in Luxembourg. See Payments on the Notes; Paying Agent. Principal, Maturity and Interest The Notes will mature on December 15, 2016 and 100% of the principal amount thereof shall be payable on such date, unless redeemed prior thereto as described herein. The Issuer will issue 80 million aggregate principal amount of Additional Notes. Subject to the covenant described under Certain Covenants Limitation on Debt, the Issuer is permitted to issue additional Notes under the Indenture (Subsequent Additional Notes) from time to time. The Notes and Subsequent Additional Notes that are actually issued will be treated as a single class for all purposes of the Indenture, including waivers,

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amendments, redemptions and offers to purchase and will be equally and ratably secured by the Collateral. Unless the context otherwise requires, references to the Notes for all purposes of the Indenture and in this Description of the Notes include references to any Subsequent Additional Notes that are actually issued. Interest on the Notes will accrue at the rate of 9.5% per annum and is payable semi annually in arrear on December 15 and June 15 of each year, commencing, in respect of the Additional Notes, on June 15, 2011. Interest on overdue principal and interest, including Additional Amounts (as defined herein), if any, will accrue at a rate that is 1% higher than the then applicable interest rate on the Notes. The Issuer will make each interest payment to the holders of record on the immediately preceding December 1 and June 1. Interest on the Notes will accrue from December 16, 2010, or, if interest has already been paid, from the date it was most recently paid. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. Payments on the Notes; Paying Agent The Issuer will make all payments, including principal of, premium, if any, and interest on the Notes through paying agents. The principal paying agent for the Notes will be The Bank of New York Mellon acting through its London branch. Initially that agent will be the corporate trust office of the Trustee. In addition, so long as the Notes are listed on the Euro MTF there will be a paying agent in Luxembourg. The Bank of New York Mellon (Luxembourg) S.A. will initially act as paying agent in Luxembourg. The Issuer may change the paying agent without prior notice to the holders of the Notes. However, for so long as the Notes are listed on the Euro MTF and the rules of the Luxembourg Stock Exchange so require, the Issuer will publish notice of the change in a paying agent in a daily newspaper with general circulation in Luxembourg (which is expected to be the Luxemburger Wort) or, to the extent and in the manner permitted by such rules, will post such notice on the official website of the Luxembourg Stock Exchange (www.bourse.lu). In addition, the Issuer or any of its Subsidiaries may act as paying agent in connection with the Notes other than for the purposes of effecting a redemption described under Optional Redemption or an offer to purchase the Notes described under Purchase of Notes upon a Change of Control or Certain Covenants Limitation on Sale of Certain Assets. The Issuer will make payments on the Global Notes to the common depositary as the registered holder of the Global Notes (as defined herein). The Issuer will make all payments in same-day funds. The Issuer undertakes that, if European Council Directive 2003/48/EC or any other Directive implementing the conclusions of the ECOFIN Council meeting of 26-27 November 2000 is brought into force, it will ensure that it maintains a paying agent in an EU Member State that will not be obliged to withhold or deduct tax pursuant to the Savings Directive. No service charge will be made for any registration of transfer, exchange or redemption of the Notes, but the Issuer may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection with any such registration of transfer or exchange. Transfer and Exchange The Notes will be issued only in fully registered form without coupons and only in denominations of 50,000 and integral multiples of 1,000 in excess thereof. Notes sold to qualified institutional buyers in reliance on Rule 144A under the U.S. Securities Act will initially be represented by a global note in registered form without interest coupons attached (the Rule 144A Global Note). Notes sold to non U.S. persons outside the United States in reliance on Regulation S under the U.S. Securities Act will initially be represented by a global note in registered form without interest coupons attached (the Regulation S Global Note and, together with the Rule 144A Global Note, the Global Notes). The Global Notes will be deposited, on the closing date, with a common depositary and registered in the name of the nominee of the common depositary for the account of Euroclear and Clearstream. During the 40-day distribution compliance period, book-entry interests in the temporary Regulation S Global Note may be (1) held only through Euroclear or Clearstream and (2) transferred only to non-U.S. persons under Regulation S or qualified institutional buyers under Rule 144A. After the 40-day distribution compliance period ends, investors may hold their interests in the permanent Regulation S Global Note through holders other than Euroclear and Clearstream. After the 40-day distribution compliance period ends, book-entry interests in the temporary Regulation S Global Note may be exchanged for book-entry interests in the permanent Regulation S Global Note upon certification that those interests are owned either by non-U.S. persons or by U.S. persons who purchased those interests pursuant to Rule 144A under the U.S. Securities Act. See Book Entry, Delivery and Form. Ownership interests in the Global Notes, and the book-entry interests therein, will be available only to persons who have accounts with Euroclear and Clearstream Banking, as the case may be, or persons that may hold interests through such persons. Book-entry interests will be shown on, and transfers thereof will be effected only through, records maintained in book-entry form by Euroclear and Clearstream Banking and their respective participants. Except as set out under the section

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entitled Book Entry, Delivery and Form Transfers, participants in Euroclear and Clearstream Banking will not be entitled to receive physical delivery of Notes in definitive form or to have Notes issued and registered in their names and, while the Notes are in global form, will not be considered the owners or holders thereof under the Indenture. See Book Entry, Delivery and Form. The Global Notes may be transferred in accordance with the Indenture, which will provide for, among other things, the transfer of the Notes by the Luxembourg Transfer Agent so long as the Notes are listed on the Euro MTF and the rules of the Luxembourg Stock Exchange so require. All transfers of book-entry interests between participants in Euroclear or Clearstream Banking will be effected by Euroclear or Clearstream Banking pursuant to customary procedures and subject to applicable rules and procedures established by Euroclear or Clearstream Banking and their respective participants. See Book-Entry, Delivery and Form. The Notes will be subject to certain restrictions on transfer and certification requirements, as described under Notice to Investors. Guarantees The Notes are guaranteed by each of the Subsidiary Guarantors. The Notes will not be guaranteed by any other Restricted Subsidiary of the Issuer unless, subject to certain limitations, any such Restricted Subsidiary guarantees or otherwise becomes liable for the payment of any Debt of the Issuer (other than the Notes) or any Subsidiary Guarantor. The Indenture also provides that: (1) any future Restricted Subsidiary must provide a Guarantee of the Notes immediately upon becoming a Restricted Subsidiary, unless the Issuers and its Restricted Subsidiaries proportionate share of the total assets (after intercompany eliminations) of such Restricted Subsidiary plus those of every other Restricted Subsidiary that does not Guarantee the Notes is equal to or less than 5% of the total assets of the Issuer and its Restricted Subsidiaries, consolidated as of the end of the most recently completed fiscal year; and (2) if at any time the Issuers and its Restricted Subsidiaries proportionate share of the total assets (after intercompany eliminations) of the Restricted Subsidiaries that do not Guarantee the Notes is more than 5% of the total assets of the Issuer and its Restricted Subsidiaries, consolidated as of the end of the most recently completed fiscal year, then additional Restricted Subsidiaries will immediately provide Guarantees of the Notes so as to cause the non-Guarantor Restricted Subsidiaries share of the total assets (after inter-company eliminations) of the Issuer and the Subsidiary Guarantors to be equal to or less than 5% of the total assets of the Issuer and its Restricted Subsidiaries, consolidated as of the end of the most recently completed fiscal year. The Issuer, however, will not be obligated to cause any Restricted Subsidiary to become a Subsidiary Guarantor if the provision by such Restricted Subsidiary of a Guarantee would result in any violation of applicable law that cannot be avoided or otherwise prevented through measures reasonably available to the Issuer (including any whitewash or similar procedures that would be required in order to enable such Guarantee to be provided in accordance with applicable law). The Guarantees are joint and several obligations of the Subsidiary Guarantors. However, the obligations of the Subsidiary Guarantors under the applicable Guarantees are limited to an amount not to exceed the maximum amount that can be guaranteed by the Subsidiary Guarantors without resulting in its obligations under their Guarantees being voidable or unenforceable under applicable laws relating to fraudulent transfer, or under similar laws affecting the rights of creditors generally. See Risk Factors Fraudulent transfer statutes may limit your rights as a Noteholder. In the event that the Issuer or any Subsidiary Guarantor is substituted by a replacement issuer or guarantor at a time when the Notes are listed on the Euro MTF, the Issuer will, to the extent required by the rules of the Luxembourg Stock Exchange, publish notice of such substitution in a daily leading newspaper with general circulation in Luxembourg (expected to be the Luxemburger Wort) or, to the extent and in the manner permitted by such rules, will post such notice on the official website of the Luxembourg Stock Exchange (www.bourse.lu), send a copy of such notice to the Luxembourg Stock Exchange and file supplemental listing particulars. Release of Guarantees A Subsidiary Guarantors Guarantee will be automatically and unconditionally released: (a) upon the sale of all or substantially all of the Capital Stock of that Subsidiary Guarantor pursuant to an enforcement action as provided for in the Intercreditor Agreement; (b) in connection with any sale or other disposition of all or substantially all of the assets of that Subsidiary Guarantor (including by way of merger or consolidation) to a Person that is not (either before or after giving effect to such

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transaction) the Issuer or a Restricted Subsidiary of the Issuer, if the sale or other disposition does not violate the covenant set forth under the heading Certain Covenants Limitation on Sale of Certain Assets; (c) in connection with any sale or other disposition of all of the Capital Stock of that Subsidiary Guarantor to a Person that is not (either before or after giving effect to such transaction) the Issuer or a Restricted Subsidiary of the Issuer, if the sale or other disposition does not violate the covenant set forth under the heading Certain Covenants Limitation on Sale of Certain Assets; (d) if the Issuer designates any Restricted Subsidiary that is a Subsidiary Guarantor to be an Unrestricted Subsidiary in accordance with the applicable provisions of the Indenture; (e) upon defeasance or satisfaction and discharge of the Indenture as provided below under the captions Legal Defeasance or Covenant Defeasance of Indenture and Satisfaction and Discharge; or (f) upon the payment in full of all amounts outstanding under the Notes and the Guarantees. Security Collateral The obligations of the Issuer and the Subsidiary Guarantors under the Indenture, the Notes and the Guarantees are secured by first priority Liens (the First Priority Liens) over: (a) the Capital Stock of the Issuer; (b) all shares of the Capital Stock of each Subsidiary Guarantor held by the Issuer and its subsidiaries; (c) bank accounts, intra-group loans (including the Proceeds Loan) and intra-group receivables of each of the Issuer, Invitel, Technocom, FiberNet Zrt and FiberNet Kft; (d) the assets of each of Invitel, Technocom, FiberNet Zrt and FiberNet Kft pursuant to floating charges; (e) the Capital Stock and, to the extent required by the Indenture, assets of any Restricted Subsidiary that becomes a Subsidiary Guarantor in the future; and (f) to the extent that International Holdings is a Subsidiary after June 15, 2011, the bank accounts, intra-group loans and intra-group receivables of such entity as well as the assets of such entity pursuant to a floating charge (or equivalent security). All assets subject to the First Priority Liens are hereinafter collectively referred to as the Collateral. Security Trustee The Collateral has been or will be pledged to BNP Paribas Trust Corporation UK Limited, as security trustee (together with any successor security trustee, the Security Trustee), for the benefit of the Trustee on behalf of the holders of the Notes (and for the benefit of the Trustee on behalf of the holders of the Existing High Yield Notes) in accordance with the terms of the Indenture and the Security Documents. Release of Liens First Priority Liens on the Collateral will be released: (a) upon the payment in full of all amounts outstanding under the Notes and the Guarantees; (b) upon defeasance or satisfaction and discharge of the Indenture as provided below under the captions Legal Defeasance or Covenant Defeasance of Indenture and Satisfaction and Discharge; or (c) with respect to the Collateral that is the subject of an asset sale but only to the extent that such asset sale is made in compliance with the provisions of the Indenture described in Certain Covenants Limitation on Sale of Certain Assets and is made to a Person that is not (either before or after giving effect to such transaction) the Issuer or a Restricted Subsidiary of the Issuer. In addition, the Collateral will be released in accordance with the Intercreditor Agreement. Other

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The Intercreditor Agreement provides that the holders of the First Priority Liens may change, waive, modify or vary the Security Documents without the consent of the Existing High Yield Notes trustee or the holders of the Existing High Yield Notes; provided that any such changes, waivers, modifications or variances made apply equally to the holders of the First Priority Liens and the holders of the Existing High Yield Shared Collateral. Additional Amounts All payments that the Issuer makes under or with respect to the Notes or that any Subsidiary Guarantor makes under or with respect to its Guarantee will be made free and clear of and without withholding or deduction for or on account of any present or future tax, duty, levy, impost, assessment or other governmental charge (including, without limitation, penalties, interest and other similar liabilities related thereto) of whatever nature (collectively, Taxes) imposed or levied by or on behalf of any jurisdiction in which the Issuer, the Subsidiary Guarantor or any Surviving Entity (as defined below) is incorporated, organized, engaged in business (where such Tax is imposed by reason of the Issuer, Subsidiary Guarantor, or Surviving Entity being engaged in business) or otherwise resident for tax purposes or from or through which any of the foregoing makes any payment on the Notes or the Guarantees (including the jurisdiction of any paying agent) or by or within any department or political subdivision thereof having power to tax (each, a Relevant Taxing Jurisdiction), unless the Issuer or such Subsidiary Guarantor, as the case may be, is required to withhold or deduct Taxes by law or by the interpretation or administration of law. If the Issuer or any Subsidiary Guarantor is required to withhold or deduct any amount for or on account of Taxes of a Relevant Taxing Jurisdiction from any payment made under or with respect to the Notes or a Guarantee, the Issuer or such Subsidiary Guarantor, as the case may be, will pay such additional amounts (Additional Amounts) as may be necessary to ensure that the net amount received by each holder of the Notes (including Additional Amounts) after such withholding or deduction will be not less than the amount the holder would have received if such Taxes had not been required to be withheld or deducted. Neither the Issuer nor any Subsidiary Guarantor will, however, pay Additional Amounts in respect or on account of: (1) any Taxes that are imposed or levied by a Relevant Taxing Jurisdiction by reason of a present or former connection of a holder (or a fiduciary, settlor, beneficiary, member or shareholder of, or possessor of a power over, such holder, if the holder is an estate, a trust, a partnership or a corporation) or a beneficial owner with such Relevant Taxing Jurisdiction (other than the mere receipt or holding of Notes or by reason of the receipt of payments thereunder or the exercise or enforcement of rights under any Notes, Guarantees or the Indenture); (2) any Taxes that are imposed or levied by reason of the failure of the holder or beneficial owner of Notes, following the Issuers written request addressed to the holder (and made at a time which would enable the holder or beneficial owner acting reasonably to comply with that request), to comply with any certification, identification, information or other reporting requirements which the holder or such beneficial owner is legally required and legally entitled to satisfy, whether imposed by statute, treaty, regulation or administrative practice of a Relevant Taxing Jurisdiction, as a precondition to exemption from, or reduction in the rate of deduction or withholding of, Taxes imposed by the Relevant Taxing Jurisdiction (including, without limitation, a certification that the holder or beneficial owner is not resident in the Relevant Taxing Jurisdiction); (3) any estate, inheritance, gift, sales, transfer or similar Taxes; (4) any Tax which is payable otherwise than by deduction or withholding from payments made under or with respect to the Notes or Guarantees; (5) any Tax that is imposed or levied by reason of the presentation (where presentation is required in order to receive payment) of such Notes for payment on a date more than 30 days after the date on which such payment became due and payable or the date on which payment thereof is duly provided for, whichever is later, except to the extent that the beneficial owner or holder thereof would have been entitled to Additional Amounts had the Notes been presented for payment on any date during such 30 day period; (6) any Tax imposed on or with respect to any payment by the Issuer or any Subsidiary Guarantor to the holder if such holder is a fiduciary or partnership or person other than the sole beneficial owner of such payment to the extent that a beneficiary or settlor with respect to such fiduciary, member of such partnership or the beneficial owner of such payment would not have been entitled to the Additional Amounts had such beneficiary, settlor, member or beneficial owner been the actual holder of such Note; (7) any Tax that is imposed on or with respect to a payment made to a holder or beneficial owner who would have been able to avoid such withholding or deduction by presenting the relevant Notes to another paying agent in a member state of the European Union;

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(8) any withholding or deduction in respect of any Taxes where such withholding or deduction is imposed on a payment to an individual and is required to be made pursuant to European Council Directive 2003/48/EC or any other Directive implementing the conclusions of the ECOFIN Council meeting of 26-27 November 2000 on the taxation of savings income or any law implementing or complying with, or introduced in order to conform to, such Directive; or (9) any combination of the above. The Issuer and any Subsidiary Guarantor will (i) make such withholding or deduction as is required by applicable law and (ii) remit the full amount deducted or withheld to the relevant taxing authority in the Relevant Taxing Jurisdiction in accordance with applicable law. At least 30 calendar days prior to each date on which any payment under or with respect to the Notes is due and payable, if the Issuer or any Subsidiary Guarantor will be obligated to pay Additional Amounts with respect to such payment (unless such obligation to pay Additional Amounts arises after the 30th day prior to the date on which payment under or with respect to the Notes is due and payable, in which case it will be promptly thereafter), the Issuer will deliver to the Trustee an Officers Certificate stating that such Additional Amounts will be payable and the amounts so payable and will set forth such other information necessary to enable the Trustee to pay such Additional Amounts to holders on the payment date. The Issuer will promptly publish a notice in accordance with the provisions set forth in Notices stating that such Additional Amounts will be payable and describing the obligation to pay such amounts. Upon request, the Issuer or the Subsidiary Guarantors will furnish to the Trustee or the holder copies of tax receipts evidencing the payment of any Taxes by the Issuer or the applicable Subsidiary Guarantor in such form as provided in the normal course by the taxing authority imposing such Taxes and as is reasonably available to the Issuer or the applicable Subsidiary Guarantor. If notwithstanding the efforts of the Issuer or the Subsidiary Guarantors to obtain such receipts, the same are not obtainable, the Issuer or the applicable Subsidiary Guarantor will provide the Trustee or such holder other evidence satisfactory to the Trustee or the holder of such payments by the Issuer or the applicable Subsidiary Guarantor. In addition, subject to certain exceptions, the Issuer and the Subsidiary Guarantors will pay any present or future stamp, issue, registration, documentation, excise or property taxes or other similar taxes, charges and duties, including interest and penalties with respect thereto, imposed by any Relevant Taxing Jurisdiction in respect of the execution, issue, delivery or registration of the Notes or any other document or instrument referred to thereunder and any such taxes, charges or duties imposed by any jurisdiction as a result of, or in connection with, the enforcement of the Notes and/or any other such document or instrument following the occurrence of any Event of Default with respect to the Notes, and the Issuer and each Subsidiary Guarantor will agree to indemnify the holders for any such taxes paid by such holders. The obligations described under this heading will apply mutatis mutandis to any jurisdiction in which any Surviving Entity or successor person to the Issuer is incorporated, organized, engaged in business or otherwise resident for tax purposes, or any political subdivision or taxing authority thereof or therein. Whenever the Indenture or this Description of the Notes refers to, in any context, the payment of principal, premium, if any, interest or any other amount payable under or with respect to any Note, such reference includes the payment of Additional Amounts, if applicable. Currency Indemnity Euro is the sole currency of account and payment for all sums payable under the Notes, the Guarantees and the Indenture. Any amount received or recovered in respect of the Notes or any Guarantee in a currency other than euro (whether as a result of, or of the enforcement of, a judgment or order of a court of any jurisdiction, in the winding up or dissolution of Holdings, the Issuer, any Subsidiary or otherwise) by a holder of the Notes in respect of any sum expressed to be due to such holder from the Issuer or any Subsidiary Guarantor will constitute a discharge of their obligation only to the extent of the euro amount which the recipient is able to purchase with the amount so received or recovered in such other currency on the date of that receipt or recovery (or, if it is not possible to purchase euro on that date, on the first date on which it is possible to do so). If the euro amount to be recovered is less than the euro amount expressed to be due to the recipient under any Note, the Issuer or any Subsidiary Guarantor will indemnify the recipient against the cost of making any further purchase of euro in an amount equal to such difference. For the purposes of this paragraph, it will be sufficient for the holder to certify in a manner reasonably satisfactory to the Issuer (indicating the sources of information used) the loss it incurred in making such purchase. These indemnities, to the extent permitted by law: (1) constitute a separate and independent obligation from the Issuers and any Subsidiary Guarantors other obligations; (2) give rise to a separate and independent cause of action;

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(3) apply irrespective of any waiver granted by any holder of a note; and (4) will continue in full force and effect despite any other judgment, order, claim or proof for a liquidated amount in respect of any sum due under any Note or any other judgment or order. Optional Redemption Except as set forth below under Optional Redemption prior to December 15, 2012 and Redemption upon Changes in Withholding Taxes, the Issuer will not be entitled to redeem the Notes at its option prior to December 15, 2012. No Notes of 50,000 or less may be redeemed in part; and no Notes will be redeemed in part if the resulting note would have a minimum denomination that is less than 50,000. Optional Redemption prior to December 15, 2012 At any time prior to December 15, 2012, upon not less than 30 nor more than 60 days notice, the Issuer may redeem all or part of the Notes, at a redemption price equal to 100% of the principal amount thereof plus the Applicable Redemption Premium and accrued and unpaid interest to the redemption date. Applicable Redemption Premium means, with respect to any Note on any redemption date, the greater of: (a) 1.0% of the then outstanding principal amount of the Note; and (b) the excess of: (i) the present value at such redemption date of (x) the redemption price of such Note at December 15, 2012, (such redemption price being set forth in the table appearing below under the caption Optional Redemption on or after December 15, 2012), plus (y) all required interest payments that would otherwise be due to be paid on such Note (assuming that the interest rate per annum on the Note applicable on the date on which the notice of redemption was given was in effect for the entire period) during the period between the redemption date and December 15, 2012 (excluding accrued but unpaid interest), computed using a discount rate (discounted quarterly assuming a 360-day year consisting of twelve 30-day months) equal to the Bund Rate at such redemption date plus 50 basis points; over (ii) the then outstanding principal amount of the Note. Optional Redemption on or after December 15, 2012 At any time on or after December 15, 2012 and prior to maturity, upon not less than 30 nor more than 60 days notice, the Issuer may redeem all or part of the Notes at the following redemption prices (expressed as percentages of their principal amount at maturity), plus accrued and unpaid interest, if any, to the redemption date, if redeemed during the 12-month period commencing on December 15 of the years set forth below (subject to the right of holders of record on the relevant regular record date that is prior to the redemption date to receive interest due on an interest payment date):
Year Redemption Price

2012 ............................................................................................................................................... 2013 ............................................................................................................................................... 2014 ............................................................................................................................................... 2015 and thereafter ........................................................................................................................ Redemption Upon Changes in Withholding Taxes If, as a result of:

109.500% 104.750% 102.375% 100.000%

(a) any amendment after the Issue Date to, or change after the Issue Date in, the laws (or regulations or rulings promulgated thereunder) of any Relevant Taxing Jurisdiction; or (b) any change after the Issue Date in the official application or official interpretation of the laws, treaties, regulations or rulings (including a holding, judgment or order by a court competent jurisdiction), which amendment or change becomes effective after the Issue Date (or, if the applicable Relevant Taxing Jurisdiction became a Relevant Taxing Jurisdiction after the Issue Date, such later date) of any Relevant Taxing Jurisdiction applicable to the Issuer or any Subsidiary Guarantor,

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the Issuer or any Subsidiary Guarantor would be obligated to pay, on the next date for any payment and as a result of that amendment or change, Additional Amounts as described above under Additional Amounts with respect to the Relevant Taxing Jurisdiction, which the Issuer or such Subsidiary Guarantor cannot avoid by the use of reasonable measures available to it (including making payments through a paying agent located in another jurisdiction but not including the Issuer moving or changing jurisdictions), then the Issuer may redeem all, but not less than all, of the Notes, at any time thereafter, upon not less than 30 nor more than 60 days notice, at a redemption price of 100% of their principal amount, plus accrued and unpaid interest and Additional Amounts, if any, to the redemption date. Prior to the giving of any notice of redemption described in this paragraph, the Issuer will deliver to the Trustee: (a) an Officers Certificate stating that the obligation to pay such Additional Amounts cannot be avoided by the Issuers or the relevant Subsidiary Guarantors taking reasonable measures available to it (including making payments through a paying agent located in another jurisdiction but not including the Issuer moving or changing jurisdictions); and (b) a written opinion in form and substance reasonably satisfactory to the Trustee of independent legal counsel to the Issuer of recognized standing acceptable to the Trustee to the effect that the Issuer has or will become obligated to pay such Additional Amounts as a result of a change or amendment or the relevant Subsidiary Guarantor described above. Notwithstanding the foregoing, the Issuer may not redeem the Notes under this provision if the Relevant Taxing Jurisdiction changes under the Indenture and the Issuer, any Subsidiary Guarantor or any or the Issuers Surviving Entity is obligated to pay any Additional Amounts as a result of a change in, or an amendment to, the laws or treaties (or any regulations or rulings promulgated thereunder), or any change in or amendment to, any official position regarding the application, administration or interpretation of such laws, treaties, regulations or rulings, of the then current Relevant Taxing Jurisdiction which, at the time such Relevant Taxing Jurisdiction became the applicable Relevant Taxing Jurisdiction under the Indenture, was publicly announced as being or having been formally proposed. Notice and Selection The Issuer will publish a notice of any optional redemption of the Notes described above in accordance with the provisions of the Indenture described under Notices. These notice provisions include a requirement to publish any such notice in a newspaper having general circulation in Luxembourg (which is expected to be the Luxemburger Wort) or, to the extent and in the manner permitted by such rules, to post such notice on the official website of the Luxembourg Stock Exchange (www.bourse.lu) if and so long as the Notes are listed on the Euro MTF and the rules of such exchange so require. The Issuer will inform the Luxembourg Stock Exchange of the principal amount of the Notes that have not been redeemed in connection with any optional redemption. If fewer than all the Notes are to be redeemed at any time, the Trustee will select the Notes by a method that complies with the requirements, as certified to the Trustee by the Issuer, of the principal securities exchange, if any, on which the Notes are listed at such time or, if the Notes are not listed on a securities exchange, on a pro rata basis; provided, however, that no such partial redemption shall reduce the portion of the principal amount of a Note not redeemed to less than 50,000. Mandatory Redemption; Offers to Purchase; Open Market Purchases The Issuer is not required to make any mandatory redemption or sinking fund payments with respect to the Notes. However, under certain circumstances, the Issuer may be required to offer to purchase the Notes as described under the captions Purchase of Notes upon a Change of Control and Certain Covenants Limitation on Sale of Certain Assets. The Issuer may, at any time and from time to time, purchase Notes in the open market or otherwise. Purchase of Notes upon a Change of Control If a Change of Control occurs at any time, then the Issuer must make an offer (a Change of Control Offer) to each holder of Notes to purchase such holders Notes, in whole or in part in denominations of 50,000 and integral multiples of 1,000 in excess thereof, at a purchase price (the Change of Control Purchase Price) in cash in an amount equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase (the Change of Control Purchase Date) (subject to the rights of holders of record on relevant regular record dates that are prior to the Change of Control Purchase Date to receive interest due on an interest payment date). Purchases made under a Change of Control Offer will also be subject to other procedures set forth in the Indenture.

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Within 30 days following any Change of Control (or, at the Issuers option, prior to such Change of Control but after it is publicly announced if a definitive agreement is in effect for such Change of Control at the time of such announcement), the Issuer will: (a) cause a notice of the Change of Control Offer to be published (i) through the newswire service of Bloomberg, or if Bloomberg does not then operate, any similar agency; and (ii) if at the time of such notice the Notes are listed on the Euro MTF and the rules of the Luxembourg Stock Exchange so require, in the Luxemburger Wort (or another leading newspaper of general circulation in Luxembourg) or, to the extent and in the manner permitted by such rules, on the official website of the Luxembourg Stock Exchange (www.bourse.lu); and (b) send notice of the Change of Control Offer by first-class mail, with a copy to the Trustee, to each holder of Notes to the address of such holder appearing in the security register, which notice will state: (i) that a Change of Control has occurred, and the date it occurred; (ii) the circumstances and relevant facts regarding such Change of Control (including, but not limited to, applicable information with respect to pro forma historical income, cash flow and capitalization after giving effect to the Change of Control); (iii) the Change of Control Purchase Price and the Change of Control Purchase Date, which will be a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed, or such later date as is necessary to comply with requirements under the Exchange Act and any applicable securities laws or regulations; (iv) that any Note accepted for payment pursuant to the Change of Control Offer will cease to accrue interest after the Change of Control Purchase Date unless the Change of Control Purchase Price is not paid; (v) that any Note (or part thereof) not tendered will continue to accrue interest; and (vi) any other procedures that a holder of Notes must follow to accept a Change of Control Offer or to withdraw such acceptance (which procedures may also be performed at the office of the paying agent in Luxembourg as long as the Notes are listed on the Euro MTF). If the notice is sent prior to the occurrence of the Change of Control, it may be conditioned upon the consummation of the Change of Control if a definitive agreement is in effect for the Change of Control at the time of the notice of such Change of Control. The Trustee or, an authorized agent of the Trustees, will as soon as may be practicable authenticate and deliver a new Note or Notes equal in principal amount to any unpurchased portion of Notes surrendered, if any, to the holder of Notes in global form or to each holder of certificated Notes; provided that each such new Note will be in a principal amount of 50,000 and integral multiples of 1,000 in excess thereof. The Issuer will publicly announce the results of a Change of Control Offer on or as soon as practicable after the Change of Control Purchase Date. If a Change of Control Offer is made, the Issuer cannot provide any assurance that it will have available funds sufficient to pay the Change of Control Purchase Price for all the Notes that might be delivered by holders of the Notes seeking to accept the Change of Control Offer. If the Issuer fails to make or consummate a Change of Control Offer or pay the Change of Control Purchase Price when due, such failure would result in an Event of Default and would give the Trustee and the holders of the Notes the rights described under Events of Default. The Issuer will not be required to make a Change of Control Offer if: (a) a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the Indenture applicable to a Change of Control Offer made by the Issuer and purchases all Notes validly tendered and not withdrawn under such Change of Control Offer; or (b) the Issuer has unconditionally exercised its rights to redeem all of the Notes as described under Optional Redemption and all conditions to such redemption have been satisfied or waived. The Change of Control provisions described above will be applicable whether or not any other provisions of the Indenture are applicable. Except as described above with respect to a Change of Control, the provisions of the Indenture will not give holders the right to require the Issuer to repurchase the Notes in the event of certain highly leveraged transactions, or certain other transactions, including a reorganization, restructuring, merger or similar transaction and, in certain

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circumstances, an acquisition by the Issuers management or its Affiliates, that may adversely affect holders of the Notes, if such transaction is not a transaction defined as a Change of Control. Any such transaction, however, would have to comply with the applicable provisions of the Indenture, including the Limitation on Debt covenant. The existence of the right of a holder of the Notes to require the Issuer to repurchase such holders Notes upon a Change of Control may deter a third party from acquiring the Issuer in a transaction which constitutes a Change of Control. The Issuer will comply with the applicable tender offer rules, including Rule 14e-1 under the Exchange Act, and any other applicable securities laws and regulations (including those of The Netherlands) in connection with a Change of Control Offer. To the extent that the provisions of any securities laws or regulations conflict with provisions of the Indenture, the Issuer will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under the Indenture by virtue of such conflict. Change of Control means the occurrence of any of the following events: (a) any person or group (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), other than one or more Permitted Holders, is or becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person will be deemed to have beneficial ownership of all securities that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the voting power of the Issuers outstanding Voting Stock; (b) the Issuer consummates any transaction (including, without limitation, any merger, consolidation, amalgamation or other combination) pursuant to which the Issuers outstanding Voting Stock is converted into or exchanged for cash, securities or other property, other than any such transaction where the Voting Stock of the Issuer outstanding immediately prior to such transaction is converted into or exchanged for Voting Stock of the surviving or transferee Person constituting a majority of the outstanding shares of such Voting Stock of such surviving or transferee Person immediately after giving effect to such Issuance; (c) the Issuer conveys, transfers, leases or otherwise disposes of all or substantially all of the Issuers assets (other than a transfer of substantially all of such assets to one or more Wholly Owned Restricted Subsidiaries); (d) during any consecutive two-year period following the date of the Indenture, individuals who at the beginning of such period constituted the Issuers board of directors (or, if the Issuers board of directors does not consist of natural persons, Holdings board of directors) (together with any new members whose election to such board, or whose nomination for election by the shareholders of the Issuer or Holdings, as the case may be, was approved by a vote of at least a majority of the members of the board of directors of the Issuer or Holdings, as the case may be, then still in office who were either members at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the members of the board of directors of the Issuer or Holdings, as the case may be, then in office (other than as a result of or in connection with the Acquisition); or (e) the Issuer is liquidated or dissolved or adopts a plan of liquidation or dissolution other than in a transaction which complies with the provisions described under Certain Covenants Consolidation, Merger and Sale of Assets; or (f) the direct or indirect sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the properties or assets of the Issuer and its Restricted Subsidiaries taken as a whole to any Person (including any person or group (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act)) other than one or more Permitted Holders. Certain Covenants The Indenture contains, among others, the following covenants. Limitation on Debt (1) The Issuer will not, and will not permit any Restricted Subsidiary to, create, issue, incur, assume, guarantee or in any manner become directly or indirectly liable with respect to or otherwise become responsible for, contingently or otherwise, the payment of (individually and collectively, to incur or, as appropriate, an incurrence), any Debt (including any Acquired Debt); provided, however, that the Issuer will be permitted to incur Debt (including Acquired Debt) if (A) after giving effect to the incurrence of such Debt and the application of the proceeds thereof, on a pro forma basis, no Default or Event of Default would occur or be continuing and (B) at the time of such incurrence and after

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giving effect to the incurrence of such Debt and the application of the proceeds thereof, on a pro forma basis, the Consolidated Leverage Ratio for the Issuer and its Restricted Subsidiaries would be less than 3.5 to 1.0. (2) This covenant will not, however, prohibit the following (collectively, Permitted Debt): (a) the incurrence by the Issuer or Invitel of revolving credit Debt under Credit Facilities in an aggregate principal amount at any one time outstanding not to exceed 18.0 million; (b) the incurrence by the Issuer of Debt pursuant to the Notes (other than Additional Notes) and the incurrence of Debt by any Subsidiary Guarantor pursuant to its Guarantee and Debt represented by the Security Documents, including with respect to such Debt, parallel debt obligations created under the Intercreditor Agreement and the Security Documents; (c) any Debt of the Issuer or any Restricted Subsidiary (other than Debt described in another clause of this paragraph) outstanding on the Issue Date after giving effect to the use of proceeds of the offering of the Notes on the Issue Date; (d) the incurrence by the Issuer or any Restricted Subsidiary of intercompany Debt between the Issuer and any Restricted Subsidiary or between or among Restricted Subsidiaries; provided that (i) if the Issuer is the obligor on any such Debt, such Debt is expressly subordinated to the prior payment in full in cash of all obligations with respect to the Notes upon any insolvency event; (ii) if a Subsidiary Guarantor is the obligor on any such Debt, such Debt is expressly subordinated to the prior payment in full in cash of all obligations of such obligor with respect to its Guarantee upon any insolvency event; and (iii) (x) any disposition, pledge or transfer of any such Debt to a Person (other than a disposition, pledge or transfer to the Issuer or a Restricted Subsidiary) and (y) any transaction pursuant to which any Restricted Subsidiary that has Debt owing to the Issuer or another Restricted Subsidiary ceases to be a Restricted Subsidiary, will, in each case, be deemed to be an incurrence of such Debt not permitted by this clause (d); (e) guarantees of the Issuers Debt or Debt of any Restricted Subsidiary by any Restricted Subsidiary that are permitted by and made in accordance with the provisions of the Limitation on Guarantees of Debt by Restricted Subsidiaries covenant described below; provided that if the Debt being guaranteed is subordinate to or pari passu with the Notes or a Guarantee, then the Guarantee must be subordinated or pari passu, as applicable, to the same extent as the Debt guaranteed; (f) guarantees of the Debt of any Restricted Subsidiary by the Issuer; (g) the incurrence by the Issuer or any Restricted Subsidiary of Debt arising from agreements providing for guarantees, indemnities or obligations in respect of purchase price adjustments in connection with the acquisition or disposition of assets, including, without limitation, shares of Capital Stock, other than guarantees or similar credit support given by the Issuer or any Restricted Subsidiary of Debt incurred by any Person acquiring all or any portion of such assets for the purpose of financing such acquisition; provided that (A) the maximum aggregate liability in respect of all such Debt permitted pursuant to this clause (g) will at no time exceed the gross proceeds, including non-cash proceeds (the Fair Market Value of such non-cash proceeds being measured at the time received and without giving effect to any subsequent changes in value) actually received from the sale of such assets and (B) such Debt is not reflected in the balance sheet of the Issuer or any Restricted Subsidiary (contingent liabilities referred to in a footnote to financial statements and not otherwise reflected on the balance sheet shall not be deemed to be reflected on such balance sheet for purposes of this clause (B)); (h) the incurrence by the Issuer or any Restricted Subsidiary of Debt under Currency Agreements not entered into for speculative purposes; (i) the incurrence by the Issuer or any Restricted Subsidiary of Debt under Interest Rate Agreements not entered into for speculative purposes; (j) the incurrence of Debt by the Issuer or any Restricted Subsidiary in respect of workers compensation and claims arising under similar legislation, or pursuant to self-insurance obligations and not in connection with the borrowing of money or the obtaining of advances or credit;

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(k) the incurrence of Debt by the Issuer or any Restricted Subsidiary arising from (i) the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business; provided that such Debt is extinguished within 5 Business Days of incurrence, (ii) bankers acceptances, performance, surety, judgment, appeal or similar bonds, instruments or obligations, or (iii) completion guarantees provided or letters of credit obtained by the Issuer or any Restricted Subsidiary in the ordinary course of business; (l) the incurrence by the Issuer or any Restricted Subsidiary of Permitted Refinancing Debt in exchange for or the net proceeds of which are used to refund, replace or refinance Debt incurred by it pursuant to, or described in, paragraphs (1) and 2(b) and (c) of this covenant, as the case may be; (m) Acquired Debt of any Person outstanding on the date on which such Person becomes a Restricted Subsidiary or is merged, consolidated, amalgamated or otherwise combined with (including pursuant to any acquisition of assets and assumption of related liabilities) the Company or any Restricted Subsidiary; provided, however, with respect to this clause (m) that at the time of the acquisition or other transaction pursuant to which such Indebtedness was deemed to be incurred the Issuer would have been able to incur 1.00 of additional Indebtedness pursuant to the first paragraph of this covenant after giving effect to the incurrence of such Indebtedness pursuant to this clause (m); (n) the incurrence by the Issuer or any Restricted Subsidiary of Indebtedness represented by Capitalized Lease Obligations, mortgage financings or purchase money obligations, in each case, incurred for the purpose of financing all or any part of the purchase price or cost of design, construction, installation or improvement of property, plant or equipment used in the business of the Issuer or any of its Restricted Subsidiaries, in an aggregate principal amount, including all Permitted Refinancing Indebtedness incurred to renew, refund, refinance, replace, defease or discharge any Indebtedness incurred pursuant to this clause (n), not to exceed 15.0 million at any time outstanding, and (o) the incurrence of Debt by the Issuer or any Restricted Subsidiary (other than and in addition to Debt permitted under clauses (a) through (n) above) in an aggregate principal amount at any one time outstanding not to exceed 25 million. (3) For purposes of determining compliance with any restriction on the incurrence of Debt in euros where Debt is denominated in a different currency, the amount of such Debt will be the Euro Equivalent determined on the date of such determination; provided that if any such Debt denominated in a different currency is subject to a Currency Agreement (with respect to euros) covering principal, premium, if any, and interest payable on such Debt, the amount of such Debt expressed in euros will be adjusted to take into account the effect of such agreement. The principal amount of any Permitted Refinancing Debt incurred in the same currency as the Debt being refinanced will be the Euro Equivalent of the Debt refinanced determined on the date such Debt being refinanced was initially incurred. Notwithstanding any other provision of this covenant, for purposes of determining compliance with this Limitation on Debt covenant, increases in Debt solely due to fluctuations in the exchange rates of currencies will not be deemed to exceed the maximum amount that the Issuer or any Restricted Subsidiary may incur under the Limitation on Debt covenant. (4) For purposes of determining any particular amount of Debt under the Limitation on Debt covenant: (a) obligations with respect to letters of credit, guarantees or Liens, in each case supporting Debt otherwise included in the determination of such particular amount will not be included; (b) any Liens granted pursuant to the equal and ratable provisions referred to in the Limitation on Liens covenant will not be treated as Debt; and (c) accrual of interest, accrual of dividends, the accretion of accreted value, the amortization of original issue discount, the obligation to pay commitment fees and the payment of regularly scheduled interest in the form of additional Debt of the same instrument or dividends on Redeemable Capital Stock or Preferred Stock of non-Guarantor Restricted Subsidiaries paid in additional shares of Redeemable Capital Stock or Preferred Stock, as the case may be, will not be treated as Debt. (5) In the event that an item of Debt meets the criteria of more than one of the types of Debt described in the Limitation on Debt covenant, the Issuer, in its sole discretion, will classify items of Debt and will only be required to include the amount and type of such Debt in one of such clauses, and the Issuer will be entitled to divide and classify an item of Debt in more than one of the types of Debt described in the Limitation on Debt covenant, and may change the classification of an item of Debt (or any portion thereof) to any other type of Debt described in the Limitation on Debt covenant at any time.

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(6) Neither the Issuer nor any Subsidiary Guarantor will incur any Debt (including Permitted Debt) that is contractually subordinated in right of payment to any other Debt of the Issuer or such Guarantor unless such Indebtedness is also contractually subordinated in right of payment to the Notes and the applicable Note Guarantee on substantially identical terms; provided, however, that no Indebtedness will be deemed to be contractually subordinated in right of payment to any other Indebtedness of the Issuer or any Subsidiary Guarantor solely by virtue of being unsecured or by virtue of being secured on a junior priority basis. (7) Notwithstanding anything to the contrary, in no event shall either (a) the Issuer or any of the Restricted Subsidiaries incur any Debt that is secured by a Lien on any of its assets or properties (including, without limitation, the Collateral) or (b) any Restricted Subsidiary that is not a Subsidiary Guarantor incur any Debt unless, in either case, the Consolidated Secured Leverage Ratio for the Issuer and its Restricted Subsidiaries, at the time of such incurrence and after giving effect to the incurrence of such Debt and the application of the proceeds thereof, on a pro forma basis, would be less than 2.5 to 1.0. Limitation on Restricted Payments (1) The Issuer will not, and will not permit any Restricted Subsidiary to, directly or indirectly, take any of the following actions (each of which is a Restricted Payment and which are collectively referred to as Restricted Payments): (a) declare or pay any dividend on or make any distribution (whether made in cash, securities or other property) with respect to any of the Issuers or any Restricted Subsidiarys Capital Stock (including, without limitation, any payment in connection with any merger or consolidation involving the Issuer or any Restricted Subsidiary) (other than (i) to the Issuer or any Wholly Owned Restricted Subsidiary or (ii) in the case of a Restricted Subsidiary, to all holders of Capital Stock of such Restricted Subsidiary on a pro rata basis or on a basis that results in the receipt by the Issuer or a Restricted Subsidiary of dividends or distributions of greater value than the Issuer or such Restricted Subsidiary would receive on a pro rata basis) except for dividends or distributions payable solely in shares of the Issuers Qualified Capital Stock or in options, warrants or other rights to acquire such shares of Qualified Capital Stock; (b) purchase, redeem or otherwise acquire or retire for value (including, without limitation, in connection with any merger or consolidation), directly or indirectly, any shares of the Issuers Capital Stock or any Capital Stock of any Affiliate of the Issuer held by persons other than the Issuer, the Subsidiary Guarantors or a Restricted Subsidiary (other than Capital Stock of any Restricted Subsidiary or any entity that becomes a Restricted Subsidiary as a result thereof) or any options, warrants or other rights to acquire such shares of Capital Stock; (c) make any principal payment on, or repurchase, redeem, defease or otherwise acquire or retire for value, prior to any scheduled principal payment, sinking fund payment or maturity, any Subordinated Debt (other than the purchase, defeasance or other acquisition of Subordinated Debt purchased in anticipation of satisfying a principal installment, sinking fund obligation or final maturity, in each case due within one year of such purchase, defeasance or other acquisition); or (d) make any Investment (other than any Permitted Investment) in any Person. If any Restricted Payment described above is not made in cash, the amount of the proposed Restricted Payment will be the Fair Market Value of the asset to be transferred as of the date of transfer. (2) Notwithstanding paragraph (1) above, the Issuer or any Restricted Subsidiary may make a Restricted Payment if, at the time of and after giving pro forma effect to such proposed Restricted Payment: (a) no Default or Event of Default has occurred and is continuing or would occur as a consequence of such Restricted Payment; (b) the Issuer could incur at least 1.00 of additional Debt (other than Permitted Debt) pursuant to the Limitation on Debt covenant; and (c) the aggregate amount of all Restricted Payments declared or made after the Issue Date does not exceed the sum of: (i) an amount equal to the difference between (a) Pro Forma EBITDA from January 1, 2010 to the end of the Issuers full fiscal quarter ending prior to the date of such proposed Restricted Payment minus (b) the product of 2.75 times Net Consolidated Interest Expense of the Issuer and its Restricted Subsidiaries on a

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consolidated basis from January 1, 2010 to the end of the Issuers full fiscal quarter ending prior to the date of such proposed Restricted Payment; plus (ii) 100% of the aggregate Net Cash Proceeds received by the Issuer from the issuance or sale of its Qualified Capital Stock subsequent to the Issue Date (excluding in each case Net Cash Proceeds from issuances or sales to a Subsidiary of the Issuer or to an employee stock ownership plan or a trust established by the Issuer or any of its Subsidiaries for the benefit of their employees to the extent funded by the Issuer or any of its Subsidiaries and also excluding any such Net Cash Proceeds comprising funds borrowed from the Issuer or any Restricted Subsidiary until and to the extent such borrowing is repaid) and 100% of any cash capital contribution received by the Issuer from its shareholders after the Issue Date; plus (iii) the amount by which Debt of the Issuer or a Restricted Subsidiary is reduced on the Issuers consolidated balance sheet upon the conversion or exchange after the Issue Date of any Debt of the Issuer convertible or exchangeable for Qualified Capital Stock of the Issuer (less the amount of any cash, or the fair value of any other property, distributed by the Issuer upon such conversion or exchange); provided, however, that the foregoing amount shall not exceed the Net Cash Proceeds received by the Issuer or any Restricted Subsidiary from the sale of such Debt and upon such conversion or exchange (excluding in each case Net Cash Proceeds from sales to a Subsidiary of the Issuer or to an employee stock ownership plan or a trust established by the Issuer or any of its Subsidiaries for the benefit of their employees to the extent funded by the Issuer or any of its Subsidiaries and also excluding any such Net Cash Proceeds comprising funds borrowed from the Issuer or any Restricted Subsidiary until and to the extent such borrowing is repaid); plus (iv) an amount equal to the sum without duplication of amounts otherwise included in the calculation under this clause (c) of (x) the net reduction in the Investments (other than Permitted Investments) made by the Issuer or any Restricted Subsidiary in any Person resulting from repurchases, repayments or redemptions of such Investments by such Person, proceeds realized on the sale of such Investment and proceeds representing the return of capital (including dividends and distributions), in each case received by the Issuer or any Restricted Subsidiary and, in the case of an Investment (other than a Permitted Investment) that is a guarantee made by the Issuer or a Restricted Subsidiary to any Person (other than the Issuer or a Restricted Subsidiary), an amount equal to the amount of such guarantee upon the full and unconditional release of such guarantee, and (y) in the case of a designation of an Unrestricted Subsidiary as a Restricted Subsidiary, the portion (proportionate to the Issuers equity interest in such Unrestricted Subsidiary) of the fair market value of the net assets of such Unrestricted Subsidiary at the time such Unrestricted Subsidiary is designated as a Restricted Subsidiary; provided that such amount will not in any case exceed the amount of the Restricted Payment that was deemed to be made at the time that the Subsidiary was designated as an Unrestricted Subsidiary; provided that in no event shall the Issuer or any Restricted Subsidiary be permitted to make a Restricted Payment pursuant to this paragraph (2) unless the Consolidated Net Leverage Ratio for the Issuer and its Restricted Subsidiaries on the date of such Restricted Payment and after giving pro forma effect thereto does not exceed 2.25 to 1.0. (3) Notwithstanding paragraphs (1) and (2) above, the Issuer and any Restricted Subsidiary may take the following actions so long as (except with respect to clauses (a), (b), (g), (i) and (n) below) no Default or Event of Default has occurred and is continuing: (a) the payment of any dividend within 60 days after the date of its declaration if at such date of its declaration such payment would have been permitted by the provisions of this covenant; (b) the purchase, redemption or other acquisition or retirement for value of any shares of the Issuers Capital Stock or options, warrants or other rights to acquire such Capital Stock in exchange for (including any such exchange pursuant to the exercise of a conversion right or privilege in connection with which cash is paid in lieu of the issuance of fractional shares or scrip), or out of the Net Cash Proceeds of a substantially concurrent issuance and sale (other than to a Subsidiary of the Issuer or an employee stock ownership plan or to a trust established by the Issuer or any of its Subsidiaries for the benefit of their employees to the extent funded by the Issuer or any of its Subsidiaries and also excluding any such Net Cash Proceeds comprising funds borrowed from the Issuer or any Restricted Subsidiary until and to the extent such borrowing is repaid) of, shares of the Issuers Qualified Capital Stock or options, warrants or other rights to acquire such Capital Stock; (c) the purchase, redemption, defeasance or other acquisition or retirement for value or payment of principal of any Subordinated Debt in exchange for, or out of the Net Cash Proceeds of a substantially concurrent issuance and sale

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(other than to a Subsidiary of the Issuer or an employee stock ownership plan or to a trust established by the Issuer or any of its Subsidiaries for the benefit of their employees to the extent funded by the Issuer or any of its Subsidiaries and also excluding any such Net Cash Proceeds comprising funds borrowed from the Issuer or any Restricted Subsidiary until and to the extent such borrowing is repaid) of, shares of the Issuers Qualified Capital Stock; (d) the purchase, redemption, defeasance or other acquisition or retirement for value of Subordinated Debt (other than Redeemable Capital Stock) in exchange for, or out of the Net Cash Proceeds of a substantially concurrent incurrence (other than to a Restricted Subsidiary) of, Permitted Refinancing Debt; (e) the repurchase of Capital Stock deemed to occur upon the exercise of stock options with respect to which payment of the cash exercise price has been forgiven if the cumulative aggregate value of such deemed repurchases does not exceed the cumulative aggregate amount of the exercise price of such options received; (f) payments or distributions to dissenting shareholders pursuant to applicable law in connection with or in contemplation of a merger, consolidation or transfer of assets that complies with the provisions of the Indenture relating to mergers, consolidations or transfers of substantially all of the Issuers assets; (g) cash payments in lieu of issuing fractional shares pursuant to the exchange or conversion of any exchangeable or convertible securities; (h) management and consulting fees paid to the Permitted Holders or any Affiliate thereof not to exceed 2.0 million per year; (i) distributions to any direct or indirect parent of the Issuer to finance general administrative expenses not to exceed 2.0 million per year; (j) the declaration and payment of dividends to holders of any class or series of Redeemable Capital Stock, or of any Preferred Stock of a Restricted Subsidiary that is not a Subsidiary Guarantor, issued in accordance with the Limitation on Debt covenant; (k) distributions to any direct or indirect parent of the Issuer and other payments made by the Issuer in connection with the Refinancing; (l) dividends or other distributions of Capital Stock, Debt or other securities of Unrestricted Subsidiaries; (m) in the event of a Change of Control, and if no Default shall have occurred and be continuing, the payment, purchase, redemption, defeasance or other acquisition or retirement of Subordinated Debt of the Issuer or any Subsidiary Guarantor, in each case, at a purchase price not greater than 101% of the principal amount or accreted value of such Subordinated Debt, plus any accrued and unpaid interest thereon; provided, however, that prior to such payment, purchase, redemption, defeasance or other acquisition or retirement, the Issuer (or a third party to the extent permitted by the Indenture) has made a Change of Control Offer with respect to the Notes as a result of such Change of Control and has repurchased all Notes validly tendered and not withdrawn in connection with such Change of Control Offer; provided further, however, that such payment, purchase, redemption, defeasance or other acquisition or retirement shall be included in the calculation of the amount of Restricted Payments; (n) any payments or other transactions pursuant to a tax sharing agreement between the Issuer and any other Person with whom the Issuer files or filed a consolidated tax return or with which the Issuer is or was part of a consolidated group for tax purposes or any tax advantageous group contribution made pursuant to applicable legislation; (o) any Designated Proceeds Restricted Payment; (p) a Restricted Payment in an amount not to exceed 26.0 million to be used to repurchase PIK Notes from the holders thereof (other than from any Affiliate of the Issuer or the issuer of the PIK Notes including, without limitation, any Permitted Holder or any Affiliate of any Permitted Holder); provided that on the date of such Restricted Payment the Issuer could incur 1.00 of additional Debt (other than Permitted Debt) in compliance with the Limitation of Debt covenant after giving pro forma effect to such Restricted Payment; (q) any other Restricted Payment; provided that the total aggregate amount of Restricted Payments made under this clause (q) does not exceed 20 million.

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The actions described in clauses (a), (f), (g), (i), (l), (m), (n), and (q) of this paragraph (3) are Restricted Payments that, although permitted to be made in accordance with this paragraph (3), will reduce the amount that would otherwise be available for Restricted Payments under clause (c) of paragraph (2) above. Limitation on Issuances and Sales of Capital Stock of Restricted Subsidiaries The Issuer will not, and will not permit any Restricted Subsidiary to, sell, lease, transfer or otherwise dispose of, and will not permit any Restricted Subsidiary to issue, any shares of Capital Stock of a Restricted Subsidiary (including options, warrants or other rights to purchase shares of such Capital Stock). The foregoing sentence, however, will not apply to: (a) any issuance or sale of shares of Capital Stock of a Restricted Subsidiary to the Issuer or a Restricted Subsidiary; (b) any issuance or sale to directors of directors qualifying shares or issuances or sales of shares of Capital Stock of Restricted Subsidiaries to be held by third parties, in each case to the extent required by applicable law; or (c) (i) any issuance or sale of shares of Capital Stock of a Restricted Subsidiary if the Issuer or such Restricted Subsidiary selling such Capital Stock complies with the covenant Certain Covenants Limitation on Sale of Certain Assets; and

(ii) any issuance or sale of shares of Capital Stock of a Restricted Subsidiary if, immediately after giving effect to such issuance or sale, such Restricted Subsidiary would no longer constitute a Restricted Subsidiary and any remaining Investment in such Person would have been permitted to be made under the Limitation on Restricted Payments covenant if made on the date of such issuance or sale. For purposes of this covenant, the creation of a Lien on any Capital Stock of a Restricted Subsidiary to secure Debt of the Issuer or any of its Restricted Subsidiaries will not be deemed to be a violation of this covenant; provided, however, that any sale or other disposition (other than in accordance with the Indenture) by the secured party of Capital Stock subject to such Lien following foreclosure of its Lien will be subject to this covenant. Limitation on Transactions with Affiliates The Issuer will not, and will not permit any Restricted Subsidiary to, directly or indirectly, enter into or suffer to exist any transaction or series of related transactions (including, without limitation, the sale, purchase, exchange or lease of assets or property, employee compensation arrangements or the rendering of any service), with, or for the benefit of, any Affiliate of the Issuer or of any Restricted Subsidiary unless: (a) such transaction or series of transactions is on terms that, taken as a whole, are no less favorable to the Issuer or such Restricted Subsidiary, as the case may be, than those that could have been obtained in a comparable armslength transaction with third parties that are not Affiliates; (b) with respect to any transaction or series of related transactions involving aggregate payments or the transfer of assets or provision of services, in each case having a value greater than 10 million, the Issuer (or, if the Issuers board of directors does not consist of natural persons, Invitel) will deliver a resolution of its board of directors (set out in an Officers Certificate to the Trustee) resolving that such transaction complies with clause (a) above and that the fairness of such transaction has been approved by a majority of the Disinterested Directors (or, in the event there is only one Disinterested Director, by such Disinterested Director) of the board of directors of the Issuer (or, if the Issuers board of directors does not consist of natural persons, Invitel); and (c) with respect to any transaction or series of related transactions involving aggregate payments or the transfer of assets or the provision of services, in each case having a value greater than 20 million, the Issuer will deliver to the Trustee a written opinion, in form and substance satisfactory to the Trustee, of an investment banking firm, appraisal firm or accounting firm of international standing stating that the transaction or series of transactions is fair to the Issuer or such Restricted Subsidiary from a financial point of view, or is not less favorable to the Issuer or such Restricted Subsidiary than could reasonably be expected to be obtained at the time in an arms-length transaction with a Person who was not an Affiliate. Notwithstanding the foregoing, the restrictions set forth in this description will not apply to: (i) customary directors fees, indemnification and similar arrangements (including the payment of directors and officers insurance premiums), consulting fees, employee salaries, bonuses, employment agreements and arrangements, compensation or employee benefit arrangements, including stock options or legal fees, so long as the board of directors of the Issuer (or, if the Issuers board of directors does not consist of

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natural persons, Holdings) has approved the terms thereof and deemed the services theretofore or thereafter to be performed for such compensation or payments to be fair consideration therefor; (ii) any Restricted Payments not prohibited by the Limitation on Restricted Payments covenant or the making of an Investment that is a Permitted Investment (other than a Permitted Investment under clause (c)(iii) of the definition of Permitted Investment); loans and advances (but not any forgiveness of such loans or advances) to the Issuers or any Restricted Subsidiarys officers, directors and employees for travel, entertainment, moving and other relocation expenses, in each case made in the ordinary course of business; provided that such loans and advances do not exceed 2.0 million in the aggregate at any one time outstanding; agreements and arrangements existing on the Issue Date and any amendment, modification or supplement thereto; provided that any such amendment, modification or supplement to the terms thereof is not more disadvantageous to the holders of the Notes and to the Issuer or Restricted Subsidiary, as applicable, in any material respect than the original agreement or arrangement as in effect on the Issue Date; any payments or other transactions pursuant to a tax sharing agreement between the Issuer and any other Person with which the Issuer files a consolidated tax return or with which the Issuer is part of a consolidated group for tax purposes or any tax advantageous group contribution made pursuant to applicable legislation; the issuance of securities pursuant to, or for the purpose of the funding of, employment arrangements, stock options, and stock ownership plans, as long as the terms thereof are or have been previously approved by the board of directors of the Issuer (or if the Issuers board of directors does not consist of natural persons, of Invitel); the granting and performance of registration rights for the Issuers securities; the Refinancing, all transactions in connection therewith and all fees or expenses paid or payable in connection therewith; the issuance or sale of shares of Capital Stock of the Issuer (including options, warrants or other rights to purchase such Capital Stock);

(iii)

(iv)

(v)

(vi)

(vii) (viii) (ix)

(x) transactions between or among the Issuer and Restricted Subsidiaries or between or among Restricted Subsidiaries; and (xi) arrangements with customers, suppliers, contractors, lessors or sellers of goods or services that are negotiated with an Affiliate, in each case, which are otherwise in compliance with the terms of the Indenture; provided that the terms and conditions of any such transaction or agreement as applicable to the Issuer and its Restricted Subsidiaries (a) are fair to the Issuer and its Restricted Subsidiaries and are on terms no less favorable to the Issuer and its Restricted Subsidiaries than those that could have reasonably been obtained in respect of an analogous transaction or agreement that would not constitute an Affiliate Transaction (in each case, as determined in good faith by the Board of Directors of the Issuer or Invitel or the senior management of the Issuer or Invitel), (b) the performance by the Issuer and any of its Restricted Subsidiaries in respect of any such arrangements are for its own behalf and in its own name and (c) the Issuer and its Restricted Subsidiaries do not assume, and are otherwise not liable for any performance or breach in respect of, any such arrangements by the relevant Affiliate. Limitation on Liens The Issuer will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create, incur, assume or suffer to exist any Lien of any kind or assign or otherwise convey any right to receive any income, profits or proceeds on or with respect to any of the Issuers or any Restricted Subsidiarys property or assets, including any shares or stock or Debt of any Restricted Subsidiary, to the extent held by the Issuer or a Restricted Subsidiary, whether owned at or acquired after the Issue Date, or any income, profits or proceeds therefrom except: (a) in the case of any such property, assets or proceeds that does not constitute Collateral, Permitted Liens; and (b) in the case of any such property, assets or proceeds that constitutes Collateral, Permitted Collateral Liens.

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Limitation on Sale of Certain Assets (1) The Issuer will not, and will not permit any Restricted Subsidiary to, consummate any Asset Sale unless: (a) the consideration the Issuer or such Restricted Subsidiary receives for such Asset Sale is not less than the Fair Market Value of the assets sold; (b) at least 75% of the consideration the Issuer or such Restricted Subsidiary receives in respect of such Asset Sale consists of (i) cash (including any Net Cash Proceeds received from the conversion within 60 days of such Asset Sale of securities, notes or other obligations received in consideration of such Asset Sale); (ii) Cash Equivalents; (iii) Replacement Assets or (iv) the assumption by the purchaser of (x) the Issuers Debt or Debt of any Restricted Subsidiary (other than Subordinated Debt) as a result of which neither the Issuer nor any of the Restricted Subsidiaries remains obligated in respect of such Debt or (y) Debt of a Restricted Subsidiary that is no longer a Restricted Subsidiary as a result of such Asset Sale, if the Issuer and each other Restricted Subsidiary is released from any guarantee of such Debt as a result of such Asset Sale; or (v) a combination of the consideration specified in clauses (i) to (iv); and (c) the Issuer delivers an Officers Certificate to the Trustee certifying that such Asset Sale complies with the provisions described in the foregoing clauses (a) and (b). (2) If the Issuer or any Restricted Subsidiary consummates an Asset Sale, the Net Cash Proceeds of the Asset Sale, within 365 days after the consummation of such Asset Sale, may be used by the Issuer or such Restricted Subsidiary to (a) to purchase the Notes pursuant to an offer to all holders of Notes at an offer price of 100% of the principal amount plus accrued and unpaid interest and Additional Amounts, if any, to the date of purchase, or (b) invest in any Replacement Assets, or (c) any combination of the foregoing. The amount of such Net Cash Proceeds not so used as set forth in this paragraph (2) constitutes Excess Proceeds. Pending the final application of any such Net Cash Proceeds, the Issuer may temporarily reduce revolving credit borrowings or otherwise invest such Net Cash Proceeds in any manner that is not prohibited by the terms of the Indenture. (3) When the aggregate amount of Excess Proceeds that are not applied as provided in the preceding paragraph within 365 days after the consummation of an applicable Asset Sale exceeds 10 million, or on such earlier date as determined by the Issuer in its sole discretion, the Issuer will, within 30 Business Days, make an offer to purchase (an Excess Proceeds Offer) from all holders of Notes and from the holders of any Pari Passu Debt, to the extent required by the terms thereof, on a pro rata basis, in accordance with the procedures set forth in the Indenture or the agreements governing any such Pari Passu Debt, the maximum principal amount (expressed as a multiple of 1,000) of the Notes and any such Pari Passu Debt that may be purchased with the amount of the Excess Proceeds. The offer price as to each Note and any such Pari Passu Debt will be payable in cash in an amount equal to (solely in the case of the Notes) 100% of the principal amount of such Note and (solely in the case of Pari Passu Debt) no greater than 100% of the principal amount (or accreted value, as applicable) of such Pari Passu Debt, plus in each case accrued and unpaid interest, if any, to the date of purchase. To the extent that the aggregate principal amount of Notes and any such Pari Passu Debt tendered pursuant to an Excess Proceeds Offer is less than the aggregate amount of Excess Proceeds, the Issuer may use the amount of such Excess Proceeds not used to purchase Notes and Pari Passu Debt for any purpose not otherwise prohibited by the Indenture. If the aggregate principal amount of Notes and any such Pari Passu Debt validly tendered and not withdrawn by holders thereof exceeds the aggregate amount of Excess Proceeds, the Notes and any such Pari Passu Debt to be purchased will be selected by the Trustee on a pro rata basis (based upon the principal amount of Notes and the principal amount or accreted value of such Pari Passu Debt tendered by each holder). Upon completion of each such Excess Proceeds Offer, the amount of Excess Proceeds will be reset to zero. (4) If the Issuer is obligated to make an Excess Proceeds Offer, the Issuer will purchase the Notes and Pari Passu Debt, at the option of the holders thereof, in whole or in part in integral multiples of 1,000, on a date that is not earlier than 30 days and not later than 60 days from the date the notice of the Excess Proceeds Offer is given to such holders, or such later date as may be required under the Exchange Act. (5) Liens under the Security Documents on assets subject to an Asset Sale will be released concurrently with the consummation of such Asset Sale. (6) If the Issuer is required to make an Excess Proceeds Offer, the Issuer will comply with the applicable tender offer rules, including Rule 14e-1 under the Exchange Act, and any other applicable securities laws and regulations, including any securities laws of The Netherlands and the requirements of any applicable securities exchange on which Notes are then

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listed. To the extent that the provisions of any securities laws or regulations conflict with provisions of the Indenture, the Issuer will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under the Indenture by virtue of such conflict. (7) Notwithstanding paragraph (2) above, to the extent that the Issuer or a Restricted Subsidiary consummates an Asset Sale on or before the date that is 18 months after the Issue Date with respect to an Identified Asset then, the Net Cash Proceeds from any such Asset Sale may be applied by the Issuer or a Restricted Subsidiary, as the case may be: (a) in accordance with clauses (a), (b) or (c) of paragraph (2) above or (b) to repurchase, repay or prepay (and cancel) any then outstanding Existing High Yield Notes or (c) to the extent that the Existing High Yield Notes have been satisfied and discharged pursuant to the terms thereof, to make a Restricted Payment on or before the date that is 12 months after the date of the consummation of such Asset Sale (or any part thereof) (the Final Date); provided that the amount of Net Cash Proceeds that may be applied pursuant to this paragraph (7) shall not exceed an amount determined in accordance with the definition of Designated Proceeds (to the extent such amount would be positive); provided further, that no such amounts may be applied pursuant to clause (b) or (c) of this paragraph (7) unless (x) the Consolidated Net Leverage Ratio for the Issuer and its Restricted Subsidiaries on the date of such application under clause (b) or (c) of this paragraph (7) and after giving pro forma effect thereto is less than 2.25 to 1.00 and (y) the Issuer shall have first made an offer to all holders of Notes to purchase such amount of Notes at an offer price of 100% of the principal amount plus accrued and unpaid interest and Additional Amounts, if any, to the date of purchase equal to the Net Cash Proceeds received for such Asset Sale and the amount that may be applied pursuant to (b) or (c) shall not exceed the amount left, if any, after making such offer. To the extent that the Net Cash Proceeds from the sale of an Identified Asset have not been applied in accordance with this paragraph by the Final Date, then such Net Cash Proceeds shall be applied in accordance with paragraph (2) above (and, for avoidance of doubt, the Net Cash Proceeds shall be required to be applied within 365 days after the consummation of the Asset Sale with respect to the Identified Asset or they shall be treated as Excess Proceeds). Under no circumstances shall any Net Cash Proceeds from an Asset Sale with respect to an Identified Asset be used to make a Restricted Payment after the Final Date. Notwithstanding the foregoing, this paragraph (7) shall be of no force or effect from and after the date that is 18 months after the Issue Date with respect to any Identified Assets that have not been sold prior to such date. Limitation on Sale and Leaseback Transactions The Issuer will not, and will not permit any Restricted Subsidiary to, enter into any sale and leaseback transaction with respect to any property or assets (whether now owned or hereafter acquired), unless: (a) the sale or transfer of such property or assets to be leased is treated as an Asset Sale and the Issuer and the Restricted Subsidiaries comply with the Limitation on Sale of Certain Assets covenant, including the provisions concerning the application of Net Cash Proceeds (treating all of the consideration received in such sale and leaseback transaction as Net Cash Proceeds for the purposes of such covenant); (b) the Issuer or such Restricted Subsidiary, as applicable, would be permitted to incur Debt under the Limitation on Debt covenant in the amount of the Attributable Debt incurred in respect of such sale and leaseback transaction; (c) the Issuer or such Restricted Subsidiary, as applicable, would be permitted to grant a Lien to secure Debt under the Limitation on Liens covenant in the amount of the Attributable Debt in respect of such sale and leaseback transaction; and (d) in the case of any sale and leaseback transaction having a Fair Market Value greater than 10.0 million, the gross cash proceeds of that sale and leaseback transaction are at least equal to the Fair Market Value, as determined in good faith by the Issuers board of directors and set out in an Officers Certificate delivered to the Trustee, of the property that is the subject of such sale and leaseback transaction. Notwithstanding the foregoing, nothing shall prevent the Issuer or any Restricted Subsidiary from engaging in a sale and leaseback transaction solely between the Issuer and any Restricted Subsidiary or solely between or among Restricted Subsidiaries. Limitation on Guarantees of Debt by Restricted Subsidiaries (1) The Issuer will not permit any Restricted Subsidiary, directly or indirectly, to guarantee, assume or in any other manner become liable for the payment of any Debt of the Issuer (other than the Notes) or any Subsidiary Guarantor, unless: (a) (i) such Restricted Subsidiary is a Subsidiary Guarantor or simultaneously executes and delivers a supplemental indenture, in form and substance satisfactory to the Trustee, to the Indenture providing for a

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Guarantee of payment of the Notes by such Restricted Subsidiary on the same terms as those set forth in the Indenture applicable to the Subsidiary Guarantors; and (ii) with respect to any guarantee of either Subordinated Debt or the Existing High Yield Notes by such Restricted Subsidiary, any such guarantee shall be subordinated to such Restricted Subsidiarys Guarantee with respect to the Notes or the Guarantee of the Notes, as the case may be, at least to the same extent as such Subordinated Debt is subordinated to the Notes or the Guarantee of the Notes or, with respect to a guarantee of the Existing High Yield Notes, at least to the same extent as the guarantee by the Subsidiary Guarantors of the Existing High Yield Notes are subordinated to the Subsidiary Guarantees, as the case may be; and (b) such Restricted Subsidiary waives and will not in any manner whatsoever claim or take the benefit or advantage of, any rights of reimbursement, indemnity or subrogation or any other rights against the Issuer or any other Restricted Subsidiary as a result of any payment by such Restricted Subsidiary under its Guarantee. This paragraph (1) will not be applicable to any guarantees of any Restricted Subsidiary: (a) that existed at the time such Person became a Restricted Subsidiary if the guarantee was not incurred in connection with, or in contemplation of, such Person becoming a Restricted Subsidiary; (b) arising solely due to the granting of a Permitted Lien that would not otherwise constitute a guarantee of Debt of the Issuer or any Subsidiary Guarantor; (c) deemed to have arisen under clause (d) of the first paragraph of the Consolidation, Merger and Sale of Assets covenant; or (d) given to a bank or trust company incorporated in any member state of the European Union as of the Issue Date or any commercial banking institution that is a member of the U.S. Federal Reserve System, (or any branch, Subsidiary or Affiliate thereof) in each case having combined capital and surplus and undivided profits of not less than 500 million, whose debt has a rating, at the time such guarantee was given, of at least A or the equivalent thereof by S&P and at least A2 or the equivalent thereof by Moodys, in connection with the operation of cash management programs established for the Issuers benefit or that of any Restricted Subsidiary. Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries (1) The Issuer will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create or otherwise cause or permit to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Restricted Subsidiary to: (a) pay dividends, in cash or otherwise, or make any other distributions on or in respect of its Capital Stock or any other interest or participation in, or measured by, its profits, in each case, to the Issuer or any Restricted Subsidiary; (b) pay any Debt owed to the Issuer or any Restricted Subsidiary; (c) make loans or advances to the Issuer or any Restricted Subsidiary; or (d) transfer any of its properties or assets to the Issuer or any Restricted Subsidiary. (2) The provisions of the covenant described in paragraph (1) above will not apply to: (a) encumbrances and restrictions imposed by the Notes, the Indenture, any Guarantee, the Credit Facilities, the Intercreditor Agreement and the security documents related thereto as in effect on the Issue Date (or in the case of the security granted over the Capital Stock of Euroweb Romania, within 90 days of the Issue Date); (b) encumbrances or restrictions contained in any agreement in effect on the Issue Date (other than an agreement described in another clause of this paragraph (2)) in the form contained in such agreement on the Issue Date; (c) with respect to restrictions or encumbrances referred to in clause (1)(d) above, encumbrances and restrictions: (i) that restrict in a customary manner the subletting, assignment or transfer of any properties or assets that are subject to a lease, license, conveyance or other similar agreement to which the Issuer or any Restricted Subsidiary is a party; and (ii) contained in operating leases for real property and restricting only the transfer of such real property upon the occurrence and during the continuance of a default in the payment of rent;

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(d) encumbrances or restrictions contained in any agreement or other instrument of a Person acquired by the Issuer or any Restricted Subsidiary in effect at the time of such acquisition (but not created in contemplation thereof), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired; (e) customary encumbrances or restrictions contained in contracts for sales of Capital Stock or assets permitted by the Limitation on Sale of Certain Assets covenant with respect to the assets or Capital Stock to be sold pursuant to such contract or in merger or acquisition agreements (or any option to enter into such contract) for the purchase or acquisition of Capital Stock or assets or any of the Issuers Subsidiaries by another Person; (f) with respect to restrictions or encumbrances referred to in clause (1)(d) above, any customary encumbrances or restrictions pertaining to any asset or property subject to a Lien to the extent set forth in the security document governing such Lien; (g) encumbrances or restrictions imposed by applicable law or regulation or by governmental licenses, concessions, franchises or permits; (h) any encumbrances or restrictions existing under any agreement that extends, renews, amends, modifies, restates, supplements, refunds, refinances or replaces the agreements containing the encumbrances or restrictions in the foregoing clauses (2)(a) and (c); provided that the terms and conditions of any such encumbrances or restrictions are not materially less favorable, taken as a whole, to the holders of the Notes than those under or pursuant to the agreements referred to in such clauses; (i) encumbrances or restrictions on cash or other deposits or net worth imposed by customers under contracts entered into in the ordinary course of business; (j) customary limitations on the distribution or disposition of assets or property in joint venture agreements entered into in good faith; provided that such encumbrance or restriction is applicable only to such Restricted Subsidiary; (k) in the case of clause 1(d) above, customary encumbrances or restrictions in connection with purchase money obligations, mortgage financings and Capitalized Lease Obligations; or (l) any encumbrance or restriction arising by reason of customary non-assignment provisions in agreements. Limitations with Respect to the Issuer The Issuer must not carry on any business or own any assets other than: (a) the ownership of shares of Invitel and Technocom and any Permitted Investments; (b) the provision of administrative services (excluding treasury services) to its Subsidiaries of a type customarily provided by a holding company to its Subsidiaries; (c) incurring Debt permitted under the covenant described above under the caption Limitation on Debt (including activities reasonably related thereto, including performance of the terms and conditions of such Debt (including the granting of any security with respect thereto), to the extent such activities are otherwise permissible under the Indenture); (d) rights and obligations arising or permitted under the Indenture, the Intercreditor Agreement (or any additional intercreditor agreement or priority agreement), the Proceeds Loan Agreements (or any similar agreement in respect of a Proceeds Loan), the Security Documents and Credit Agreements or Credit Facilities to which it is a party; (e) the ownership of cash and Cash Equivalents; or (f) directly related or reasonably incidental to the establishment and/or maintenance of its corporate existence. The Issuer will not and will not permit any of its Restricted Subsidiaries to amend the following provisions of the Existing High Yield Notes Indenture relating to subordination, payment blockage and release in any manner that would be adverse to the holders of the Notes: Sections 10.01(c), 10.03, 11.03 and 11.06 and Article 14 (Subordination). Designation of Unrestricted and Restricted Subsidiaries

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The Issuers board of directors may designate any Subsidiary (including newly acquired or newly established Subsidiaries) to be an Unrestricted Subsidiary only if: (a) no Default has occurred and is continuing at the time of or after giving effect to such designation; (b) the Issuer would be permitted to make an Investment (other than a Permitted Investment) at the time of designation (assuming the effectiveness of such designation) pursuant to the first paragraph of the Limitation on Restricted Payments covenant in an amount equal to the Fair Market Value of the Issuers interest in such Subsidiary; (c) the Issuer would be permitted under the Indenture to incur 1.00 of additional Debt (other than Permitted Debt) pursuant to paragraph (1) of the Limitation on Debt covenant at the time of such designation (assuming the effectiveness of such designation); (d) neither the Issuer nor any Restricted Subsidiary has a contract, agreement, arrangement, understanding or obligation of any kind, whether written or oral, with such Subsidiary unless the terms of such contract, arrangement, understanding or obligation are no less favorable to the Issuer or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Issuer or of any Restricted Subsidiary; (e) such Subsidiary does not own any Capital Stock, Redeemable Capital Stock or Debt of, or own or hold any Lien on any property or assets of, or have any Investment in, the Issuer or any other Restricted Subsidiary; (f) such Subsidiary is not liable, directly or indirectly, with respect to any Debt, Lien or other obligation that, if in default, would result (with the passage of time or notice or otherwise) in a default on any of the Issuers Debt or Debt of any Restricted Subsidiary; provided that an Unrestricted Subsidiary may provide a Guarantee for the Notes; (g) such Subsidiary, either alone or in the aggregate with all other Unrestricted Subsidiaries, does not operate, directly or indirectly, all or substantially all of the business of the Issuer and its Subsidiaries; and (h) such Subsidiary is a Person with respect to which neither the Issuer nor any of the Restricted Subsidiaries has any direct or indirect obligation to. In the event of any such designation, the Issuer will be deemed to have made an Investment constituting a Restricted Payment pursuant to the Limitation on Restricted Payments covenant for all purposes of the Indenture in an amount equal to the Fair Market Value of the Issuers interest in such Subsidiary. The Indenture further provides that neither the Issuer nor any Restricted Subsidiary will at any time: (i) provide a guarantee of, or similar credit support to, any Debt of any Unrestricted Subsidiary (including of any undertaking, agreement or instrument evidencing such Debt), except to the extent permitted under the Limitation on Restricted Payments, Limitation on Debt and Limitation on Transactions with Affiliates covenants; provided that the Issuer may pledge Capital Stock or Debt of any Unrestricted Subsidiary on a non-recourse basis as long as the pledge has no claim whatsoever against the Issuer other than to obtain such pledged property; (j) be directly or indirectly liable for any Debt of any Unrestricted Subsidiary, except to the extent permitted under the Limitation on Restricted Payments and Limitation on Transactions with Affiliates covenants; or (k) be directly or indirectly liable for any other Debt that provides that the holder thereof may (upon notice, lapse of time or both) declare a default thereon (or cause the payment thereof to be accelerated or payable prior to its final scheduled maturity) upon the occurrence of a default with respect to any other Debt that is Debt of an Unrestricted Subsidiary (including any corresponding right to take enforcement action against such Unrestricted Subsidiary). The Issuers board of directors may designate any Unrestricted Subsidiary as a Restricted Subsidiary if: (a) no Default or Event of Default has occurred and is continuing at the time of or will occur and be continuing after giving effect to such designation; and (b) unless such redesignated Subsidiary shall not have any Debt outstanding (other than Debt that would be Permitted Debt), immediately before and after giving effect to such proposed designation, and after giving pro forma effect to the incurrence of any such Debt of such redesignated Subsidiary as if such Debt was incurred on the date of the redesignation, the Issuer could incur 1.00 of additional Debt (other than Permitted Debt) pursuant to paragraph (1) of the Limitation on Debt covenant.

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Any such designation as an Unrestricted Subsidiary or Restricted Subsidiary by the Issuers board of directors will be evidenced to the Trustee by filing a resolution of the Issuers board of directors with the Trustee giving effect to such designation and an Officers Certificate certifying that such designation complies with the foregoing conditions, and giving the effective date of such designation. Any such filing with the Trustee must occur within 45 days after the end of the Issuers fiscal quarter in which such designation is made (or, in the case of a designation made during the last fiscal quarter of the Issuers fiscal year, within 90 days after the end of such fiscal year). Listing The Issuer will use its best efforts to effect and, if the Issuer so succeeds, maintain the listing of the Notes on the Euro MTF or another international securities exchange for so long as the Notes are outstanding. Impairment of Security Interest (1) The Issuer will not, and will not permit any of its Restricted Subsidiaries to, take or knowingly or negligently omit to take, any action which action or omission might or would have the result of materially impairing the security interest with respect to the Collateral for the benefit of the Trustee and the holders of the Notes, and the Issuer will not, and will not permit any of its Restricted Subsidiaries to, grant to any Person other than the Security Trustee, for the benefit of the Trustee and the holders of the Notes (other than Subsequent Additional Notes) and the other beneficiaries described in the Security Documents, any interest whatsoever in any of the Collateral, except as permitted in the Security Documents, but subject to paragraph (2) the Issuer and its Restricted Subsidiaries may incur Permitted Collateral Liens; (2) The Indenture provides that, at the direction of the Issuer and without the consent of the holders of the Notes, the Trustee and the Security Trustee may from time to time enter into one or more amendments to the Security Documents to: (i) cure any ambiguity, omission, defect or inconsistency therein, (ii) provide for Permitted Collateral Liens to the extent permitted under the Indenture, (iii) comply with the terms of the Intercreditor Agreement, (iv) add to the Collateral, (v) evidence the succession of another Person to the Issuer and the assumption by such successor of the obligations under the Indenture, the Notes and the Security Documents, in each case, in accordance with Certain Covenants Consolidation, Merger and Sale of Assets, (vi) provide for the release of property and assets constituting Collateral from the Lien of the Security Documents and/or the release of the Guarantee of a Subsidiary Guarantor, in each case, in accordance with (and if permitted by) the terms of the Indenture, (vii) conform the Security Documents to this Description of Notes, (viii) to evidence and provide for the acceptance of the appointment of a successor Trustee or Security Trustee or (ix) make any other change thereto that does not adversely affect the holders of the Notes in any material respect; provided, however, that no Security Document may be amended, extended, renewed, restated, supplemented or otherwise modified or replaced (otherwise than for reasons specified in clauses (i), (iii) (in connection with any enforcement action) and (iv) through (ix)), unless contemporaneously with such amendment, extension, renewal, restatement, supplement, modification or renewal, the Issuer delivers to the Trustee, either: (a) a solvency opinion, in form and substance satisfactory to the Trustee, from an investment banking firm, appraisal firm or accounting firm of international standing confirming the solvency of the Issuer and its Subsidiaries, taken as a whole, after giving effect to any transactions related to such amendment, extension, renewal, restatement, supplement, modification or replacement; or (b) an opinion of counsel acceptable to the Trustee, in form and substance satisfactory to the Trustee (subject to customary exceptions and qualifications), confirming that, after giving effect to any transactions related to such amendment, extension, renewal, restatement, supplement, modification or replacement, the Lien or Liens securing the Notes created under the Security Documents so amended, extended, renewed, restated, supplemented, modified or replaced are valid and perfected Liens not otherwise subject to any limitation imperfection or new hardening period, in equity or at law, that such Lien or Liens were not otherwise subject to immediately prior to such amendment, extension, renewal, restatement, supplement, modification or replacement which shall be substantially in the form attached to the Indenture. Reports to Holders (1) So long as any Notes are outstanding, the Issuer will furnish to the Trustee and shall make available to potential investors: (a) within 120 days following the end of each of the Issuers fiscal years, an annual report containing the following information with a level of detail that is substantially comparable and similar in scope to this Offering Memorandum: (a) audited combined or consolidated balance sheets of the Issuer as of the end of the two most

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recent fiscal years and audited consolidated income statements and statements of cash flow of Issuer for the two most recent fiscal years, in each case prepared in accordance with GAAP, including complete footnotes to such financial statements and the report of the independent auditors on the financial statements; (b) pro forma income statement and balance sheet information, together with explanatory footnotes, for any material acquisitions or dispositions (including, without limitation, any acquisitions or disposition that, individually or in the aggregate when considered with all other acquisition or dispositions that have occurred since the beginning of the most recently completed fiscal year as to which such annual report relates, represent greater than 20% of the consolidated revenues, EBITDA, or assets of the Issuer on a pro-form basis) or recapitalizations that have occurred since the beginning of the most recently completed fiscal year as to which such annual report relates including appropriate footnotes to such financial statements; (c) an operating and financial review of the audited financial statements, including a discussion of the results of operations including a discussion of subscribers, churn and lines and a breakout of revenue and EBITDA for mass market voice, business, mass market internet and wholesale, financial condition and liquidity and capital resources, and a discussion of material commitments and contingencies and critical accounting policies; (d) a description of the industry, business, management and shareholders of Invitel and the Issuer, all material affiliate transactions, Indebtedness and material financing arrangements and a description of all material contractual arrangements, including material debt instruments; and (e) risk factors and material recent developments; (b) within 60 days following the end of the first three fiscal quarters in each of the Issuers fiscal years, quarterly reports containing the following information: (a) an unaudited condensed consolidated balance sheet as of the end of such quarter and unaudited condensed statements of income and cash flow for the quarterly and year to date periods ending on the unaudited condensed balance sheet date, and the comparable prior year periods for the Issuer, together with condensed footnote disclosure; (b) pro forma income statement and balance sheet information, together with explanatory footnotes, for any material acquisitions or dispositions (including, without limitation, any acquisition or disposition that, individually or in the aggregate when considered with all other acquisitions or dispositions that have occurred since the beginning of the most recently completed fiscal quarter as to which such quarterly report relates, represents greater than 20% of the consolidated revenues, EBITDA or assets of the Issuer on a pro forma basis) or recapitalizations that have occurred since the beginning of the most recently completed fiscal quarter as to which such quarterly report relates; (c) an operating and financial review of the unaudited financial statements (including a discussion of subscribers, churn and lines and a breakout of revenue and EBITDA between for mass market voice, business, mass market internet and wholesale), including a discussion of the consolidated financial condition and results of operations of the Issuer and any material change between the current quarterly period and the corresponding period of the prior year; (d) material developments in the business of the Issuer and its Subsidiaries; (e) financial developments and trends in the business in which the Issuer and its Subsidiaries are engaged; (f) material recent developments and any material changes to the risk factors disclosed in the most recent annual report with respect to the Issuer; (c) promptly from time to time after the occurrence of (a) a material acquisition, disposition or restructuring (including any acquisition or disposition that would require the delivery of pro forma financial information pursuant to clauses (a) or (b) above), (b) any senior management change at the Issuer or Invitel, (c) any change in the auditors of the Issuer, (d) any resignation or a member of the Board of Directors of the Issuer or Invitel as a result of a disagreement with the Issuer or Invitel, as applicable, (e) the entering into an agreement that will result in a Change of Control or (f) any material events that the Issuer or Invitel announces publicly, in each case, a report containing a description of such events; and (d) so long as the Existing High Yield Notes are outstanding, any information provided to holders of the Existing High Yield Notes pursuant to Section 4.21 of the indenture dated April 27, 2007, as amended and supplemented from time to time, relating to the Existing High Yield Notes. (2) In addition, the Issuer shall furnish to the holders of the Notes and to prospective investors, upon the request of such holders, any information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act so long as the Notes are not freely transferable under the Exchange Act by Persons who are not affiliates under the Securities Act. (3) If any of the Issuers Subsidiaries are Unrestricted Subsidiaries, then the annual and quarterly financial information referred to in paragraphs (1) or (2) above will include a reasonably detailed presentation, either on its face or in the footnotes thereto, and in the operating and financial review, of the financial condition and results of operations of the Issuer and its Restricted Subsidiaries, in each case, separate from the financial condition and results of operations of the Issuers Unrestricted Subsidiaries.

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(4) The Issuer will also make available copies of all reports furnished to the Trustee (a) on the Issuers website; (b) through the newswire service of Bloomberg, or, if Bloomberg does not then operate, any similar agency; and (c) if and so long as the Notes are listed on the Euro MTF and the rules of the Luxembourg Stock Exchange so require, copies of such reports furnished to the Trustee will also be made available at the specified office of the paying agent in Luxembourg. Consolidation, Merger and Sale of Assets The Issuer The Issuer will not, in a single transaction or through a series of transactions, consolidate or merge with or into any other Person or sell, assign, convey, transfer, lease or otherwise dispose of, or take any action pursuant to any resolution passed by the Issuers board of directors or shareholders with respect to a demerger or division pursuant to which the Issuer would dispose of, all or substantially all of the properties and assets of the Issuer and its Restricted Subsidiaries taken as a whole to any other Person or Persons. The previous sentence will not apply if: (a) at the time of, and immediately after giving effect to, any such transaction or series of transactions, either (i) the Issuer will be the continuing entity or (ii) the Person (if other than the Issuer) formed by or surviving any such consolidation or merger or to which such sale, assignment, conveyance, transfer, lease or disposition of all or substantially all the properties and assets of the Issuer and the Restricted Subsidiaries on a consolidated basis has been made (the Surviving Entity): (i) will be a corporation duly incorporated and validly existing under the laws of any member state of the European Union as of the Issue Date, the United States of America, any state thereof, or the District of Columbia, and (ii) will expressly assume, by a supplemental indenture and/or other agreements, in each case in form and substance satisfactory to the Trustee, the Issuers obligations under the Notes, the Indenture, the Intercreditor Agreement and the other relevant Security Documents and the Notes, the Indenture, the Intercreditor Agreement and the other relevant Security Documents will remain in full force and effect as so supplemented; (b) immediately after giving effect to such transaction or series of transactions on a pro forma basis (and treating any obligation of the Issuer or any Restricted Subsidiary incurred in connection with or as a result of such transaction or series of transactions as having been incurred by the Issuer or such Restricted Subsidiary at the time of such transaction), no Default or Event of Default will have occurred and be continuing; (c) immediately before and immediately after giving effect to such transaction or series of transactions on a pro forma basis (on the assumption that the transaction or series of transactions occurred on the first day of the applicable four-quarter fiscal period ended prior to the consummation of such transaction or series of transactions with the appropriate adjustments with respect to the transaction or series of transactions being included in such pro forma calculation), the Issuer (or the Surviving Entity if the Issuer is not the continuing obligor under the Indenture) could incur at least 1.00 of additional Debt under clause 1 of the Limitation on Debt covenant; (d) any Subsidiary Guarantor, unless it is the other party to the transactions described above, or unless its Guarantee has been released in accordance with the provisions of the Indenture described above under the heading Release of the Guarantees, will have by supplemental indenture confirmed that its Guarantee will apply to such Persons obligations under the Indenture and the Notes; (e) if any of the Issuers or any Restricted Subsidiarys property or assets would thereupon become subject to any Lien, the provisions of the Limitation on Liens covenant are complied with; and (f) the Issuer or the Surviving Entity will have delivered to the Trustee, in form and substance satisfactory to the Trustee, an Officers Certificate (attaching the computations to demonstrate compliance with clause (c) above) and an opinion in form and substance reasonably satisfactory to the Trustee, of independent counsel reasonably acceptable to the Trustee, each stating that such consolidation, merger, sale, assignment, conveyance, transfer, lease or other disposition, and if a supplemental indenture is required in connection with such transaction, such supplemental indenture, comply with the requirements of the Indenture and that all conditions precedent in the Indenture relating to such transaction have been satisfied and that the Indenture and the Notes constitute legal, valid and binding obligations of the continuing person, enforceable in accordance with their terms. The Surviving Person (other than the Issuer) shall succeed to, and be substituted for, and may exercise every right and power of the Issuer under the Indenture and the Security Documents, but the predecessor company in the case of the lease of

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all the assets of the Issuer as an entirety or substantially as an entirety shall not be released from any of its payment obligations under the Indenture. Subsidiary Guarantors A Subsidiary Guarantor will not, in a single transaction or through a series of transactions, consolidate or merge with or into any other Person or sell, assign, convey, transfer, lease or otherwise dispose of, or take any action pursuant to any resolution passed by such Subsidiary Guarantors board of directors or shareholders with respect to a demerger or division pursuant to which such Subsidiary Guarantor would dispose of, all or substantially all of the properties and assets of such Subsidiary Guarantor and its Restricted Subsidiaries taken as a whole to any other Person or Persons. The previous sentence will not apply if: (a) at the time of, and immediately after giving effect to, any such transaction or series of transactions, either (i) such Subsidiary Guarantor will be the continuing entity or (ii) the Person (if other than such Subsidiary Guarantor) formed by or surviving any such consolidation or merger or to which such sale, assignment, conveyance, transfer, lease or disposition of all or substantially all the properties and assets of the Issuer and the Restricted Subsidiaries on a consolidated basis has been made (the Surviving Entity): (i) will be a corporation duly incorporated and validly existing under the laws of any member state of the European Union as of the Issue Date, the United States of America, any state thereof, or the District of Columbia, and (ii) will expressly assume, by a supplemental indenture and/or other agreements, in each case in form and substance satisfactory to the Trustee, such Subsidiary Guarantors obligations under its Guarantee, the Indenture, the Intercreditor Agreement and the other relevant Security Documents, and its Guarantee, the Indenture, the Intercreditor Agreement and the other relevant Security Documents will remain in full force and effect as so supplemented; (b) immediately after giving effect to such transaction or series of transactions on a pro forma basis (and treating any obligation of such Subsidiary Guarantor or any Restricted Subsidiary incurred in connection with or as a result of such transaction or series of transactions as having been incurred by such Subsidiary Guarantor or such Restricted Subsidiary at the time of such transaction), no Default or Event of Default will have occurred and be continuing; (c) if any of such Subsidiary Guarantors or any Restricted Subsidiarys property or assets would thereupon become subject to any Lien, the provisions of the Limitation on Liens covenant are complied with; and (d) such Subsidiary Guarantor or the Surviving Entity will have delivered to the Trustee, in form and substance satisfactory to the Trustee, an Officers Certificate and an opinion in form and substance reasonably satisfactory to the Trustee of independent counsel reasonably acceptable to the Trustee, each stating that such consolidation, merger, sale, assignment, conveyance, transfer, lease or other disposition, and if a supplemental indenture is required in connection with such transaction, such supplemental indenture, comply with the requirements of the Indenture and that all conditions precedent in the Indenture relating to such transaction have been satisfied and that the Indenture and the Notes constitute legal, valid and binding obligations of the continuing person, enforceable in accordance with their terms. The Surviving Person (other than such Subsidiary Guarantor) shall succeed to, and be substituted for, and may exercise every right and power of such Subsidiary Guarantor under the Indenture and the Security Documents, but the predecessor company in the case of the lease of all the assets of such Subsidiary Guarantor as an entirety or substantially as an entirety shall not be released from any of its payment obligations under the Indenture. General Nothing in the Indenture will prevent (i) any Wholly Owned Restricted Subsidiary that is not a Subsidiary Guarantor from consolidating with, merging into or transferring all or substantially all of its properties and assets to the Issuer or any other Wholly Owned Restricted Subsidiary whether or not a Subsidiary Guarantor, (ii) any Subsidiary Guarantor from merging into or transferring all or part of its properties and assets to another Subsidiary Guarantor or the Issuer or (iii) the Issuer from merging into an Affiliate holding 100% of its Capital Stock which was incorporated solely for the purpose of reincorporating the Issuer in another jurisdiction to realize tax or other benefits. Although there is a limited body of case law interpreting the phrase all or substantially all, there is no precise established definition of the phrase under applicable law. Accordingly, in certain circumstances there may be a degree of uncertainty as to whether a particular transaction would involve all or substantially all of the property or assets of a Person.

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The Issuer will publish a notice of any consolidation, merger or sale of assets described above in accordance with the provisions of the Indenture described under Notices and, so long as the rules of the Luxembourg Stock Exchange so require, notify such exchange of any such consolidation, merger or sale and file supplemental listing particulars. Lines of Business The Issuer will not permit any of its Restricted Subsidiaries to engage in any business other than a Related Business, except to the extent that it would not be material to the Issuer and its Restricted Subsidiaries taken as a whole. Security Matters (a) To the extent that International Holdings is a Subsidiary of the Issuer on the date that is 18 months after the Issue Date, the Issuer will, and will cause its Restricted Subsidiaries to, ensure that, on or before the date that is 18 months after the Issue Date, the capital stock of such entity and all of the assets of any such entity, including (i) bank accounts, (ii) intra-group loans, (iii) intra-group receivables and (iv) all assets (pursuant to a floating charge or equivalent security) of such entity are pledged to secure the Notes and the Guarantors on a first priority basis and will constitute Collateral for all purposes under the Indenture and the Intercreditor Agreement. (b) To the extent that any Restricted Subsidiary becomes a Subsidiary Guarantor, the Issuer will, and will cause its Restricted Subsidiaries, to ensure that, as promptly as practicably and in any event within 10 Business Days, the capital stock of such Restricted Subsidiary and all of the assets of such Restricted Subsidiary including (i) bank accounts, (ii) intra-group loans, (iii) intra-group receivables and (iv) all assets (pursuant to a floating charge or equivalent security) are pledged to secure the Notes and the Guarantees on a first priority basis and will constitute Collateral for all purposes under the Indenture and the Intercreditor Agreement; provided that if any such asset is subject to a Lien securing Acquired Debt permitted by clause (k) of the definition of Permitted Liens and the terms and conditions of the Acquired Debt secured by such Lien does not permit a Lien on the assets for purposes of securing the Notes, then such asset shall not be pledged to secure the Notes for so long as such prohibition is in effect. (c) In addition, the Issuer will not be obligated to cause any Restricted Subsidiary to become a Subsidiary Guarantor if the provision by such Restricted Subsidiary of a Guarantee would result in any violation of applicable law that cannot be avoided or otherwise prevented through measures reasonably available to the Issuer (including any whitewash or similar procedures that would be required in order to enable such Guarantee to be provided in accordance with applicable law). Also, the obligations of each Subsidiary Guarantors under its Guarantee will be limited to an amount not to exceed the maximum amount that can be guaranteed by such Subsidiary Guarantor without resulting in its obligations under its Guarantee being voidable or unenforceable under applicable laws relating to fraudulent transfer, or under similar laws affecting the rights of creditors generally. (d) Upon the execution and delivery of each Security Document entered into in connection with the Collateral described in clause (a) and (b) above, the Issuer shall provide the Trustee legal opinions from legal counsel as to such matters with respect to such agreements as the Trustee may reasonably request. Events of Default (1) Each of the following will be an Event of Default under the Indenture: (a) default for 30 days in the payment when due of any interest or any Additional Amounts on any Note (whether or not prohibited by the subordination provisions of the Indenture or the Intercreditor Agreement); (b) default in the payment of the principal of or premium, if any, on any Note at its Maturity (upon acceleration, optional or mandatory redemption, if any, required repurchase or otherwise) whether or not prohibited by the subordination provisions of the Indenture or the Intercreditor Agreement; (c) failure to comply with the provisions of Certain Covenants Consolidation, Merger and Sales of Assets; (d) failure to make or consummate an Excess Proceeds Offer in accordance with the provisions of Certain Covenants Limitation on Sale of Certain Assets; (e) failure to make or consummate a Change of Control Offer in accordance with the provisions of Purchase of Notes upon a Change of Control;

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(f) failure to comply with any covenant or agreement of the Issuer or of any Restricted Subsidiary that is contained in the Indenture or any Guarantee (other than specified in clause (a), (b), (c), (d) or (e) above) and such failure continues for a period of 60 days or more after written notice from the Trustee or holders of 25% in aggregate principal amount of the Notes then outstanding; (g) default under the terms of any instrument evidencing or securing the Debt of the Issuer or any Restricted Subsidiary having an outstanding principal amount in excess of 15 million individually or in the aggregate, if that default: (x) results in the acceleration of the payment of such Debt or (y) is caused by the failure to pay such Debt at final maturity thereof (giving effect to any applicable grace periods and any extensions thereof) other than by regularly scheduled required prepayment and such failure to make any payment has not been waived or the maturity of such Debt has not been extended, and in either case the total amount of such Debt unpaid or accelerated exceeds 15 million or its equivalent at the time; (h) any Guarantee of a Subsidiary Guarantor ceases to be, or shall be asserted by the relevant Subsidiary Guarantor, or any Person acting on behalf of such Subsidiary Guarantor, not to be, in full force and effect or enforceable in accordance with its terms (other than as provided for in the Indenture, such Guarantee or the Intercreditor Agreement); (i) one or more final judgments, orders or decrees (not subject to appeal and not covered by insurance) shall be rendered against the Issuer or any Restricted Subsidiary, either individually or in an aggregate amount, in excess of 15 million, such judgments remain undischarged, unpaid or unstayed for a period of 60 days after such final judgment; (j) any Proceeds Loan shall be held in any judicial proceeding to be unenforceable or invalid or ceases for any reason to be in full force and effect or any obligor on any Proceeds Loan denies or disaffirms its obligations under such Proceeds Loan, as the case may be; (k) the occurrence of certain events of bankruptcy, insolvency, receivership or reorganization with respect to the Issuer, any Subsidiary Guarantor or any Significant Subsidiary; and (l) the security interests under any of the Security Documents shall not constitute valid Liens or shall, at any time, other than in accordance with their terms, cease to be in full force and effect for any reason other than the satisfaction in full of all obligations under the Indenture, discharge of the Indenture or the release of such security interests in accordance with the terms of the Indenture, or any security interest created thereunder shall be declared invalid or unenforceable, or the Issuer or any Subsidiary Guarantor or any Affiliate thereof shall assert, in any pleading in any court of competent jurisdiction, that any such security interest is invalid or unenforceable. (2) If an Event of Default (other than as specified in clause (1)(k) above) occurs and is continuing, the Trustee or the holders of not less than 25% in aggregate principal amount of the Notes then outstanding by written notice to the Issuer (and to the Trustee if such notice is given by the holders) may, and the Trustee, upon the written request of such holders, shall, declare the principal of, premium, if any, and any Additional Amounts and accrued interest on all of the outstanding Notes immediately due and payable, and upon any such declaration all such amounts payable in respect of the Notes will become immediately due and payable. (3) If an Event of Default specified in clause (1)(k) above occurs and is continuing, then the principal of, premium, if any, and accrued and unpaid interest on all of the outstanding Notes shall become and be immediately due and payable without any declaration or other act on the part of the Trustee or any holder of Notes. (4) At any time after a declaration of acceleration under the Indenture, but before a judgment or decree for payment of the money due has been obtained by the Trustee, the holders of a majority in aggregate principal amount of the outstanding Notes, by written notice to the Issuer and the Trustee, may rescind such declaration and its consequences if: (a) the Issuer has paid or deposited with the Trustee a sum sufficient to pay: (i) all overdue interest and Additional Amounts on all Notes then outstanding; (ii) all unpaid principal of and premium, if any, on any outstanding Note that has become due otherwise than by such declaration of acceleration and interest thereon at the rate borne by the Notes; (iii) to the extent that payment of such interest is lawful, interest upon overdue interest and overdue principal at the rate borne by the Notes; and

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(iv) all sums paid or advanced by the Trustee under the Indenture and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; (b) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction; and (c) all Events of Default, other than the non-payment of amounts of principal of, premium, if any, and any Additional Amounts and interest on the Notes that has become due solely as a result of such declaration of acceleration, have been cured or waived. No such rescission shall affect any subsequent default or impair any right consequent thereon. (5) The holders of not less than a majority in aggregate principal amount of the outstanding Notes may, on behalf of the holders of all the Notes, waive any existing Default or Event of Default under the Indenture, except a default in the payment of the principal of, premium, if any, and Additional Amounts or interest on any Note. (6) No holder of any of the Notes has any right to institute any proceedings with respect to the Indenture or any remedy thereunder, unless the holders of at least 25% in aggregate principal amount of the outstanding Notes have made a written request, and offered indemnity or security satisfactory to the Trustee, to the Trustee to institute such proceeding as Trustee under the Notes and the Indenture, the Trustee has failed to institute such proceeding within 30 Business Days after receipt of such notice and the Trustee within such 30-Business Day period has not received directions inconsistent with such written request by holders of a majority in aggregate principal amount of the outstanding Notes. Such limitations do not, however, apply to a suit instituted by a holder of a Note for the enforcement of the payment of the principal of, premium, if any, and Additional Amounts or interest on such Note on or after the respective due dates expressed in such Note. (7) If a Default or an Event of Default occurs and is continuing and is known to the Trustee, the Trustee will give notice to each holder of the Notes of the Default or Event of Default within 30 Business Days after its occurrence in accordance with the provisions set forth under Notices below. Except in the case of a Default or an Event of Default in payment of principal of, premium, if any, Additional Amounts or interest on any Notes, the Trustee may withhold the notice to the holders of such Notes if a committee of its trust officers in good faith determines that withholding the notice is in the interests of the holders of the Notes. (8) The Issuer is required to furnish to the Trustee annual statements as to the performance of the Issuer and the Restricted Subsidiaries under the Indenture and as to any default in such performance. The Issuer is also required to notify the Trustee within 30 Business Days of the occurrence of any Default. Legal Defeasance or Covenant Defeasance of Indenture The Indenture provides that the Issuer may, at its option and at any time prior to the Stated Maturity of the Notes, elect to have the obligations of the Issuer discharged with respect to the outstanding Notes (Legal Defeasance). Legal Defeasance means that the Issuer will be deemed to have paid and discharged the entire Debt represented by the outstanding Notes except as to: (a) the rights of holders of outstanding Notes to receive payments in respect of the principal of, premium, if any, and interest on such Notes when such payments are due; (b) the Issuers obligations to issue temporary Notes, register, transfer or exchange any Notes, replace mutilated, destroyed, lost or stolen Notes, maintain an office or agency for payments in respect of the Notes and segregate and hold such payments in trust; (c) the rights, powers, trusts, duties and immunities of the Trustee and the obligations of the Issuer and the Subsidiary Guarantors in connection therewith; and (d) the Legal Defeasance provisions of the Indenture. In addition, the Issuer may, at its option and at any time, elect to have its obligations released with respect to certain covenants set forth in the Indenture (Covenant Defeasance), and thereafter any omission to comply with such covenants will not constitute a Default or an Event of Default with respect to the Notes. In the event Covenant Defeasance occurs, certain events described under Events of Default will no longer constitute an Event of Default with respect to the Notes. These events do not include events relating to non-payment, bankruptcy, insolvency, receivership and reorganization. The Issuer may exercise its Legal Defeasance option regardless of whether it has previously exercised Covenant Defeasance.

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In order to exercise either Legal Defeasance or Covenant Defeasance: (a) the Issuer must irrevocably deposit or cause to be deposited in trust with the Trustee, for the benefit of the holders of the Notes, cash in euro, European Government Obligations, or a combination thereof (if applicable, in combination with Qualified Interest Rate Agreements) that through the payment of interest and principal (in respect of such money or European Government Obligations) or other amounts (in respect of such Qualified Interest Rate Agreements) will provide funds (net of any amounts payable by the trust pursuant to any such Qualified Interest Rate Agreements) as will be sufficient, in the opinion of an internationally recognized firm of independent public accountants, to pay and discharge the principal of, premium, if any, and interest, on the outstanding Notes on the Stated Maturity or on the applicable redemption date, as the case may be, and the Issuer must (i) specify whether the Notes are being defeased to maturity or to a particular redemption date; and (ii) if applicable, have delivered to the Trustee an irrevocable notice to redeem all of the outstanding Notes of such principal, premium, if any, or interest; (b) in the case of Legal Defeasance, the Issuer must have delivered to the Trustee an opinion of counsel acceptable to the Trustee, in form and substance reasonably satisfactory to the Trustee, stating that (x) the Issuer has received from, or there has been published by, the U.S. Internal Revenue Service a ruling, or (y) since the Issue Date, there has been a change in applicable U.S. federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the holders of the outstanding Notes will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such Legal Defeasance and will be subject to U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (c) in the case of Legal Defeasance, the Issuer must have delivered to the Trustee an opinion of counsel acceptable to the Trustee, in form and substance reasonably satisfactory to the Trustee, to the effect that the holders of the outstanding Notes will not recognize income, gain or loss for tax purposes in the Netherlands as a result of such Legal Defeasance and will be subject to tax in the Netherlands on the same amounts, in the same manner and at the same times as would have been the case if such legal defeasance had not occurred; (d) in the case of Covenant Defeasance, the Issuer must have delivered to the Trustee an opinion of counsel acceptable to the Trustee, in form and substance reasonably satisfactory to the Trustee, to the effect that the holders of the outstanding Notes will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such Covenant Defeasance and will be subject to U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (e) in the case of Covenant Defeasance, the Issuer must have delivered to the Trustee an opinion of counsel acceptable to the Trustee, in form and substance reasonably satisfactory to the Trustee, to the effect that the holders of the outstanding Notes will not recognize income, gain or loss for tax purposes in the Netherlands as a result of such Covenant Defeasance and will be subject to tax in the Netherlands on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (f) no Default or Event of Default will have occurred and be continuing on the date of such deposit (other than a Default or Event of Default resulting from the borrowing of funds to be applied to such deposit); (g) such Legal Defeasance or Covenant Defeasance shall not cause the Trustee for the Notes to have a conflicting interest as defined in the Indenture; (h) such Legal Defeasance or Covenant Defeasance will not result in a breach or violation of, or constitute a default under (other than a Default or Event of Default resulting from the borrowing of funds to be applied to such deposit), the Indenture or any material agreement or instrument to which the Issuer or any Restricted Subsidiary is a party or by which the Issuer or any Restricted Subsidiary is bound; (i) such Legal Defeasance or Covenant Defeasance shall not result in the trust arising from such deposit constituting an investment company within the meaning of the U.S. Investment Company Act of 1940 unless such trust shall be registered under such Act or exempt from registration thereunder; (j) the Issuer must have delivered to the Trustee an Officers Certificate stating that the deposit was not made by the Issuer with the intent of preferring the holders of the Notes over the other creditors of the Issuer with the intent of defeating, hindering, delaying or defrauding creditors of the Issuer or others, or removing assets beyond the reach of the relevant creditors or increasing debts of the Issuer to the detriment of the relevant creditors; and

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(k) the Issuer must have delivered to the Trustee an Officers Certificate and an opinion, in form and substance reasonably satisfactory to the Trustee of counsel acceptable to the Trustee, each stating that all conditions precedent provided for relating to the Legal Defeasance or the Covenant Defeasance, as the case may be, have been complied with. If the funds deposited with the Trustee to effect Covenant Defeasance are insufficient to pay the principal of, premium, if any, and interest on the Notes when due because of any acceleration occurring after an Event of Default, then the Issuer will remain liable for such payments. Satisfaction and Discharge The Indenture will be discharged and will cease to be of further effect (except as to surviving rights of registration of transfer or exchange of the Notes as expressly provided for in the Indenture) when: (a) the Issuer has irrevocably deposited or caused to be deposited with the Trustee as funds in trust for such purpose an amount in euro and/or European Government Obligations (if applicable, in combination with Qualified Interest Rate Agreements) that through the payment of interest and principal (in respect of such cash or European Government Obligations) or other amounts (in respect of such Qualified Interest Rate Agreements) will provide funds (net of any amounts payable by the trust pursuant to any such Qualified Interest Rate Agreements) as will be sufficient to pay and discharge the entire Debt on such Notes that have not, prior to such time, been delivered to the Trustee for cancellation, for principal of, premium, if any, and any Additional Amounts and accrued and unpaid interest, if any, on the Notes to the date of such deposit (in the case of Notes which have become due and payable) or to the Stated Maturity or redemption date, as the case may be and the Issuer has delivered irrevocable instructions to the Trustee under the Indenture to apply the deposited money toward the payment of Notes at Maturity or on the redemption date, as the case may be and either: (i) all the Notes that have been authenticated and delivered (other than destroyed, lost or stolen Notes that have been replaced or paid and Notes for whose payment money has been deposited in trust or segregated and held in trust by the Issuer and thereafter repaid to the Issuer or discharged from such trust as provided for in the Indenture) have been delivered to the Trustee for cancellation; or (ii) all Notes that have not been delivered to the Trustee for cancellation (x) have become due and payable (by reason of the mailing of a notice of redemption or otherwise), (y) will become due and payable at Stated Maturity within one year or (z) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the Issuers name, and at the Issuers expense; and (b) the Issuer has paid or caused to be paid all sums payable by the Issuer under the Indenture; (c) the Issuer has delivered to the Trustee an Officers Certificate and an opinion of counsel acceptable to the Trustee, each stating that: (i) all conditions precedent provided in the Indenture relating to the satisfaction and discharge of the Indenture have been satisfied; and (ii) such satisfaction and discharge will not result in a breach or violation of, or constitute a default under, the Indenture or any other agreement or instrument to which the Issuer or any Subsidiary is a party or by which the Issuer or any Subsidiary is bound. Amendments and Waivers With the consent of the holders of not less than a majority in aggregate principal amount of the Notes then outstanding, the Issuer, any Subsidiary Guarantor and the Trustee are permitted to amend or supplement the Indenture, the Intercreditor Agreement and the other Security Documents; provided that no such modification or amendment may, without the consent of the holders of at least 90% of the Notes affected thereby: (a) change the Stated Maturity of the principal of, or any installment of or Additional Amounts or interest on, any Note; (b) reduce the principal amount of any Note (or Additional Amounts or premium, if any) or the rate of or change the time for payment of interest on any Note;

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(c) change the coin or currency in which the principal of any note or any premium or any Additional Amounts or the interest thereon is payable; (d) impair the right to institute suit for the enforcement of any payment on or after the Stated Maturity thereof (or, in the case of redemption, on or after the redemption date); (e) after the Issuers obligation to purchase Notes arises thereunder, amend, change or modify the obligation to make and consummate an Excess Proceeds Offer with respect to any Asset Sale in accordance with the Limitation on Sale of Certain Assets covenant or the obligation to make and consummate a Change of Control offer in the event of a Change of Control in accordance with the Purchase of Notes upon a Change of Control covenant, including, in each case, amending, changing or modifying any definition relating thereto; (f) reduce the principal amount of Notes whose holders must consent to any amendment, supplement or waiver of provisions of the Indenture; (g) modify any of the provisions relating to supplemental indentures requiring the consent of holders of the Notes or relating to the waiver of past defaults or relating to the waiver of certain covenants, except to increase the percentage of outstanding Notes required for such actions or to provide that certain other provisions of the Indenture cannot be modified or waived without the consent of the holder of each Note affected thereby; (h) release any Guarantee except in compliance with the terms of the Indenture, or make any change in any Guarantee that would materially adversely affect the holders of the Notes; (i) make any change to any provisions of the Indenture affecting the ranking of the Notes or the Guarantees, in each case in a manner that adversely affects the rights of the holders of the Notes; (j) make any change in the provisions of the Indenture described under Additional Amounts that adversely affects the rights of any holder of the Notes or amend the terms of the Notes or the Indenture in a way that would result in a loss of an exemption from any of the Taxes described thereunder or an exemption from any obligation to withhold or deduct Taxes so described thereunder unless the Issuer or any Subsidiary Guarantors agree to pay Additional Amounts (if any) in respect thereof in the supplemental indenture; or (k) release the Lien in Collateral granted for the benefit of holders of Notes, except in accordance with the terms of the relevant Security Document, the Indenture and Intercreditor Agreement. Notwithstanding the foregoing, without the consent of any holder of the Notes, the Issuer, any Subsidiary Guarantor and the Trustee may modify, amend or supplement the Indenture: (a) to evidence the succession of another Person to the Issuer and the assumption by any such successor of the covenants in the Indenture and in the Notes in accordance with Certain Covenants Consolidation, Merger and Sale of Assets; (b) to add to the Issuers covenants and those of any Subsidiary Guarantor or any other obligor upon the Notes for the benefit of the holders of the Notes or to surrender any right or power conferred upon the Issuer or any Subsidiary Guarantor or any other obligor upon the Notes, as applicable, in the Indenture, in the Notes or in the any Guarantees; (c) to cure any ambiguity, or to correct or supplement any provision in the Indenture, the Notes or any Guarantee that may be defective or inconsistent with any other provision in the Indenture, the Notes or any Guarantee or make any other provisions with respect to matters or questions arising under the Indenture, the Notes or any Guarantee; provided that, in each case, such provisions shall in the opinion of the Trustee not adversely affect the interests of the holders of the Notes; (d) to add a Subsidiary Guarantor or other guarantor under the Indenture; (e) to release a Subsidiary Guarantor in accordance with and if permitted by the terms of and limitations set forth in the Indenture; (f) to evidence and provide for the acceptance of the appointment of a successor Trustee or Security Trustee under the Indenture; (g) to mortgage, pledge, hypothecate or grant a security interest in favor of the Trustee for the benefit of the holders of the Notes as additional security for the payment and performance of the Issuers and any Subsidiary Guarantors

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obligations under the Notes and the Indenture, in any property, or assets, including any of which are required to be mortgaged, pledged or hypothecated, or in which a security interest is required to be granted to the Trustee pursuant to the Indenture or otherwise; (h) to conform the Indenture to this Description of the Notes; and (i) to provide for the issuance of Subsequent Additional Notes in accordance with and if permitted by the terms of and limitations set forth in the Indenture. The Issuer will inform the Luxembourg Stock Exchange of any material amendment to the Indenture or any supplement thereto. The Issuer will also publish a notice of any such material amendment in accordance with the provisions of the Indenture described immediately below under Notices. Notices Notices regarding the Notes will be: (a) published (i) through the newswire service of Bloomberg or, if Bloomberg does not then operate, any similar agency, and (ii) if and so long as the Notes are listed on the Euro MTF and the rules and regulations of the Luxembourg Stock Exchange so require, in a newspaper having a general circulation in Luxembourg (which is expected to be the Luxemburger Wort) or on the website of the Luxembourg Stock Exchange (www.bourse.lu); and (b) in the case of certificated Notes, mailed to holders of such Notes by first-class mail at their respective addresses as they appear on the registration books of the registrar. Notices given by first-class mail will be deemed given five calendar days after mailing and notices given by publication will be deemed given on the first date on which publication is made. If and so long as the Notes are listed on any other securities exchange, notices will also be given in accordance with any applicable requirements of such securities exchange. No Personal Liability of Directors, Officers, Employees and Shareholders No director, officer, employee, incorporator or shareholder of the Issuer or any Subsidiary Guarantor, as such, shall have any liability for any obligations of Issuer or the Subsidiary Guarantors under the Notes, the Guarantees or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each holder of Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. The waiver may not be effective to waive liabilities under U.S. federal or other applicable securities laws. Enforceability of Judgments Because all of the assets of the Issuer and its Subsidiaries are located outside the United States, any judgment obtained in the United States against the Issuer or any Subsidiary Guarantor, including judgments with respect to the payment of principal, premium, interest, Additional Amounts and any redemption price and any purchase price with respect to the Notes, may not be collectable within the United States. The Trustee The Indenture contains limitations on the rights of the Trustee under the Indenture in the event the Trustee becomes a creditor of the Issuer. These include limitations on the Trustees rights to obtain payment of claims in certain cases or to realize on certain property received by it in respect of any such claims, as security or otherwise. The Indenture contains provisions for the indemnification of the Trustee and for its relief from responsibility, including provisions relieving it from taking action unless indemnified to its satisfaction. Governing Law The Indenture, the Notes and the Guarantees are governed by and construed in accordance with the laws of the State of New York, and provide for the submission of the parties to the jurisdiction of the courts in the State of New York. The Security Documents are governed by and construed in accordance with English law, Dutch law and Hungarian law, as applicable. Prescription

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Claims against the Issuer for payment of principal, interest and Additional Amounts, if any, on the Notes will become void unless presentment for payment is made (where so required herein) within, in the case of principal and Additional Amounts, if any, a period of ten years or, in the case of interest, a period of five years, in each case from the applicable original payment date therefor. Certain Definitions Acquired Debt means Debt of a Person: (a) existing at the time such Person becomes a Restricted Subsidiary or is merged into or consolidated with the Issuer or any Restricted Subsidiary; or (b) assumed in connection with the acquisition of assets from any such Person. Acquired Debt will be deemed to be incurred on the date the acquired Person becomes a Restricted Subsidiary or the date of the related acquisition of assets from any Person. Affiliate means, with respect to any specified Person: (a) any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person; (b) any other Person that owns, directly or indirectly, 10% or more of such specified Persons Capital Stock or any executive officer performing a policy-making function or director of any such specified Person or other Person or, with respect to any natural Person, any Person having a relationship with such Person by blood, marriage or adoption not more remote than first cousin; or (c) any other Person 10% or more of the Voting Stock of which is beneficially owned or held, directly or indirectly by such specified Person. For the purposes of this definition, control, when used with respect to any specified Person, means the power to direct or cause the direction of the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms controlling and controlled have meanings correlative to the foregoing. Asset Sale means any sale, issuance, conveyance, transfer, lease or other disposition (including, without limitation, by way of merger, consolidation or sale and leaseback transaction) (collectively, a transfer), directly or indirectly, in one or a series of related transactions, of: (a) any Capital Stock of any Restricted Subsidiary; (b) all or substantially all of the properties and assets of any division or line of business of the Issuer or any Restricted Subsidiary; or (c) any other of the Issuers or any Restricted Subsidiarys properties or assets, other than in the ordinary course of business. Notwithstanding the preceding, none of the following items will be deemed to be an Asset Sale: (d) any sale, conveyance, transfer or other disposition of assets that is governed by the provisions of the Indenture described under Certain Covenants Consolidation, Merger and Sale of Assets or Certain Covenants Purchase of Notes upon a Change of Control; (e) any sale, conveyance, transfer or other disposition of assets by the Issuer to any Restricted Subsidiary, or by any Restricted Subsidiary, including any issuance of Capital Stock by a Restricted Subsidiary, to the Issuer or any other Restricted Subsidiary in accordance with the terms of the Indenture; (f) any sale, conveyance, transfer or other disposition of obsolete or permanently retired equipment or facilities that are no longer useful in the conduct of the Issuers and any Restricted Subsidiarys business; (g) a transaction or series of transactions for which the Issuer or its Restricted Subsidiaries receive aggregate consideration with a Fair Market Value of less than 5.0 million in any calendar year; (h) the sale of cash or Cash Equivalents;

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(i) any Restricted Payment permitted by the Limitation on Restricted Payments covenant or that constitutes a Permitted Investment; (j) the sale or lease of inventory, products or services of the Issuer or any Restricted Subsidiary (including the lease of excess network capacity and the sale of dark fiber) in the ordinary course of business; (k) any issuance or sale to directors of directors qualifying shares or issuances or sales of shares of Capital Stock of Restricted Subsidiaries to be held by third parties, in each case to the extent required by applicable law; (l) the sale or discount of accounts receivable in the ordinary course of business in connection with the compromise or collection thereof; (m) any sale or transfer pursuant to, or in connection with, the Refinancing; and (n) the creation of a Lien not prohibited by the Indenture. Attributable Debt means, with respect to any sale and leaseback transaction at the time of determination, the present value (discounted at the interest rate implicit in the lease determined in accordance with GAAP or, if not known, at the Issuers incremental borrowing rate) of the total obligations of the lessee of the property subject to such lease for rental payments during the remaining term of the lease included in such sale and leaseback transaction, including any period for which such lease has been extended or may, at the option of the lessor, be extended, or until the earliest date on which the lessee may terminate such lease without penalty or upon payment of penalty (in which case the rental payments shall include such penalty), after excluding from such rental payments all amounts required to be paid on account of maintenance and repairs, insurance, taxes, assessments, water, utilities and similar charges; provided that if such sale and leaseback transaction results in a Capitalized Lease Obligation, the amount of Debt represented thereby will be determined in accordance with the definition of Capitalized Lease Obligation. Average Life means, as of the date of determination with respect to any Debt, the quotient obtained by dividing: (a) the sum of the products of: (i) the numbers of years from the date of determination to the date or dates of each successive scheduled principal payment of such Debt multiplied by (ii) the amount of each such principal payment; by (b) the sum of all such principal payments. Bund Rate means, with respect to any redemption date, the rate per annum equal to the equivalent yield to maturity as of such redemption date of the Comparable German Bund Issue, assuming a price for the Comparable German Bund Issue (expressed as a percentage of its principal amount) equal to the Comparable German Bund Price for such redemption date, where: (a) Comparable German Bund Issue means the German Bundesanleihe security selected by any Reference German Bund Dealer as having a fixed maturity most nearly equal to the period from such redemption date to December 15, 2012, and that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of euro denominated corporate debt securities in a principal amount approximately equal to the then outstanding principal amount of the Notes and of a maturity most nearly equal to December 15, 2012; provided, however, that, if the period from such redemption date to December 15, 2012 is not equal to the fixed maturity of the German Bundesanleihe security selected by such Reference German Bund Dealer, the Bund Rate shall be determined by linear interpolation (calculated to the nearest one-twelfth of a year) from the yields of German Bundesanleihe securities for which such yields are given; except that if the period from such redemption date to December 15, 2012 is less than one year, a fixed maturity of one year shall be used; (b) Comparable German Bund Price means, with respect to any redemption date, the average of the Reference German Bund Dealer Quotations for such redemption date (which in any event must include at least two such quotations), after excluding the highest and lowest such Reference German Bund Dealer Quotations, or if the Issuer obtains fewer than four such Reference German Bund Dealer Quotations, the average of all such quotations;

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(c) Reference German Bund Dealer means any dealer of German Bundesanleihe securities appointed by the Issuer in consultation with the Trustee; and (d) Reference German Bund Dealer Quotations means, with respect to each Reference German Bund Dealer and any redemption date, the average as determined by the Issuer in good faith of the bid and offered prices for the Comparable German Bund issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Issuer by such Reference German Bund Dealer at 3:30 p.m. Frankfurt, Germany time on the third German business day preceding such redemption date. Business Day means a day other than a Saturday, Sunday or other day on which banking institutions in London, Luxembourg or Budapest or a place of payment under the Indenture are authorized or required by law to close. Capital Stock means, with respect to any Person, any and all shares, interests, partnership interests (whether general or limited), participations, rights in or other equivalents (however designated) of such Persons equity, any other interest or participation that confers the right to receive a share of the profits and losses, or distributions of assets of, such Person and any rights (other than debt securities convertible into or exchangeable for Capital Stock), warrants or options exchangeable for or convertible into such Capital Stock, whether now outstanding or issued after the Issue Date. Capitalized Lease Obligation means, with respect to any Person, any obligation of such Person under a lease of (or other agreement conveying the right to use) any property (whether real, personal or mixed), which obligation is required to be classified and accounted for as a capital lease obligation under GAAP, and, for purposes of the Indenture, the amount of such obligation at any date will be the capitalized amount thereof at such date, determined in accordance with GAAP and the Stated Maturity thereof will be the date of the last payment of rent or any other amount due under such lease prior to the first date such lease may be terminated without penalty. Cash Equivalents means any of the following: (a) any evidence of indebtedness denominated in euro, Sterling, Hungarian forint or dollars with (except for up to 5.0 million equivalent of indebtedness denominated in Hungarian forint) a maturity of one year or less from the date of acquisition issued or directly and fully guaranteed or insured by a member state (an EU Member State) of the European Union whose sole lawful currency on the Issue Date is the euro (or, in the case of Hungary, Hungarian forint), the government of the United Kingdom of Great Britain and Northern Ireland, the United States of America, any state thereof or the District of Columbia, or any agency or instrumentality thereof; (b) time deposit accounts, certificates of deposit, money market deposits or bankers acceptances denominated in euro, Sterling, Hungarian forint or dollars with a maturity of one year or less from the date of acquisition issued by a bank or trust company organized in an EU Member State (including Hungary), the United Kingdom of Great Britain and Northern Ireland or any commercial banking institution that is a member of the U.S. Federal Reserve System, in each case having combined capital and surplus and undivided profits of not less than 500 million, whose debt has a rating, at the time any investment is made therein, of at least A or the equivalent thereof by S&P and at least A2 or the equivalent thereof by Moodys; (c) commercial paper with a maturity of one year or less from the date of acquisition issued by a corporation that is not the Issuers or any Restricted Subsidiarys Affiliate and is incorporated under the laws of an EU Member State (including Hungary), England and Wales, the United States of America or any state thereof and, at the time of acquisition, rated at least A-1 or the equivalent thereof by S&P or at least P-1 or the equivalent thereof by Moodys; (d) repurchase obligations with a term of not more than seven days for underlying securities of the type described in clause (a) above entered into with a financial institution meeting the qualifications described in clause (b) above; and (e) Investments in money market mutual funds at least 95% of the assets of which constitute Cash Equivalents of the kind described in clauses (a) through (d) above. Change of Control has the meaning given to such term under Purchase of Notes upon a Change of Control. Commission means the U.S. Securities and Exchange Commission.

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Consolidated Adjusted Net Income means, for any period, the Issuers and the Restricted Subsidiaries consolidated net income (or loss) for such period as determined in accordance with GAAP, adjusted by excluding (to the extent included in such consolidated net income or loss), without duplication: (a) any net after-tax extraordinary or non-recurring gain, loss or charge (including, without limitation, fees, expenses and charges associated with the Refinancing or any acquisition, merger or consolidation after the Issue Date and charges or expenses in respect of any restructuring, redundancy or severance); (b) any net after-tax gains attributable to sales of assets of the Issuer or any Restricted Subsidiary that are not sold in the ordinary course of business (it being understood that sales of dark fiber shall be deemed to be in the ordinary course); (c) the net income (loss) of any Person (other than the Issuer or a Restricted Subsidiary), including Unrestricted Subsidiaries, in which the Issuer or any Restricted Subsidiary has an equity ownership interest, except (i) the Issuers equity in the net income of any such Person for such period will be included in Consolidated Adjusted Net Income only to the extent of the aggregate amount of dividends or other distributions actually paid to the Issuer or any Restricted Subsidiary in cash dividends or distributions during such period, and (ii) the Issuers equity in a net loss of any such Person for such period will be included in determining such Consolidated Adjusted Net Income; (d) the net income (loss) of any Restricted Subsidiary (other than any Subsidiary Guarantor) to the extent that the declaration or payment of dividends or similar distributions by such Restricted Subsidiary is not at the date of determination permitted, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to such Restricted Subsidiary or its shareholders; (e) net after-tax gains or losses attributable to the termination of any employee pension benefit plan; (f) any restoration to net income of any contingency reserve, except to the extent provision for such reserve was made out of income accrued at any time following the Issue Date; (g) any net gain arising from the disposition of any securities or extinguishment, under GAAP, of any Debt of such Person; (h) all deferred financing costs existing on the Issue Date to the extent written off or amortized on or after the Issue Date, and all amortization or write-offs of deferred financing costs related to the Transactions to the extent recognized; (i) the net income (loss) attributable to discontinued operations (including, without limitation, operations disposed of during such period whether or not such operations were classified as discontinued); (j) any impairment loss of the Issuer or a Restricted Subsidiary relating to goodwill or other intangible assets; (k) any gains or losses from currency exchange transactions (including those arising on translation of currency debt) not in the ordinary course of business; (l) the cumulative effect of a change in accounting principles after the Issue Date; (m) any non-cash compensation charge, including any such charge arising from any grant or issuance of stock, stock options or other equity-based awards; (n) any non-cash impact attributable to the application of the purchase method of accounting in accordance with GAAP (including, without limitation, the mark up of inventory to fair value and the total amount of depreciation and amortization, cost of sales and other non-cash expense (other than a non-cash charge or expense described in clause (j)) resulting from the write-up of assets for such period on a consolidated basis in accordance with GAAP to the extent such non-cash expense results from such purchase accounting adjustments); and (o) to the extent the interest expense in respect of the PIK Notes has been included in the Issuers consolidated net income as a result of the application of GAAP, the interest expense in respect of the PIK Notes (provided the PIK Issuer is not the Issuer or a Restricted Subsidiary).

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Consolidated EBITDA means, for any period, the Consolidated Adjusted Net Income for such period, plus, without duplication, the following, to the extent deducted in calculating such Consolidated Net Income: (a) Consolidated Income Taxes; plus (b) Consolidated Interest Expense; plus (c) depreciation expense of the Issuer and its consolidated Restricted Subsidiaries; plus (d) amortization expense of the Issuer and its consolidated Restricted Subsidiaries (excluding amortization of any such non-cash charge to the extent it represents an accrual of or reserve for cash expenditures in any future period); plus (e) other non-cash charges reducing Consolidated Net Income (excluding any such non-cash charge to the extent it represents an accrual of or reserve for cash charges in any future period); plus (f) minority interest expense; plus (g) (i) realized and unrealized losses with respect to Interest Rate Agreements or Currency Agreements or other derivative instruments (ii) and any realized and unrealized foreign currency transaction losses in respect of Indebtedness of any Person denominated in a currency other than the functional currency of such Person and any realized and unrealized foreign exchange losses relating to translation of assets and liabilities denominated in foreign currencies will be excluded; plus

(h) amounts written off, financial assets and investments held as current assets; minus, without duplication, to the extent included in calculating Consolidated Net Income each of: (a) realized and unrealized gains with respect to Interest Rate Agreements or Currency Agreements or other derivative instruments (ii) and any realized and unrealized foreign currency transaction gains in respect of Indebtedness of any Person denominated in a currency other than the functional currency of such Person and any realized and unrealized foreign exchange gains relating to translation of assets and liabilities denominated in foreign currencies will be excluded; and (b) all non-cash items of income of the Issuer and its consolidated Restricted Subsidiaries to the extent included in calculating Consolidated Net Income (excluding any such non-cash item of income to the extent it represents the reversal of accruals or reserves for cash charges taken in prior periods or will result in receipt of cash payments in any future period and excluding, for the avoidance of doubt, the reversal of deferred income related to any income received in cash in prior periods amortized over the life of the related contract including but not limited to income from indefeasible rights of use contracts), in each case, for such period. Notwithstanding the foregoing, the provision for taxes based on the income or profits of, and the depreciation and amortization and non-cash charges of, a Restricted Subsidiary of the Issuer shall be added to Consolidated Net Income to compute EBITDA only to the extent (and in the same proportion) that the net income of such Restricted Subsidiary was included in calculating Consolidated Net Income and (other than with respect to a Subsidiary Guarantor) only to the extent that a corresponding amount would be permitted at the date of determination to be dividended or distributed, directly or indirectly, to the Issuer by such Restricted Subsidiary without breaching or violating a restriction, directly or indirectly, applicable to such Restricted Subsidiary. Consolidated Income Taxes means, with respect to any Person for any period, taxes imposed upon such Person or other payments required to be made by such Person by any governmental authority which taxes or other payments are calculated by reference to the income or profits of such Person or such Person and its Restricted Subsidiaries (to the extent such income or profits were included in computing Consolidated Net Income for such period), regardless of whether such taxes or payments are required to be remitted to any governmental authority. Consolidated Interest Expense means, for any period, without duplication and in each case determined on a consolidated basis in accordance with GAAP, the sum of: (a) the Issuers and the Restricted Subsidiaries total interest expense for such period, including, without limitation: (i) amortization of debt discount;

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(ii) the net costs of Interest Rate Agreements and Currency Agreements (including amortization of fees and discounts but excluding any realized and unrealized gains or losses related to Interest Rate Agreements and Currency Agreements); (iii) commissions, discounts and other fees and charges owed with respect to letters of credit and bankers acceptance financing and similar transactions; (iv) the interest portion of any deferred payment obligation and amortization of debt issuance costs; plus (b) dividends accrued in respect of all Disqualified Stock of the Issuer and Preferred Stock of Restricted Subsidiaries held by Persons other than the Issuer or a Restricted Subsidiary (other than dividends payable solely in Qualified Capital Stock of the Issuer); provided, however, that such dividends will be multiplied by a fraction the numerator of which is one and the denominator of which is one minus the effective combined tax rate of the issuer of such Preferred Stock (expressed as a decimal) for such period (as estimated by the chief financial officer of the Issuer or Holdings in good faith); plus (c) the interest component of the Issuers and the Restricted Subsidiaries Capitalized Lease Obligations accrued and/or scheduled to be paid or accrued during such period; plus (d) the Issuers and the Restricted Subsidiaries non-cash interest expenses and interest that was capitalized during such period; plus (e) the interest expense on Debt of another Person to the extent such Debt is guaranteed by the Issuer or any Restricted Subsidiary or secured by a Lien on the Issuers or any Restricted Subsidiarys assets, but only to the extent that such interest is actually paid by the Issuer or such Restricted Subsidiary. Consolidated Leverage Ratio, as of any date of determination, means the ratio of: (a) the outstanding Debt of the Issuer and its Restricted Subsidiaries on a consolidated basis, to (b) the Pro Forma EBITDA for the period of the most recent four consecutive fiscal quarters for which financial statements have previously been furnished to holders of the Notes pursuant to the covenant described under Certain Covenants Reports to Holders. Consolidated Net Leverage Ratio as of any date of determination, means the ratio of: (a) the outstanding Debt of the Issuer and its Restricted Subsidiaries on a consolidated basis less the cash and Cash Equivalents of the Issuer and its Restricted Subsidiaries on a consolidated basis (and for the avoidance of doubt, such cash and Cash Equivalents shall not give pro forma effect to any amounts received in connection with the incurrence of Debt for which purpose the ratio is being calculated), to (b) the Pro Forma EBITDA for the period of the most recent four consecutive fiscal quarters for which financial statements have previously been furnished to holders of the Notes pursuant to the covenant described under Certain Covenants Reports to Holders. Consolidated Secured Leverage Ratio as of any date of determination, means the ratio of: (a) the outstanding Measured Debt of the Issuer and its Restricted Subsidiaries on a consolidated basis, to (b) the Pro Forma EBITDA for the period of the most recent four consecutive fiscal quarters for which financial statements have previously been furnished to holders of the Notes pursuant to the covenant described under Certain Covenants Reports to Holders. Credit Facility or Credit Facilities means, one or more debt facilities or arrangements, as the case may be, with banks, insurance companies or other institutions, in each case, as amended, restated, modified, renewed, refunded, replaced or refinanced in whole or in part from time to time and, for the avoidance of doubt, includes any agreement extending the maturity of, refinancing or restructuring all or any portion of the indebtedness under such agreements, indentures or financing arrangements or any successor agreements, indentures or financing arrangements. Currency Agreements means in respect of a Person any spot or forward foreign exchange agreements and currency swap, currency option or other similar financial agreements or arrangements designed to protect such Person against or manage exposure to fluctuations in foreign currency exchange rates.

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Debt means, with respect to any Person, without duplication: (a) the principal of indebtedness of such Person for borrowed money (including overdrafts) or the principal component of obligations of such Person for the deferred purchase price of property or services, excluding any trade payables and other accrued current liabilities incurred in the ordinary course of business; (b) the principal of obligations of such Person evidenced by bonds, notes, debentures or other similar instruments; (c) all obligations of such Person in connection with any letters of credit, bankers acceptances, receivables facilities or other similar facilities; (d) the principal component of all indebtedness of such Person created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even if the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), but excluding trade payables arising in the ordinary course of business; (e) all Capitalized Lease Obligations of such Person; (f) all obligations of such Person under or in respect of Interest Rate Agreements and Currency Agreements; (g) the principal component of all Debt referred to in (but not excluded from) the preceding clauses (a) through (f) of other Persons and all dividends of other Persons, the payment of which is secured by any Lien upon or with respect to property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Debt (the amount of such obligation being deemed to be the lesser of the fair market value of such property or asset and the amount of the obligation so secured); (h) all guarantees by such Person of the principal component of Debt referred to in (but not expressly excluded from) this definition of any other Person to the extent guaranteed by such Person; (i) all Redeemable Capital Stock of such Person valued at the greater of its voluntary maximum fixed repurchase price and involuntary maximum fixed repurchase price but excluding accrued dividends; and (j) Preferred Stock of any Restricted Subsidiary (other than a Subsidiary Guarantor) excluding accrued dividends; provided that the term Debt shall not include (i) non-interest bearing installment obligations and accrued liabilities incurred in the ordinary course of business that are not more than 90 days past due; (ii) Debt in respect of the incurrence by the Issuer or any Restricted Subsidiary of Debt in respect of standby letters of credit, performance bonds or surety bonds provided by the Issuer or any Restricted Subsidiary in the ordinary course of business to the extent such letters of credit or bonds are not drawn upon or, if and to the extent drawn upon are honored in accordance with their terms and if, to be reimbursed, are reimbursed no later than the fifth Business Day following receipt by such Person of a demand for reimbursement following payment on the letter of credit or bond; (iii) anything accounted for as an operating lease in accordance with GAAP (including, for the avoidance of doubt, any Operating IRUs); and (iv) the PIK Notes (provided that the PIK Issuer is not the Issuer or a Restricted Subsidiary). Except as provided in the next paragraph, the amount of Debt of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date, in each case as determined in accordance with GAAP. The amount of Debt under Interest Rate Agreements or Currency Agreements of a Person will be calculated by reference to the net liability of such Person thereunder (as determined in accordance with GAAP as of the date of the most recent financial statements distributed to holders of Notes under the covenant described under Certain Covenants Reports to Holders). For purposes of this definition, the maximum fixed repurchase price of any Redeemable Capital Stock that does not have a fixed redemption, repayment or repurchase price will be calculated in accordance with the terms of such Redeemable Capital Stock as if such Redeemable Capital Stock were purchased on any date on which Debt will be required to be determined pursuant to the Indenture, and if such price is based upon, or measured by, the fair market value of such Redeemable Capital Stock, such fair market value will be determined in good faith by the board of directors of the issuer of such Redeemable Capital Stock; provided that if such Redeemable Capital Stock is not then permitted to be redeemed, repaid or repurchased, the redemption, repayment or repurchase price shall be the book value of such Redeemable Capital Stock as reflected in the most recent financial statements of such Person.

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Default means any event that is, or after notice or passage of time or both would be, an Event of Default. Designated Proceeds shall mean as of the date of determination an amount equal to (a) an amount equal to the Net Cash Proceeds received in connection with the sale of an Indentified Asset, less (b) the aggregate amount of all such Net Cash Proceeds applied in accordance with clause (a) of paragraph (7) of the covenant entitled Limitation on Sale of Certain Assets. Designated Proceeds Restricted Payment shall mean any Restricted Payment made with Designated Proceeds on or before the Final Date provided that at the time of making of such Restricted Payment (i) the Existing High Yield Notes have been satisfied and discharged pursuant to the terms thereof and (ii) the Consolidated Net Leverage Ratio for the Issuer and its Restricted Subsidiaries after giving pro forma effect thereto does not exceed 2.25 to 1.0; provided further that no such Restricted Payment may be made with respect to any Identified Asset that is not sold on or before the date that is 18 months after the Issue Date; and provided further that prior to making any such Restricted Payment, the Issuer will apply Net Cash Proceeds from the sale of any Identified Asset to make an offer to all holders of Notes to purchase such amount of Notes at an offer price of 100% of the principal amount plus accrued and unpaid interest and Additional Amounts, if any, to the date of purchase equal to the Net Cash Proceeds received for such Asset Sale and the amount that may be applied to make a Restricted Payment shall not exceed the amount left, if any, after making such offer. Disinterested Director of the Issuer or Holdings means, with respect to any transaction or series of related transactions, a member of the Issuers or Holdings board of directors, as the case may be, who does not have any material direct or indirect financial interest in or with respect to such transaction or series of related transactions and who is not an Affiliate, officer, director or employee of any Person (other than the Issuer or Holdings, as the case may be) who has any direct or indirect financial interest in or with respect to such transaction or series of related transactions. A member of the Issuers or Holdings board of directors shall not be deemed to have such a financial interest by reason of such members holding of Capital Stock of the Issuer or Holdings. dollars means the lawful currency of the United States of America. euro or means the lawful currency of the member states of the European Union who have agreed to share a common currency in accordance with the provisions of the Maastricht Treaty dealing with European monetary union. Euro Equivalent means with respect to any monetary amount in a currency other than euro, at any time for the determination thereof, the amount of euro obtained by converting such foreign currency involved in such computation into euro at the spot rate for the purchase of euro with the applicable foreign currency as published under Currency Rates in the section of the Financial Times entitled Currencies, Bonds & Interest Rates on the date two Business Days prior to such determination. European Government Obligations means direct obligations (or certificates representing an ownership interest in such obligations) of a member state of the European Union as of the Issue Date (including any agency or instrumentality thereof) for the payment of which the full faith and credit of such government is pledged. Euroweb Romania means S.C. Euroweb Romania S.A., an entity organized under the laws of Romania. Exchange Act means the U.S. Securities Exchange Act of 1934, as amended, or any successor statute, and the rules and regulations promulgated by the Commission thereunder. Existing High Yield Notes means the Floating Rate Senior Notes due 2013 of issued by the Issuer with aggregate principal amount on the issue date of 200,000,000. Existing High Yield Notes Indenture means the indenture governing the Existing High Yield Notes. Existing High Yield Shared Collateral means the liens over certain intercompany funding loans from Magyar Telecom B.V. to certain of its subsidiaries, the liens over the Capital Stock of Magyar Telecom B.V. and all shares of Capital Stock of Magyar Telecom B.V., Invitel Tvkzlsi Zrt., Euroweb Romania, Invitel Technocom Kft., Invitel International AG, Memorex Turkey, Invitel Telecom Kft. and International Hungary. Fair Market Value means, with respect to any asset or property, the sale value that would be obtained in an armslength free market transaction between an informed and willing seller under no compulsion to sell and an informed and willing buyer under no compulsion to buy, as determined in good faith by the Issuers board of directors (or, if the Issuers board of directors does not consist of natural persons, Holdings board of directors). Generally Accepted Accounting Principles or GAAP means IFRS.

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guarantees means, as applied to any obligation, (a) a guarantee (other than by endorsement of negotiable instruments for collection or deposit in the ordinary course of business), direct or indirect, in any manner, of any part or all of such obligation and (b) an agreement, direct or indirect, contingent or otherwise, to pay or perform (or pay damages in the event of nonperformance) of all or any part of such obligation, including, without limiting the foregoing, by the pledge of assets and the payment of amounts drawn down under letters of credit. Guarantee means any guarantee of the Issuers obligations under the Indenture and the Notes by any Subsidiary Guarantor. When used as a verb, Guarantee shall have a corresponding meaning. Holdings means Invitel Holdings A/S., a Danish corporation, and its successors. Identified Assets means (1) the Shares of Capital Stock of International Holdings, (2) the shares of Capital Stock of Euroweb Romania and (3) the Shares of Capital Stock of Invitel International. IFRS means International Financial Reporting Standards as endorsed by the European Union and in effect on the date of calculation or determination required hereunder. Intercreditor Agreement means the Intercreditor Deed dated the Issue Date by and among the Issuer, the guarantors named therein and the other parties named therein, as amended from time to time. Interest Rate Agreements means in respect of a Person any interest rate protection agreements and other types of interest rate hedging agreements (including, without limitation, interest rate swaps, caps, floors, collars and similar agreements) designed to protect such Person against or manage exposure to fluctuations in interest rates. International Holdings means Invitel International Holdings B.V., a company incorporated under the laws of The Netherlands. Investment means, with respect to any Person, any direct or indirect advance, loan or other extension of credit (including guarantees) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition by such Person of any Capital Stock, bonds, notes, debentures or other securities or evidences of Debt issued or owned by, any other Person and all other items that would be classified as investments on a balance sheet prepared in accordance with GAAP. In addition, the portion (proportionate to the Issuers equity interest in such Restricted Subsidiary) of the fair market value of the net assets of any Restricted Subsidiary at the time that such Restricted Subsidiary is designated an Unrestricted Subsidiary will be deemed to be an Investment that the Issuer made in such Unrestricted Subsidiary at such time. The portion (proportionate to the Issuers equity interest in such Restricted Subsidiary) of the fair market value of the net assets of any Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is designated a Restricted Subsidiary will be considered a reduction in outstanding Investments. Investments excludes extensions of trade credit on commercially reasonable terms and endorsements of negotiable instruments and other documents, in each case in accordance with normal trade practices. Investment Grade Status shall occur when the Notes receive both of the following: (a) a rating of Baa3 (or the equivalent) or higher from Moodys; and (b) a rating of BBB- (or the equivalent) or higher from Standard & Poors, in each case, with stable outlook from such rating agency. Invitel ZRt means Invitel Tvkzlsi ZRt., a joint stock company incorporated under the laws of Hungary. Issue Date means December 16, 2009 which was the issue date of the Existing Notes. Lien means any mortgage or deed of trust, charge, pledge, lien (statutory or otherwise), privilege, security interest, hypothecation, assignment for security, claim, or preference or priority or other encumbrance upon or with respect to any property of any kind, real or personal, movable or immovable, now owned or hereafter acquired. A Person will be deemed to own subject to a Lien any property which such Person has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement. Maturity means, with respect to any indebtedness, the date on which any principal of such indebtedness becomes due and payable as therein or herein provided, whether at the Stated Maturity with respect to such principal or by declaration of acceleration, call for redemption or purchase or otherwise.

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Measured Debt means, without duplication, (a) any Debt (i) of the Issuer or any Restricted Subsidiary that is secured by a Lien on any assets or properties (including, without limitation, the Collateral) of the Issuer or any Restricted Subsidiary pursuant to clause (a) of the definition of Permitted Collateral Liens and (ii) of Restricted Subsidiary that is not a Subsidiary Guarantor less (b) Capitalized Lease Obligations incurred pursuant to clause (n) of paragraph (2) of the covenant described under Certain Covenants Limitation on Debt. Moodys means Moodys Investors Service, Inc. and its successors or assigns. Net Cash Proceeds means: (a) with respect to any Asset Sale, the proceeds thereof in the form of cash or Cash Equivalents including payments in respect of deferred payment obligations when received in the form of, or stock or other assets when disposed for, cash or Cash Equivalents (except to the extent that such obligations are financed or sold with recourse to the Issuer or any Restricted Subsidiary), net of: (i) brokerage commissions and other fees and expenses (including, without limitation, fees and expenses of legal counsel, accountants, investment banks and other consultants) related to such Asset Sale; (ii) provisions for all taxes paid or payable, or required to be accrued as a liability under GAAP as a result of such Asset Sale; (iii) all payments made on any Debt that is secured by any Property subject to such Asset Sale, in accordance with the terms of any Lien upon or other security agreement of any kind with respect to such Property, or which must by its terms, or in order to obtain a necessary consent to such Asset Sale, or by applicable law, be repaid out of the proceeds from such Asset Sale; (iv) all distributions and other payments required to be made to any Person (other than the Issuer or any Restricted Subsidiary) owning a beneficial interest in the assets subject to the Asset Sale; and (v) appropriate amounts required to be provided by the Issuer or any Restricted Subsidiary, as the case may be, as a reserve in accordance with GAAP against any liabilities associated with such Asset Sale and retained by the Issuer or such Restricted Subsidiary, as the case may be, after such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as reflected in an Officers Certificate delivered to the Trustee; and (b) with respect to any capital contributions, issuance or sale of Capital Stock or options, warrants or rights to purchase Capital Stock, or debt securities or Capital Stock that have been converted into or exchanged for Capital Stock as referred to under Certain Covenants Limitation on Restricted Payments, the proceeds of such issuance or sale in the form of cash or Cash Equivalents, payments in respect of deferred payment obligations when received in the form of, or stock or other assets when disposed of for, cash or Cash Equivalents (except to the extent that such obligations are financed or sold with recourse to the Issuer or any Restricted Subsidiary), net of attorneys fees, accountants fees and brokerage, consultation, underwriting and other fees and expenses actually incurred in connection with such issuance or sale and net of taxes paid or payable as a result of thereof. Net Consolidated Interest Expense means Consolidated Interest Expense of the Issuer and its Restricted Subsidiaries on a consolidated basis net of interest income of the Issuer and its Restricted Subsidiaries on a consolidated basis in accordance with GAAP. Officers Certificate means a certificate signed by an officer of the Issuer, a Subsidiary Guarantor or a Surviving Entity, as the case may be, and delivered to the Trustee in form and substance satisfactory to the Trustee. Operating IRU means an indefeasible right of use of, or operating lease or payable for lit or unlit fiber optic cable or telecommunications conduit or the use of either thereof for a period constituting all or substantially all of the expected useful life thereof. Pari Passu Debt means (a) any Debt of the Issuer that ranks equally in right of payment with the Notes or (b) with respect to any Guarantee, any Debt that ranks equally in right of payment to such Guarantee. Permitted Collateral Liens means: (a) any Lien on the Collateral to secure

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(i) Pari Passu Debt of the Issuer or Invitel ZRt (and Pari Passu Debt of a guarantor thereof) that is permitted to be incurred under paragraph (1) or clauses (a), (b) or (o) of paragraph (2) of the covenant described under Certain Covenants Limitation on Debt; (ii) any Permitted Refinancing Debt relating to Debt initially incurred under paragraph (1) or clause (b) of paragraph (2) of the covenant described under Certain Covenants Limitation on Debt; or (iii) any obligations under Interest Rate Agreements or Currency Agreements entered into in connection with any of the Debt referred to in the preceding clauses (a)(i) and (a)(ii) or clause (c) of this definition of Permitted Collateral Liens; provided, in each case, that all property, assets and proceeds (including, without limitation, the Collateral), securing such Debt also secures the Notes and the Guarantees on a senior or pari passu basis (except that Pari Passu Debt incurred under clause (a) of paragraph (2) of the covenant described under Certain Covenants Limitation on Debt or Interest Rate Agreements or Currency Agreements of a type referred to in the preceding clause (iii) may receive priority as to enforcement proceeds from such Collateral); or (b) any Lien on the Collateral that is a statutory Lien arising by operation of law; or (c) any Lien on the Existing High Yield Shared Collateral to secure (i) the Existing High Yield Notes, (ii) any Permitted Refinancing Debt in respect of Debt referred to in the foregoing clause (i) and (iii) any Debt permitted to be incurred under paragraph (1) of the covenant described under Certain Covenants Limitation on Debt; provided, in each case, that such Lien ranks junior to all Liens on such Collateral securing the Notes and Guarantees on substantially the same terms as the Liens on such Collateral rank with respect to the Existing High Yield Notes and guarantees thereof (provided that, for the avoidance of doubt, such terms (other than with respect to the Existing High Yield Notes) will include customary provisions providing, upon enforcement action on any Collateral taken by creditors with respect to Debt of the types specified in the preceding clauses (a)(i) and (ii), for the release of any Lien on the Collateral subject to such enforcement action securing Debt of the type specified in this clause (c), and if such Collateral consists of the Capital Stock of a Subsidiary Guarantor or any of its parent entities, any Lien on the shares of Capital Stock of such Subsidiary Guarantor or on any of the assets of such Subsidiary Guarantor and of its obligations under such Debt). Notwithstanding anything in the Indenture to the contrary, in no event shall the Issuer incur any Debt which is to be secured by a Lien on any of the Collateral (a) if either: (1) the principal amount of the Debt to be secured by such Lien is less than 50.0 million (or in the case of Debt incurred under clauses (a) or (o) of paragraph (2) of the covenant described under Certain Covenants Limitation on Debt, the amount of Debt that may be incurred under such clause) or (2) with respect to any Lien on the Collateral to secure Debt pursuant to the foregoing clause (a)(i) and (a)(iii) at the time of such incurrence, the Consolidated Secured Leverage Ratio for the Issuer and its Restricted Subsidiaries, after giving effect to the incurrence of such Debt and the application of the proceeds thereof, on a pro forma basis, would be less than 2.5 to 1.0; or (b) unless the parties thereto have acceded to the Intercreditor Agreement. Permitted Debt has the meaning given to such term under Certain Covenants Limitation on Debt. Permitted Holder means Mid Europa Partners Limited and any investment fund or vehicle advised, sponsored or managed directly or indirectly by Mid Europa Partners Limited or any successor thereto, or by any Affiliate of such Person or any such successor. Permitted Investments means any of the following: (a) Investments in cash or Cash Equivalents; (b) intercompany Debt to the extent permitted under clause (d) of the definition of Permitted Debt; (c) Investments in (i) the Issuer, (ii) a Restricted Subsidiary or (iii) another Person if as a result of such Investment such other Person becomes a Restricted Subsidiary or such other Person is merged or consolidated with or into, or transfers or conveys all or substantially all of its assets to, the Issuer or a Restricted Subsidiary; (d) Investments made by the Issuer or any Restricted Subsidiary as a result of or retained in connection with an Asset Sale permitted under or made in compliance with Certain Covenants Limitation on Sale of Certain Assets to the extent such Investments are non-cash proceeds permitted thereunder; (e) expenses or advances to cover payroll, travel entertainment, moving, other relocation and similar matters that are expected at the time of such advances to be treated as expenses in accordance with GAAP;

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(f) Investments in the Notes; (g) Investments existing at, or made pursuant to legally binding commitments in existence on, the Issue Date; (h) Investments in Interest Rate Agreements and Currency Agreements permitted under clauses (h) and (i) of Certain Covenants Limitation on Debt; (i) Investments in receivables owing to the Issuer or any Restricted Subsidiary created or acquired in the ordinary course of business; (j) Investments in a Person to the extent that the consideration therefor consists of the net proceeds of the substantially concurrent issue and sale (other than to any Restricted Subsidiary) of shares of the Issuers Qualified Capital Stock; provided that the net proceeds of such sale to the extent applied pursuant to this clause (j) have been excluded from, and shall not have been included in, the calculation of the amount determined under clause (2)(c)(ii) of Certain Covenants Limitation on Restricted Payments; (k) Investments made using Qualified Capital Stock of the Issuer; (l) Guarantees permitted to be incurred by the covenant described under Certain Covenants Limitation on Debt; (m) Investments held by a Person (other than an Affiliate) that becomes a Restricted Subsidiary, provided that (i) such Investments were not acquired in contemplation of the acquisition of such Person and (ii) at the time such Person becomes a Restricted Subsidiary such Investments would not, individually or in the aggregate, constitute a Significant Subsidiary of such acquired Person; and (n) other Investments the Fair Market Value (measured on the date each such Investment was made and without giving effect to subsequent changes in value) of which, together with all other Investments pursuant to this clause (n), in the aggregate amount at the time of such Investment does not exceed the greater of 6.0 million and 1.5% of the total assets of the Issuer and its Restricted Subsidiaries, on a consolidated basis, at any one time outstanding. Permitted Liens means the following types of Liens: (a) Liens existing as of, or made pursuant to legally binding commitments in existence on, the Issue Date (including Liens securing the Notes); (b) Liens on any property or assets of a Restricted Subsidiary granted in favor of the Issuer or any Restricted Subsidiary; (c) Liens on any of the Issuers or any Restricted Subsidiarys property or assets securing the Notes or any Guarantee; (d) any interest or title of a lessor, licensor or sub-licensor in the property subject to any lease, license or sub-license; (e) Liens arising out of conditional sale, title retention, consignment or similar arrangements for the sale of goods entered into by the Issuer or any Restricted Subsidiary in the ordinary course of business in accordance with the Issuers or such Restricted Subsidiarys past practices prior to the Issue Date; (f) statutory Liens of landlords and carriers, warehousemen, mechanics, suppliers, materialmen, repairmen, employees, pension plan administrators or other like Liens arising in the ordinary course of the Issuers or any Restricted Subsidiarys business and with respect to amounts not yet delinquent or being contested in good faith by appropriate proceedings and for which a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made or Liens arising solely by virtue of any statutory or common law provisions relating to attorneys liens or bankers liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depositary institution; (g) Liens for taxes, assessments, government charges or claims not yet delinquent or that are being contested in good faith by appropriate proceedings and for which a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made; (h) Liens incurred or deposits made to secure the performance of tenders, bids, leases, statutory or regulatory obligations, surety or appeal bonds, government contracts, performance bonds or other obligations of a like nature incurred in the ordinary course of business (other than obligations for the payment of money);

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(i) zoning restrictions, easements, ground leases, licenses, reservations, title defects, rights of others for rights-of-way, utilities, sewers, electrical lines, telephone lines, telegraph wires, restrictions and other similar charges, encumbrances or title defects or survey exceptions incurred in the ordinary course of business that do not interfere in any material respect with the ordinary conduct of the business of the Issuer and its Restricted Subsidiaries taken as a whole; (j) Liens arising by reason of any judgment, decree or order or award of any court so long as such Lien is adequately bonded and any appropriate legal proceedings that may have been duly initiated for the review of such judgment, decree or order shall not have been finally terminated or the period within which such proceedings may be initiated shall not have expired; (k) Liens on property or other assets of, or on shares of Capital Stock or Debt of, any Person existing at the time such Person becomes a Restricted Subsidiary or such Person, property, assets or Capital Stock or Debt is acquired by, or such Person is merged with or into or consolidated with, the Issuer or any Restricted Subsidiary; provided that such Liens (i) do not extend to or cover any property, assets, Capital Stock or Debt of the Issuer or any Restricted Subsidiary other than the property, assets, Capital Stock or Debt acquired or than those of the Person merged into or consolidated with the Issuer or Restricted Subsidiary and (ii) were created prior to, and not in connection with or in contemplation of such acquisition, merger or consolidation; (l) Liens securing the Issuers or any Restricted Subsidiarys obligations under Interest Rate Agreements or Currency Agreements permitted under clauses (h) and (i) of paragraph (2) under Certain Covenants Limitation on Debt or any collateral for the Debt to which such Interest Rate Agreements or Currency Agreements relate; (m) Liens incurred or deposits made in the ordinary course of business in connection with workers compensation, unemployment insurance and other types of social security or other insurance (including unemployment insurance); (n) Liens incurred in connection with a cash management program established in the ordinary course of business for the Issuers benefit or that of any Restricted Subsidiary in favor of a bank or trust company of the type described in paragraph (1) of Certain Covenants Limitation on Guarantees of Debt by Restricted Subsidiaries; (o) Liens encumbering deposits made to secure obligations arising from statutory, regulatory, contractual, or warranty requirements of the Issuer or any Restricted Subsidiary, including rights of offset and set-off; (p) any encumbrance or restriction with respect to Capital Stock of any joint venture or similar arrangement pursuant to any joint venture or similar agreement; (q) any extension, renewal or replacement, in whole or in part, of any Lien described in the foregoing clauses (a) through (p); provided that any such extension, renewal or replacement shall be no more restrictive in any material respect than the Lien so extended, renewed or replaced and shall not extend in any material respect to any additional property or assets; (r) Liens in favor of banks having a right of setoff, revocation, refund or chargeback with respect to money or instruments of the Issuer or any Restricted Subsidiary on deposit with or in possession of such bank; (s) Liens securing Debt incurred to refinance Debt that has been secured by a Lien permitted by the Indenture; provided that (i) any such Lien shall not extend to or cover any assets not securing the Debt so refinanced and (ii) the Debt so refinanced shall have been permitted to be incurred pursuant to clause (l) of paragraph (2) of the Limitation on Debt covenant; (t) any Lien to the extent constituting a Guarantee which is subject to the provisions of the Indenture applicable to Guarantees; (u) Liens incurred with respect to obligations that do not exceed 25.0 million at any one time outstanding; (v) Liens arising as a result of the Refinancing; (w) pledges of Capital Stock or Debt of an Unrestricted Subsidiary; and (x) Liens to secure Debt (including Capitalized Lease Obligations) permitted to be incurred by clause (n) of paragraph (2) of the Limitation on Debt covenant covering only the assets acquired with or financed by such Debt.

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Permitted Refinancing Debt means any renewals, extensions, substitutions, refinancings or replacements (each, for purposes of this definition and paragraph (2)(l) of Certain Covenants Limitation on Debt, a refinancing) of any Debt of the Issuer or a Restricted Subsidiary or pursuant to this definition, including any successive refinancings, so long as: (a) the Issuer is the borrower under such refinancing or, if not, the borrower is the borrower of the Debt being refinanced; (b) such Debt is in an aggregate principal amount (or if incurred with original issue discount, an aggregate issue price) not in excess of the sum of (i) the aggregate principal amount (or if incurred with original issue discount, the aggregate accreted value) then outstanding of the Debt being refinanced and (ii) an amount necessary to pay any fees and expenses, including premiums and defeasance costs, related to such refinancing; (c) the Average Life of such Debt is equal to or greater than the Average Life of the Debt being refinanced; (d) the Stated Maturity of such Debt is no earlier than the Stated Maturity of the Debt being refinanced; and (e) the new Debt is not senior in right of payment to the Debt that is being refinanced; provided that Permitted Refinancing Debt will not include (i) Debt of a Subsidiary (other than the Subsidiary Guarantors) that refinances the Debt of the Subsidiary Guarantors or (ii) Debt of any Restricted Subsidiary that refinances Debt of an Unrestricted Subsidiary. Person means any individual, corporation, limited liability company, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. PIK Issuer means any obligor under the PIK Notes and under the indenture governing such notes. PIK Notes means the 125,000,000 floating rate senior PIK notes due 2013 originally issued by Invitel Holdings N.V. Preferred Stock means, with respect to any Person, Capital Stock of any class or classes (however designated) of such Person which is preferred as to the payment of dividends or distributions, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over the Capital Stock of any other class of such Person whether now outstanding, or issued after the Issue Date, and including, without limitation, all classes and series of preferred or preference stock of such Person. Proceeds Loan means the loan from the Issuer to Invitel ZRt of the proceeds from the issuance of the Notes permitted by the Indenture pursuant to a loan agreement and, all loans directly or indirectly replacing or refinancing such loan or any portion thereof. Pro Forma EBITDA means, for any period, the Consolidated EBITDA of the Issuer and its Restricted Subsidiaries; provided, however, that for the purposes of calculating Pro Forma EBITDA for such period, if, as of such date of determination: (a) other than for purposes of clause (c)(i) of paragraph (2) of the covenant described under Limitation on Restricted Payments, since the beginning of such period through the date of determination, the Issuer or any Restricted Subsidiary will have made any Asset Sale or disposed of any company, any business, or any group of assets constituting an operating unit of a business (any such disposition, a Sale) or if the transaction giving rise to the need to calculate the Consolidated Leverage Ratio is such a Sale, Pro Forma EBITDA for such period will be reduced by an amount equal to the Consolidated EBITDA (if positive) attributable to the assets which are the subject of such Sale for such period or increased by an amount equal to the Consolidated EBITDA (if negative) attributable thereto for such period; (b) since the beginning of such period through the date of determination, the Issuer or any Restricted Subsidiary (by merger or otherwise) will have made an Investment in any Person that thereby becomes a Restricted Subsidiary, or otherwise acquires any company, any business, or any group of assets constituting an operating unit of a business (any such Investment or acquisition, a Purchase) including any such Purchase occurring in connection with a transaction causing a calculation to be made hereunder, Consolidated EBITDA for such period will be calculated after giving pro forma effect thereto as if such Purchase occurred on the first day of such period; and (c) since the beginning of such period through the date of determination, any Person (that became a Restricted Subsidiary or was merged with or into the Issuer or any Restricted Subsidiary since the beginning of such period) will have made any Sale or any Purchase that would have required an adjustment pursuant to clause (1) or

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(2) above if made by the Issuer or a Restricted Subsidiary since the beginning of such period, Consolidated EBITDA for such period will be calculated after giving pro forma effect thereto as if such Sale or Purchase occurred on the first day of such period, provided that paragraph (a) of this definition shall not apply for purposes of clause (c)(i) of paragraph (2) of the covenant described under Limitation on Restricted Payments. For purposes of this definition, whenever pro forma effect is to be given to any transaction or calculation under this definition, the pro forma calculations will be as determined in good faith by a responsible financial or accounting officer of the Issuer (including in respect of anticipated cost reductions and synergies). Property means, with respect to any Person, any interest of such Person in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, including Capital Stock, and other securities of, any other Person. For purposes of any calculation required pursuant to the Indenture, the value of any Property shall be its Fair Market Value. Qualified Capital Stock of any Person means any and all Capital Stock of such Person other than Redeemable Capital Stock. Qualified Interest Rate Agreement means an interest rate swap agreement with a bank or trust company organized in an EU Member State (including Hungary), the United Kingdom of Great Britain and Northern Ireland or any commercial banking institution that is a member of the U.S. Federal Reserve System, in each case having combined capital and surplus and undivided profits of not less than 500 million, whose debt has a rating, at the time such agreement is entered into, of at least A or the equivalent thereof by S&P and at least A2 or the equivalent thereof by Moodys. Redeemable Capital Stock means any class or series of Capital Stock that, either by its terms, by the terms of any security into which it is convertible or exchangeable or by contract or otherwise, is, or upon the happening of an event or passage of time would be, required to be redeemed prior to 181 days after the final Stated Maturity of the Notes or is redeemable at the option of the holder thereof at any time prior to 181 days after the final Stated Maturity (other than upon a change of control of the Issuer in circumstances in which the holders of the Notes would have similar rights), or is convertible into or exchangeable for debt securities at any time prior to 181 days after the final Stated Maturity; provided that any Capital Stock that would constitute Qualified Capital Stock but for provisions thereof giving holders thereof the right to require such Person to repurchase or redeem such Capital Stock upon the occurrence of any asset sale or change of control occurring prior to 181 days after the final Stated Maturity of the Notes will not constitute Redeemable Capital Stock if the asset sale or change of control provisions applicable to such Capital Stock are no more favorable to the holders of such Capital Stock than the provisions contained in Certain Covenants Limitation on Sale of Certain Assets and Purchase of Notes upon a Change of Control covenants described herein and such Capital Stock specifically provides that such Person will not repurchase or redeem any such stock pursuant to such provision prior to the Subsidiary Guarantors or the Issuers repurchase of such Notes as are required to be repurchased pursuant to Certain Covenants Limitation on Sale of Certain Assets and Purchase of Notes upon a Change of Control. Recapitalization means the transactions described in the offering memorandum for the Existing Notes dated December 8, 2009 under the heading Summary The Recapitalization. Refinancing means the transactions described in the offering memorandum for the Existing Notes dated December 8, 2009 under the heading Summary The Refinancing. Related Business means the telecommunications business and related telecommunications activities and any services, activities or businesses incidental or related or similar thereto; any businesses and activities engaged in by Holdings or Invitel on the Issue Date; and any businesses and activities that are related, complementary, incidental, ancillary or similar to any of the foregoing, or are extensions, developments or expansions of any thereof. Replacement Assets means properties and assets that replace the properties and assets that were the subject of an Asset Sale or properties and assets that will be used in the Issuers business or in that of the Restricted Subsidiaries. Restricted Subsidiary means any Subsidiary of the Issuer other than an Unrestricted Subsidiary. S&P means Standard and Poors Ratings Service, a division of The McGraw-Hill Companies, Inc. and its successors. Secured Debt means any Debt of the Issuer secured by a Lien. Secured Debt of any Subsidiary Guarantor has a correlative meaning.

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Securities Act means the U.S. Securities Act of 1933, as amended, or any successor statute, and the rules and regulations promulgated by the Commission thereunder. Security Documents means, collectively, the Intercreditor Agreement and all security agreements, pledges and other agreement or instruments evidencing or creating any security in favor of the Security Trustee, the Trustee and/or any holders of the Notes in any or all of the Collateral. Significant Subsidiary, with respect to any Person, means a Restricted Subsidiary of such Person that satisfies the criteria for a significant subsidiary set forth in Rule 1.02(w) of Regulation S-X under the Exchange Act. Stated Maturity means, when used with respect to any Note or any installment of interest thereon, the date specified in such Note as the fixed date on which the principal of such Note or such installment of interest, respectively, is due and payable, and, when used with respect to any other indebtedness, means the date specified in the instrument governing such indebtedness as the fixed date on which the principal of such indebtedness, or any installment of interest thereon, is due and payable. Sterling or means the lawful currency of the United Kingdom of Great Britain and Northern Ireland. Subordinated Debt means Debt of the Issuer or any Subsidiary Guarantor that is subordinated in right of payment to the Notes or the Guarantee of such Subsidiary Guarantor, as the case may be. Subsidiary means, with respect to any Person: (a) a corporation a majority of whose Voting Stock is at the time, directly or indirectly, owned by such Person, by one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries thereof; and (b) any other Person (other than a corporation), including, without limitation, a partnership, limited liability company, business trust or joint venture, in which such Person, one or more Subsidiaries thereof or such Person and one or more Subsidiaries thereof, directly or indirectly, at the date of determination thereof, has at least majority ownership interest entitled to vote in the election of directors, managers or trustees thereof (or other Person performing similar functions). Technocom means Invitel Technocom Kft., a limited liability company incorporated under the laws of Hungary. Unrestricted Subsidiary means: (a) any Subsidiary of the Issuer that at the time of determination is an Unrestricted Subsidiary (as designated by the Issuers board of directors pursuant to the Designation of Unrestricted and Restricted Subsidiaries covenant) and (b) any Subsidiary of an Unrestricted Subsidiary. Voting Stock means any class or classes of Capital Stock pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees (or Persons performing similar functions) of any Person (irrespective of whether or not, at the time, stock of any other class or classes shall have, or might have, voting power by reason of the happening of any contingency). Wholly Owned Restricted Subsidiary means (a) any Restricted Subsidiary, all of the outstanding Capital Stock (other than directors qualifying shares or shares of Restricted Subsidiaries required to be owned by third parties pursuant to applicable law) of which are owned by the Issuer or by one or more other Wholly Owned Restricted Subsidiaries or by the Issuer and one or more other Wholly Owned Restricted Subsidiaries.

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BOOK ENTRY, DELIVERY AND FORM General Notes sold to qualified institutional buyers in reliance on Rule 144A under the U.S. Securities Act will initially be represented by a global note in registered form without interest coupons attached (the Rule 144A Global Note). Notes sold to non-U.S. persons outside the United States in reliance on Regulation S under the U.S. Securities Act will initially be represented by a global note in registered form without interest coupons attached (the Regulation S Global Note and, together with the Rule 144A Global Note, the Global Notes). The Global Notes will be deposited, on the closing date, with a common depositary and registered in the name of the nominee of the common depositary for the account of Euroclear and Clearstream. Ownership of interests in the Rule 144A Global Note (Rule 144A Book-Entry Interests) and ownership of interests in the Regulation S Global Note (the Regulation S Book-Entry Interests and, together with the Rule 144A Book-Entry Interests, the Book-Entry Interests) will be limited to persons that have accounts with Euroclear and/or Clearstream or persons that hold interests through such participants. Euroclear and Clearstream will hold interests in the Global Notes on behalf of their participants through customers securities accounts in their respective names on the books of their respective depositories. Except under the limited circumstances described below, Book-Entry Interests will not be issued in definitive form. After the expiration of the period ending 40 days after the later of the commencement of the offering of the Additional Notes and the date the Additional Notes were originally issued (the Distribution Compliance Period), investors may hold interests in a permanent Regulation S Global Note through holders other than Euroclear and Clearstream. Euroclear and Clearstream will hold interests in a Regulation S Global Note on behalf of their participants through their respective depositaries. Regulation S prohibits the Initial Purchaser of the Additional Notes under Regulation S from offering, selling or delivering the Additional Notes within the United States or to or for the account or benefit of U.S. persons until the expiration of the Distribution Compliance Period. Until the expiration of the Distribution Compliance Period, beneficial interests in the Regulation S Global Note may be held only through Euroclear and Clearstream, unless transferred to a person that takes delivery through the Rule 144A Global Note in accordance with the certification requirements described below. Beneficial interests in the Rule 144A Global Note may not be exchanged for beneficial interests in the Regulation S Global Note at any time except in the circumstances described below. See Transfers. In addition, transfers of beneficial interests in the Global Notes will be subject to the applicable rules and procedures of Euroclear and Clearstream, which may change from time to time. Book-Entry Interests will be shown on, and transfers thereof will be effected only through, records maintained by Euroclear and Clearstream and their participants. The laws of some jurisdictions, including certain states of the United States, may require that certain purchasers of securities take physical delivery of those securities in definitive form. The foregoing limitations may impair your ability to own, transfer or pledge Book-Entry Interests. In addition, while the Notes are in global form, holders of Book-Entry Interests will not be considered the owners or holders of Notes for any purpose. So long as the Notes are held in global form, Euroclear and/or Clearstream (or their respective nominees), as applicable, will be considered the sole holders of the Global Notes for all purposes under the Indenture. In addition, participants must rely on the procedures of Euroclear and Clearstream, and indirect participants must rely on the procedures of Euroclear and Clearstream and the participants through which they own Book-Entry Interests, to transfer their interests or to exercise any rights of holders of Notes under the Indenture. Neither we nor the trustee will have any responsibility, or be liable, for any aspect of the records relating to the BookEntry Interests. Definitive Registered Notes Under the terms of the Indenture, owners of the Book-Entry Interests will receive Definitive Registered Notes: (1) if Euroclear or Clearstream notifies us that it is unwilling or unable to continue to act as depositary and a successor depositary is not appointed by the Issuer within 120 days; (2) if Euroclear or Clearstream so requests following an Event of Default under the Indenture; or (3) if the owner of a Book-Entry Interest requests such exchange in writing delivered through Euroclear or Clearstream following an Event of Default under the Indenture.

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Euroclear and Clearstream have advised us that upon request by an owner of a Book-Entry Interest described in the immediately preceding clause (3), their current procedure is to request that we issue or cause to be issued Notes in definitive registered form to all owners of Book-Entry Interests. In such an event, the Registrar will issue Definitive Registered Notes, registered in the name or names and issued in any approved denominations, requested by or on behalf of Euroclear, Clearstream or us, as applicable (in accordance with their respective customary procedures and based upon directions received from participants reflecting the beneficial ownership of Book-Entry Interests), and such Definitive Registered Notes will bear the restrictive legend as provided in the relevant indenture, unless that legend is not required by the Indenture or applicable law. To the extent permitted by law, we, the Trustee, the Paying Agent and the Registrar shall be entitled to treat the registered holder of any Global Note as the absolute owner thereof and no person will be liable for treating the registered holder as such. Ownership of the Global Notes will be evidenced through registration from time to time at the registered office of the Issuer, and such registration is a means of evidencing title to the Notes. We will not impose any fees or other charges in respect of the Notes; however, owners of the Book-Entry Interests may incur fees normally payable in respect of the maintenance and operation of accounts in Euroclear and Clearstream. Redemption of the Global Notes In the event that any Global Note (or any portion thereof) is redeemed, Euroclear and/or Clearstream, as applicable, will redeem an equal amount of the Book-Entry Interests in such Global Note from the amount received by them in respect of the redemption of such Global Note. The redemption price payable in connection with the redemption of such Book-Entry Interests will be equal to the amount received by Euroclear and Clearstream, as applicable, in connection with the redemption of such Global Note (or any portion thereof). We understand that, under the existing practices of Euroclear and Clearstream, if fewer than all of the Notes are to be redeemed at any time, Euroclear and Clearstream will credit their participants accounts on a proportionate basis (with adjustments to prevent fractions), by lot or on such other basis as they deem fair and appropriate, provided, however, that no Book-Entry Interest of less than 50,000 principal amount may be redeemed in part. Payments on Global Notes We will make payments of any amounts owing in respect of the Global Notes (including principal, premium, if any, interest and additional amounts, if any) to the common depositary or its nominee for Euroclear and Clearstream. The common depositary will distribute such payments to participants in accordance with their customary procedures. We will make payments of all such amounts without deduction or withholding for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature, except as may be required by law and as described under Description of the Notes Additional Amounts. If any such deduction or withholding is required to be made, then, to the extent described under Description of the Notes Additional Amounts above, we will pay additional amounts as may be necessary in order for the net amounts received by any holder of the Global Notes or owner of Book-Entry Interests after such deduction or withholding will equal the net amounts that such holder or owner would have otherwise received in respect of such Global Note or Book-Entry Interest, as the case may be, absent such withholding or deduction. We expect that standing customer instructions and customary practices will govern payments by participants to owners of Book-Entry Interests held through such participants. Under the terms of the Indenture, we and the trustee will treat the registered holders of the Global Notes (e.g., Euroclear or Clearstream (or their respective nominee)) as the owner thereof for the purpose of receiving payments and for all other purposes. Consequently, none of us, the trustee or any of its agents has or will have any responsibility or liability for:

any aspect of the records of Euroclear, Clearstream or any participant or indirect participant relating to, or payments made on account of, a Book-Entry Interest or for maintaining, supervising or reviewing the records of Euroclear or Clearstream or any participant or indirect participant relating to, or payments made on account of, a Book-Entry Interest; Euroclear, Clearstream or any participant or indirect participant; or the records of the common depositary.

Currency of Payment for the Global Notes The principal of, premium, if any, and interest on, and all other amounts payable in respect of, the Global Notes will be paid to holders of interests to such Notes through Euroclear or Clearstream in Euro.

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Action by Owners of Book-Entry Interests Euroclear and Clearstream have advised us that they will take any action permitted to be taken by a holder of Notes (including the presentation of Notes for exchange as described above) only at the direction of one or more participants to whose account the Book-Entry Interests in the Global Notes are credited and only in respect of such portion of the aggregate principal amount of Notes as to which such participant or participants has or have given such direction. Euroclear and Clearstream will not exercise any discretion in the granting of consents, waivers or the taking of any other action in respect of the Global Notes. However, if there is an Event of Default under the Notes, Euroclear and Clearstream, at the request of the holders of the Notes, reserve the right to exchange the Global Notes for definitive registered Notes in certificated form (the Definitive Registered Notes), and to distribute such Definitive Registered Notes to their participants. Transfers Transfers between participants in Euroclear or Clearstream will be effected in accordance with Euroclear and Clearstreams rules and will be settled in immediately available funds. If a holder of Notes requires physical delivery of Definitive Registered Notes for any reason, including to sell Notes to persons in states which require physical delivery of such securities or to pledge such securities, such holder of Notes must transfer its interests in the Global Notes in accordance with the normal procedures of Euroclear and Clearstream and in accordance with the procedures set forth in the Indenture governing the Notes. The Global Notes will bear a legend to the effect set forth under Notice to Investors. Book-Entry Interests in the Global Notes will be subject to the restrictions on transfers and certification requirements discussed under Notice to Investors. Transfers of Rule 144A Book-Entry Interests to persons wishing to take delivery of Rule 144A Book-Entry Interests will at all times be subject to such transfer restrictions. Rule 144A Book-Entry Interests may be transferred to a person who takes delivery in the form of a Regulation S BookEntry Interest, whether before or after the expiration of the Distribution Compliance Period, only upon delivery by the transferor of a written certification (in the form provided in the Indenture) to the effect that such transfer is being made in accordance with Regulation S or Rule 144 under the U.S. Securities Act or any other exemption (if available under the U.S. Securities Act). Regulation S Book-Entry Interests may be transferred to a person who takes delivery in the form of a Rule 144A BookEntry Interest only upon delivery by the transferor of a written certification (in the form provided in the Indenture) to the effect that such transfer is being made to a person who the transferor reasonably believes is a qualified institutional buyer within the meaning of Rule 144A in a transaction meeting the requirements of Rule 144A or otherwise in accordance with the transfer restrictions described under Notice to Investors and in accordance with any applicable securities laws of any other jurisdiction. In connection with transfers involving an exchange of a Regulation S Book-Entry Interest for a Rule 144A Book-Entry Interest, appropriate adjustments will be made to reflect a decrease in the principal amount of the Regulation S Global Note and a corresponding increase in the principal amount of the Rule 144A Global Note. Definitive Registered Notes may be transferred and exchanged for Book-Entry Interests in a Global Note only as described under Description of the Notes Transfer and Exchange and, if required, only if the transferor first delivers to the trustee a written certificate (in the form provided in the Indenture) to the effect that such transfer will comply with the appropriate transfer restrictions applicable to such Notes. See Notice to Investors. Any Book-Entry Interest in one of the Global Notes that is transferred to a person who takes delivery in the form of a Book-Entry Interest in any other Global Note will, upon transfer, cease to be a Book-Entry Interest in the first mentioned Global Note and become a Book-Entry Interest in such other Global Note, and accordingly will thereafter be subject to all transfer restrictions, if any, and other procedures applicable to Book-Entry Interests in such other Global Note for as long as it remains such a Book-Entry Interest. Information Concerning Euroclear and Clearstream All Book-Entry Interests will be subject to the operations and procedures of Euroclear and Clearstream, as applicable. We provide the following summaries of those operations and procedures solely for the convenience of investors. The operations and procedures of the settlement system are controlled by the settlement system and may be changed at any time. Neither we nor the Initial Purchaser are responsible for those operations or procedures.

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We understand as follows with respect to Euroclear and Clearstream: Euroclear and Clearstream hold securities for participating organizations. They facilitate the clearance and settlement of securities transactions between their participants through electronic book-entry changes in accounts of such participants. Euroclear and Clearstream provide various services to their participants, including the safekeeping, administration, clearance, settlement, lending and borrowing of internationally traded securities. Euroclear and Clearstream interface with domestic securities markets. Euroclear and Clearstream participants are financial institutions such as underwriters, securities brokers and dealers, banks, trust companies and certain other organizations. Indirect access to Euroclear and Clearstream is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Euroclear and Clearstream participant, either directly or indirectly. Because Euroclear and Clearstream can only act on behalf of participants, who in turn act on behalf of indirect participants and certain banks, the ability of an owner of a beneficial interest to pledges such interest to persons or entities that do not participate in the Euroclear and/or Clearstream system, or otherwise take actions in respect of such interest, may be limited by the lack of a definitive certificate for that interest. The laws of some jurisdictions require that certain persons take physical delivery of securities in definitive form. Consequently, the ability to transfer beneficial interests to such persons may be limited. In addition, owners of beneficial interests through the Euroclear or Clearstream systems will receive distributions attributable to the 144A Global Notes only through Euroclear or Clearstream participants. Global Clearance and Settlement Under the Book-Entry System The Notes represented by the Global Notes are expected to be listed on the Official List of the Luxembourg Stock Exchange and admitted for trading on the Euro MTF. Transfers of interests in the Global Notes between participants in Euroclear or Clearstream will be effected in the ordinary way in accordance with their respective systems rules and operating procedures. Although Euroclear and Clearstream currently follow the foregoing procedures in order to facilitate transfers of interests in the Global Notes among participants in Euroclear or Clearstream, they are under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued or modified at any time. None of us, any Subsidiary Guarantor, the trustee or the paying agent will have any responsibility for the performance by Euroclear, Clearstream or their participants or indirect participants of their respective obligations under the rules and procedures governing their operations. Initial Settlement Initial settlement for the Notes will be made in Euro. Book-Entry Interests owned through Euroclear or Clearstream accounts will follow the settlement procedures applicable to conventional bonds in registered form. Book-Entry Interests will be credited to the securities custody accounts of Euroclear and Clearstream holders on the business day following the settlement date against payment for value of the settlement date. Secondary Market Trading The Book-Entry Interests will trade through participants of Euroclear and Clearstream and will settle in same-day funds. Since the purchase determines the place of delivery, it is important to establish at the time of trading of any Book-Entry Interests where both the purchasers and the sellers accounts are located to ensure that settlement can be made on the desired value date.

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TAX CONSIDERATIONS U.S. Federal Income Tax Considerations The following is a description of the material U.S. federal income tax considerations relevant to the acquisition, ownership, disposition and retirement of Additional Notes by a holder thereof. This description only applies to Additional Notes held as capital assets and does not address, except as set forth below, aspects of U.S. federal income taxation that may be applicable to holders that are subject to special tax rules, such as:

financial institutions, insurance companies, real estate investment trusts, regulated investment companies, certain former citizens or long-term residents of the United States, grantor trusts, tax-exempt organizations, dealers or traders in securities or currencies, including those that mark to market, holders that will hold an Additional Note as part of a position in a straddle or as part of a hedging, conversion or integrated transaction for U.S. federal income tax purposes, holders that will hold the Additional Notes through a partnership or other pass-through entity, or U.S. holders (as defined below) that have a functional currency other than the U.S. dollar.

Moreover, this description does not address the U.S. federal estate and gift tax or alternative minimum tax consequences of the acquisition, ownership, disposition or retirement of the Additional Notes and does not address the U.S. federal income tax treatment of holders that do not acquire the Additional Notes pursuant to this Offering. Each prospective purchaser should consult its tax adviser with respect to the U.S. federal, state, local and foreign tax consequences of acquiring, holding and disposing of the Additional Notes. This description is based on the Internal Revenue Code of 1986, as amended (the Code), existing and proposed Treasury Regulations (Regulations), administrative pronouncements and judicial decisions, each as available and in effect on the date hereof. All of the foregoing are subject to change, possibly with retroactive effect, or differing interpretations which could affect the tax consequences described herein. For purposes of this description, a U.S. holder is a beneficial owner of the Additional Notes who for U.S. federal income tax purposes is

an individual who is a citizen or resident of the United States; a corporation organized in or under the laws of the United States or any State thereof, including the District of Columbia; an estate the income of which is subject to U.S. federal income taxation regardless of its source; or a trust (1) that validly elects to be treated as a United States person for U.S. federal income tax purposes or (2)(a) the administration over which a U.S. court can exercise primary supervision and (b) all of the substantial decisions of which one or more U.S. persons have the authority to control.

If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds the Additional Notes, the tax treatment of the partnership and a partner in such partnership generally will depend on the status of the partner and the activities of the partnership. Such partner or partnership should consult its own tax adviser regarding the specific consequences of the acquisition, ownership and disposition of the Additional Notes.

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A Non-U.S. holder is a beneficial owner of the Additional Notes that is neither a U.S. holder, nor a partnership (or an entity that is treated as a partnership for U.S. federal income tax purposes). INTERNAL REVENUE SERVICE CIRCULAR 230 DISCLOSURE PURSUANT TO INTERNAL REVENUE SERVICE (IRS) CIRCULAR 230, WE HEREBY INFORM YOU THAT THE DESCRIPTION SET FORTH HEREIN WITH RESPECT TO U.S. FEDERAL TAX ISSUES WAS NOT INTENDED OR WRITTEN TO BE USED, AND SUCH DESCRIPTION CANNOT BE USED, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED ON THE TAXPAYER UNDER THE CODE. SUCH DESCRIPTION WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE ADDITIONAL NOTES. TAXPAYERS SHOULD SEEK ADVICE BASED ON THE TAXPAYERS PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR. U.S. Holders Pre-Issuance Accrued Interest A portion of the price paid for the Additional Notes will be allocable to interest that accrued prior to the date the Additional Notes are purchased (the pre-issuance accrued interest). The Issuer intends to take the position that, on the first interest payment date, a portion of the interest received in an amount equal to the pre-issuance accrued interest will be treated as a return of a portion of the purchase price paid for the Additional Notes that is allocable to the pre-issuance accrued interest and not as a payment of interest on the Additional Notes. Amounts treated as a return of preissuance accrued interest should not be taxable when received but should reduce the Holders adjusted tax basis in the Additional Notes by a corresponding amount (in the same manner as would a payment of principal). Bond Premium A U.S. Holder that purchases an Additional Note for an amount (excluding any amount attributable to pre-issuance accrued interest) that exceeds the sum of all amounts payable on the Additional Notes, other than payments of qualified stated interest, as defined below (any such excess being amortizable bond premium), may elect to reduce the amount required to be included in the U.S. Holders income each year with respect to qualified stated interest, as defined below on the Additional Note by the amount of amortizable bond premium allocable (based on the Additional Notes yield to maturity) to that year. If the Additional Notes are subject to optional redemption by us, special rules may apply which could result in a deferral of the amortization of some or all amortizable bond premium until later during the term of the Additional Notes. Any election to amortize bond premium shall apply to all debt instruments (other than debt instruments the interest on which is excludable from gross income for U.S. federal income tax purposes) held by the U.S. Holder at the beginning of the first taxable year to which the election applies or thereafter acquired by the U.S. Holder, and is irrevocable without the consent of the IRS. The term qualified stated interest generally means stated interest that is unconditionally payable in cash or property (other than debt instruments of the issuer), or that is treated as constructively receives, at least annually at a single fixed rate. Stated interest payable on the Additional Notes will be qualified stated interest. Amortizable bond premium will be computed in Euros. A U.S. Holder may recognize exchange gain or loss equal to the difference between the U.S. dollar value of bond premium amortized with respect to a period determined on the date the interest attributable to such period is received and the U.S. dollar value of that portion of the bond premium determined on the date of the acquisition of the Additional Notes. Interest Subject to the description relating to amortizable bond premium above, if you are a U.S. holder, interest paid to you on an Additional Note or under the Guarantees, including any additional amounts with respect thereto as described under Description of the Notes Additional Amounts, will be includible in your gross income as ordinary interest income in accordance with your usual method of U.S. federal income tax accounting. In addition, interest on the Additional Notes or under the Guarantees will be treated as foreign source income for U.S. federal income tax purposes. The limitation on foreign taxes eligible for the U.S. foreign tax credit is calculated separately with respect to specific baskets of income. For this purpose, interest on the Additional Notes should generally constitute passive category income, or in the case of certain U.S. holders, general category income. U.S. holders should consult their own tax advisors regarding the availability of foreign tax credits. We may redeem all or part of the Additional Notes at any time on or after 15 December 2012, by, in some cases, paying a specified premium (see Description of the Notes Optional Redemption on or after 15 December 2012). U.S. Treasury Regulations regarding notes issued with original issue discount (OID) contain special rules for determining the maturity date and the stated redemption price at maturity (i.e., the sum of all payments required to be made on the Additional Note

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other than payments of qualified stated interest) of a debt instrument where the issuer of such debt instrument has an unconditional option to make payments under such debt instrument under an alternative payment schedule. Under such rules, it is assumed that the issuer of such debt instrument will exercise an option to redeem a debt instrument if such exercise will lower the yield to maturity of such debt instrument. Since the terms of our option to redeem the Additional Notes on or after 15 December 2012 by, in some cases, paying a specified premium would not lower the yield to maturity of the Additional Notes, we will disregard this optional redemption provision in determining the amount or timing of any OID inclusions thereon. We may redeem some or all of the Additional Notes at any time prior to 15 December 2012 at a redemption price equal to 100% of the principal amount thereof plus the Applicable Redemption Premium (see Description of the Notes Optional Redemption prior to 15 December 2012). Additionally, you may require us to redeem some or all of the Additional Notes in an amount equal to 101% of the principal amount of the Additional Notes if a Change of Control occurs. Under the U.S. Treasury Regulations regarding notes issued with OID, if based on all the facts and circumstances as of the date on which the notes are issued there is a remote likelihood that a contingent redemption option will be exercised, it is assumed that such redemption will not occur. We believe that as of the issue date of the Additional Notes, March 30, 2011, the likelihood of either such redemption event occurring is for this purpose remote. Our determination is not binding on the IRS, and if the IRS were to challenge this determination, you may be required to accrue income on Additional Notes that you own in excess of stated interest, and to treat as ordinary income rather than capital gain any income realized on the taxable disposition of Additional Notes before the resolution of the contingency. In the event that any of these contingencies were to occur, it would affect the character, amount and timing of the income that you recognize. U.S. holders should consult their own tax advisors regarding the potential application to the Additional Notes of the contingent payment debt instrument rules and the consequences thereof. Any interest paid in Euros will be included in your gross income in an amount equal to the U.S. dollar value of the Euros, including the amount of any withholding tax thereon, regardless of whether the Euro are converted into U.S. dollars. Generally, if you are a U.S. holder that uses the cash method of U.S. federal income tax accounting you will determine such U.S. dollar value using the spot rate of exchange on the date of receipt. A cash method U.S. holder generally will not realize foreign currency gain or loss on the receipt of the interest payment but may have foreign currency gain or loss attributable to the actual disposition of the Euros received. Generally, if you are a U.S. holder that uses the accrual method of U.S. federal income tax accounting you will determine the U.S. dollar value of accrued interest income using the average rate of exchange for the accrual period (or, with respect to an accrual period that spans two taxable years, at the average rate for the partial period within the U.S. holders taxable year). Alternatively, an accrual basis U.S. holder may make an election (which must be applied consistently to all debt instruments from year to year and cannot be changed without the consent of the IRS) to translate interest income at the spot rate of exchange on the last day of the accrual period (or with respect to an accrual period that spans two taxable years, at the spot rate of exchange on the last day of the part of the period within the taxable year), or the spot rate on the date of receipt if that date is within five business days of the last day of the accrual period. If you are a U.S. holder that uses the accrual method of accounting for U.S. federal income tax purposes you will recognize foreign currency gain or loss on the receipt of an interest payment if the exchange rate in effect on the date the payment is received differs from the rate applicable to the accrual of that interest. The amount of foreign currency gain or loss to be recognized by such holder will be an amount equal to the difference between the U.S. dollar value of the Euro interest payment (determined on the basis of the spot rate on the date the interest income is received) in respect of the accrual period and the U.S. dollar value of the interest income that has accrued during the accrual period (as determined above). This foreign currency gain or loss will be ordinary income or loss. Foreign currency gain or loss generally will be U.S. source provided that the residence of a taxpayer is considered to be the United States for purposes of the rules regarding foreign currency gain or loss. Sale, Exchange or Retirement If you are a U.S. holder, upon the sale, exchange or retirement of an Additional Note you will recognize taxable gain or loss equal to the difference, if any, between the amount realized on the sale, exchange or retirement, other than accrued but unpaid interest which will be taxable as such, and your adjusted tax basis in the Additional Note. Your adjusted tax basis in an Additional Note generally will equal the cost of the Additional Note to you decreased by the amount of amortizable bond premium previously taken into account. The cost of an Additional Note will be the U.S. dollar value of the purchase price in Euro on the date of purchase (reduced by a portion that is attributable to pre-issuance accrued interest), calculated at the spot rate in effect on the date. If the Additional Note is traded on an established securities market, a cash basis taxpayer (and if it elects, an accrual basis taxpayer) will determine the U.S. dollar value of the cost of the Additional Note at the spot rate on the settlement date of the purchase. The conversion of U.S. dollars to a foreign currency and the immediate use of the foreign currency to purchase an Additional Note generally will not result in taxable gain or loss for a U.S. holder. If the Additional Note is traded on an established securities market, a cash basis taxpayer (and if it elects, an accrual basis taxpayer) will determine the U.S. dollar equivalent of the amount realized by translating that amount at the spot rate on the settlement date of the sale or other disposition. If an accrual method taxpayer makes such an election, the election must be applied

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consistently to all debt instruments from year to year and cannot be changed without the consent of the IRS. Except as set forth below with respect to foreign currency gain or loss, any such gain or loss will be capital gain or loss. If you are a noncorporate U.S. holder, the maximum marginal U.S. federal income tax rate applicable to the gain will be lower than the maximum marginal U.S. federal income tax rate applicable to ordinary income (other than certain dividends) if your holding period for the Additional Notes exceeds one year (i.e., such gain is long-term capital gain). Any gain or loss realized on the sale, exchange or retirement of an Additional Note generally will be treated as U.S. source gain or loss, as the case may be. The deductibility of capital losses is subject to limitations. Gain or loss realized upon the sale or other disposition of an Additional Note that is attributable to fluctuations in foreign currency exchange rates will constitute foreign currency gain or loss with respect to the principal amount to the extent provided under special rules. This foreign currency gain or loss will be taxable as U.S. source ordinary income or loss, but generally will not be treated as interest income or expense. The U.S. holder will recognize foreign currency gain or loss on the principal amount of the Additional Note equal to the difference between (i) the U.S. dollar value of the U.S. holders purchase price for the Additional Note (minus a portion that is attributable to pre-issuance accrued interest and the amount of amortizable bond premium that was previously taken into account with respect to the Additional Note prior to the date of such sale or other disposition) determined at the spot rate on the date of sale or other disposition and (ii) the U.S. dollar value of the U.S. holders purchase price for the Additional Note (adjusted as described in clause (i) above) determined at the spot rate on the date the U.S. holder acquired the Additional Note. However, a U.S. holder will recognize foreign currency gain or loss only to the extent of the total gain or loss realized on the sale or other disposition. Tax Return Disclosure Requirements A U.S. holder may be required to report a sale or other disposition of its Additional Notes (or, in the case of an accrual basis U.S. holder, a payment of accrued interest) on IRS Form 8886 (Reportable Transaction Disclosure Statement) if it recognizes foreign currency exchange loss that exceeds U.S.$50,000 in a single taxable year from a single transaction, if such U.S. holder is an individual or trust, or higher amounts for other non-individual U.S. holders. U.S. holders are urged to consult their tax advisers in this regard. Surtax Effective for taxable years beginning after December 31, 2012, certain U.S. Holders of Additional Notes who are individuals, estates or trusts will be required to pay a 3.8% tax on net investment income, including on interest and capital gains. U.S. Holders of Additional Notes should consult their tax advisors regarding the effect, if any, of this surtax on their acquisition, ownership and disposition of Additional Notes. Non-U.S. holders Subject to the discussion below under the caption U.S. Backup Withholding Tax and Information Reporting, if you are a Non-U.S. holder, payments to you of interest on an Additional Note generally will not be subject to U.S. federal income tax unless the income is effectively connected with your conduct of a trade or business in the United States. Subject to the discussion below under the caption U.S. Backup Withholding Tax and Information Reporting, if you are a Non-U.S. holder, any gain realized by you upon the sale, exchange or retirement of an Additional Note generally will not be subject to U.S. federal income tax, unless

the gain is effectively connected with your conduct of a trade or business in the United States or if you are an individual Non-U.S. holder, you are present in the United States for 183 days or more in the taxable year of the sale, exchange or retirement and certain other conditions are met.

U.S. Backup Withholding Tax and Information Reporting A backup withholding tax and information reporting requirements apply to certain payments of principal of, and interest (including for this purpose any Additional Amounts) on, an Additional Note and to proceeds of the sale or redemption of an Additional Note, to certain holders of Additional Notes that are U.S. persons. Information reporting generally will apply to payment of interest on, or principal of, the Additional Notes, or under the Guarantees, made within the United States or by a U.S. payor or U.S. middleman to a holder of the Additional Notes, other than an exempt recipient. The payor will be required to withhold backup withholding tax on payments made within the United States or by a U.S. payor or U.S. middleman on an Additional Note or under the Guarantees to a holder of an Additional Note that is a U.S. person, other than an exempt recipient, if the holder fails to furnish its correct taxpayer identification number or otherwise fails to comply with, or establish an exemption from, the backup withholding requirements. Payments within the United States or by a U.S. payor or

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U.S. middleman of principal and interest or under the Guarantees to a holder of an Additional Note that is not a U.S. person will not be subject to backup withholding tax and information reporting requirements if an appropriate certification is provided by the holder to the payor and the payor does not have actual knowledge or a reason to know that the certificate is incorrect. The backup withholding tax rate is 28.0% for taxable years beginning before January 1, 2013. In the case of payments to certain trusts or certain partnerships, the persons treated as the owners of the trust or the partners of the partnership, as the case may be, will be required to provide the certification discussed above in order to establish an exemption from backup withholding tax and information reporting requirements. Moreover, a payor may rely on a certification provided by a payee that is not a U.S. person only if the payor does not have actual knowledge or a reason to know that any information or certification stated in the certificate is incorrect. Backup withholding is not an additional tax. You generally will be entitled to credit any amount withheld under the backup withholding rules against your U.S. federal income tax liability provided the required information is timely provided to the IRS. The above description is not intended to constitute a complete analysis of all tax consequences relating to the ownership of the Additional Notes. Prospective purchasers of the Additional Notes should consult their tax advisers concerning the tax consequences of their particular situations.

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CERTAIN ERISA CONSIDERATIONS The U.S. Employee Retirement Income Security Act of 1974, as amended (ERISA) imposes fiduciary standards and certain other requirements on employee benefit plans (as defined in ERISA) subject to Title I of ERISA, including, but not limited to, entities such as bank collective investment funds and insurance company separate accounts and other entities or accounts whose underlying assets include plan assets as defined in U.S. Department of Labor Regulation Section 2510.3101, as modified by Section 3(42) of ERISA (collectively, ERISA Plans) and on those persons who are fiduciaries with respect to ERISA Plans. Section 4975 of the U.S. Internal Revenue Code of 1986, as amended (the Code) also imposes certain requirements on plans described in Section 4975(e)(1) of the Code, including, but not limited to, plans not subject to Title I of ERISA such as individual retirement accounts (such plans together with ERISA Plans, Plans). Section 406 of ERISA and Section 4975 of the Code prohibit certain transactions involving the assets of a Plan and certain persons having certain relationships to Plans (referred to as parties in interest or disqualified persons), unless a statutory or administrative exemption is applicable to the transaction. Section 408(b)(17) of ERISA and Section 4975(d)(20) of the Code and prohibited transaction class exemptions 96-23, 95-60, 91-38, 90-1 and 84-14 issued by the U.S. Department of Labor may provide exemptive relief for certain direct or indirect prohibited transactions resulting from the purchase, holding or sale of the Notes. Even if the conditions specified in one or more of these class exemptions are met, the scope of the relief provided by these exemptions might not cover all acts which might be construed as prohibited transactions. A party in interest or disqualified person who engages in a prohibited transaction may be subject to excise taxes and other penalties and liabilities under ERISA and/or Section 4975 of the Code. Each original and subsequent purchaser and transferee of any Note that is or may become a Plan or a plan subject to any federal, state, local or non-U.S. law that is substantially similar to the provisions of Section 406 of ERISA or Section 4975 of the Code (Similar Laws) is responsible for determining that its purchase and holding of such Note will not constitute a prohibited transaction under ERISA, Section 4975 of the Code or Similar Laws. The sale of any Notes to a Plan or plan subject to Similar Laws is in no respect a representation by the Issuer or any of its affiliates or representatives that such an investment meets all relevant legal requirements with respect to investments by any such plan generally or any particular Plan or plan subject to Similar Laws, or that such investment is appropriate for such plans generally or any particular Plan or plan subject to Similar Laws. THE PRECEDING DISCUSSION IS ONLY A SUMMARY OF CERTAIN ERISA IMPLICATIONS OF AN INVESTMENT IN THE NOTES AND DOES NOT PURPORT TO BE COMPLETE. PROSPECTIVE INVESTORS SHOULD CONSULT WITH THEIR OWN LEGAL, TAX, FINANCIAL AND OTHER ADVISORS PRIOR TO INVESTING IN THE NOTES TO REVIEW THESE IMPLICATIONS IN LIGHT OF SUCH INVESTORS PARTICULAR CIRCUMSTANCES.

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PLAN OF DISTRIBUTION Subject to the terms and conditions set forth in a purchase agreement (the Purchase Agreement) to be dated as of the date of this Offering Memorandum, the Issuer has agreed to sell to the Initial Purchaser, and the Initial Purchaser has agreed to purchase the Additional Notes from the Issuer. The Purchase Agreement provides that the obligations of the Initial Purchaser to pay for and accept delivery of the Additional Notes are subject to, among other conditions, the delivery of certain legal opinions by their counsel. The Initial Purchaser proposes to offer the Additional Notes initially at the price indicated on the cover page hereof. After the initial offering of the Additional Notes, the offering price and other selling terms of the Additional Notes may from time to time be varied by the Initial Purchaser without notice. Persons who purchase Additional Notes from the Initial Purchaser may be required to pay stamp duty, taxes and other charges in accordance with the laws and practice of the country of purchase in addition to the offering price set forth on the cover page hereof. The Purchase Agreement provides that we will indemnify and hold harmless the Initial Purchaser against certain liabilities, including liabilities under the Securities Act, and will contribute to payments that the Initial Purchaser may be required to make in respect thereof. We have agreed, subject to certain limited exceptions, that during the period from the date hereof through and including the date that is 180 days after the date the Additional Notes are issued, to not, and to cause our subsidiaries to not, without having received the prior written consent provided for in the Purchase Agreement, offer, sell, contract to sell or otherwise dispose of any securities that are substantially similar to the Additional Notes. The Notes and the Guarantees have not been and will not be registered under the Securities Act and may not be offered or sold within the United States except to qualified institutional buyers in reliance on Rule 144A under the Securities Act and to certain persons in offshore transactions in reliance on Regulation S under the Securities Act. Terms used in this paragraph have the meanings given to them by Regulation S under the Securities Act. Resales of the Notes are restricted as described under Notice to Investors. Each Initial Purchaser represents, warrants and agrees that it:

has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the FSMA) received by it in connection with the issue or sale of any Additional Notes in circumstances in which section 21(1) of the FSMA does not apply to us or the Guarantors; and has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Additional Notes in, from or otherwise involving the United Kingdom.

No action has been taken in any jurisdiction, including the United States and the United Kingdom, by us or the Initial Purchaser that would permit a public offering of the Additional Notes or the possession, circulation or distribution of this Offering Memorandum or any other material relating to us or the Additional Notes in any jurisdiction where action for this purpose is required. Accordingly, the Additional Notes may not be offered or sold, directly or indirectly, and neither this Offering Memorandum nor any other offering material or advertisements in connection with the Additional Notes may be distributed or published, in or from any country or jurisdiction, except in compliance with any applicable rules and regulations of any such country or jurisdiction. This Offering Memorandum does not constitute an offer to sell or a solicitation of an offer to purchase in any jurisdiction where such offer or solicitation would be unlawful. Persons into whose possession this Offering Memorandum comes are advised to inform themselves about and to observe any restrictions relating to the offering of the Additional Notes, the distribution of this Offering Memorandum and resale of the Notes. See Notice to certain European Investors. The Issuer and the Subsidiary Guarantors have also agreed that we will not at any time offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any securities under circumstances in which such offer, sale, pledge, contract or disposition would cause the exemption afforded by Section 4(2) of the U.S. Securities Act or the safe harbor of Rule 144A and Regulation S under the U.S. Securities Act to cease to be applicable to the offer and sale of the Additional Notes. We have applied, through our listing agent, to list the Additional Notes on the Official List of the Luxembourg Stock Exchange and trade the Additional Notes on the Euro MTF, however, we cannot assure you that such listing will be maintained.

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The Initial Purchaser has advised us that they intend to make a market in the Notes as permitted by applicable law. The Initial Purchaser is not obligated, however, to make a market in the Notes, and any market-making activity may be discontinued at any time at the sole discretion of the Initial Purchaser without notice. In addition, any such market-making activity will be subject to the limits imposed by the U.S. Securities Act and the U.S. Securities Exchange Act of 1934, as amended (the U.S. Exchange Act). Accordingly, we cannot assure you that any market for the Notes will develop, that it will be liquid if it does develop, or that you will be able to sell any Notes at a particular time or at a price which will be favorable to you. See Risk Factors Risks Relating to the Notes and Our Debt An active trading market may not develop for the Notes. Delivery of the Additional Notes was made against payment on the Additional Notes on March 30, 2011, which was five business days (as such term is used for purposes of Rule 15c6-1 of the U.S. Exchange Act) following the date of pricing of the Additional Notes (this settlement cycle is being referred to as T+5). Under Rule 15c6-1 of the U.S. Exchange Act, trades in the secondary market generally are required to settle in three business days unless the parties to any such trade expressly agree otherwise. In connection with the Offering, Credit Suisse Securities (Europe) Limited (the Stabilizing Manager), or persons acting on its behalf, may engage in transactions that stabilize, maintain or otherwise affect the price of the Additional Notes. Specifically, the Stabilizing Manager, or persons acting on its behalf, may bid for and purchase Notes in the open markets to stabilize the price of the Additional Notes. The Stabilizing Manager, or persons acting on its behalf, may also over allot the Offering, creating a syndicate short position, and may bid for and purchase Notes in the open market to cover the syndicate short position. In addition, the Stabilizing Manager, or persons acting on its behalf, may bid for and purchase Notes in market making transactions as permitted by applicable laws and regulations and impose penalty bids. These activities may stabilize or maintain the respective market price of the Additional Notes above market levels that may otherwise prevail. The Stabilizing Manager is not required to engage in these activities, and may end these activities at any time. Accordingly, no assurances can be given as to the liquidity of, or trading markets for, the Notes. See Risk Factors Risks Relating to the Notes and Our Debt An active trading market may not develop for the Notes. The Initial Purchaser may engage in over-allotment, stabilizing transactions, covering transactions and penalty bids in accordance with Regulation M under the U.S. Exchange Act. Over-allotment involves sales in excess of the offering size, which creates a short position for the Initial Purchaser. Stabilizing transactions permit bidders to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. Covering transactions involve purchase of the Notes in the open market after the distribution has been completed in order to cover short positions. Penalty bids permit the Initial Purchaser to reclaim a selling concession from a broker or dealer when the Notes originally sold by that broker or dealer are purchased in a stabilizing or covering transaction to cover short positions. These stabilizing transactions, covering transactions and penalty bids may cause the price of the Additional Notes to be higher than it would otherwise be in the absence of these transactions. These transactions, if commenced, may be discontinued at any time. The Initial Purchaser or its affiliates from time to time have provided in the past and may provide in the future investment banking, financial advisory and commercial banking services to us and our affiliates in the ordinary course of business for which they have received or may receive customary fees and commissions. In addition, Credit Suisse Securities (Europe) Limited is acting as solicitation agent in connection with the Consent Solicitation and related transactions for which they will receive customary fees.

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NOTICE TO INVESTORS You are advised to consult legal counsel prior to making any offer, resale, pledge or other transfer of any of the Additional Notes offered hereby. We have not registered and will not register the Notes or the Guarantees under the U.S. Securities Act and, therefore, the Notes may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the U.S. Securities Act. Accordingly, we are offering and selling the Additional Notes to the Initial Purchaser for re-offer and resale only:

in the United States to qualified institutional buyers, commonly referred to as QIBs, as defined in Rule 144A in compliance with Rule 144A; and outside the United States in an offshore transaction in accordance with Regulation S.

We use the terms offshore transaction, U.S. person and United States with the meanings given to them in Regulation S. Each purchaser of Notes, by its acceptance thereof, will be deemed to have acknowledged, represented to and agreed with us and the Initial Purchaser as follows: (1) You understand and acknowledge that the Notes and the guarantees have not been registered under the U.S. Securities Act or any other applicable securities laws and that the Notes are being offered for resale in transactions not requiring registration under the U.S. Securities Act or any other securities laws, including sales pursuant to Rule 144A under the U.S. Securities Act, and, unless so registered, may not be offered, sold or otherwise transferred except in compliance with the registration requirements of the U.S. Securities Act or any other applicable securities laws, pursuant to an exemption therefrom or in any transaction not subject thereto and in each case in compliance with the conditions for transfer set forth in paragraphs (4) and (5) below. (2) You are not our affiliate (as defined in Rule 144 under the U.S. Securities Act) or acting on our behalf and you are either: (a) a QIB, within the meaning of Rule 144A under the U.S. Securities Act and are aware that any sale of these Notes to you will be made in reliance on Rule 144A under the U.S. Securities Act, and such acquisition will be for your own account or for the account of another QIB; or (b) you are purchasing the Notes in an offshore transaction in accordance with Regulation S under the U.S. Securities Act. (3) You acknowledge that none of us, the Issuer, the Subsidiary Guarantors, or the Initial Purchaser, nor any person representing any of them, has made any representation to you with respect to us, the Issuer and its subsidiaries or the offer or sale of any of the Notes, other than the information contained in this Offering Memorandum, which Offering Memorandum has been delivered to you and upon which you are relying in making your investment decision with respect to the Notes. You acknowledge that neither the Initial Purchaser nor any person representing the Initial Purchaser make any representation or warranty as to the accuracy or completeness of this Offering Memorandum. You have had access to such financial and other information concerning us, the Issuer and its subsidiaries and the Notes as you have deemed necessary in connection with your decision to purchase any of the Notes, including an opportunity to ask questions of, and request information from, us and the Initial Purchaser. (4) You are purchasing the Notes for your own account, or for one or more investor accounts for which you are acting as a fiduciary or agent, in each case for investment, and not with a view to, or for offer or sale in connection with, any distribution thereof in violation of the U.S. Securities Act or any state securities laws, subject to any requirement of law that the disposition of your property or the property of such investor account or accounts be at all times within its or their control and subject to your or their ability to resell such Notes pursuant to Rule 144A, Regulation S or any other exemption from registration available under the U.S. Securities Act. (5) You agree on your own behalf and on behalf of any investor account for which you are purchasing the Notes, and each subsequent holder of the Notes by its acceptance thereof will be deemed to agree, to offer, sell or otherwise transfer such Notes prior to the date (the Resale Restriction Termination Date) that is one year (in the case of Rule 144A Notes) or 40 days (in the case of Regulation S Notes) after the later of the date of the original issue and the last date on which we or any of our affiliates were the owner of such Notes (or any predecessor thereto) only

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(i) to us, (ii) pursuant to a registration statement that has been declared effective under the U.S. Securities Act, (iii) for so long as the Notes are eligible pursuant to Rule 144A under the U.S. Securities Act, to a person you reasonably believe is a QIB that purchases for its own account or for the account of a QIB to whom notice is given that the transfer is being made in reliance on Rule 144A under the U.S. Securities Act, (iv) pursuant to offers and sales that occur outside the United States in compliance with Regulation S under the U.S. Securities Act or (v) pursuant to any other available exemption from the registration requirements of the U.S. Securities Act, subject in each of the foregoing cases to any requirement of law that the disposition of its property or the property of such investor account or accounts be at all times within its or their control and to compliance with any applicable state securities laws, and any applicable local laws and regulations, and further subject to the our and the trustees rights prior to any such offer, sale or transfer (I) pursuant to clauses (iv) and (v) to require the delivery of an opinion of counsel, certification and/or other information satisfactory to each of them and (II) in each of the foregoing cases, to require that a certificate of transfer in the form appearing on the reverse of the security is completed and delivered by the transferor to the Trustee. The foregoing restrictions on resale will not apply subsequent to the Resale Restriction Termination Date. Each purchaser acknowledges that each Note will contain a legend substantially to the following effect: THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT), OR OTHER SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. NEITHER THIS NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION UNLESS THE TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS NOTE BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT (A) IT IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION PURSUANT TO RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, (2) AGREES ON ITS OWN BEHALF AND ON BEHALF OF ANY INVESTOR ACCOUNT FOR WHICH IT HAS PURCHASED SECURITIES, TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE RESALE RESTRICTION TERMINATION DATE) THAT IS IN THE CASE OF RULE 144A NOTES: ONE YEAR AND IN THE CASE OF REGULATION S NOTES: 40 DAYS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE ISSUER OR ANY AFFILIATE OF THE ISSUER WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY), ONLY (A) TO THE ISSUER, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT, TO A PERSON IT REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE ISSUERS AND THE TRUSTEES RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. BY ACCEPTING THIS NOTE (OR AN INTEREST IN THE NOTES REPRESENTED HEREBY), EACH BENEFICIAL OWNER HEREOF IS DEEMED TO REPRESENT AND WARRANT (I) EITHER (A) IT IS NOT (AND FOR SO LONG AS IT HOLDS THIS NOTE OR AN INTEREST HEREIN WILL NOT BE), AND IS NOT ACTING ON BEHALF OF (AND FOR SO LONG AS IT HOLDS THIS NOTE OR AN INTEREST HEREIN WILL NOT BE ACTING ON BEHALF OF) AN EMPLOYEE BENEFIT PLAN, AS DEFINED IN SECTION 3(3) OF THE UNITED STATES EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED (ERISA), THAT IS SUBJECT TO THE PROVISIONS OF PART 4 OF SUBTITLE B OF TITLE I OF ERISA, A PLAN TO WHICH SECTION 4975 OF THE UNITED STATES INTERNAL REVENUE CODE OF 1986, AS AMENDED (CODE) APPLIES, OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE PLAN ASSETS BY REASON OF SUCH AN EMPLOYEE BENEFIT PLANS OR PLANS INVESTMENT IN SUCH ENTITY (EACH, A BENEFIT PLAN INVESTOR), OR A GOVERNMENTAL, CHURCH OR NON-U.S. PLAN WHICH IS SUBJECT TO ANY FEDERAL, STATE, LOCAL, NON-U.S. OR OTHER LAWS OR REGULATIONS THAT ARE SUBSTANTIALLY SIMILAR TO THE FIDUCIARY

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RESPONSIBILITY OR THE PROHIBITED TRANSACTION PROVISIONS OF ERISA AND/OR SECTION 4975 OF THE CODE (SIMILAR LAWS), AND NO PART OF THE ASSETS BEING USED BY IT TO ACQUIRE OR HOLD SUCH NOTE OR ANY INTEREST HEREIN CONSTITUTES THE ASSETS OF ANY SUCH BENEFIT PLAN INVESTOR OR SUCH A GOVERNMENTAL, CHURCH OR NON-U.S. PLAN, OR (B) THE ACQUISITION, HOLDING AND DISPOSITION OF THIS NOTE OR AN INTEREST HEREIN DOES NOT AND WILL NOT RESULT IN A NONEXEMPT PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA AND/OR SECTION 4975 OF THE CODE (OR, IN THE CASE OF A GOVERNMENTAL, CHURCH OR NON-U.S. PLAN, A VIOLATION OF ANY SIMILAR LAWS); AND (II) IT WILL NOT SELL OR OTHERWISE TRANSFER THIS NOTE OR ANY INTEREST HEREIN OTHERWISE THAN TO AN ACQUIRER OR TRANSFEREE THAT IS DEEMED TO REPRESENT AND AGREE WITH RESPECT TO ITS ACQUISITION, HOLDING AND DISPOSITION OF THIS NOTE TO THE SAME EFFECT AS THE ACQUIRERS REPRESENTATION AND AGREEMENT SET FORTH IN THIS SENTENCE. If you purchase Notes, you will also be deemed to acknowledge that the foregoing restrictions apply to holders of beneficial interests in these Notes as well as to holders of these Notes. (6) You agree that you will give to each person to whom you transfer the Notes notice of any restrictions on the transfer of such Notes. (7) You acknowledge that until 40 days after the commencement of the offering, any offer or sale of the Notes within the United States by a dealer (whether or not participating in the offering) may violate the registration requirements of the U.S. Securities Act if such offer or sale is made otherwise than in accordance with Rule 144A under the U.S. Securities Act. (8) You acknowledge that the Registrar will not be required to accept for registration or transfer any Notes acquired by you except upon presentation of evidence satisfactory to us and the Registrar that the restrictions set forth therein have been complied with. (9) You acknowledge that we, the Initial Purchaser and others will rely upon the truth and accuracy of your acknowledgements, representations, warranties and agreements and agrees that if any of the acknowledgements, representations, warranties and agreements deemed to have been made by your purchase of the Notes are no longer accurate, it shall promptly notify the initial purchaser. If you are acquiring any Notes as a fiduciary or agent for one or more investor accounts, you represent that you have sole investment discretion with respect to each such investor account and that you have full power to make the foregoing acknowledgements, representations and agreements on behalf of each such investor account. (10) You understand that no action has been taken in any jurisdiction (including the United States) by us or the Initial Purchaser that would result in a public offering of the Notes or the possession, circulation or distribution of this Offering Memorandum or any other material relating to us or the Notes in any jurisdiction where action for such purpose is required. Consequently, any transfer of the Notes will be subject to the selling restrictions set forth under Plan of Distribution. European Economic Area In relation to each member state of the European Economic Area that has implemented the Prospectus Directive (each, a Relevant Member State), the Initial Purchaser has represented and agreed that with effect from and including the date on which the Prospectus Directive is implemented in that member state (the Relevant Implementation Date), it has not made and will not make an offer of the Notes to the public in that Relevant Member State prior to the publication of a prospectus in relation to the Notes which has been approved by the competent authority in that Relevant Member State in accordance with the Prospectus Directive or, where appropriate, published in another Relevant Member State and notified the competent authority in that relevant member state in accordance with Article 18 of the Prospectus Directive, except that it may, with effect from and including the Relevant Implementation Date, make an offer of the Notes to the public in that relevant member state at any time: (i) to any legal entity which is a qualified investor as defined in the Prospectus Directive; or (ii) in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of Notes shall require the Issuer or any Initial Purchaser to publish a prospectus pursuant to Article 3 of the Prospectus Directive. For the purposes of this provision, the expression an offer of the Notes to the public in relation to any of the Notes in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms

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of the offering and the Notes to be offered so as to enable an investor to decide to purchase or subscribe for the Notes, as the same may be varied in that member state by any measure implementing the Prospectus Directive in that member state, the expression Prospectus Directive means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in the Relevant Member State, and the expression 2010 PD Amending Directive means Directive 2010/73/EU.

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LEGAL MATTERS Certain legal matters in connection with this Offering will be passed upon for the Issuer by the London, New York and Hungary offices of White & Case LLP as to matters of English, United States and New York law and Hungarian Law and by Baker & McKenzie Amsterdam N.V. as to matters of Netherlands law. Certain legal matters in connection with this Offering will be passed upon for the Initial Purchaser by Latham & Watkins (London) LLP as to matters of English, United States and New York law, by Burai-Kovacs and Partners as to matters of Hungarian law and by Norton Rose LLP as to matters of Netherlands law.

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INDEPENDENT AUDITORS The Issuers consolidated financial statements as of and for the years ended December 31, 2010 and 2009 included in this Offering Memorandum have been audited by PricewaterhouseCoopers Kft., independent auditors, as stated in their reports appearing herein.

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WHERE YOU CAN FIND ADDITIONAL INFORMATION Each purchaser of the Additional Notes from the Initial Purchaser will be furnished a copy of this Offering Memorandum and any related amendments or supplements to this Offering Memorandum. Each person receiving this Offering Memorandum and any related amendments or supplements to the Offering Memorandum acknowledges that: (1) such person has been afforded an opportunity to request from us, and to review and has received, all additional information considered by it to be necessary to verify the accuracy and completeness of the information herein; such person has not relied on the Initial Purchaser or any person affiliated with any of the Initial Purchaser in connection with its investigation of the accuracy of such information or its investment decision; and except as provided pursuant to paragraph (1) above, no person has been authorized to give any information or to make any representation concerning the Additional Notes offered hereby other than those contained herein and, if given or made, such other information or representation should not be relied upon as having been authorized by us or the Initial Purchaser.

(2) (3)

Copies of documents concerning the Issuer, this Offering Memorandum and other information relating to the issuance of the Additional Notes may be obtained from the specified offices of the paying agent in Luxembourg. To permit compliance with Rule 144A under the U.S. Securities Act (Rule 144A) in connection with the sale of interests in the Additional Notes, we will furnish, upon request of a holder or beneficial owner of a Note who is a qualified institutional investor or a prospective investor who is a qualified institutional investor within the meaning of Rule 144A, designated by such holder or beneficial owner, the information relating to us to be delivered under Rule 144A(d)(4) under the U.S. Securities Act if at the time of the request (1) we are neither a reporting company under section 13 or section 15(d) of the U.S. Exchange Act, nor exempt from reporting pursuant to Rule 12g3-2(b) under the U.S. Exchange Act, and (2) the Additional Notes are restricted securities within the meaning of Rule 144 under the U.S. Securities Act. The Issuer is not currently subject to the periodic reporting and other information requirements of the Exchange Act. However, pursuant to the indenture governing the Notes and so long as the Notes are outstanding, the Issuer will furnish periodic information to holders of the Notes. See Description of the Notes Certain Covenants Reports to Holders.

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ENFORCEMENT OF CIVIL LIABILITIES Matel is a Dutch limited liability company with all or substantially all of its respective assets located outside the United States. Similarly, all or substantially all of the assets of Invitel ZRt and the other Subsidiary Guarantors assets are located outside the United States. Substantially all of the directors and officers of Matel, Invitel ZRt and the other Subsidiary Guarantors, and certain of the advisers named in this Offering Memorandum, reside in countries other than the United States, and most of the assets of those directors and officers are located outside the United States. As a result, you may not be able to serve process within the United States upon these directors and officers or to enforce against them judgments of U.S. courts, including judgments based on the civil liability provisions of the federal securities laws of the United States. In addition, there is doubt as to the enforceability in original actions in Hungary and The Netherlands of civil liabilities predicated upon the U.S. federal securities laws. The United States and The Netherlands do not currently have a treaty providing for reciprocal recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters. Therefore, a final judgment for the payment of money rendered by any federal or state court in the United States based on civil liability, whether or not predicated solely on U.S. federal securities laws, would not be enforceable in The Netherlands. If, however, the party in whose favor such final judgment is rendered brings a new suit in a competent court in The Netherlands, such party may submit to a Dutch court the final judgment that has been rendered in the United States. To the extent that the Dutch court finds that the jurisdiction of the federal or state court in the United States has been based on grounds that are internationally acceptable, that proper legal procedures have been observed and that all appeals have been exhausted, the Dutch court will, in principle, give binding effect to the final judgment that has been rendered in the United States, unless such judgment contravenes principles of public policy of The Netherlands. The Netherlands and the United States are signatories to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958. Arbitration awards in other signatory countries are enforceable in The Netherlands subject to this convention and certain other limitations (including applicable provisions of Netherlands law). In addition, enforcement of arbitration awards in The Netherlands is subject to selected provisions of The Netherlands Code of Civil Procedure. Hungary Currently there is no bilateral or multilateral treaty between, inter alia, the United States and Hungary providing for reciprocal recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters. Hungarian legislation (and Law Decree 13 of 1979 on Private International Law in particular) provides, however, that a court in the Republic of Hungary will enforce any judgment obtained in the courts of other countries (such as the various federal states of the United States, including of New York) without re-trial or re-examination of the merits of the case, provided that: (i) the original judgment is final, conclusive and enforceable between the parties under the laws of the state the court of which has rendered the decision; (ii) the subject matter of the judgment was not a claim in connection with which Hungary has retained its exclusive jurisdiction pursuant to Law Decree 13 of 1979 on Private International Law; (iii) the competence of the foreign court was based upon legal regulation or upon the agreement of the parties; and (iv) none of the following conditions subsists: (a) the judgment conflicts with Hungarian public policy; (b) the Hungarian defendant (or its properly authorized representative) did not participate in proceedings because no summons or petition or any other document forming the basis of the proceedings was delivered to the defendant or its agent for service of process; (c) the judgment was passed in proceedings which seriously conflict with basic principles of Hungarian litigation law; (d) proceedings have commenced with respect to the same legal matter and factual background between the same parties before a Hungarian court or other authority prior to the commencement of the foreign proceedings; and (e) a final judgment with respect to the same legal matter and factual background between the same parties has been rendered by a Hungarian court or other authority. Hungary (similarly to The Netherlands and the United States) are signatories to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958. Therefore arbitration awards in other signatory countries are enforceable in Hungary subject to this convention and certain other limitations.

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LISTING AND GENERAL INFORMATION Listing Application has been made to list the Additional Notes on the Luxembourg Stock Exchange in accordance with the rules of that exchange and to trade the Additional Notes on the Euro MTF. Notice of any change of control or any change in the rate of interest payable on the Notes will be published in a newspaper having general circulation in Luxembourg (which is expected to be the Luxemburger Wort) or on the Luxembourg Stock Exchanges website (www.bourse.lu). The Issuer accepts responsibility for the information contained in this Offering Memorandum. To the best of the Issuers knowledge (having taken all reasonable care to ensure that such is the case), the information contained in this Offering Memorandum is in accordance with the facts as of the date hereof and does not omit anything likely to affect the import of such information. For so long as any of the Notes are listed on the Luxembourg Stock Exchange and the rules of that exchange so require, copies of the following documents may be inspected and obtained free of charge at the specified office of the listing agent in Luxembourg during normal business hours on any weekday:

the organizational documents of Matel and each Subsidiary Guarantor; the Issuers most recent annual financial statements; the Purchase Agreement; the indenture dated December 16, 2009, as amended and supplemented by the supplemental indenture dated March 3, 2010, the second supplemental indenture dated February 28, 2011 and the third supplemental indenture dated March 16, 2011 (the Indenture) (which includes the form of the Notes and the Guarantees); and the security documents.

The Issuer has appointed The Bank of New York Mellon as principal paying agent. The Issuer has appointed The Bank of New York Mellon (Luxembourg) S.A. as the paying agent for the Notes in Luxembourg. We will maintain a paying and transfer agent in Luxembourg for as long as any of the Notes are listed on the Luxembourg Stock Exchange. We reserve the right to vary such appointment and we will publish notice of such change of appointment in a newspaper having a general circulation in Luxembourg (which is expected to be the Luxemburger Wort) or on the Luxembourg Stock Exchanges website (www.bourse.lu). The issue of the Additional Notes by the Issuer was approved by the board of directors on March 14, 2011. Subsidiary Guarantors The following chart summarizes the ownership of our Subsidiary Guarantors at the date hereof:
Magyar Telecom B.V. (The Netherlands)
99.983% 100% 100%

Invitel Tvkzlsi ZRt (Hungary)

0.002725%

Invitel Technocom Kft (Hungary)

FiberNet Hungary Tancsad Kft (Hungary)

100%

100%

Invitel International Holdings B.V. (The Netherlands)

FiberNet Kommunikcis Zrt (Hungary)

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Invitel International Holdings B.V. was incorporated on March 26, 2009 as a limited liability company under the laws of The Netherlands. Its authorized share capital is 90,000 divided into 9,000,000 ordinary shares with the nominal value of 0.01 each. Invitel Technocom Kft. (formerly PanTel Technocom Kft.) was incorporated on September 28, 2001 as a limited liability company under the laws of Hungary. Its registered share capital is HUF 165 million. The main business activity of Invitel Technocom is telecommunications. Invitel Tvkzlsi ZRt was incorporated on November 17, 1995 as a joint stock company under the laws of Hungary. The current authorized share capital of Invitel ZRt is HUF 16,000 million divided into 20 million registered ordinary dematerialized shares with a nominal value of HUF 800 each. The shareholders of Invitel ZRt are Matel (99.98%), Invitel Technocom (owning less than 1%) and 39 municipalities (owning in the aggregate less than 1%). The main business activity of Invitel ZRt is telecommunications. FiberNet Kommunikcis Zrtkren Mkd Rszvnytrsasg was incorporated on July 15, 2004 as a joint stock company under the laws of Hungary. Its registered share capital is HUF 772,160,000. The main business activity of FiberNet Kommunikcis Zrtkren Mkd Rszvnytrsasg is cable telecommunications services. FiberNet Hungary Tancsad Kft. was incorporated on September 22, 2006 as a limited liability company under the laws of Hungary. Its registered share capital is HUF 3,210,000. The main business activity of FiberNet Hungary Tancsad Kft. is business consultancy services. Clearing information The Additional Notes have been or will be accepted for clearance through Clearstream and Euroclear. The Additional Notes represented by the Rule 144A Global Note will have the same Common Code and ISIN as the Existing Notes represented by the Rule 144A Global Note. Upon issue, the Additional Notes represented by the Regulation S Global Note will be represented by a temporary Regulation S Global Note with a temporary Common Code of 061128115 and a temporary ISIN of XS0611281154. On the expiry of a period of 40 calendar days following the date of issue of the Additional Notes, the temporary Regulation S Global Note will be fungible into the permanent Regulation S Global Note. The permanent Regulation S Global Note and permanent Rule 144A Global Note, respectively, will have the following Common Codes and ISINs:
Rule 144A Global Note Regulation S Global Note

Common Code ....................................................................................................... ISIN ....................................................................................................................... Legal information about the Issuer

047317690 XS0473176906

047317665 XS0473176658

Matel is a limited liability company incorporated under the laws of The Netherlands on December 17, 1996. Matel is incorporated for an indefinite duration and is registered in the Chamber of Commerce and Industries (Kamer van Koophandel) for Amsterdam under number 33286951. Matels authorized capital is divided into 90,000,000 shares of 4.54 each. Matel is an intermediate holding company and its corporate objects (Article 2 of its Articles of Association) are to provide design, engineering consultancy, intermediary, construction, accounting, technical, financial, management and related services; to finance and give guarantees or security to enable other entities to engage in and develop such activities; to acquire, dispose of, manage and use movable and immovable property and copyrights, patents, trademarks, licenses, permits and other industrial property rights; to finance and provide administrative or other support to organizations and institutions engaged in education, training or development of the activities referred to above; and to engage in ancillary activities. Matels registered office is Parnassustoren, Locatellikade 1, 1076 AZ Amsterdam, The Netherlands and its principal business address is also Parnassustoren, Locatellikade 1, 1076 AZ Amsterdam, The Netherlands. General Except as disclosed in this Offering Memorandum: there has been no material adverse change in either the Issuer or the Guarantors financial position since December 31, 2010; and

188

neither the Issuer nor the Guarantors has been involved in any litigation, administrative proceeding or arbitration relating to claims or amounts which are material in the context of the issuance of the Notes except as otherwise disclosed in this Offering Memorandum, and, so far as the Issuer and the Guarantors are aware, no such litigation, administrative proceeding or arbitration is pending or threatened.

189

190

GLOSSARY access network part of a network which connects end-users to the backbone. ADSL means asymmetric digital subscriber line. ATM or asynchronous transfer mode an international high-speed, high-volume, packet-switching protocol which supplies bandwidth on demand and divides any signal (voice, data or video) into efficient, manageable packets for ultra-fast switching. backbone a high-speed line or series of connections that forms a major pathway within a network. bitstream access a broadband access product which utilizes DSL in the local loop point of presence and then transports across the network to a DSL regional point of presence. It allows a voice and a DSL service to be integrated over the same two-wire copper pair. broadband a descriptive term for evolving digital technologies that provided consumers with a signal-switched facility offering integrated access to voice, high-speed data service, video-demand services and interactive delivery services. Business refers to one of the four markets in which we operate. cable modem a cable modem is a device that enables connection of a PC to the cable TV network and receive data at a high speed. CPS or Carrier Pre-selection whereby the selected operator is pre-set as the default operator for making certain calls so that no prefix needs to be dialed. CS or Carrier Selection carrier selection on a call-by-call basis, whereby an operator different from the default operator may be selected by the subscriber through dialing a prefix for making certain calls. Dark fiber unused fiber optic cable. Fiber optic cables convey information in the form of light pulses so that dark fiber means that no light pulses are being sent over the fiber optic cable. DSL or digital subscriber line an access technology that allows voice and high-speed data to be sent simultaneously over local exchange service copper facilities. DWDM or Dense Wavelength Division Multiplexing is a technology which multiplexes multiple optical carrier signals on a single optical fiber by using different wavelengths (colors) of laser light to carry different signals. This allows for a multiplication in capacity, in addition to making it possible to perform bidirectional communications over one strand of fiber. Ethernet the most common type of connection computers used in a local area network. Frame Relay industry-standard switched data link layer protocol, used typically for high speed data transmission through leased lines. GSM global system for mobile communications. incumbent the dominant operator which was licensed to enter the market and establish a proprietary network under the protection of a regulatory monopoly. IP or Internet protocol the communications standard that defines the unit of information passed between computer systems that provides a basic packet delivery service. IPTV Internet protocol television. ISDN or integrated services digital network an international standard which enables high speed simultaneous transmission of voice and/or data over an existing public network. ISDN2 ISDN access with two channels designed primarily for residential use. ISDN30 ISDN access with 30 channels designed primarily for business use. leased line A dedicated communications circuit for continual data transmission leased typically by business customers enabling the connection of two geographically distant points.

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local loop the part of a communications circuit between the subscribers equipment and the equipment in the local exchange. Also known as the subscriber loop, local line and access line. LLU local loop unbundling. LRIC or long run incremental cost a cost accounting methodology focusing on long-run incremental costs. LTO or local telephone operator a telecommunications operator which, until the liberalization of voice telephony, was licensed to provide local telephone services in designated concession areas only. MAN metropolitan area network. managed leased line a leased line monitored, managed and controlled by a network management system offering an increased level of flexibility, reliability and security. Mass Market: refers to Mass Market Internet, two of the four markets in which we operate. MPLS or Multiprotocol label switching: a widely supported method of speeding up data communication over combined IP/ATM networks. number portability: the ability of a customer to transfer from one telecom operator to another and retain the original telephone number. PMP or Point-to-multipoint: point-multipoint; usually refers to access networks utilizing microwave technology to link the operators point of presence with a number of remote customer locations. POP or point of presence: the interface point between communications entities. PP or point-to-point: refers to the use of microwave technology to link the telecommunications service providers point-of-presence directly with one single customer location. PSTN or public switched telephone network: traditional landline network for voice telephony. RIO: reference interconnection offer. RUO: reference unbundling offer. SDH or synchronous digital hierarchy: European standard that defines a set of rate and format standards that are transmitted using optical signals over fiber. SME: small and medium-sized enterprises. SMP: significant market power. transit services: an interconnection service comprising of conveyance on a network between two points of interconnection, linking two networks that are not directly interconnected. UMTS: universal mobile telecommunications system; a third generation (3G) mobile system designed to provide a wide range of voice, high speed data and multimedia services. unbundling: granting unbundled access to the local loop so that the third party operators requesting access to the local loop is not required to purchase interconnection services from the incumbent operator; also referred to as local loop unbundling. VLAN: virtual local area network. VoIP: voice over Internet protocol. VPN or virtual private network: A private network (often an Intranet) that makes use of the public telecommunication infrastructure, maintaining privacy through the use of specific protocols and security procedures. A VPN can be contrasted with a system of owned or leased lines that can only be used by one company. The main purpose of a VPN is to give the company the same capabilities as private leased lines at much lower cost by using the shared public infrastructure.

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Wholesale: refers to one of the four markets in which we operate. WiMAX or Worldwide Interoperability for Microwave Access: a telecommunications technology that provides for the wireless transmission of data using a variety of transmission modes.

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INDEX TO FINANCIAL INFORMATION MAGYAR TELECOM B.V. Audited Consolidated Financial Statements as of and for the year ended December 31, 2010 Independent Auditors Report ............................................................................................................... Consolidated Balance Sheet .................................................................................................................. Consolidated Statement of Comprehensive Income.............................................................................. Consolidated Cash Flow Statement....................................................................................................... Consolidated Statements of Changes in Equity..................................................................................... Notes to the Consolidated Financial Statements ................................................................................... Audited Consolidated Financial Statements as of and for the year ended December 31, 2009 Independent Auditors Report ............................................................................................................... Consolidated Balance Sheet .................................................................................................................. Consolidated Income Statement and Statement of Comprehensive Income/(Loss) .............................. Consolidated Cash Flow Statement....................................................................................................... Consolidated Statements of Changes in Equity..................................................................................... Notes to the Consolidated Financial Statements ................................................................................... F-54 F-55 F-56 F-57 F-58 F-59 F-4 F-5 F-6 F-7 F-8 F-9

195

MAGYAR TELECOM B.V. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2010 (PRESENTED IN THOUSAND EUROS)

196

Magyar Telecom B.V. CONSOLIDATED FINANCIAL STATEMENTS Table of contents

Page

Independent Auditors Report ........................................................................................................................ Consolidated Balance Sheet............................................................................................................................. Consolidated Statement of Comprehensive Income ........................................................................................ Consolidated Cash Flow Statement ................................................................................................................. Consolidated Statement of Changes in Equity................................................................................................. Notes to the Consolidated Financial Statements..............................................................................................

F-4 F-5 F-6 F-7 F-8 F-9

197

Independent Auditors Report To the Shareholders and Board of Directors of Magyar Telecom B.V. We have audited the accompanying consolidated financial statements of Magyar Telecom B.V. and its subsidiaries which comprise the consolidated balance sheet as of December 31, 2010 and the related consolidated statement of comprehensive income, statement of changes in equity and cash flow statement for the year then ended and a summary of significant accounting policies and other explanatory notes. Managements responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the European Union and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the accompanying consolidated financial statements referred to above give a true and fair view of the financial position of Magyar Telecom B.V. and its subsidiaries as of December 31, 2010 and of their financial performance and their cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union. March 14, 2011 Budapest, Hungary

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Magyar Telecom B.V. Consolidated Balance Sheet as of December 31, 2010

Notes At 31 December 2010 At 31 December 2009

(in thousands of EUR)

Non-Current Assets Intangible Assets......................................................................................... Property, Plant and Equipment ................................................................... Other Non-Current Financial Assets........................................................... Non-Current Derivative Financial Instruments........................................... Deferred Tax Assets ................................................................................... Current Assets Cash and Cash Equivalents......................................................................... Trade and Other Receivables...................................................................... Derivative Financial Instruments................................................................ Other Current Assets................................................................................... Assets of Disposal Group Classified as Held-for-Sale ............................... Total Assets ............................................................................................... Equity Capital and Reserves Attributable to Owners of the Company Share Capital............................................................................................... Capital Reserve........................................................................................... Other Reserve ............................................................................................. Cumulative Translation Reserve................................................................. Accumulated Losses ................................................................................... Non-Controlling Interest............................................................................. Total Equity............................................................................................... Liabilities Non-Current Liabilities Borrowings ................................................................................................. Other Non-Current Liabilities..................................................................... Non-Current Derivative Financial Instruments........................................... Current Liabilities Trade and Other Payables ........................................................................... Derivative Financial Instruments................................................................ Accrued Expenses and Deferred Income .................................................... Provisions for Other Liabilities and Charges.............................................. Liabilities of Disposal Group Classified as Held-for-Sale.......................... Total Liabilities ......................................................................................... Total Equity and Liabilities .....................................................................

11 12 20 28

42,822 303,039 69 345,930

48,123 333,076 74 2,334 16,811 400,418 49,695 25,385 11,053 2,020 88,153 234,094 722,665

13 14 19 15 3

109,010 28,303 196 2,479 139,988 485,918

17 17 17 17 17 17

92,201 256,047 (16,693) (42,146) (211,290) 78,119 11 78,130

92,201 256,047 (17,193) (37,883) (222,489) 70,683 18 70,701

18 20 19

351,006 16,134 904 368,044

475,531 13,478 7,247 496,256 27,117 18,613 16,739 267 62,736 92,972 651,964 722,665

22 19 23 21 3

20,840 1,528 17,221 155 39,744 407,788 485,918

The accompanying notes form an integral part of the consolidated financial statements.

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Magyar Telecom B.V. Consolidated Statement of Comprehensive Income for the year ended December 31, 2010
For the year ended 31 December Notes 2010 2009 (in thousands of EUR)

Revenue ...................................................................................................... Cost of Sales, Exclusive of Depreciation Shown Below ............................ Depreciation and Amortization................................................................... Operating Expenses .................................................................................... Cost of Restructuring .................................................................................. Income / (Loss) from Operations............................................................. Financial Income ........................................................................................ Financial Expenses ..................................................................................... Loss on Extinguishment of Debt ................................................................ Income / (Loss) Before Tax ...................................................................... Income Tax (Expense) / Benefit ................................................................. Income / (Loss) from Continuing Operations......................................... Income / (Loss) from Discontinued Operations...................................... Income / (Loss) for the Year .................................................................... Attributable to: Owners of the Parent ......................................................................... Non-Controlling Interest ................................................................... Change in Cumulative Translation Reserve................................................ Total Comprehensive Income / (Loss) for the Year............................... Attributable to: Owners of the Parent ......................................................................... Non-Controlling Interest ...................................................................

4 5 8 6 9 10 10 10 28 3

193,224 (62,657) (53,885) (46,214) (1,216) 29,252 12,024 (71,682) (30,406) (18,355) (48,761) 59,953 11,192 11,199 (7) 11,192 (4,263) 6,929 6,936 (7) 6,929

209,990 (69,125) (54,835) (40,541) (2,121) 43,368 1,833 (89,683) (24,470) (68,952) 4,806 (64,146) 25,790 (38,356) (38,357) 1 (38,356) 3,902 (34,454) (34,455) 1 (34,454)

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Magyar Telecom B.V. Consolidated Cash Flow Statement for the years ended December 31, 2010
For the year ended 31 December Notes 2010 2009 (in thousands of EUR) Cash Flows from Operating Activities Income / (Loss) Before Tax of Continued Operations .......................................................................... Income / (Loss) Before Tax of Discontinued Operations...................................................................... Income / (Loss) Before Tax .................................................................................................................. Adjustments for Income Taxes ....................................................................................................................................... Interest Expense / (Income) .................................................................................................................. Loss on Extinguishment of Debt........................................................................................................... Amortization......................................................................................................................................... Depreciation ......................................................................................................................................... Result of Sale of Intangible Assets ....................................................................................................... Result of Sale of Property, Plant and Equipment .................................................................................. Result of Sale of Subsidiaries ............................................................................................................... Fair Value Change of Derivative Financial Instruments ....................................................................... Provision for Impairment of Trade Receivables.................................................................................... Provisions............................................................................................................................................. Unrealized Foreign Exchange (Gain) / Loss ......................................................................................... Other Non-Cash Items .......................................................................................................................... Working Capital Changes: Change in Trade and Other Receivables ............................................................................................... Change in Inventories........................................................................................................................... Change in Prepayments and Accrued Income....................................................................................... Change in Trade and Other Payables and Accrued Expenses and Deferred Income ............................. Income Taxes Paid ............................................................................................................................... Interest Paid.......................................................................................................................................... Net Cash Flow Provided by / (Used in) Operating Activities........................................................... Cash Flows from Investing Activities Purchase of Intangible Assets ............................................................................................................... Purchase of Property, Plant and Equipment.......................................................................................... Proceeds from Sale of Intangible Assets............................................................................................... Proceeds from Sale of Property, Plant and Equipment.......................................................................... Proceeds from Sale of Subsidiaries, Net of Cash .................................................................................. Restricted Cash..................................................................................................................................... Interest Received .................................................................................................................................. Net Cash Flow Provided by / (Used in) Investing Activities............................................................. Cash Flows from Financing Activities Settlement of Derivative Financial Instruments .................................................................................... Proceeds from Interest Bearing Borrowings ......................................................................................... Principal Payments under Capital Lease Obligations............................................................................ Proceeds from Issuance of Notes 2009 ................................................................................................. Proceeds from Related Party Loan........................................................................................................ Deferred Financing Costs Paid ............................................................................................................. Repurchase of the 2009 Notes .............................................................................................................. Repurchase of the 2007 Notes .............................................................................................................. Advance payment to Related Party ....................................................................................................... Repayments of Interest Bearing Borrowings ........................................................................................ Net Cash Flow Provided by / (Used in) Financing Activities ........................................................... Effect of Exchange Rate Changes on Cash and Cash Equivalents ........................................................ Net Increase / (Decrease) in Cash and Cash Equivalents................................................................. Cash and Cash Equivalents at the Beginning of the Year ..................................................................... Cash and Cash Equivalents at the End of the Year ......................................................................... Included in Cash and Cash Equivalents per the Balance Sheet ............................................................. Included in Assets of Disposal Group Classified as Held-for-Sale ....................................................... 13 3 13

(30,406) 64,547 34,141

(68,952) 28,574 (40,378)

28 10 10 8,11 8,12 11 12 3 14

(5,306) 45,747 12,253 41,632 (238) (5,142) (41,982) 6,939 3,328 (1,720) 9,331 (4,758) 226 144 (1,568) (15,973) (3,014) (37,753) 36,287 (8,249) (33,303) 119 7,265 190,981 1,203 158,016 (16,947) (2,535) (75,003) (47,593) (6,407) (1,480) (149,965) (420) 43,918 65,092 109,010 109,010

(4,352) 56,433 24,470 17,889 47,693 777 (7,330) 17,402 2,504 146 17,569 9,536 1,845 276 476 (17,472) (11,106) (47,911) 68,467 (11,865) (54,498) 245 10,223 2,500 1,086 (52,309) (18,611) 182,000 (1,559) 340,694 125,453 (33,701) (573,334) 20,942 (456) 36,644 28,448 65,092 49,695 15,397

18 18 18 18 18 18 26 18

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Summary of non-cash transactions: On December 18, 2009 EUR 133.9 million of the New Shareholder Loan was contributed by HoldCo I. B.V. and Mid Europa as a capital contribution (see note 26 Commitments). The Group had unpaid capital expenditures in the amount of EUR 7,449 thousand and EUR 15,443 thousand as of December 31, 2010 and 2009. The accompanying notes form an integral part of the consolidated financial statements.

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Magyar Telecom B.V. Consolidated Statement of Changes in Equity for the year ended December 31, 2010
Attributable to Owners of the Parent Share Capital Capital Reserve Other Reserve Cumulative Translation Reserve Accumulated Losses Non-Controlling Interest Total Equity

Notes

Total

(in thousands of EUR)

Balance as of 31 December 2008 ................................. Change in Functional Currency of Discontinued Operations ................................................................. Translation Adjustment for the Year.............................. Net Income Recognized Directly in Equity ................... Net Result for the Period................................................ Total Comprehensive Income ........................................ Capital Increase.............................................................. Balance as of 31 December 2009 ................................. Translation Adjustment for the Year.............................. Net Income Recognized Directly in Equity ................... Net Result for the Period................................................ Total Comprehensive Income ........................................ Termination of Stock Options........................................ Balance as of 31 December 2010 ................................. 16 26 2.4

92,201 92,201 92,201

122,110 133,937 256,047 256,047

(17,193) (17,193) 500 (16,693)

(41,785) 1,428 2,474 3,902 3,902 (37,883) (4,263) (4,263) (4,263) (42,146)

(184,132) (38,357) (38,357) (222,489) 11,199 11,199 (211,290)

(28,799) 1,428 2,474 3,902 (38,357) (34,455) 133,937 70,683 (4,263) (4,263) 11,199 6,936 500 78,119

17 1 1 18 (7) (7) 11

(28,782) 1,428 2,474 3,902 (38,356) (34,454) 133,937 70,701 (4,263) (4,263) 11,192 6,929 500 78,130

The accompanying notes form an integral part of the consolidated financial statements.

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Magyar Telecom B.V. Notes to the Consolidated Financial Statements for the year ended December 31, 2010 1. General Information Magyar Telecom B.V. (Matel or the Company) was incorporated in the Netherlands on December 17, 1996 as a limited liability company and has its statutory seat in Amsterdam (Locatellikade 1,1076 AZ Amsterdam, The Netherlands). Matel is engaged in investing in telecommunication related activities in Hungary, primarily through its telecommunications service provider companies, Invitel Tvkzlsi Zrt. (Invitel Zrt) and Invitel Technocom Kft (ITC) providing telecommunications services to mass market and business customers. All subsidiaries are majority owned and controlled subsidiaries of Matel (collectively, the Group). Matel is the second largest fixed line telecommunications services provider in Hungary and the incumbent provider of fixed line telecommunications services to residential and business customers in its historical concession areas, where it has a dominant market share. The historical concession areas cover an estimated 2.1 million people, representing approximately 21% of Hungarys population. It also provides fixed line telecommunications services as an alternative operator in the remainder of Hungary either by connecting business customers to its backbone network, or through the use of carrier preselection or wholesale DSL services for mass market customers. The 100% shareholder of Matel is Matel Holdings N.V. (Matel Holdings). Matel Holdings was incorporated on December 27, 2000 under the laws of the Netherlands Antilles. Matel Holdings is 100% owned by Invitel Holdings A/S, through its holding companies, as of December 31, 2010. On February 26, 2009, a reorganization was completed, whereby HTCC effectively changed its place of incorporation from Delaware to Denmark by merging HTCC with and into MergeCo, which was the surviving company and become a wholly owned direct subsidiary of Invitel Holdings A/S. Invitel Holdings A/S is a Danish company established for the purpose of this reorganization. After completion of the reorganization, Invitel Holdings A/S became the successor to HTCC as the holding company for the group of companies that were subsidiaries of HTCC. On November 23, 2009, TDC and Mid Europa completed a transaction whereby Mid Europa Partners Limited (Mid Europa) acquired 10,799,782 of Invitel Holdings A/S shares held by TDC (64.67% of the outstanding shares, TDCs entire shareholding), for USD 1.00 per share. On November 27, 2009, Mid Europa completed the acquisition of an additional 9.87% of the shares of Invitel Holdings A/S (1,650,611 shares) from Straumur Burdaras Investment Bank for a purchase price of USD 4.50 per share, increasing Mid Europas ownership interest to 74.4% as of December 31, 2009. On December 7, 2009, Mid Europa announced the commencement of a tender offer (the Tender Offer) to purchase any and all outstanding shares and any and all outstanding American Depositary Shares (ADS) of Invitel Holdings A/S at a price of USD 4.50 per share. As a result of the Tender Offer, which closed on January 22, 2010, Mid Europa held approximately 91.78% of the shares of Invitel Holdings A/S (including shares represented by ADS). Following the completion of the Tender Offer, Mid Europa initiated steps to acquire the remaining shares of Invitel Holdings A/S not owned by it (1,375,351 or 8.22% of the shares) in a compulsory acquisition procedure under the Danish Companies Act at the same per share cash price offered and paid in the Tender Offer (USD 4.50 per share). The procedure was commenced on February 22, 2010, by Mid Europa requesting the remaining minority shareholders of Invitel Holdings A/S to transfer their shares and upon its expiry on July 5, 2010, Mid Europa became the sole shareholder of Invitel Holdings A/S. As of December 31, 2010 the ultimate parent company of the Group is Invitel Holdings A/S. Invitel Holdings A/S is 100% owned by Mid Europa. Mid Europa does not prepare financial statements under International Financial Reporting Standards. As of December 31, 2010 the Group includes the following subsidiaries: Invitel Zrt was incorporated on September 20, 1995 as a joint stock company under the laws of Hungary. The authorized share capital of Invitel as of December 31, 2010 is HUF 16 billion (approximately EUR 57 million). Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010

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ITC was incorporated on September 28, 2001 as a limited liability company under the laws of Hungary. The authorized share capital of ITC as of December 31, 2010 is HUF 165 million (approximately EUR 592 thousand). Invitel International Holdings B.V. (Invitel International Holdings) was incorporated on March 26, 2009 in Amsterdam and has its statutory seat under Laan van Kronenburg 8, 1183AS Amstelveen, the Netherlands. The 100% owner of Invitel International Holdings is Invitel Zrt. Invitel International Holdings was the holding company of the Groups international operations, which was sold on October 7, 2010 (see note 3 Discontinued Operations). The authorized share capital of Invitel International Holdings as of December 31, 2010 is EUR 18,000. AT-Invitel GmbH was formed on December 17, 2009 under Austrian law. The registered share capital of AT-Invitel GmbH as of December 31, 2010 is EUR 35 thousand. AT-Invitel GmbH is under liquidation as of December 31, 2010. 2. Significant Accounting Policies The significant accounting policies applied in the preparation of the consolidated financial statements are set out below. These policies set out below have been consistently applied by all Group entities to all periods presented in these consolidated financial statements, unless otherwise stated. Where it was necessary, accounting policies of the subsidiaries were modified to ensure consistency with the policies adopted by the Group. 2.1. Statement of Compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). 2.2. Basis of Preparation The consolidated financial statements are presented in euro (EUR) rounded to the nearest thousand of EUR (TEUR). The preparation of the consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the accounting policies. The areas involving a higher degree of judgement or complexity or areas where assumptions and estimates are significant to the consolidated financial statements are discussed in note 2.24. The Group has adopted the following new and amended IFRS as of January 1, 2010, which are relevant to the Groups consolidated financial statements: IFRIC 17 Distribution of non-cash assets to owners is effective for periods beginning on or after July 1, 2009. The Group applies IFRIC 17 from January 1, 2010. The interpretation is part of the IASBs annual improvements project published in April 2009. This interpretation provides guidance on accounting for arrangements whereby an entity distributes non-cash assets to shareholders either as a distribution of reserves or as dividends. IFRS 5 has also been amended to require that assets are classified as held for distribution only when they are available for distribution in their present condition and the distribution is highly probable. This standard did not have a material impact on the Groups consolidated financial statements. IAS 27 (revised) Consolidated and separate financial statements effective for periods beginning on or after July 1, 2009 requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is re-measured to fair value, and a gain or loss is recognised in profit or loss. The Group applies IAS 27 (revised) prospectively to transactions with non-controlling interests from January 1, 2010. The adoption of this standard did not have an impact on the consolidated financial statements. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010 IFRIC 18 Transfers of assets from customers, effective for transfer of assets received on or after July 1, 2009. This interpretation clarifies the requirements of IFRSs for agreements in which an entity receives from a customer an item of property, plant and equipment that the entity must then use either to connect the customer to a network or to provide the customer with ongoing access to a supply of goods or services (such as a supply of electricity, gas or water). In some cases, the entity receives cash from a customer that must be used only to acquire or construct the item of property, plant, and

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equipment in order to connect the customer to a network or provide the customer with ongoing access to a supply of goods or services (or to do both). The adoption of this standard did not have a material impact on the consolidated financial statements. IFRIC 9 Reassessment of embedded derivatives and IAS 39, Financial instruments: Recognition and measurement, is effective from July 1, 2009. This amendment to IFRIC 9 requires an entity to assess whether an embedded derivative should be separated from a host contract when the entity reclassifies a hybrid financial asset out of the fair value through profit or loss category. This assessment is to be made based on circumstances that existed on the later of the date the entity first became a party to the contract and the date of any contract amendments that significantly change the cash flows of the contract. If the entity is unable to make this assessment, the hybrid instrument must remains classified as at fair value through profit or loss in its entirety. The adoption of this standard did not have an impact on the consolidated financial statements. IFRIC 16 Hedges of a net investment in a foreign operation is effective from July 1, 2009. This amendment states that, in a hedge of a net investment in a foreign operation, qualifying hedging instruments may be held by any entity or entities within the group, including the foreign operation itself, as long as the designation, documentation and effectiveness requirements of IAS 39 that relate to a net investment hedge are satisfied. In particular, the group should clearly document its hedging strategy because of the possibility of different designations at different levels of the group. IAS 38 (Amendment) Intangible assets, effective January 1, 2010. The amendment clarifies guidance in measuring the fair value of an intangible asset acquired in a business combination and permits the grouping of intangible assets as a single asset if each asset has similar useful economic lives. The adoption of this standard did not have an impact on the consolidated financial statements. IAS 36 (Amendment) Impairment of assets is effective from January 1, 2010. The amendment clarifies that the largest cash-generating unit (or group of units) to which goodwill should be allocated for the purposes of impairment testing is an operating segment, as defined by paragraph 5 of IFRS 8 Operating segments (that is, before the aggregation of segments with similar economic characteristics). The adoption of this amendment did not have a material impact on the Groups consolidated financial statements. IFRS 3 (revised) Business combinations effective for periods beginning on or after July 1, 2009 continues to apply the acquisition method to business combinations, with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently remeasured through the income statement. There is a choice on an acquisition-by-acquisition basis to measure the noncontrolling interest in the acquiree either at fair value or at the non-controlling interests proportionate share of the acquirees net assets. All acquisition-related costs should be expensed. The Group applies IFRS 3 (revised) prospectively to all business combinations from January 1, 2010. The adoption of this standard did not have an impact on the consolidated financial statements. IAS 38 (Amendment) Intangible assets is part of the IASBs annual improvements project published in April 2009 and the Group applies IAS 38 (Amendment) from the date on which IFRS 3 (revised) was adopted. The amendment clarifies guidance in measuring the fair value of an intangible asset acquired in a business combination and it permits the grouping of intangible assets as a single asset if each asset has similar useful economic lives. The adoption of this standard did not have an impact on the Groups consolidated financial statements. IFRS 5 (Amendment) Measurement of non-current assets (or disposal groups) classified as held-for-sale is part of the IASBs annual improvements project published in April 2009 and was adopted by the Group from January 1, 2010. The amendment provides clarification that IFRS 5 specifies the disclosures required in respect of non-current assets (or disposal groups) classified as held for sale or discontinued operations. It also clarifies that the general requirements of IAS 1 still apply, particularly paragraph 15 (to achieve a fair presentation) and paragraph 125 (sources of estimation uncertainty). The adoption of this amendment did not have a material impact on the Groups consolidated financial statements. IAS 1 (Amendment) Presentation of financial statements is part of the IASBs annual improvements project published in April 2009 and is applied by the Group from January 1, 2010. The amendment provides clarification that the potential settlement of a liability by the issue of equity is not relevant to its classification as current or non-current. By amending the definition of current liabilities, the amendment permits a liability to be classified as non-current (provided that the entity has an unconditional right to defer settlement by transfer of cash or other assets for at least 12 months after the accounting period) notwithstanding the fact that the entity could be required by the counterparty to settle in shares at any time. The adoption of this amendment did not have an impact on the Groups consolidated financial statements. IFRS 2 (Amendments) Group cash-settled and share-based payment transactions was adopted by the Group as of January 1, 2010. In addition to incorporating IFRIC 8 Scope of IFRS 2 and IFRIC 11 IFRS 2 Group and treasury share transactions, the amendments expand on the guidance in IFRIC 11 to address the classification of group arrangements that were not covered by that interpretation. The new guidance is expected to have an impact on the Groups consolidated financial statements, refer to note 16 Share based compensation.

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The following standards and amendments to existing standards, which are mostly relevant to the Groups consolidated financial statements, have been published and are mandatory for the Groups accounting periods beginning on or after January 1, 2011 or later periods, but the Group has not early adopted them: IFRS 9 Financial instruments is replacing IAS 39 Financial instruments: recognition and measurement and shall apply for annual periods beginning on or after January 1, 2013. The Group is currently evaluating the impact of IFRS 9 on the consolidated financial statements. IFRS 7 (Amendments) Transfers of financial assets is effective for annual periods beginning on or after July 1, 2011, requires that the transfer of financial assets is disclosed as a single note in an entitys financial statement. An entity shall disclose information that enables users of its financial statements to understand the relationship between transferred financial assets that are not derecognised in their entirety and the associated liabilities and to evaluate the nature of, and risks associated with, the entitys continuing involvement in derecognised financial assets. The Group is currently assessing the impact of this amendment, though its adoption is not expected to have a material impact on the Groups financial statements. IAS 24 (revised) Related party disclosures was issued in November 2009. It supersedes IAS 24 Related party disclosures issued in 2003. IAS 24 (revised) is mandatory for periods beginning on or after January 1, 2011. Earlier application, in whole or in part, is permitted. However, the standard has not yet been endorsed by the EU. The adoption of this standard is not expected to have a material impact on the Groups consolidated financial statements. IFRIC 19 Extinguishing financial liabilities with equity instruments is effective July 1, 2010. The interpretation clarifies the accounting by an entity when the terms of a financial liability are renegotiated and result in the entity issuing equity instruments to a creditor of the entity to extinguish all or part of the financial liability (debt for equity swap). It requires a gain or loss to be recognised in profit or loss, which is measured as the difference between the carrying amount of the financial liability and the fair value of the equity instruments issued. If the fair value of the equity instruments issued cannot be reliably measured, the equity instruments should be measured to reflect the fair value of the financial liability extinguished. The group will apply the interpretation from January 1, 2011, subject to endorsement by the EU. It is not expected to have any impact on the Groups consolidated financial statements. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010 IAS 32 (Amendment) Classification of rights issues was issued in October 2009. The amendment applies to annual periods beginning on or after February 1, 2010. Earlier application is permitted. The amendment addresses the accounting for rights issues that are denominated in a currency other than the functional currency of the issuer. Provided certain conditions are met, such rights issues are now classified as equity regardless of the currency in which the exercise price is denominated. Previously, these issues had to be accounted for as derivative liabilities. The amendment applies retrospectively in accordance with IAS 8 Accounting policies, changes in accounting estimates and errors. The Group will apply the amended standard from January 1, 2011 though its adoption is not expected to have a material impact on the consolidated financial statements. 2.3. Basis of Consolidation

2.3.1. Subsidiaries Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the group controls another entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of the transaction with contingent payments classified as debt subsequently re-measured through the income statement. Any costs attributable to the acquisition are expensed from January 1, 2010 in accordance with IFRS 3 (revised). Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Groups share of the identifiable net assets acquired is recorded as goodwill. If the cost

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of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the consolidated income statement. 2.3.2. Transactions eliminated on consolidation All inter-group balances, transactions, unrealized gains and losses on transactions between Group companies have been eliminated from the consolidated financial statements. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. The Group applies a policy of treating transactions with minority interests as transactions with parties external to the Group. 2.3.3. Transactions with entities under common control Business combinations arising from transfers of interests in entities that are under the common control of the shareholders that control the Group are accounted for by using predecessor accounting, at the date that the common control was established. The assets and liabilities are recorded at book values by the acquiree. The components of equity of the acquired entities are added to the same components within Group equity except that any share capital of the acquired entities is recognized as part of reserves. The difference between the consideration given and the aggregate book value of the assets and liabilities of the acquired entity as of the date of the transaction is recorded as an adjustment to other reserve equity. No additional goodwill is created by these transactions. 2.4. Foreign Currency

2.4.1. Translation of financial statements Items included in the financial statements of each of the Groups entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The functional currency of Matel is the EUR. The functional currency of the Hungarian subsidiaries of Matel the Hungarian forint (HUF), the functional currency of the non-Hungarian subsidiaries of Matel is the EUR. Invitel International Hungary Kft has changed its functional currency from HUF to EUR on January 1, 2009. The change in the functional currency of Invitel International Kft was accounted for prospectively from January 1, 2009 as required by IAS 21 and all non-monetary assets and liabilities were adjusted through equity. The functional currency was changed due to the legal separation of Invitel International Kft from Invitel Zrt which occurred in November 2008. The assets and liabilities of operations that are measured in functional currencies other than the EUR are translated into EUR at foreign exchange rates in effect at the balance sheet date. Revenues and expenses of transactions measured in currencies other than the EUR are translated into EUR at average rates. Equity amounts are translated at historical exchange rates. Exchange rate translation differences are reported as a component of equity as cumulative translation reserve. 2.4.2. Transactions and balances Transactions in foreign currencies are translated to the respective functional currencies at the foreign exchange rate in effect at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to the functional currency at the foreign exchange rate in effect at that date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortized cost in foreign currency translated at the exchange rate at the end of the period. Foreign currency differences arising on translation are recognized in the consolidated income statement as net foreign exchange gain / (loss) in financial expenses. Non-monetary assets and liabilities denominated in foreign currencies other than the functional currency that are stated at historical cost are translated using the exchange rate at the date of the transaction. 2.5. Cash and Cash Equivalents

Cash and cash equivalents is comprised of cash in bank balances and highly liquid call deposits with original maturities of three months or less and exclude all overdrafts which are shown within borrowings in current liabilities on the face of the consolidated balance sheet. 2.6. Financial Assets

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Financial assets are classified in the following categories: at fair value through profit or loss, loans and receivables and available for sale. The classification depends on the purpose for which the financial asset was acquired. The classification of financial assets is determined at initial recognition. Financial assets at fair value through profit or loss are financial assets held for trading. These financial assets are acquired for the purpose of sale in the short term. Derivative financial instruments are also classified as held for trading unless they are designated hedges. Assets in this category are classified as current assets, except for maturities more than twelve months after the balance sheet date, which are classified as non-current assets. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in active markets. They are included in current assets, except for maturities more than twelve months after the balance sheet date, which are classified as non-current assets. As of December 31, 2010 and 2009 the Group did not have any financial instruments in the available-for-sale category. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010 Regular sales and purchases of financial assets are recognized on the trade date, the date on which the Group commits to sell or purchase the financial asset. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows from that asset. An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. Financial assets and liabilities are offset and the net amount reported in the consolidated balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. 2.7. Derivative Financial Instruments

The Group uses derivative financial instruments to manage its exposure to foreign exchange and interest rate risks arising from operational, financing and investing activities. In accordance with its treasury policy, the Group does not hold or issue derivative financial instruments for trading purposes. The derivative financial instruments held by the Group do not qualify for hedge accounting and are therefore designated as fair value through profit and loss. Derivative financial instruments are recognized at fair value. The gains or losses resulting from the changes in fair value of financial instruments are recorded in the consolidated income statement for the period to which they relate. The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the swap counter-parties. The fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price. The fair value of cross currency interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates, foreign exchange rates and the current creditworthiness of the swap counter-parties. Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and the combined instrument is not measured at fair value through profit or loss. Changes in the fair value of separable embedded derivatives are recognized immediately in the consolidated income statement. Financial instruments are classified as current or non-current depending on the terms of the contract. The portion of the financial instruments is expected to be realized or settled within twelve months of the balance sheet date or settlement can not be deferred for at least twelve months after balance sheet date, that portion is presented as current, the remainder is presented as a non-current financial instrument.

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2.8.

Trade and Other Receivables

Receivables are recognized initially at fair value, and subsequently thereafter they are measured at amortized cost using the effective interest rate method less accumulated impairment losses. Receivables with a short duration are not discounted. The amounts of any impairment losses are included in operating expenses. Trade receivables and payables from other network operators are offset and the net amount is reported in the consolidated balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and liability simultaneously. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010 2.9. Trade and Other Payables Trade and other payables are initially recognized at fair value and subsequently at amortized cost. 2.10. Inventories

Inventories consist of materials to be used in construction and repair of the telephone network. Inventories are carried at the lower of cost and net realizable value. Cost is based on the first-in, first-out principle and includes expenditures incurred in acquiring the inventories and bringing them to their existing condition and location. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. 2.11. Intangible Assets and Goodwill

Intangible assets are stated at cost less accumulated amortization and accumulated impairment losses except for goodwill and intangible assets with an indefinite useful life which are not amortized and are stated at cost less accumulated impairment losses. After initial recognition it is assessed whether an intangible asset has a finite or an indefinite useful life. The cost of intangible assets with a finite useful life is amortized on a straight-line basis over the period in which the asset is expected to be available for use. 2.11.1. Intangible assets with definite useful life

The Group has the following types of intangible assets with definite useful lives which are amortized over the following estimated useful lives: Software................................................................................................................................................... Property rights ......................................................................................................................................... Other ........................................................................................................................................................ 3 years 1-43 years 1-16 years

Concession rights represent amounts paid for the right to provide fixed line telecommunications services in certain geographical areas of Hungary (historical concession areas) and were amortized over the 25-year term provided for in the concession contracts signed in 1994 and 1995. As of January 1, 2008, due to the change in customer churn rates, the Group completed a review of the estimated amortization period of concession rights. As a result of this review, the remaining useful life of concession rights was reduced from 12 to 3 years. The change of useful life of concession rights qualifies a change in accounting estimate and accordingly is accounted for prospectively from January 1, 2008. As of December 31, 2010 concession rights of the Group were fully amortized. Property rights represent amounts paid for the right to use third party property for the placement of telecommunication equipment. Useful lives are determined based on the underlying contracts. Other intangible assets include subscriber acquisition costs, which are sales commissions paid to internal sales force and third parties in relation to fixed term subscriber contracts. Subscriber acquisition costs are amortized over the term of the related subscriber contracts. Amortization of intangible assets ceases at the earlier of the date that the asset is classified as held-for-sale in accordance with IFRS 5 Non-current assets held-for-sale and discontinued operations and the date the asset is derecognized. The

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amortization periods are reviewed annually at each financial year-end. Any changes arising from such review are accounted for as a change in an accounting estimate. 2.11.2. Goodwill

All business combinations are accounted for by applying the purchase method. Goodwill arising in a business combination represents the excess of the cost of the acquisition over the fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree after a reassessment of such fair values. Goodwill on acquisition of subsidiaries is included among intangible assets. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010 Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the goodwill maybe impaired, in accordance with IAS 36 Impairment of assets. Goodwill is allocated into operating segments for the purposes of impairment testing. The allocation is made to those operating segments that are expected to benefit from the business combination in which the goodwill arose. Segments of the Group are as follows: Mass Market Voice In-Concession, Mass Market Voice Out-of-Concession, Mass Market Internet (including IPTV), Business Voice InConcession, Business Voice Out-of-Concession, Business Data and Internet and Domestic Wholesale. 2.12. 2.12.1. Property, Plant and Equipment Owned assets

Items of property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. The cost of self-constructed assets includes the cost of materials, direct labor and an appropriate proportion of overhead, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the cost of dismantling and removing the items and restoring the site on which they are located. Where an item of property, plant and equipment comprises major components having different useful lives, they are accounted for as separate items of property, plant and equipment. Borrowing costs directly attributable to the acquisition, construction or production of assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Capital work in progress is stated at cost less accumulated impairment losses and represents property, plant and equipment that have not been completed and capitalized. 2.12.2. Leased assets

Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. An asset acquired by way of a finance lease is measured initially at an amount equal to the lower of its fair value and the present value of the minimum lease payments at inception of the lease. Leased assets are depreciated over the shorter of the lease term or their useful lives unless it is reasonably certain that ownership will be obtained by the end of the lease term. Other leases are operating leases and the leased assets are not recognized on the consolidated balance sheet. 2.12.3. Subsequent expenditure on property, plant and equipment

Expenditure incurred to replace a component of an item of property, plant and equipment that is accounted for separately, including major inspection and overhaul expenditure is included in the carrying amount if it is probable that future economic benefits embodied in that expenditure will flow to the International Business and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. All other expenditures are recognized in the consolidated income statement as an expense as incurred. 2.12.4. Depreciation

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Depreciation is charged to the consolidated income statement on a straight-line basis over the estimated useful lives of items of property, plant and equipment, and major components that are accounted for separately. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Land and capital work in progress are not depreciated. The estimated useful lives are as follows: Buildings................................................................................................................................................ Network and equipment......................................................................................................................... Other equipment .................................................................................................................................... Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010 Depreciation of property, plant and equipment ceases at the earlier of the date that the asset is classified as held-for-sale in accordance with IFRS 5 Non-current assets held-for-sale and discontinued operations and the date the asset is derecognized. Depreciation methods, useful lives and residual values are reviewed annually at each financial year-end. Any changes arising from such review are accounted for as a change in an accounting estimate. 2.13. Impairment of Non-Financial Assets 25-50 years 3-25 years 3-7 years

Assets that are subject to amortization are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the assets recoverable amount is estimated. For goodwill and intangible assets with an indefinite useful life or not available for use, the recoverable amount is estimated annually, irrespective of whether any indication of impairment exists. An impairment loss is recognized whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. For an asset that does not generate largely independent cash flows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. A cash-generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups. Impairment losses are recognized in the consolidated income statement. Impairment losses recognized in respect of cashgenerating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. 2.13.1. Calculation of recoverable amount

The recoverable amount of financial assets carried at amortized cost is calculated as the present value of expected future cash flows, discounted at the original effective interest rate inherent in the asset. Receivables with a short duration are not discounted. The recoverable amount of the cash-generating units is the greater of their fair value less costs to sell and value-in-use. In assessing value-in-use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. 2.13.2. Reversal of impairment

An impairment loss on non-financial assets other than goodwill is reversed only to the extent that the assets carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. 2.14. Non-Current Assets (or Disposal Groups) Held-for-Sale

Non-current assets (or disposal groups) are classified as held-for-sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable. They are stated at the lower of carrying amount and fair value less costs to sell if their carrying amount is to be recovered principally through a sale transaction rather than through continuing use. 2.15. Borrowings

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Borrowings are recognized initially at fair value net of transaction costs. Subsequent to initial recognition, borrowings are stated at amortized cost with any difference between initial cost and redemption value being recognized in the consolidated income statement over the period of the borrowings on an effective interest basis. Costs and expenses directly related to raising funds and borrowings or refinancing are deferred and amortized using the effective interest rate method. Such transaction costs are disclosed in the consolidated balance sheet as a reduction of borrowings and current portion of borrowings. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010 2.16. Provisions

Provisions for restructuring costs and legal claims are recognized in the consolidated balance sheet when the Group has a legal or constructive obligation as a result of past events that can be measured reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the obligation. A provision for restructuring is recognized when a detailed and formal restructuring plan is approved, and the restructuring has either commenced or has been announced publicly. Provisions are not recognized for future operating costs or losses. 2.17. Revenue Recognition

Revenue from all goods and services are shown net of VAT, rebates and discounts. Revenue from services is recognized when services are provided. Revenue from the sale of goods is recognized when the significant risks and rewards of ownership of products sold have been transferred to the buyer. Revenue from connection fees are recognized upon service activation. Revenue from monthly fees charged for accessing the network is recognized in the month during which the customer is permitted to access the network. Traffic revenue is recognized in the period of the related usage. Leased line and data transmission revenue is recognized in the period of usage or of the service available to the customer. Revenue from contracts relating to Indefeasible Rights of Use (IRU) comprises installation fees, one-off or up-front fees, monthly fees and maintenance fees. One-off or up-front fees of IRU contracts are deferred over the term of the related contract. Installation fees, monthly fees and maintenance fees are charged periodically as specified in the related contract and the revenue is recognized straight-line over the life of the related contract. Revenue from the sale of ducts and other network equipment is recognized in revenue and the related cost is recognized in cost of sales when significant risks and rewards of ownership have been transferred. Revenues and cost of sales from other network operators for IRU contracts are shown net where a right of set-off exists and the amounts are intended to be settled on a net basis. Third parties using the Groups telecommunications network include roaming customers of other service providers and other telecommunications providers which terminate or transit calls on the Groups network. These wholesale (incoming) traffic revenues are recognized in the period of related usage. A proportion of the revenue received is often paid to other operators (interconnect) for the use of their networks, where applicable. The revenues and costs of these transit calls are stated gross in the consolidated financial statements as the Group is the principal supplier of these services using its own network freely defining the pricing of the services, and recognized in the period of related usage. The Groups main operating revenue categories are as follows: Mass Market Voice. The revenue generated from the fixed line voice and voice-related services provided to massmarket customers in the historical concession areas (Mass Market Voice In) and out of the historical concession areas (Mass Market Voice Out). Mass Market Voice Revenue comprises time based call charges, subject to a minimum monthly fee charged for accessing the network and time based fixed-to-mobile, local, long distance and international call charges, interconnect charges on calls terminated in the Groups network, monthly fees for value added services, subsidies, one-off

216

connection and new service fees, as well as monthly fees for packages with built-in call minutes. Mass Market Voice In revenue also includes access calls to dial-up ISPs networks at local call tariffs and revenue from providing DSL access to other ISPs, but revenue from bundled Internet call and Internet services is recorded under Mass Market Internet. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010 Mass Market Internet. The revenue generated from dial-up and DSL Internet connections provided to mass-market customers nationwide both inside and outside the historical concession areas. Mass Market Internet comprises dial-up revenue, which is generated through a combination of time based and access fees, and DSL revenue, which is generated through a variety of monthly packages. Business. The revenue generated from the fixed line voice, data and Internet services provided to business, government and other institutional customers nationwide. Business revenue comprises access charges, monthly fees, time based fixed-tomobile, local, long distance and international call charges, interconnect charges on calls terminated in the Groups network, monthly fees for value added services, Internet access packages and regular data transmission services. Business revenues include the same components as Mass Market Voice In and Mass Market Internet revenues and include, in addition, revenue from leased line, Internet and data transmission services which is comprised of fixed monthly rental fees based on the capacity/bandwidth of the service and the distance between the endpoints of the customers. Domestic Wholesale. The revenue generated from voice and data services provided on a wholesale basis to a selected number of resellers to use the Groups excess network capacity. Wholesale revenue comprises rental payments for high bandwidth leased line services, which are based on the bandwidth of the service and the distance between the endpoints of the customers, and voice transit charges from other Hungarian and international telecommunications service providers, which are based on the number of minutes transited. 2.18. Pension Costs and Employee Benefits

Contributions are made to the Hungarian pension, health and unemployment schemes at the statutory rates in force during the year, based on gross salary payments. The cost of social security payments is charged to the income statement in the same period when the related salary costs incurred. The Group has no obligation for pension or other post employment benefits beyond the government programs. Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A provision is recognized for the amount expected to be paid under short-term cash bonuses or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. 2.19. Share Capital and Share Based Compensation

Incremental costs directly attributable to issue of ordinary shares and share options are recognized as a deduction from equity. When share capital recognized as equity is repurchased, the amount of the consideration paid, including directly attributable costs, is recognized as a deduction from equity. Repurchased shares are classified as treasury shares and are presented as a deduction from total equity until cancelled. HTCC had three equity compensation plans: the stock option plan that was adopted by the Board of Directors in April 1992 (the 2002 Plan); the Non-Employee Director Stock Option Plan (the Directors Plan) which was established by the Board of Directors in 1997; and the 2004 Long-Term Incentive Plan (the 2004 Plan) which was approved by the stockholders in 2004. After the acquisition of the Group by HTCC on April 27, 2007 expenses and income relating to such stock option plans for the employees of the Group are pushed down to the Group. When Invitel Holdings A/S took over as the parent company of the Group from HTCC, the outstanding equity commitments under the existing HTCC Option Plans were assumed by Invitel Holdings A/S and set out in the Articles of Association of Invitel Holdings A/S. The options from that time on are governed by the Articles of Association of Invitel Holdings A/S and relate to the shares of Invitel Holdings A/S.

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On October 5, 2010 the options were terminated pursuant to the Option Termination Agreement and Articles of Association were subsequently amended to delete the reference to those options (see note 16 Share Based Compensation). Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010 2.20. Financial Income and Expenses

Financial income includes dividend income, foreign exchange gains, interest income on funds invested and gains resulting from the changes in the fair values of derivative financial instruments. Interest income is recognized in the consolidated income statement as it accrues, taking into account the effective yield on the asset. Dividend income is recognized in the income statement on the date that the Groups right to receive payment is established, which in the case of quoted securities is the ex-dividend date. Financial expenses comprise of interest expense on borrowings, foreign exchange losses, losses resulting from the changes in the fair values of derivative financial instruments and impairment losses on financial investments. All borrowing costs directly attributable to the acquisition, construction or production of assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. All other borrowing costs are recognized in the consolidated income statement in the period in which they are incurred. 2.21. Leases

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made in respect of operating leases are charged to the consolidated income statement on a straight-line basis over the lease term and included in operating expenses. The Group leases certain property, plant and equipment. Leases of property, plant and equipment, where the Group has substantially all the risks and rewards of ownership, are classified as finance leases. Finance leases are capitalized at the lessees commencement at the lower of the fair value of the leased property and the present value of future minimum lease payments. Lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding lease liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. 2.22. Current and Deferred Income Taxes

Income tax expense is comprised of current and deferred taxes. Income tax expense is recognized in the consolidated income statement except to the extent that it relates to items recognized directly in equity, in which case it is recognized in other comprehensive income. Current tax is the expected tax payable on taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date in the countries where the Groups enterprises operate and generate income and any adjustment to tax payable in respect of previous years. Management periodically evaluates positions taken in tax returns with respect to situations in which the applicable tax regulations are subject to interpretations. It establishes provisions where amounts are expected to be paid to the tax authorities. These provisions are classified as other payables in the consolidated balance sheet. Deferred tax is provided for using the liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using the appropriate tax rate enacted or substantively enacted at the balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention or permissibility by tax authority to settle balances on a net basis.

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Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010 Deferred tax assets are recognized only to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. Deferred tax assets are reviewed at each reporting date and reduced to the extent that it is no longer probable that the related tax benefit will be realized. 2.23. Segment Reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segment, has been identified as the chief executive officer. The Group has four operating segments that are identified in the accounting policy relating to revenue (see accounting policy note 2.17 Revenue recognition). Allocation of revenues and cost of sales and other segment information into operating segments is based on management information collected in the information systems. 2.24. Critical Accounting Estimates and Judgements

The management of the Group makes estimates and assumptions concerning the future. The estimates and assumptions that have a significant risk of affecting the carrying amounts of assets and liabilities in the consolidated financial statements are described below. 2.24.1. Deferred tax assets

The Group recognizes deferred tax assets in its consolidated balance sheet relating to tax loss carry forwards. The recognition of such deferred tax assets is subject to the utilization of tax loss carry forwards. The utilization of such tax loss carry forwards is dependent on the amount of future taxable income of the Group companies. The Group has recognized no deferred tax assets relating to tax loss carry forwards in 2010 (see note 28 Taxation). 2.24.2. Impairment provision for doubtful accounts

The Group maintains an impairment provision for doubtful accounts for estimated losses resulting from customers or carriers failure to make payments on amounts due. These estimates are based on a number of factors including: 1) historical experience; 2) aging of trade accounts receivable; 3) amounts disputed and the nature of the dispute; 4) bankruptcy; 5) general economic, industry or business information; and 6) specific information that we obtain on the financial condition and current credit worthiness of customers or carriers. The estimates used in evaluating the adequacy of the impairment provision for doubtful accounts receivable are based on the aging of the accounts receivable balances and historical write-off experience, customer credit-worthiness, payment defaults and changes in customer payment terms. The accounting estimate related to the impairment provision for doubtful accounts receivable is a critical accounting estimate since it involves assumptions about future customer behavior and the resulting future cash collections. 2.24.3. Depreciation and amortization

Property, plant and equipment and intangible assets are recorded at cost and are depreciated or amortized on a straightline basis over their estimated useful lives. The determination of the useful lives of assets is based on historical experience with similar assets as well as any anticipated technology evolution and changes in broad economic or industry factors. The appropriateness of the estimated useful lives is reviewed annually. The accounting estimate related to the determination of the useful lives of assets is a critical accounting estimate since it involves assumptions about technology evolutions in an innovative industry. Further, due to the significant weight of long-lived assets in the asset base, the impact of any changes in these assumptions could be material to the consolidated financial statements. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010

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As an example, if the Group was to shorten the average useful life of its assets by 10%, this would result in additional annual depreciation and amortization expense of approximately EUR 5.8 million and EUR 6.0 million for the year ended December 31, 2010 and 2009, respectively. 2.24.4. Impairment of property, plant and equipment, intangible assets and goodwill

The Group tests annually whether property, plant and equipment, intangible assets and goodwill have suffered any impairment in accordance with the accounting policy stated in note 2.12 Property, plant and equipment. The recoverable amounts of cash generating units have been determined based on value-in-use evaluations, which considers a number of factors, including, future cash flows, technological obsolescence and discontinuation of services and other market evidence. The estimated value-in-use uses a 12.8% pre-tax discount rate, 0% growth and estimate cash flows until 2013 for the year ended December 31, 2010. The estimated value-in-use uses a 12.8% pre-tax discount rate, 0% growth and estimate cash flows until 2015 for the year ended December 31, 2009. 0% growth rate is determined in both 2009 and 2010 to calculate the terminal value by applying the perpetual method. For assets held for sale, fair value less costs to sell was determined based on other market evidence including multiples implied by comparable companies. If the Group used 15% pre-tax discount rate in its impairment calculation, this would have resulted in an impairment of EUR 17.2 million for the year ended December 31, 2010. 2.24.5. Fair value of derivative financial instruments

Derivative financial instruments are not traded on active markets, thus, the fair value of such instruments is determined by using valuation techniques. The Group uses its judgment to select a variety of methods and make assumptions that are based on market conditions at each balance sheet date. A sensitivity analysis of derivative financial instruments is included in note 20 Financial Instruments and Financial Risk Management. 3. Discontinued Operations

In 2008 Invitel Zrt acquired in two steps the outstanding equity of Austrian-based Memorex Telex Communication AG (Memorex subsequently renamed to Invitel International AG) and its subsidiaries. Invitel International AG has a majority ownership of the equity capital of the subsidiaries set forth in the table below:
Name of Company As Defined Country of Incorporation

Invitel International Bulgaria EODD............ Invitel International CZ s.r.o......................... Invitel Telecom d.o.o. Beograd..................... Invitel Telecomunikacije d.o.o. .................... Invitel International SK s.r.o......................... MTCTR Memorex Telekomnikasyon Sanayi ve Ticaret Limited Sirketi ............................. Memorex Telex Communications UA Ltd. .. Invitel International Italia S.R.L. ..................

Invitel International Bulgaria Invitel International Czech Republic Invitel International Serbia Invitel International Slovenia Invitel International Slovakia Invitel International Turkey Invitel International Ukraine Invitel International Italy

Bulgaria Czech Republic Serbia Slovenia Slovakia Turkey Ukraine Italy

Invitel International Hungary Kft. (Invitel International Kft) was incorporated on November 24, 2008 as a joint stock company under the laws of Hungary. The international operations of Invitel Zrt were transferred to Invitel International Kft as of January 1, 2009. Euroweb Romania is domiciled in Romania and was registered with the Romanian Trade Register as a joint-stock company in March 1998 and commenced activities in November 1998. During December of 2009, the Board of Directors and management of the Group announced a plan to sell Invitel International AG and its subsidiares along with Invitel International Kft and Euroweb Romania (together the International Business) in 2010. As such, the International Business was reclassified as discontinued operations in the consolidated financial statements for the years ended December 31, 2010 and 2009. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010

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The sale of the International Business was completed on October 7, 2010 (the closing date) whereby the International Business was sold to Trk Telekomnikasyon A. (Trk Telekom) for an enterprise value of EUR 221.0 million, which included EUR 14.6 million cash and cash equivalents of the International Business. The purchase price of the International Business was EUR 205.6 million, which represents the enterprise value adjusted by the net debt of the International Business as of the closing date of the transaction. The book value of the International Business at the closing date was EUR 163.6 million and thus a gain on sale of the International Business of EUR 42.0 million was recorded. This amount is being reported as part of the income / (loss) from discontinued operations in the consolidated income statement for the year ended December 31, 2010. The Company has given a covenant such that the net cash proceeds received in respect of an asset sale should be applied to the following within 365 days of such sale: a) to purchase the 2009 Notes at par plus any accrued or unpaid interest; or b) invest in any replacement assets; or c) any combination of a) and b). If such net cash proceeds in excess of EUR 10 million is not applied within 365 days in accordance with the foregoing paragraph it shall be used for an offer to purchase an equivalent amount of the 2009 Notes and any pari passu debt. Within the 365 day deadline, the proceeds can be temporarily used for any purpose not prohibited by the Indenture, but within 365 days, the net cash proceeds must be used as outlined above. As of December 31, 2010 EUR 120.7 million remains to be invested in accordance with this covenant. The following summarizes the results of discontinued operations:
For the year ended 31 December 2010 2009 (in thousands of EUR)

Revenue ..................................................................................................................... Expenses .................................................................................................................... Profit Before Tax of Discontinued Operations .......................................................... Income Tax (Expense) / Benefit ................................................................................ Gain on Sale............................................................................................................... Income / (Loss) from Discontinued Operations.....................................................

91,133 (68,568) 22,565 (4,594) 41,982 59,953

117,468 (88,894) 28,574 (2,784) 25,790

The following table presents the assets of disposal group classified for as held-for-sale as of December 31, 2009, which was sold on October 7, 2010:
At 31 December 2009 (in thousands of EUR)

Property, plant and equipment ................................................................................................. Intangible assets....................................................................................................................... Cash and cash equivalents ....................................................................................................... Trade and other receivables ..................................................................................................... Other current assets.................................................................................................................. Total Assets of Disposal Group Classified as Held-For-Sale.............................................. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010

128,780 57,710 15,397 25,087 7,120 234,094

The following table presents the liabilities of disposal group classified for as held-for-sale as of December 31, 2009, which was sold on October 7, 2010:

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At 31 December 2009 (in thousands of EUR)

Borrowings .............................................................................................................................. Other non-current liabilities..................................................................................................... Trade and other payables ......................................................................................................... Deferred income ...................................................................................................................... Other current liabilities ............................................................................................................ Total Liabilities of Disposal Group Classified as Held-For-Sale ....................................... 4. Revenue

18,748 8,782 24,579 28,207 12,656 92,972

For the year ended 31 December 2010 2009 (in thousands of EUR)

Mass Market Voice.................................................................................................... Mass Market Internet ................................................................................................. Business ..................................................................................................................... Wholesale .................................................................................................................. Total Revenue........................................................................................................... 5. Cost of Sales, Exclusive of Depreciation

63,940 32,665 73,198 23,421 193,224

77,045 32,868 79,003 21,074 209,990

For the year ended 31 December 2010 2009 (in thousands of EUR)

Sales commissions ..................................................................................................... Interconnect expenses ................................................................................................ Access type charges................................................................................................... Other cost of sales...................................................................................................... Network operating expenses ...................................................................................... Direct personnel expenses ......................................................................................... Total Cost of Sales, Exclusive of Depreciation ......................................................

(1,587) (14,343) (9,691) (6,697) (19,517) (10,822) (62,657)

(2,391) (19,143) (11,131) (5,963) (19,593) (10,904) (69,125)

Network operating expenses include the maintenance costs of the telecommunication infrastructure of the Group and its network related license and rental fees. Such license and rental fees amounted to EUR 3,001 thousand and EUR 3,480 thousand for the years ended December 31, 2010 and 2009. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010 6. Operating Expenses
For the year ended 31 December 2010 2009 (in thousands of EUR)

Indirect personnel expenses .......................................................................................................... Headcount-related costs................................................................................................................ Advertising and marketing costs................................................................................................... IT costs .........................................................................................................................................

(15,261) (8,741) (2,430) (4,792)

(17,166) (8,834) (2,804) (4,905)

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For the year ended 31 December 2010 2009 (in thousands of EUR)

Local operating and other taxes .................................................................................................... Bad debt expense .......................................................................................................................... Collection costs............................................................................................................................. Legal and audit fees ...................................................................................................................... Consultant expenses...................................................................................................................... Crisis tax ....................................................................................................................................... Management fee............................................................................................................................ U.S. listing related expenses and share based compensation........................................................ Consulting expenses relating to strategic projects ........................................................................ Other cost, net............................................................................................................................... Less: Capitalised costs .................................................................................................................. Total Operating Expenses ..........................................................................................................

(1,886) (2,056) (409) (197) (233) (11,198) (572) (256) (2,706) 533 (50,204) 3,990 (46,214)

(2,087) (1,779) (641) (86) (1,985) (132) (1,246) (3,443) 770 (44,338) 3,797 (40,541)

A crisis tax was introduced by the Hungarian government as of October 20, 2010 with retrospective effect to January 1, 2010. The tax is calculated as a percentage of telecommunication services revenue based on the following rates: 0% up to HUF 500 million, 4.5% between HUF 500 million and 5 billion and 6.5% for excess over HUF 5 billion. Management fees for the years ended December 31, 2010 and 2009 relate to costs charged by the trustee of Matel as well as management fees paid to Mid Europa from June 30, 2010 in the amount of EUR 500 thousand. U.S. listing related expenses and share based compensation mainly include compliance expenses and the benefit or expense relating to the mark-to-market revaluation of options of the Group. Consulting expenses relating to strategic projects mainly include legal and financial consulting expenses of major projects of the Group. Capitalized costs include labor and overhead expenses associated with the construction of property, plant and equipment of the Group. 7. Indirect Personnel Expenses
For the year ended 31 December 2010 2009 (in thousands of EUR)

Salaries....................................................................................................................... Social security and other contributions...................................................................... Personnel related expenses ........................................................................................ Bonuses and charges.................................................................................................. Total Indirect Personnel Expenses .........................................................................

(8,826) (2,724) (2,815) (896) (15,261)

(9,527) (3,164) (3,166) (1,309) (17,166)

The number of employees of the Group was 1,102 and 1,142 as of December 31, 2010 and 2009, respectively. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010 8. Depreciation and Amortization

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For the year ended 31 December 2010 2009 (in thousands of EUR)

Amortization .............................................................................................................. Depreciation............................................................................................................... Impairment loss ......................................................................................................... Total Depreciation and Amortization ....................................................................

(12,253) (41,512) (120) (53,885)

(14,179) (39,962) (694) (54,835)

The impairment loss of EUR 120 thousand for the year ended December 31, 2010 mainly related to impairments accounted for in relation to certain network elements. The impairment loss of EUR 694 thousand for the year ended December 31, 2009 mainly related to impairments accounted for in relation to buildings of EUR 288 thousand, public pay phones in the amount of EUR 153 thousand and for various small other projects in the amount of EUR 253 thousand. 9. Cost of Restructuring
For the year ended 31 December 2010 2009 (in thousands of EUR)

Severance................................................................................................................... Cost of reorganization................................................................................................ Total Cost of Restructuring ....................................................................................

(1,140) (76) (1,216)

(1,474) (647) (2,121)

Severance expenses for the years ended December 31, 2010 and 2009 mainly related to headcount reductions in Invitel Zrt. The cost of reorganization for the year ended December 31, 2009 mainly related to the cost of site migrations and billing system consolidations at Invitel Zrt. 10. Financial Income and Expense
For the year ended 31 December 2010 2009 (in thousands of EUR)

Interest income........................................................................................................... Fair value change of derivative financial instruments ............................................... Financial Income...................................................................................................... Related party interest expense.......................................................................... Third party interest expense ............................................................................. Amortization of bond discount......................................................................... Amortization of deferred borrowing costs ....................................................... Other interest expense ...................................................................................... Interest expense ......................................................................................................... Net foreign exchange gain (loss) ............................................................................... Fair value change of derivative financial instruments ............................................... Other financial expense, net....................................................................................... Financial Expense .................................................................................................... All interest income in 2010 and 2009 relates to cash and cash equivalents. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010

1,505 10,519 12,024 (2,395) (35,780) (1,411) (6,017) (615) (46,218) (7,116) (17,458) (890) (71,682)

941 892 1,833 (10,667) (39,267) (866) (4,203) (629) (55,632) (15,651) (18,294) (106) (89,683)

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The unrealized loss on the fair value change of derivative financial instruments amounted to EUR 5,587 thousand for the year ended December 31, 2009 and the unrealized gain on the fair value change of derivative financial instruments amounted to EUR 10,519 thousand for the year ended December 31, 2010. Loss on extinguishment of debt for the year ended December 31, 2009 in the amount of EUR 24,470 thousand relates to the three refinancings the Group undertook in 2009 (see note 18 Borrowings). 11. Intangible Assets Movements during the period in the intangible assets of the Group were as follows:
Concession Rights Property Rights Total Intangible Assets

Software

Goodwill

Other

( in thousands of EUR )

Cost at 1 January 2009 .................................... Additions during the year .................................. Disposals during the year................................... Effect of exchange rates..................................... Netting of IRU ................................................... Reclassified as asset held-for-sale ..................... Cost at 31 December 2009 ............................... Accumulated amortization at 1 January 2009 .............................................................. Amortization charge for the year ....................... Impairment for the year ..................................... Disposals during the year................................... Effect of exchange rates..................................... Netting of IRU ................................................... Reclassified as asset held-for-sale ..................... Accumulated amortization at 31 December 2009 .............................................................. Carrying value at 1 January 2009 .................. Carrying value at 31 December 2009 ............. Cost at 1 January 2010 .................................... Additions during the year .................................. Retirement ......................................................... Disposals during the year................................... Effect of exchange rates..................................... Cost at 31 December 2010 ............................... Accumulated amortization at 1 January 2010 .............................................................. Amortization charge for the year ....................... Retirement ......................................................... Disposals during the year................................... Effect of exchange rates..................................... Accumulated amortization at 31 December 2010 .............................................................. Carrying value at 1 January 2010 .................. Carrying value at 31 December 2010 .............

2,892 (2) (47) (177) 2,666 (1,018) (822) 2 (13) 47 (1,804) 1,874 862 2,666 (2,559) (107) (1,804) (806) 2,559 51 862

51,921 4,878 (1,126) (1,044) (780) 53,849 (44,051) (5,516) (106) 1,122 835 472 (47,244) 7,870 6,605 53,849 2,658 (355) (11) (1,561) 54,580 (47,244) (3,978) 355 11 1,386 (49,470) 6,605 5,110

77,175 2,985 (1,690) (936) (5,373) (32,869) 39,292 (20,127) (4,240) 672 308 1,252 3,954 (18,181) 57,048 21,111 39,292 813 417 (4,857) (1,077) 34,588 (18,181) (3,139) (417) 6,042 323 (15,372) 21,111 19,216

24,692 (550) (8,212) 15,930 24,692 15,930 15,930 (314) 15,616 15,930 15,616

43,681 4,001 (177) (23,673) 23,832 (16,677) (7,205) 137 3,528 (20,217) 27,004 3,615 23,832 3,690 (2,452) (721) 24,349 (20,217) (4,330) 2,452 626 (21,469) 3,615 2,880

200,361 11,864 (2,818) (2,754) (5,373) (65,711) 135,569 (81,873) (17,783) (106) 1,796 1,267 1,252 8,001 (87,446) 118,488 48,123 135,569 7,161 (4,949) (4,868) (3,780) 129,133 (87,446) (12,253) 4,949 6,053 2,386 (86,311) 48,123 42,822

Concession rights represent amounts paid for the right to provide fixed line telecommunications services in certain geographical areas of Hungary (historical concession areas) based on concession contracts signed in 1994 and 1995.

225

Concession rights and licenses as of December 31, 2009 included the value of the Hungarotel concession contract in the amount of EUR 1,659 thousand with a remaining useful life of one year. As of December 31, 2010 concession rights were fully amortized. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010 Goodwill relates to acquisitions undertaken by the Group. The Group performed the annual goodwill impairment test according to its accounting policy for the years ended December 31, 2010 and 2009. No goodwill impairment was accounted for the years ended December 31, 2010 and 2009. Other intangible assets mainly include capitalized customer acquisition costs (mainly sales commissions). The net book value of capitalized subscriber acquisition costs which are internally generated amounts to EUR 2,880 thousand and EUR 3,615 thousand as of December 31, 2010 and 2009, respectively. 12. Property, Plant and Equipment Movements in property, plant and equipment of the Group were as follows:
Land and Buildings Network and Equipment Capital Work In Progress Total Property, Plant and Equipment

Other

( in thousands of EUR )

Cost at 1 January 2009 ....................................... Additions during the year ..................................... Transfers from capital WIP................................... Disposals during the year...................................... Effect of exchange rates........................................ Reclassified as asset held-for-sale ........................ Cost at 31 December 2009 .................................. Accumulated depreciation at 1 January 2009 .. Depreciation charge for the year........................... Impairment for the year ........................................ Disposals during the year...................................... Effect of exchange rates........................................ Reclassified as asset held-for-sale ........................ Accumulated depreciation at 31 December 2009 ................................................................. Carrying value at 1 January 2009 ..................... Carrying value at 31 December 2009 ................ Cost at 1 January 2010 ....................................... Additions during the year ..................................... Retirement ............................................................ Transfers from capital WIP................................... Disposals during the year...................................... Effect of exchange rates........................................ Cost at 31 December 2010 .................................. Accumulated depreciation at 1 January 2010 .. Depreciation charge for the year........................... Impairment for the year ........................................ Retirement ............................................................ Disposals during the year...................................... Effect of exchange rates........................................

10,589 1,387 (741) (119) (5,742) 5,374 (759) (723) (287) 598 7 630 (534) 9,830 4,840 5,374 2 (238) (157) 4,981 (534) (668) (2) 21

763,990 69 46,155 (4,828) (13,659) (125,098) 666,629 (320,443) (43,676) (172) 2,257 5,786 7,416 (348,832) 443,547 317,797 666,629 3,126 20,706 (3,413) (19,556) 667,492 (348,832) (38,539) (120) (3,126) 1,987 10,246

15,052 1 3,706 (1,725) (254) (2,860) 13,920 (9,739) (2,693) (14) 1,621 192 1,257 (9,376) 5,313 4,544 13,920 1,161 989 (666) (400) 15,004 (9,376) (2,305) (1,161) 654 286

21,559 40,675 (51,248) (203) (505) (4,383) 5,895 (128) 128 21,559 5,895 5,895 22,764 (21,457) (171) 7,031

811,190 40,745 (7,497) (14,537) (138,083) 691,818 (330,941) (47,092) (601) 4,604 5,985 9,303 (358,742) 480,249 333,076 691,818 22,764 4,289 (4,079) (20,284) 694,508 (358,742) (41,512) (120) (4,289) 2,641 10,553

226

Land and Buildings

Network and Equipment

Other

Capital Work In Progress

Total Property, Plant and Equipment

( in thousands of EUR )

Accumulated depreciation at 31 December 2010 ................................................................. Carrying value at 1 January 2010 ..................... Carrying value at 31 December 2010 ................

(1,183) 4,840 3,798

(378,384) 317,797 289,108

(11,902) 4,544 3,102

5,895 7,031

(391,469) 333,076 303,039

Network and equipment includes all tangible assets associated with the telecommunication network and related equipment. Network and equipment include cost of assets where the Group is the lessee under finance leases in the amount of EUR 3,035 thousand and EUR 3,124 thousand and accumulated depreciation of EUR 150 thousand and EUR 61 thousand as of December 31, 2010 and 2009, respectively. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010 Other assets include other non-telecom equipment, fixtures and fittings, vehicles and computers. Capital work in progress includes property, plant and equipment in the course of construction. After completion, such assets are put into operation (capitalized) and are transferred to the appropriate fixed asset categories. No depreciation is charged on capital work in progress. 13. Cash and Cash Equivalents
At 31 December 2010 2009 (in thousand of EUR)

Cash on hand and in banks ...................................................................................................... Cash deposits ........................................................................................................................... Total Cash and Cash Equivalents ........................................................................................

4,385 104,625 109,010

9,086 40,609 49,695

Out of the total of cash and cash equivalents of EUR 109,010 thousand as of December 31, 2010, the EUR denominated part is EUR 94,745 thousand or 87%, the USD denominated part is EUR 10 thousand or 1% and the HUF denominated part is EUR 14,255 thousand or 12%. Out of the total of cash and cash equivalents of EUR 49,695 thousand at December 31, 2009, the EUR denominated part is EUR 32,632 thousand or 65%, the USD denominated part is EUR 45 thousand or 1% and the HUF denominated part is EUR 17,018 thousand or 34%. Matel invests its free cash into bank deposits held at the following banks rated by Moodys as follows: BNP Paribas.................................................................................................................................................... Credit Agricole CIB........................................................................................................................................ K&H Bank member of KBC ..................................................................................................................... MKB Bank...................................................................................................................................................... Unicredit Bank................................................................................................................................................ 14. Trade and Other Receivables
At 31 December 2010 2009 (in thousands of EUR)

AAAa3 Aa3 Baa3 Aa3

227

At 31 December 2010 2009 (in thousands of EUR)

Trade accounts receivable........................................................................................................ Impairment provision............................................................................................................... Receivables from related parties.............................................................................................. Other receivables ..................................................................................................................... Total Trade and Other Receivables .....................................................................................

26,953 (6,471) 7,821 28,303

26,213 (6,635) 2,832 2,975 25,385

Receivables from related parties as of December 31, 2009 mainly related to receivables from Invitel Holdings A/S and Mid Europa in the amount of EUR 2,358 thousand and EUR 290 thousand, respectively. Other receivables as of December 31, 2010 mainly include advances given relating to strategic projects in the amount of EUR 1,800 thousand, prepaid rental fees in the amount of EUR 2,102 thousand as well as corporate income tax and VAT receivables. Other receivables as of December 31, 2009 mainly include corporate income tax and VAT receivables. The carrying amounts of trade and other receivables of the Group are denominated in the following currencies:
At 31 December 2010 2009 (in thousands of EUR)

Currency in HUF ..................................................................................................................................... in EUR ..................................................................................................................................... Total Trade and Other Receivables ..................................................................................... Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010 The aging analysis of trade receivables of the Group are as follows:

20,912 7,391 28,303

20,622 4,763 25,385

At 31 December 2010 2009 (in thousands of EUR)

Not past due ............................................................................................................................. past due by less than 30 days ................................................................................................... past due by 30-90 days ............................................................................................................ past due by 91-180 days........................................................................................................... past due by 181-360 days......................................................................................................... past due by over 360 days........................................................................................................ Total Trade Accounts Receivable.........................................................................................

11,523 5,440 3,091 914 1,314 4,671 26,953

8,856 7,127 2,477 1,455 1,557 4,741 26,213

The vast majority of past due trade receivables are partly or fully provided for depending on the period of delay of payments. Only insignificant amounts of past due trade receivables are not provided for based on past experience of payment behavior of certain business customers. As these amounts are not significant, these are not disclosed separately. Non past due receivables are not assessed collectively for impairment, but in case of bankruptcy of the customer non past due receivables may have to be partly or fully provided for, the amount of which is not significant, therefore, not disclosed separately. The non past due trade receivables represent approximately 0.7 months of revenue. The Group has no collaterals related to its trade receivables.

228

Movements in the impairment provision of the Group are as follows:

At 31 December 2010 2009 (in thousands of EUR)

Opening at 1 January ............................................................................................................ Provision for receivables impairment ...................................................................................... Receivables written off during the year as uncollectible ......................................................... Effect of exchange rates........................................................................................................... Reclassified as asset held-for-sale ........................................................................................... Closing at 31 December.........................................................................................................

(6,635) (3,328) 3,307 184 (6,471)

(11,584) (2,504) 6,144 280 1,029 (6,635)

The creation and release of provision for impaired receivables are included in bad debt expense within operating expenses in the consolidated income statement. Amounts of impairment provision are generally written off when there is no expectation of recovering additional cash. 15. Other Current Assets
At 31 December 2010 2009 (in thousand of EUR)

Inventories ................................................................................................................................. Prepayments and accrued income.............................................................................................. Total Other Current Assets .................................................................................................... Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010 16. Share Based Compensation

1,193 1,286 2,479

1,436 584 2,020

HTCC had three equity compensation plans: the stock option plan that was adopted by the Board of Directors in April 1992 (the 2002 Plan); the Non-Employee Director Stock Option Plan (the Directors Plan) which was established by the Board of Directors in 1997; and the 2004 Long-Term Incentive Plan (the 2004 Plan) which was approved by the stockholders in 2004. Upon the approval of the 2004 Plan, no more options were issued from either the 2002 Plan or the Directors Plan. The 2004 Plan authorized 1,000,000 shares of common stock for awards. As of the adoption of the 2004 Plan, 424,410 shares of common stock which were then available for issuance under the 2002 Plan and 88,716 shares of common stock, which were then available for issuance under the Directors Plan, were rolled over and available for issuance under the 2004 Plan. In addition, any shares of common stock subject to awards outstanding under the 2002 Plan or the Directors Plan at the time of the adoption of the 2004 Plan which subsequently lapse, expire or otherwise terminate without the issuance of such shares of common stock are also available for awards under the 2004 Plan. Stock options from the 2004 Plan may be either incentive stock options or options not intended to qualify as incentive stock options. The term of an option cannot exceed ten years from the date of grant. All options must have an exercise price that is not less than the fair market value of a share of common stock on the date of grant. Stock options are fully vested when granted. Upon exercise of an option, the participant may pay the option price in cash, by delivering shares of common stock or by having the Company withhold shares otherwise deliverable to the participant upon exercise (net exercise). An option may also be exercised through a cashless exercise procedure involving a broker or dealer that affords the employees the opportunity to sell immediately some or all of the shares underlying the exercised portion of the option in order to generate sufficient cash to pay the option price and/or to satisfy withholding tax obligations related to the option. In the event such option price is paid in whole or in part with shares, the portion of the option price so paid shall be equal to the value, as of the date of the exercise of the option, of such shares. The value of such shares shall be equal to the number of such shares multiplied by the fair market value of such shares on the trading day coincident with the date of exercise of such option.

229

When Invitel Holdings A/S took over as the parent company of the Group from HTCC in February 2009, the outstanding equity commitments under the existing HTCC option plans were assumed by Invitel Holdings A/S and set out in Invitel Holdings A/S's Articles of Association. The options from that time on are governed by the Articles of Association of Invitel Holdings A/S. As of December 31, 2009, there were outstanding options to purchase 80,000 shares issued from the 2002 Plan; outstanding options to purchase 80,000 shares issued from the Directors Plan; and outstanding options to purchase 430,000 shares under the 2004 Plan. Upon the approval of the 2004 Plan, no more options were issued from either the 2002 Plan or the Directors Plan. For the year ended December 31, 2009 a compensation expense was recorded in the amount of EUR 111 thousand related to stock options granted and a fair value benefit was recorded in operating expenses relating to the push down accounting for the mark-to-market revaluation of outstanding stock options in the amount of EUR 20 thousand. On October 5, 2010 (the Effective Date) an agreement was concluded between Invitel Holdings A/S and the holders of outstanding options to terminate the options (the Option Termination Agreement). Based on the Option Termination Agreement the parties agreed to cancel the options and terminate all rights, entitlements and obligations relating to such options in exchange for a cash payment, which was made to the option holders within ten days of the Effective Date in the aggregate amount of EUR 500 thousand. The Option Termination Agreement also includes an additional payment provision in the event of a sale by Mid Europa of all or substantially all of its beneficial ownership in the Group (the Disposition) within 60 months from the Effective Date. In case of such Disposition, Invitel Holdings A/S is obliged to make an additional payment to each option holder for all options that would have had an expiration date later than the Disposition (the Exercisable Options). Such additional payment would be calculated as the Exercisable Options multiplied by the per share value that would be obtained by Mid Europa from the Disposition minus the payment made to the option holders on the Effective Date. Any settlement of such additional payment would be accounted for under IAS 32 and would be a liability of Invitel Holdings A/S. For the year ended December 31, 2010 a benefit of EUR 1,036 thousand was recorded in operating expenses related to the termination of stock options, which is difference of the write-off of the fair value of liability related to stock options and the cash payment made to the option holders in accordance with the Option Termination Agreement. The cash payment to the option holders was made out of Invitel Holdings A/S in the amount of EUR 500 thousand and reflected as a pushed-down item in equity in these consolidated financial statements. In May 2010, Mid Europa, the ultimate parent of the Group, signed a term sheet for a long term incentive plan applying to the Chief Executive Officer, Chief Financial Officer and such other participants as Mid Europa and the Chief Executive Officer may from time to time agree (together the Participants). Pursuant to the provisions of the term sheet, the Participants will be entitled to: (a) (b) an equity value bonus (the Equity Value Bonus) in the case of an Exit Event (as defined below); and certain distributions (the Participant Distributions) provided that certain thresholds are met, in each case in relation to shares of Invitel Holdings A/S (the intermediate holding company controlling indirectly 100% of the share capital of the Company).

An Exit Value Bonus is payable to the Participants in cash, if at some point in the future (i) Mid Europa sells more than 50% of its shares of Invitel Holdings A/S; or (ii) there is a sale by Invitel Holdings A/S of all or substantially all of its assets (the Exit Event). The aggregate amount of the equity value bonus paid to all Participants is based on 5% of the difference between the equity value of Invitel Holdings A/S (based on the total amount paid by Mid Europa in acquiring shares of Invitel Holding A/S and any options of former management), increased using interest of 8% per annum from the date of the acquisition of the shares by MEP until the Exit Event, and the equity value of Invitel Holdings A/S as at the Exit Event. The Participants are entitled to a Participant Distribution if the aggregate amount of distributions of Invitel Holdings A/S since 2 November 2009 (the Aggregate Distributions) exceed the aggregate amount of contributions made by Mid Europa to Invitel Holdings A/S on or since 2 November 2009 (increased using interest of 8% per annum from 2 November 2009) (the Aggregate Contributions). The aggregate amount of the Participant Distribution shall be equal to 7.5% of the amount by which Aggregate Distributions are greater than Aggregate Contributions. In the event that the employment of a Participant is terminated prior to an Exit Event for cause, such Participant is not entitled to any Equity Value Bonus or Participant Distributions in accordance with the incentive program. If the employment

230

of a Participant is terminated without cause, the Participant is entitled to a percentage of the Equity Value Bonus and Participant Distributions depending on number of years employed and, with respect to the Participant Distributions, also depending on the amount of the Aggregate Distributions made prior to the termination of such employment. As the definitive structure and documentation has not been finalised (including allocation of rights to Participants), the grant date fair value cannot be ultimately established. For the purposes of assessment of the cost relating to the scheme, the fair value of the instruments was based on the valuation of shares of the Invitel Holdings A/S using the discounted cash flow technique. The preliminary value is estimated as negligible but will be updated once the conditions of the grant are finalised. The Group has recognised nil expenses in relation to the scheme in the year ended December 31, 2010. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010 17. Equity

As of December 31, 2010 and 2009 the authorized share capital of Matel was EUR 408,600,000 divided into 90,000,000 ordinary shares with a par value of EUR 4.50 each. As of December 31, 2010 and 2009 the issued share capital of Matel was EUR 92,201 thousand. The issued capital is fully paid in. The balance of capital reserve as of December 31, 2010 and 2009 includes the amounts of share capital of former legal entities merged into Matel in the amount of EUR 122,110 thousand and a capitalized shareholder loan that was provided to the Group during 2009 in the amount of EUR 133,937 thousand (see note 18 Borrowings). There are no restrictions for distribution regarding these amounts. The balance of other reserves as of December 31, 2010 and 2009 includes the equity adjustment relating to the acquisition of Hungarotel and Pantel by Matel on April 27, 2007. This acquisition was accounted for as a transaction between entities under common control at predecessor value and the equity adjustment represents the difference between the value of the investment and the net assets acquired by Matel. The balance of cumulative translation reserve comprises all foreign exchange differences arising from the translation into EUR of the financial statements of foreign operations whose functional currency is not EUR. As of December 31, 2010 and 2009 non-controlling interest related to the 0.02% investments held in Invitel by local municipalities. 18. Borrowings
At 31 December

2010

2009

(in thousands of EUR)

Related party subordinated loan............................................................................................. 2007 Notes ................................................................................................................... 2007 Notes under cancellation ..................................................................................... 2007 Notes ............................................................................................................................. 2009 Notes ............................................................................................................................. Deferred borrowing costs....................................................................................................... Total Borrowings .................................................................................................................

15,210 100,675 (22,593) 78,082 267,130 (9,416) 351,006

24,568 125,675 125,675 340,721 (15,433) 475,531

During 2009 the Group undertook three refinancings on March 4, 2009 on November 2, 2009 and on December 16, 2009. The details of such refinancings are described below. The net costs and expenses related to such refinancings are detailed in the following table:
For the year ended 31 December 2009 (in thousands of EUR)

231

For the year ended 31 December 2009 (in thousands of EUR)

Refinancing cost 2009 March.............................................................................................................................. 2009 November ....................................................................................................................... 2009 December........................................................................................................................ Total loss on extinguishment of debt.................................................................................... 2009 March Refinancing

13,192 2,168 9,110 24,470

On March 4, 2009 the Group completed a refinancing which included (i) an amendment to the existing Senior Facilities Agreement to increase the amount of credit available under such agreement, and (ii) entering into two additional loan agreements, the Subordinated Loan Agreement and the TDC PIK Loan, the proceeds of which were used for the repayment of the funds borrowed under, and termination of, the Bridge Loan Agreement (the 2009 March Refinancing). The funds borrowed under the 2009 March Refinancing comprise (i) a EUR 165.0 million term and revolving facility (the Amended Senior Facilities Agreement) with Invitel Zrt as borrower, and Matel and certain of its subsidiaries as guarantors, (ii) a EUR 32.0 million subordinated term loan with Matel as borrower (the Subordinated Term Loan) and (iii) a EUR 34.1 million subordinated PIK loan from one of TDCs affiliates to Matel (the TDC PIK Loan and, together with the Amended Senior Facilities Agreement and the Subordinated Term Loan, the 2009 Amended Facilities). A loss on extinguishment of debt of EUR 13,192 thousand was recorded in connection with the 2009 March Refinancing relating to the loss from the write down of deferred borrowing costs of EUR 3,624 thousand and transaction costs in the amount of EUR 9,568 thousand. The 2009 November Refinancing On November 2, 2009 a series of transactions were completed, which resulted in a change in the Groups ownership structure and a deleveraging of cash-pay debt. On November 2, 2009 Mid Europa, concurrently with becoming the controlling shareholder of the Group, purchased all of TDCs rights and obligations under the EUR 34.1 million TDC PIK Loan and amended and restated it to increase the loan by EUR 91.4 million, on terms substantially similar to the existing loan, which became a new shareholder loan of EUR 133.9 million including accrued interest provided by Mid Europa to Matel (Advance 1). Part of the funds under Advance 1 were used by Matel to purchase EUR 74.3 million or 37.2% of the 2007 Notes and EUR 10.7 million or 7.5%, of the 2004 Notes and to repay EUR 10.7 million out of the outstanding amount of the Subordinated Term Loan. The 2007 Notes and the 2004 Notes purchased by Matel were subsequently cancelled. In connection with the 2009 November Refinancing a loss on extinguishment of debt was recorded in the amount of EUR 2,168 thousand, comprising of a gain of EUR 747 thousand and EUR 11,892 thousand which was recognized on the repurchase of the 2004 Notes and the 2007 Notes, respectively, offset by a loss relating to the write off of deferred borrowing costs of EUR 2,657 thousand and transaction costs of EUR 12,150 thousand. In connection with the 2009 November Refinancing, Hungarian Telecom Finance International Limited (HTFI), a company controlled by Mid Europa also purchased approximately EUR 154.6 million or 87% of the outstanding aggregate principal amount of the 2006 PIK Notes issued by Holdco I. B.V. in a tender offer (the 2006 PIK Notes Tender Offer). Concurrently with the consummation of the 2006 PIK Notes Tender Offer, holders of the 2006 PIK Notes consented to eliminate substantially all of the covenants and related events of default under the indenture governing the 2006 PIK Notes (see note 26.3 Off-balance sheet contingencies). The 2009 December Refinancing On December 16, 2009 the Group completed a refinancing which included the issuance of Senior Secured Bonds in the notional amount of EUR 345 million due 2016 (the 2009 Notes), the proceeds of which were used for the (i) repayment of the Amended Senior Facilities Agreement, (ii) repayment of the remaining balance of the Subordinated Term Loan, (iii) repayment of the remaining outstanding balance of the 2004 Notes. The intercreditor deed of the Group was amended and restated to take into account the impact of the 2009 December Refinancing (the The Intercreditor Agreement). A loss on extinguishment of debt of EUR 9,110 thousand was recorded in connection with the 2009 December Refinancing relating to the loss on the write down of deferred borrowing costs of EUR 4,199 thousand and transactions costs of EUR 4,911 thousand.

232

Concurrently with the 2009 December Refinancing, all of the 2006 PIK Notes held by HTFI were converted into a new shareholder loan by Mid Europa to Holdco I. B.V. (Advance 2). Advance 1 and Advance 2 were granted as a new subordinated shareholder loan between Mid Europa and Holdco I. B.V. (the New Shareholder Loan). The New Shareholder Loan is non-cash pay and has a 15 year maturity. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010 The rights under the New Shareholder Loan were contributed by Holdco I. B.V. as a capital contribution to Matel Holdings and then from Matel Holdings to Matel after which Matels obligations under the New Shareholder Loan were automatically extinguished by operation of law (the Shareholder Debt Conversion). The extinguishment of Matels obligation under the New Shareholder Loan was recorded in equity as an increase to capital reserve. Following the Shareholder Debt Conversion, approximately EUR 288.5 million aggregate principal amount of the New Shareholder Loan remained outstanding between Holdco I. B.V. and Mid Europa. Related Party Subordinated Loan On August 6, 2004 a loan agreement was concluded between Matel Holdings and the Matel (the Related Party Subordinated Loan). The Related Party Subordinated Loan bears a fixed interest charge of 9.75%, which is compounded annually. The loan is to be repaid in full including the compounded interest at maturity, on August 15, 2013. During the year ended December 31, 2010 there was no repayment on this loan however, 11,107 thousand EUR was netted during the year against intercompany receivables. The 2007 Notes On April 27, 2007, Matel completed the issuance of the 2007 Notes. Net proceeds of EUR 189 million were received following the payment of financing costs associated with the issuance of the 2007 Notes in the amount of EUR 11 million, which costs were deferred and are amortized to interest expense using the effective interest method over the term of the 2007 Notes. The 2007 Notes mature on February 1, 2013 and bear interest at a rate of EURIBOR plus 3.0% per annum, payable quarterly in arrears on February 1, May 1, August 1 and November 1 of each year, beginning on August 1, 2007. The 2007 Notes are guaranteed by some of our subsidiaries. The 2007 Notes and subsidiary guarantees are collateralized by secondpriority liens over certain inter-company funding loans, the capital stock of some of our subsidiaries. Matel has the option to redeem the 2007 Notes, as a whole or in part, at any time or from time to time, at redemption prices specified in the 2007 Notes indenture (the 2007 Notes Indenture). In the event of a change of control, Matel must make an offer to purchase the 2007 Notes at a purchase price equal to 101% of the principal amount thereof. Matel is also required to offer to purchase the 2007 Notes with the excess proceeds following certain asset sales at a purchase price equal to 100% of the principal amount thereof. The 2007 Notes Indenture contains covenants restricting Matels ability to, among other things, (i) incur additional indebtedness or issue preferred shares, (ii) make investments and certain other restricted payments, (iii) issue or sell shares in subsidiaries, (iv) agree to restrictions on the payment of dividends by subsidiaries, (v) enter into transactions with affiliates, (vi) create certain liens, (vii) merge, consolidate or combine with other entities, (viii) layer debt, (ix) designate subsidiaries as unrestricted subsidiaries, (x) engage in unrelated business activities and (xi) impair any security interests. The 2007 Indenture also contains customary events of default, including non-payment of principal, interest, premium or other amounts, violation of covenants, bankruptcy events, cross-defaults, material judgments and invalidity of any guarantee, security document or security interest. In November 2009 Matel redeemed and cancelled 37.2% of the 2007 Notes in the notional amount of EUR 74.3 million as part of the 2009 November Refinancing. On January 20, 2010 Matel BV repurchased and cancelled 2007 Notes in the amount of EUR 25.0 million at a purchase price equal to 102% of the principal amount plus accrued interest up to but excluding the date of settlement. After this cancellation the aggregate principal amount of the 2007 Notes was EUR 100.7 million.

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On November 9, 23, 24, 25 and 28, 2010 and on December 1 and 20, 2010, Matel repurchased 2007 Notes in the aggregate principal amount of EUR 22.6 million at a weighted average purchase price equal to 92.1% of the principal amount thereof plus accrued interest up to but excluding the date of settlement. The cancellation of these 2007 Notes repurchased is ongoing as of December 31, 2010. After the completion of the cancellation, the aggregate principal amount outstanding of the 2007 Notes is EUR 78.1 million. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010 The 2009 Notes On December 9, 2009 as part of the 2009 December Refinancing, Matel issued senior secured notes in the principal amount of EUR 345,000,000 (the 2009 Notes). The 2009 Notes mature in 2016 and are subject to the indenture dated December 16, 2009 (the 2009 Notes Indenture). The 2009 Notes are listed on the Luxembourg Stock Exchange, and are governed by New York law. The proceeds from the issuance of the 2009 Notes were used to refinance certain indebtedness including redeeming the remaining of the 2004 Notes and to make a consent payment to the holders of the 2007 Notes who consented to certain proposed waivers and amendments to the 2007 Notes Indenture. Interest on the 2009 Notes is payable semi-annually at an annual rate of 9.50% on June 15 and December 15 of each year, beginning on June 15, 2010. The 2009 Notes have been guaranteed, by some of Matels subsidiaries, which guarantee ranks senior in right of payment to any existing and future guarantee of Matel and the subsidiary guarantors that is subordinated in right of payment to the 2009 Notes (including the 2007 Notes). The obligations of Matel and the subsidiary guarantors are secured by first priority liens over, inter alia, all shares or quotas (as applicable), bank accounts and assets of certain of our subsidiaries. Prior to December 15, 2012, Matel has the option to redeem all or part of the 2009 Notes by paying a make-whole amount specified in the 2009 Notes Indenture and following such date at the redemption prices set forth in the 2009 Notes Indenture. In the event of a change of control at any time, Matel is required to offer to repurchase the 2009 Notes at a purchase price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of the purchase. Matel is also required to offer to purchase the 2009 Notes with the excess proceeds following certain asset sales at a purchase price equal to 100% of the principal amount thereof. The 2009 Notes Indenture contains covenants restricting Matels ability to, among other things, (i) incur additional indebtedness or issue preferred shares, (ii) make investments and certain other restricted payments, (iii) issue or sell shares in certain restricted subsidiaries, (iv) agree to restrictions on the payment of dividends by subsidiaries, (v) enter into transactions with affiliates, (vi) create certain liens, (vii) transfer or sell assets, (viii) enter into sale and leaseback transactions, (ix) merge, consolidate, amalgamate or combine with other entities, (x) designate subsidiaries as unrestricted subsidiaries, (xi) de-list the notes, (xii) impair any security interests and (xiii) engage in any business other than specifically enumerated activities. The 2009 Notes Indenture also contains customary events of default, including non-payment of principal, interest, premium or other amounts, violation of covenants, failure to make required offers, certain cross-defaults, invalidity of any guarantee, material judgments, bankruptcy insolvency, receivership or reorganization events, and invalidity or unenforceability of any security document or security interest. On November 10, 2010 Matel repurchased 2009 Notes in the aggregate principal amount of EUR 75 million at a weighted average purchase price equal to 100% of the principal amount thereof plus accrued interest up to but excluding the date of settlement. After these transactions, the aggregate principal amount outstanding of the 2009 Notes including bond discount is EUR 267.1 million as of December 31, 2010. The Intercreditor Agreement In order to reflect the new obligations under the 2009 Notes and establish the relative rights of certain creditors under Matels financing arrangements (including priority of claims and subordination) the existing Intercreditor Deed was amended (the Intercreditor Agreement). The Intercreditor Agreement was concluded with, among others, the security trustee, the trustee for the 2007 Notes, the trustee for the 2009 Notes and certain hedging counterparties. The Intercreditor Agreement

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provides that if there is an inconsistency between the provisions of the Intercreditor Agreement (regarding subordination, turnover, ranking and amendments only), and certain other documents, including the 2009 Notes Indenture governing the 2009 Notes, the Intercreditor Agreement will prevail. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010 The Groups borrowings are payable as of December 31, 2010 as follows:
At 31 December 2010 2009 (in thousands of EUR)

1 Year or Less............................................................................................................... 2-3 Years....................................................................................................................... 4-5 Years....................................................................................................................... After 5 Years ................................................................................................................ Deferred borrowing costs.............................................................................................. Total ............................................................................................................................. 19. Financial Instruments and Financial Risk Management

93,292 267,130 360,422 (9,416) 351,006

150,243 340,721 490,964 (15,433) 475,531

Financial instruments carried on the consolidated balance sheet include cash and cash equivalents, trade and other receivables, other non-current financial assets and borrowings. The Group also has derivative financial instruments that reduce the exposure to fluctuations in foreign currency exchange and interest rates and manage credit risk. The Groups financial instruments by category are as follows as of December 31, 2010:
Assets at fair value through the profit and loss Loans and receivables

Available-for-sale

Total

(in thousand of EUR)

31 December 2010 Assets as per consolidated balance sheet Derivative financial instruments ...................................... Trade and other receivables ............................................. Other non-current financial assets ................................... Cash and cash equivalents ............................................... Total ................................................................................

196 196

28,303 69 109,010 137,382

Liabilities at fair value through the profit and loss

196 28,303 69 109,010 137,578

Other financial liabilities

Total

(in thousand of EUR)

Liabilities as per consolidated balance sheet Borrowings ............................................................................................. Derivative financial instruments ............................................................. Total ....................................................................................................... Magyar Telecom B.V.

2,432 2,432

360,422 360,422

360,422 2,432 362,854

Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010

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The Groups financial instruments by category are as follows as of December 31, 2009:
Assets at fair value through the profit and loss Loans and receivables

Available-for-sale

Total

(in thousand of EUR)

31 December 2009 Assets as per consolidated balance sheet........................ Derivative financial instruments ........................................ Trade and other receivables ............................................... Other non-current financial assets ..................................... Cash and cash equivalents ................................................. Total ..................................................................................

13,387 13,387

25,385 74 49,695 75,154

13,387 25,385 74 49,695 88,541

Liabilities at fair value through the profit and loss

Other financial liabilities

Total

(in thousand of EUR)

Liabilities as per consolidated balance sheet Borrowings ............................................................................................. Derivative financial instruments ............................................................. Total .......................................................................................................

25,860 25,860

490,964 490,964

490,964 25,860 516,824

The Groups activities expose it to a variety of financial risks: customer credit risk, liquidity risk, interest rate risk and foreign currency risk. The Groups risk management programs focuses on the unpredictability of the financial markets and seeks to minimize potential adverse effects of the Groups financial performance. Risk management is carried out by the executive management team under the policies approved by the Board of Directors. Customer credit risk Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations are performed on all customers requiring credit over a certain amount. The Group generally does not require collateral in respect of financial assets. The Group is not exposed to any significant concentration of credit risk as its customer base is widely spread. Investments are allowed in EUR or HUF denominated securities, which are freely negotiable, marketable and (1) are rated at least AA by Standard & Poors Corporation or Aa2 by Moodys Investor Services, Inc. or (2) are issued by the Republic of Hungary. Transactions involving derivative financial instruments are with counter-parties with whom the Group has a signed netting agreement as well as high credit ratings. Given their high credit ratings, management does not expect any counter-party to fail to meet its obligations with respect to its derivative financial instruments. The Group has made provisions of EUR 6,471 thousand and EUR 6,635 thousand for overdue receivables as of December 31, 2010 and 2009, respectively. Besides the risk on receivables the maximum exposure to credit risk is represented by the carrying amount of each financial asset, including derivative financial instruments, in the consolidated balance sheet. Due to the nature of the services provided by the Group there are no significant concentrations of credit risk. Management does not expect any losses from non-performance of the financial institutions. Liquidity risk In accordance with the Treasury Policy of the Group as approved by the Board of Directors, a prudent liquidity management is maintained by means of holding sufficient amounts of cash that are available for making all operational and debt service related payments when those become due. Investments are only kept in highly liquid assets, which are readily convertible into cash. The table below provides the information on the Groups financial liabilities classified into relevant maturity groupings based on the remaining period to the contractual maturity date as of December 31, 2010 and 2009. The amounts disclosed in the table are contractual cash flows.

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Total

1 year or Less

2-3 years

4-5 years

After 5 years

31 December 2010 Borrowings and interest payments.............................. Finance lease liabilities............................................... Derivative financial instruments ................................. Trade and other payables ............................................

543,294 4,410 2,236 20,840

Total

28,729 200 1,332 20,840

1 year or Less

167,618 449 904

2-3 years

51,300 537
4-5 years

295,647 3,224
After 5 years

31 December 2009 Borrowings and interest payments.............................. Finance lease liabilities............................................... Trade and other payables ............................................ Interest rate risk

749,690 4,714 27,117

37,453 192 27,117

74,905 427

226,782 503

410,550 3,592

The Groups investments in fixed-rate debt securities and its fixed-rate borrowings are exposed to a risk of change in their fair value due to changes in interest rates. The Groups investments in variable-rate debt securities and its variable-rate borrowings are exposed to a risk of change in cash flows due to changes in interest rates. The Group is exposed to interest rate risk since a portion of the interest of its borrowings (2007 Notes) is based on variable inter-bank rates. To reduce its interest rate cash flow risk the Group entered into interest rate swap agreements based on standard ISDA agreements in which the floating EURIBOR rates were swapped for fixed EUR rates. Under the terms of the interest rate swaps, the Group receives variable interest rate payments from the counterparty and makes fixed interest rate payments in the same currency, thereby creating the equivalent of fixed-rate debt. Foreign currency risk The majority of the Groups recurring revenue is denominated in Hungarian forint, but its debt is 100% euro denominated. To limit the impact of fluctuations between the HUF and the EUR, the Group has entered into foreign exchange forward agreements, to receive euro and pay Hungarian forint, thereby creating the equivalent of Hungarian forint debt obligations. In addition, the Group uses interest rate swaps to manage the interest rate exposure inherent in debt instruments bearing variable interest. By entering into such transactions the Group receives variable interest payments and makes fixed interest payments. Fair values The carrying amounts of financial assets including cash and cash equivalents, trade and other receivables and trade and other payables reflect reasonable estimates of fair value due to the relatively short period to maturity of the instruments. The Group estimates the fair values of derivative financial instruments by using a model which discounts future contractual cash-flows determined based on market conditions (foreign exchange rates, yield curves in the functional currency and in the foreign currency) prevailing on the date of the valuation. The model is regularly tested against third party prices for reasonableness. The fair value represents the estimated amounts that the Group would pay or receive to terminate the contracts as of December 31, 2010 and 2009. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments. The fair market value of the 2007 Notes was 91.5% or EUR 69.7 million and 82% or EUR 103.1 million as of December 31, 2010 and 2009, respectively, as quoted on the Luxembourg Stock Exchange. The fair market value of the 2009 Notes as of December 31, 2010 was 100% or EUR 270.0 million and as of December 31, 2009 its book value approximates fair value as the 2009 Notes were issued on December 16, 2009. The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximize the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2.

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The following table represents the Groups assets and liabilities that are measured at fair value as of December 31, 2010:
Level 1 Level 2 Level 3 Total (in thousands of EUR)

31 December 2010 Assets as per consolidated balance sheet Derivative financial instruments .......................................................................... Total Assets ........................................................................................................ 31 December 2010 Liabilities as per consolidated balance sheet Derivative financial instruments .......................................................................... Total Liabilities .................................................................................................. Reconciliation of derivative fair values

196 196

196 196

(2,432) (2,432)

(2,432) (2,432)

The tables below provide a reconciliation of the fair value of the derivative contracts outstanding as of December 31, 2010 and 2009. The fair value of derivatives were recognized in the consolidated balance sheet as derivative financial instruments among current assets, non-current assets, current liabilities or non-current liabilities depending on the maturity of the contracts.
At 31 December 2010 Asset Liability (in thousands of EUR) Net

Fair value of cross currency interest rate swaps current ................................................ Fair value of cross currency interest rate swaps non current ......................................... Fair value of foreign currency forward contracts current .............................................. Fair value of interest rate swap contracts current........................................................... Fair value of interest rate swap contracts non-current ...................................................

196 196

(307) (1,221) (904) (2,432)

(111) (1,221) (904) (2,236)

Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010
At 31 December 2009 Asset Liability (in thousands of EUR) Net

Fair value of cross currency interest rate swaps current ........................................... Fair value of cross currency interest rate swaps non current .................................... Fair value of foreign currency forward contracts current ......................................... Fair value of foreign currency forward contracts non current .................................. Fair value of interest rate swap contracts current...................................................... Fair value of interest rate swap contracts non-current ..............................................

11,053 877 350 1,107 13,387

(11,967) (7,247) (3,450) (3,196) (25,860)

(914) (6,370) (3,450) 350 (3,196) 1,107 (12,473)

Fair value of current and non-current derivative financial instruments is presented in the consolidated balance sheet as of December 31, 2010 and 2009 are as follows:

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At 31 December 2010 2009 (in thousands of EUR)

Fair value of cross currency interest rate swaps current ............................................... Fair value of fx forward contracts current .................................................................... Current Derivative Financial Instruments Assets ...................................................

196 196
At 31 December 2010

11,053 11,053

2009

(in thousands of EUR)

Fair value of cross currency interest rate swaps current ............................................... Fair value of fx forward contracts current .................................................................... Fair value of IRS contracts current ............................................................................... Current Derivative Financial Instruments Liabilities .............................................

(307) (1,221) (1,528)

(11,967) (3,450) (3,196) (18,613)

At 31 December 2010 2009 (in thousands of EUR)

Fair value of cross currency interest rate swaps non-current ........................................ Fair value of fx forward contracts non-current ............................................................. Fair value of IRS contracts non-current........................................................................ Non-Current Derivative Financial Instruments Assets ...........................................

At 31 December 2010

877 350 1,107 2,334

2009

(in thousands of EUR)

Fair value of cross currency interest rate swaps non-current ........................................ Fair value of IRS contracts non-current........................................................................ Non-Current Derivative Financial Instruments Liabilities..................................... Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010

(904) (904)

(7,247) (7,247)

The following table shows the sensitivity of debt instruments of the Group and the related transactions to foreign currency exchange rate and interest rate changes as of December 31, 2010 and 2009:
2010 Notional amount 1% p.a. increase in EURIBOR 5% increase in HUF/EUR fx rate

Net profit impact on debt services (in thousands of EUR)

Debt 2009 SSB Notes..................................................................... 2007 FRN Notes .................................................................... Total ......................................................................................

269,997 76,130 346,127

(761) (761)

(1,282) (154) (1,436)

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2010

Notional amount

1% p.a. increase in EURIBOR

5% increase in HUF/EUR fx rate

2010

Net profit impact on debt services (in thousands of EUR) 1% p.a. increase in 5% increase in EURIBOR HUF/EUR fx rate Notional amount Net profit impact on related derivatives (in thousands of EUR)

Derivatives Forward deals ........................................................................ SWAP deals ........................................................................... Total ......................................................................................

16,833 100,675 117,508

(75) 1,707 1,632

1% p.a. increase in EURIBOR

802 802
5% increase in HUF/EUR fx rate

2009

Notional amount

Net profit impact on debt services (in thousands of EUR)

Debt 2009 SSB Notes..................................................................... 2007 FRN Notes .................................................................... Total ......................................................................................

345,000 125,675 470,675

(1,257) (1,257)
1% p.a. increase in EURIBOR

(1,639) (234) (1,873)

5% increase in HUF/EUR fx rate

2009

Notional amount

Net profit impact on related derivatives (in thousands of EUR)

Derivatives Forward deals ........................................................................ SWAP deals ........................................................................... Total ......................................................................................

85,013 334,543 419,556

(662) 6,373 5,711

4,151 903 5,054

The above table shows the impact of a 1% increase in interest rates (e.g. BUBOR and EURIBOR) and a 5% increase in the EUR/HUF exchange rate on the fair value of derivative financial instruments as of December 31, 2010. In late April 2009 the Group entered into several interest rate swap agreements with BNP Paribas and Calyon pursuant to which some of the floating rate EUR interest payment obligations were swapped for fixed rate EUR interest payment obligations. After the December 2009 refinancing, in early 2010 the Group unwound most of its interest rate swap agreements and restructured the maturity of its foreign exchange forward agreements according to the new debt structure. A loss of EUR 1.7 million was realized on the transactions. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010 20. Other Non-Current Liabilities
At 31 December 2010 2009 (in thousands of EUR)

Deferred income ...................................................................................................................... Share based payments.............................................................................................................. Financial lease liabilities.......................................................................................................... Other non-current liabilities.....................................................................................................

11,639 4,210 285

6,563 1,536 4,522 857

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At 31 December 2010 2009 (in thousands of EUR)

Total Other Non-Current Liabilities....................................................................................

16,134

13,478

Deferred income as of December 31, 2010 and 2009 include the long-term part of deferred income related to IRU contracts. IRU deferred income relating to the International Business has been classified as liabilities held-for-sale as of December 31, 2009. The decrease in liabilities related to share based payments to zero relates to the termination of the option plans in October 2010 (see note 16 Share Based Compensation). 21. Provisions for Other Liabilities and Charges
At 31 December 2010 2009 (in thousands of EUR)

Provision for restructuring ....................................................................................................... Other provision ........................................................................................................................ Total Provisions for Other Liabilities and Charges............................................................

70 85 155

103 164 267

Other provisions as of December 31, 2010 and 2009 relates to provisions for legal cases of the Group. The amount of provisions made approximates the expected outflows of economic benefits. Movements in the balance of provisions were as follows:
At 31 December 2010 2009 (in thousands of EUR)

At 1 January............................................................................................................................. Additional provisions................................................................................................................. Used during the year .................................................................................................................. Reclassified to liabilities held-for-sale....................................................................................... Exchange differences................................................................................................................. At 31 December........................................................................................................................ 22. Trade and Other Payables

267 113 (217) (8) 155

9,274 146 (6,244) (2,832) (77) 267

At 31 December 2010 2009 (in thousands of EUR)

Trade payables ......................................................................................................................... Payables to related parties........................................................................................................ Other payables ......................................................................................................................... Total Trade and Other Payables .......................................................................................... Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010

14,800 682 5,358 20,840

18,640 621 7,856 27,117

Other payables as of December 31, 2010 mainly include VAT and other tax payables in the amount of EUR 3,920 thousand and a liability due to the minority shareholders of Memorex in the amount of EUR 1,015 thousand.

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Other payables as of December 31, 2009 mainly include VAT and other tax payables in the amount of EUR 5,888 thousand and a liability due to the minority shareholders of Memorex in the amount of EUR 1,015 thousand. 23. Accrued Expenses and Deferred Income
At 31 December 2010 2009 (in thousands of EUR)

Accrued expenses .................................................................................................................... Accrued interest ....................................................................................................................... Deferred income ...................................................................................................................... Total Accrued Expenses and Deferred Income ...................................................................

12,315 1,778 3,128 17,221

12,459 2,158 2,122 16,739

Accrued expenses as of December 31, 2010 and 2009 are mainly related to access type charges, tax related amounts and operating expenses accruals. Accrued interest includes EUR 647 thousand and EUR 589 thousand accrued interest due to related parties as of December 31, 2010 and 2009, respectively. 24. Operating Leases

The Group leases various telecommunication network equipment and rights and other equipment under non-cancellable operating lease agreements. Non-cancellable future operating lease rental payments are as follows:
At 31 December 2010 2009 (in thousands of EUR)

1 year or less ............................................................................................................................ 2-3 years .................................................................................................................................. 4-5 years .................................................................................................................................. After 5 years ............................................................................................................................ Total Non-Cancellable Future Lease Payments.................................................................. 25. Finance Leases

5,745 10,090 8,813 19,883 44,531

7,288 10,628 8,652 24,193 50,761

As of December 31, 2010 and 2009 the present value of the minimum finance lease payments are as follows:
At 31 December 2010 2009 (in thousands of EUR)

1 year or less ............................................................................................................................ 2-3 years .................................................................................................................................. 4-5 years .................................................................................................................................. After 5 years ............................................................................................................................ Total Non-cancellable Finance Leases Payable................................................................... Less Current Portion ................................................................................................................ Non-Current Portion of Non-cancellable............................................................................. Finance Leases Payable ......................................................................................................... Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010

200 449 537 3,224 4,410 (200) 4,210

192 427 503 3,592 4,714 (192) 4,522

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26. 26.1

Commitments Capital commitments

During the year ended December 31, 2010 and 2009 the Group entered into several purchase contracts and commitments for future capital expenditures (including the purchase of new equipment or upgrading existing equipment). Current projects to which such capital commitments relate to investments in information systems and customer service related infrastructure, number portability compliance, data and voice transmission equipment, and access network construction. Capital commitments are expected to be realized during the course of the following year. 26.2 Performance guarantees and payment guarantees

Guarantees and claims arise during the ordinary course of business from relationships with suppliers and customers when the Group requests its bankers to guarantee its performance if specified triggering events occur. Non-performance under a contract could trigger an obligation for the Group. These potential claims can arise from late or non-payment to suppliers (payment guarantees) and/or late or incomplete delivery of services to customers (performance guarantees). The Group also provides bid guarantees to new or existing customers in connection with bids on commercial projects. Potential future payments of the Group under these guarantees as of December 31, 2010 are summarized as follows:
At 31 December 2010 At 31 December 2009

(in thousands of EUR)

Payment guarantees ................................................................................................ Total Guarantees .................................................................................................. 26.3 Off-balance sheet contingencies The 2006 PIK Notes

3,277 3,277

1,502 1,502

On October 30, 2006, Invitel Holdings N.V., a former owner of Matel Holdings, issued the 2006 PIK Notes pursuant to an Indenture, dated as of October 30, 2006 (the 2006 PIK Notes Indenture). Upon the closing of the sale of Matel Holdings to Hungarian Telephone and Cable Corp. (HTCC) on April 27, 2007, HTCC entered into a supplemental indenture with Invitel Holdings N.V. and the 2006 PIK Notes Indenture trustee. Pursuant to such supplemental indenture, Holdco I. B.V., a 100% subsidiary of HTCC replaced Invitel Holdings N.V. as the issuer of the 2006 PIK Notes and assumed all of the rights and obligations of the issuer under the 2006 PIK Notes Indenture. Obligations under the 2006 PIK Notes are general unsubordinated obligations and are collateralized by a first priority lien over the shares of Matel Holdings and are effectively subordinated to all existing and future debt of the subsidiaries of the Group. This is an obligation of the parent company and as such has not been reflected in these consolidated financial statements. Interest on the 2006 PIK Notes is payable quarterly in cash or in the form of additional 2006 PIK Notes at an annual rate of EURIBOR plus 8.25%, reset quarterly, plus a ratchet margin. Interest on the PIK Notes is due on January 15, April 15, July 15 and October 15 of each year beginning on January 15, 2007. The ratchet margin is zero for the period to but excluding October 15, 2009 and 2.00% if the consolidated leverage ratio of Matel is greater than 2.50 to 1.00 for any interest period beginning on or after October 15, 2009. The maturity date of the 2006 PIK Notes is April 15, 2013. The Group has the option to redeem the 2006 PIK Notes, as a whole or in part, at any time or from time to time, at redemption prices specified in the 2006 PIK Notes Indenture. In the event of a change of control, an offer has to be made to purchase the 2006 PIK Notes at a purchase price equal to 101% of the principal amount thereof. The Group is also required to make an offer to purchase the 2006 PIK Notes with the excess proceeds following certain asset sales at a purchase price equal to 100% of the principal amount of thereof. The 2006 PIK Notes Indenture contains covenants restricting the Groups ability to, among other things, (i) incur additional indebtedness or issue preferred shares, (ii) make investments and certain other restricted payments, (iii) enter into transactions with affiliates, (iv) create certain liens, (v) enter into sale and leaseback transactions, (vi) issue or sell shares of subsidiaries, (vii) merge, consolidate or combine with other entities, (viii) designate subsidiaries as unrestricted subsidiaries, (ix) engage in unrelated business activities and (x) impair any security interests. The 2006 PIK Notes Indenture also contains

243

customary events of default, including, among other things, non-payment of the principal, interest or premium, if any, on any 2006 PIK Notes, certain failures to comply with any covenant of the 2006 PIK Notes Indenture, certain defaults under other indebtedness, failure to pay certain indebtedness or judgments, bankruptcy or insolvency events and invalidity of any security document or security interest. In September and November 2010 Matel purchased 2006 PIK Notes on the market in the amount of EUR 6,288 thousand and EUR 119 thousand, respectively, including accrued interest up to the date of settlement. On February 22, 2011 all outstanding 2006 PIK Notes were redeemed for cancellation by Holdco I. B.V. The redemption price was 101% of the principal amount of the 2006 PIK Notes plus accrued and unpaid interest thereon, from the most recent interest payment date for which interest of the 2006 PIK Notes has been paid to the date the redemption was made. The New Shareholder Loan In connection with the 2009 November Refinancing, Hungarian Telecom Finance International Limited (HTFI), a company controlled by Mid Europa purchased approximately EUR 154.6 million or 87% of the outstanding aggregate principal amount of the 2006 PIK Notes issued by Holdco I. B.V. in a tender offer (the 2006 PIK Notes Tender Offer). Concurrently with the consummation of the 2006 PIK Notes Tender Offer, holders of the 2006 PIK Notes consented to eliminate substantially all of the covenants and related events of default under the indenture governing the 2006 PIK Notes. Concurrently with the 2009 December Refinancing, all of the 2006 PIK Notes held by HTFI were converted into the second tranche of a new shareholder loan by Mid Europa to Holdco I. B.V. (Advance 2). Advance 1 provided by Mid Europa to Matel and Advance 2 provided by Mid Europa to Holdco I. B.V. were converted into a new subordinated shareholder loan (the New Shareholder Loan) between Mid Europa and Holdco I. B.V. (the Shareholder Debt Conversion). Holdco I. B.V. owns 100% of the equity of Matel Holdings and Matel Holdings owns 100% of the equity of Matel. The New Shareholder Loan is non-cash pay and has a 15 year maturity. Following assignment to Holdco I. B.V. the New Shareholder Loan of EUR 133.9 million was contributed as a capital contribution to Matel Holdings and then from Matel Holdings to Matel after which Matels obligations under the New Shareholder Loan was automatically extinguished by operation of law. Following the Shareholder Debt Conversion, approximately EUR 279.7 million aggregate principal amount of the New Shareholder Loan remained outstanding for Holdco I.B.V. Advance 1 accrues interest of EURIBOR plus 20.00% per annum. The balance as of December 31, 2010 was EUR 164.0 million and the balance of accrued but not capitalized interest was EUR 1.5 million. Advance 2 accrues interest of EURIBOR plus 10.25% per annum. The balance as of December 31, 2010 was EUR 172.5 million and the balance of accrued but not capitalized interest was EUR 4.2 million. These are obligations of the parent company of Matel and as such have not been reflected in these consolidated financial statements. 27. Contingencies

The Group is involved in legal proceedings in the normal course of business. Based on legal advice, management made appropriate provisions in its December 31, 2010 and 2009 consolidated balance sheet for the potential future cash outflows relating to certain ongoing legal matters. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010 The Group accounts for termination services provided by mobile operators at regulated interconnection rates. The mobile service providers have ongoing legal cases against the regulator with respect to such termination fees. Management of the Group believes that the outcome of such disputes will not have a significant impact on the consolidated financial statements of Matel, and accordingly no provision has been recorded in the consolidated financial statements for the possible return of amounts arising from reduced regulated interconnection rates. 28. Taxation Income tax (expense) / benefit for the year ended December 31, 2010 and 2009 comprises:
For the year ended 31 December 2010 2009 (in thousands of EUR)

244

For the year ended 31 December 2010 2009 (in thousands of EUR)

Corporate tax ............................................................................................................. Local business tax...................................................................................................... Deferred tax benefit / (expense)................................................................................. Total income tax benefit / (expense) .......................................................................

(38) (3,616) (14,701) (18,355)

(141) (3,646) 8,593 4,806

Matel is resident for tax purposes in the Netherlands and is subject to Dutch corporate income tax on its net worldwide income. For the year ended December 31, 2010 and 2009 the corporate income tax rate for Matel was 25.5% in both years. Since Matels subsidiaries are subject to the participation exemption in Article 13 of the Dutch Corporate Income Tax Act, dividends received from the subsidiaries will not be subject to Dutch corporate income tax upon meeting the relevant criteria. Matel is required to remit 8.3% withholding tax on dividends paid to its shareholders. Invitel Zrt and ITC are tax residents in Hungary and were taxed at a flat corporate income tax rate of 16% for the year ended December 31, 2009. In addition to the corporate income tax Solidarity Tax was also payable in Hungary at the rate of 4% until the end of 2009. The basis of Solidarity Tax was the unconsolidated adjusted pre-tax profit. Tax losses carried forward cannot be offset against the basis of the Solidarity Tax. As of January 1, 2010, the corporate income tax rate in Hungary was increased to 19% and at the same time the 4% Solidarity Tax was abolished. From July 1, 2010 the corporate income tax rate was changed to 10% up to HUF 250 million of the positive corporate income tax base. The tax base above this limit is subject to 19% corporate income tax. Deferred tax assets and liabilities are determined by the legal entities of the Group. Deferred tax is calculated at the respective statutory tax rates where the entities of the Group are tax resident. For the Netherlands income tax purposes the Group has unused net operating loss carry forwards as of December 31, 2010 of approximately EUR 102,677 thousand, out of which EUR 11,176 thousand expires between 2012 and 2015, EUR 16,177 thousand expires in 2017 and EUR 52,092 thousand expires in 2018 and EUR 11,078 thousand expires in 2019. No deferred tax asset has been recorded for such unused tax losses as the realization of those is not probable. For Hungarian corporate income tax purposes, the Group has unused net operating loss carry forwards of approximately EUR 67,377 thousand as of December 31, 2010. Such tax losses are not subject to any statutory expiry limitations. In view of the impact on taxable profits of the crisis tax (see note 6 Operating Expenses) and uncertainty as to its ultimate date of repeal, the Group has not recognised any deferred tax benefit in respect of these losses. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010 Deferred tax assets as of December 31, 2010 and 2009 are attributable to the following items:
Assets 31 December 2010 31 December 2009 (in thousands of EUR) Liabilities 31 December 2010 31 December 2009

Tax loss carried forward ......................... Derivative financial instruments ............. Interest bearing borrowings .................... Trade and other receivables .................... Provisions ............................................... Trade and Other Payables ....................... Finance Leases........................................ Property, plant and equipment ................ Intangible assets...................................... Net Deferred Tax Assets.......................

897 198 98 1,193

12,787 2,682 147 1,315 442 1,168 896 3,783 23,220 16,811

198 857 98 40 1,193

2,364 2,791 14 984 256 6,409

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Reconciliation of effective tax rate is as follows:

For the year ended 31 December 2010 2009 (in thousands of EUR)

Net profit / (loss) before tax.................................................................................... Income tax using the parent company corporate tax rate........................................ Solidarity tax paid................................................................................................... Tax losses for which no deferred tax asset was recognized.................................... Effect of tax rates in foreign jurisdictions............................................................... Tax on non-taxable income..................................................................................... Tax on non-deductible expenses............................................................................. Effect of change in tax rate ..................................................................................... Local business and other taxes paid, net of tax benefit........................................... Under /(over) provided in prior years ..................................................................... Income Tax (Expense) / Benefit ...........................................................................

(30,406) 7,754 (11) (12,140) (2,793) (1,853) (1,516) (4,235) (3,616) 55 (18,355)

(68,952) 17,583 (109) (15,031) (709) 5,699 (1,632) 2,132 (3,028) (99) 4,806

Derecognition of deferred tax on tax losses relates to the tax losses carried forward by Matel and Invitel Zrt. 29. Related Party Transactions

Related parties as of December 31, 2010 and 2009 include the Groups subsidiaries, as well as Mid Europa, Invitel Holdings A/S, Matel Holdings, Invitel Hungary Holdings Kft, Holdco I. B.V., Holdco II. B.V., and key management personnel of the Group. Matel Holdings charged to the Group the cost of the 2004 refinancing. The outstanding payable balance relating to these charges was EUR 628 thousand both as of December 31, 2010 and 2009, respectively. Matel has incurred interest expense on related party subordinated loans in the amount of EUR 2,395 thousand and EUR 2,183 thousand for the years ended December 31, 2010 and 2009, respectively. The interest was payable to Matel Holdings and is capitalized onto the outstanding loan balance on an annual basis. The outstanding balance of the related party subordinated loan was EUR 15,210 thousand and EUR 24,568 thousand as of December 31, 2010 and 2009, respectively. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010 Salaries and other short-term employee benefits paid to key management personnel amounted to EUR 1,589 thousand and EUR 1,991 thousand for the years ended December 31, 2010 and 2009, respectively. Termination benefits paid to key management personnel amounted to EUR 131 thousand for the year ended December 31, 2010. There have been no share based compensation, post-employment benefits or other long-term benefits paid to key management personnel during the years ended December 31, 2010 and 2009. There have been no loans or guarantees provided to key management personnel during the years ended December 31, 2010 and 2009. 30. Segment Reporting

The chief operating decision maker considers the Group from a revenue service perspective and assesses the performance based on segment gross margin. This measurement primarily focuses on the variable costs associated with this business. Other fixed and non-cash charges are excluded from this measure. Segment liabilities are not regularly reviewed by the chief operating decision maker. The following table presents a summary of the Groups operating segment financial information for the years ended December 31, 2010 and 2009. The International Business has been excluded from the 2010 and 2009 information below as the amounts have been included in discontinued operations.

246

For the year ended 31 December 2010 2009 (in thousands of EUR)

Revenue Mass Market Voice.................................................................................................... Mass Market Internet ................................................................................................. Business ..................................................................................................................... Domestic Wholesale .................................................................................................. Inter-segment elimination .......................................................................................... Total Revenue........................................................................................................... Segment Cost of Sales Mass Market Voice.................................................................................................... Mass Market Internet ................................................................................................. Business ..................................................................................................................... Domestic Wholesale .................................................................................................. Inter-segment elimination .......................................................................................... Total Segment Cost of Sales.................................................................................... Network operating expenses ...................................................................................... Direct personnel expenses ......................................................................................... Total Cost of Sales, exclusive of Depreciation ....................................................... Segment Gross Margin Mass Market Voice.................................................................................................... Mass Market Internet ................................................................................................. Business ..................................................................................................................... Domestic Wholesale .................................................................................................. Inter-segment elimination .......................................................................................... Total Segment Gross Margin.................................................................................. Network operating expenses ...................................................................................... Direct personnel expenses ......................................................................................... Depreciation and Amortization.................................................................................. Operating Expenses ................................................................................................... Cost of Restructuring ................................................................................................. Total Income from Operations ...............................................................................

63,940 32,665 75,099 31,955 (10,435) 193,224 (8,414) (6,418) (17,248) (7,369) 7,131 (32,318) (19,517) (10,822) (62,657) 55,526 26,247 57,851 24,586 (3,304) 160,906 (19,517) (10,822) (53,885) (46,214) (1,216) 29,252

77,062 32,868 80,912 33,504 (14,356) 209,990 (13,022) (6,229) (20,408) (8,321) 9,352 (38,628) (19,593) (10,904) (69,125) 64,040 26,639 60,504 25,183 (5,004) 171,362 (19,593) (10,904) (54,835) (40,541) (2,121) 43,368

The above segment information includes the continued operations of Matel, which is carried out in Hungary. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the year ended December 31, 2010 31. Subsequent Events

On January 9, 19, and 28, 2011 Matel repurchased 2007 Notes in the aggregate principal amount of EUR 7.2 million at an average purchase price equal to 93.1% of the principal amount thereof plus accrued interest up to but excluding the date of settlement. All the 2007 Notes purchased during November and December 2010 and January 2011 were cancelled on March 7, 2011 and a gain of EUR 2.5 million was realised. After this transaction, the aggregate principal amount outstanding of the 2007 Notes is EUR 68.9 million. On February 22, 2011 all 2006 PIK Notes were redeemed for cancellation. The redemption price was 101% of the principal amount of the 2006 PIK Notes plus accrued and unpaid interest thereon, from the most recent interest payment date for which interest of the 2006 PIK Notes has been paid to the date the redemption was made.

247

On February 28, 2011, Matel acquired 100% of the issued share capital of FiberNet Kommunikcis Zrtkren Mkd Rszvnytrsasg (FiberNet) for a combination of cash and repayment of debt in a total amount of EUR 44.5 million. In a simultaneous transaction, Matel sold, for competition reasons, certain of FiberNets local cable networks and customers in Hungary (which together totaled one-third of FiberNets assets), to UPC Magyarorszg Kft for approximately EUR 22.2 million.

248

MAGYAR TELECOM B.V. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2009 (PRESENTED IN THOUSAND EUROS)

Magyar Telecom B.V. CONSOLIDATED FINANCIAL STATEMENTS Table of contents

Page

Independent Auditors Report ....................................................................................................................... Consolidated Balance Sheet............................................................................................................................ Consolidated Income Statement and Statement of Comprehensive Income / (Loss) ..................................... Consolidated Cash Flow Statement ................................................................................................................ Consolidated Statement of Changes in Equity................................................................................................ Notes to the Consolidated Financial Statements.............................................................................................

F-54 F-55 F-56 F-57 F-58 F-59

249

Independent Auditors Report To the Shareholders and Board of Directors of Magyar Telecom B.V. We have audited the accompanying consolidated financial statements of Magyar Telecom B.V. and its subsidiaries which comprise the consolidated balance sheet as of December 31, 2009 and the related consolidated income statement and statement of comprehensive income/(loss), statement of changes in equity and cash flow statement for the year then ended and a summary of significant accounting policies and other explanatory notes. Managements responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing and in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the accompanying consolidated financial statements referred to above give a true and fair view of the financial position of Magyar Telecom B.V. and its subsidiaries as of December 31, 2009 and of their financial performance and their cash flows for the year then ended in accordance with International Financial Reporting Standards. April 30, 2010 Budapest, Hungary

250

Magyar Telecom B.V. Consolidated Balance Sheet as of December 31, 2009 and 2008
At 31 December Notes 2009 2008 (in thousands of EUR)

Non-Current Assets Intangible Assets........................................................................................................... Property, Plant and Equipment ..................................................................................... Other Non-Current Financial Assets............................................................................. Non-Current Derivative Financial Instruments............................................................. Deferred Tax Assets ..................................................................................................... Current Assets Cash and Cash Equivalents........................................................................................... Trade and Other Receivables........................................................................................ Derivative Financial Instruments.................................................................................. Other Current Assets..................................................................................................... Assets of Disposal Group Classified as Held-for-Sale ................................................. Total Assets ................................................................................................................. Equity Capital and Reserves Attributable to Equity Holders of the Company Share Capital................................................................................................................. Capital Reserve............................................................................................................. Other Reserve ............................................................................................................... Cumulative Translation Reserve................................................................................... Accumulated Losses ..................................................................................................... Minority Interest ........................................................................................................... Total Equity................................................................................................................. Liabilities Non-Current Liabilities Borrowings ................................................................................................................... Other Non-Current Liabilities....................................................................................... Non-Current Derivative Financial Instruments............................................................. Deferred Tax Liabilities................................................................................................ Current Liabilities Current Portion of Borrowings ..................................................................................... Trade and Other Payables ............................................................................................. Derivative Financial Instruments.................................................................................. Accrued Expenses and Deferred Income ...................................................................... Provisions for Other Liabilities and Charges................................................................ Liabilities of Disposal Group Classified as Held-for-Sale............................................ Total Liabilities ........................................................................................................... Total Equity and Liabilities .......................................................................................

12 13 20 29

48,123 333,076 74 2,334 16,811 400,418

118,488 480,249 1,103 3,111 11,262 614,213 28,448 58,844 4,552 4,733 96,577 710,790

14 15 20 16 4

49,695 25,385 11,053 2,020 88,153 234,094 722,665

18 18 18 18

92,201 256,047 (17,193) (37,883) (222,489) 70,683 18 70,701

92,201 122,110 (17,193) (41,785) (184,132) (28,799) 17 (28,782)

18

19 21 20 29

475,531 13,478 7,247 496,256

507,139 37,702 2,203 617 547,661 45,374 65,783 12,346 59,134 9,274 191,911 739,572 710,790

19 23 20 24 22 4

27,117 18,613 16,739 267 62,736 92,972 651,964 722,665

251

At 31 December Notes 2009 2008 (in thousands of EUR)

The accompanying notes form an integral part of the consolidated financial statements.

252

Magyar Telecom B.V. Consolidated Income Statement and Other Comprehensive Income /(Loss) for the years ended December 31, 2009 and 2008
For the year ended 31 December Notes 2009 2008 (in thousands of EUR)

Revenue ...................................................................................................... Cost of Sales, exclusive of Depreciation shown below .............................. Depreciation and Amortization................................................................... Operating Expenses .................................................................................... Cost of Restructuring .................................................................................. Income / (Loss) from Operations............................................................. Financial Income ........................................................................................ Financial Expenses ..................................................................................... Loss on extinguishment of debt .................................................................. Income / (Loss) Before Tax ...................................................................... Income Tax (Expense) / Benefit ................................................................. Income / (Loss) from Continuing Operations......................................... Income / (Loss) from Discontinued Operations...................................... Income / (Loss) for the Year .................................................................... Attributable to: Equity Holders of the Parent ............................................................. Minority Interest................................................................................ Change in cumulative translation reserve ................................................... Total Comprehensive Income / (Loss)..................................................... Total Comprehensive Income / (Loss) Attributable to: Equity Holders .................................................................................. Minority Interest................................................................................

5 6 9 7 10 11 11 19 29 4

209,990 (69,125) (54,835) (40,541) (2,121) 43,368 1,833 (89,683) (24,470) (68,952) 4,806 (64,146) 25,790 (38,356) (38,357) 1 (38,356) 3,902 (34,454) (34,455) 1 (34,454)

265,937 (90,881) (69,732) (51,978) (8,074) 45,272 18,345 (92,296) (28,679) (4,759) (33,438) 7,706 (25,732) (25,737) 5 (25,732) (3,579) (29,311) (29,316) 5 (29,311)

253

Magyar Telecom B.V. Consolidated Cash Flow Statement for the years ended December 31, 2009 and 2008
For the year ended 31 December Notes 2009 2008 (in thousands of EUR) Cash Flows from Operating Activities Income / (Loss) Before Tax of Continued Operations ..................................................................... Income / (Loss) Before Tax of Discontinued Operations................................................................. Income / (Loss) Before Tax ............................................................................................................. Adjustments for Income taxes.................................................................................................................................... Interest Expense / (Income) ............................................................................................................. Loss on extinguishment of debt ....................................................................................................... Amortization.................................................................................................................................... Depreciation .................................................................................................................................... Result of Sale of Intangible Assets .................................................................................................. Result of Sale of Property, Plant and Equipment ............................................................................. Fair Value Change of Derivative Financial Instruments .................................................................. Provision for Impairment of Trade Receivables............................................................................... Provisions........................................................................................................................................ Unrealized Foreign Exchange (Gain) / Loss .................................................................................... Other Non-Cash Items ..................................................................................................................... Working Capital Changes: Change in Trade and Other Receivables .......................................................................................... Change in Inventories...................................................................................................................... Change in Prepayments and Accrued Income.................................................................................. Change in Trade and Other Payables and Accrued Expenses and Deferred Income ........................ Income Taxes Paid .......................................................................................................................... Interest Paid..................................................................................................................................... Net Cash Flow Provided by / (Used in) Operating Activities...................................................... Cash Flows from Investing Activities Purchase of subsidiaries, net of cash acquired ................................................................................. Purchase of Intangible Assets .......................................................................................................... Purchase of Property, Plant and Equipment..................................................................................... Proceeds from Sale of Intangible Assets.......................................................................................... Proceeds from Sale of Property, Plant and Equipment..................................................................... Restricted Cash................................................................................................................................ Interest Received ............................................................................................................................. Net Cash Flow Provided by / (Used in) Investing Activities........................................................ Cash Flows from Financing Activities Proceeds from Interest Bearing Borrowings .................................................................................... Proceeds from Issuance of Notes 2009 ............................................................................................ Proceeds from Related Party Loan................................................................................................... Deferred Financing Costs Paid ........................................................................................................ Settlement of Derivative Financial Instruments ............................................................................... Principal Payments under Capital Lease Obligations....................................................................... Repayments of Interest Bearing Borrowings ................................................................................... Net Cash Flow Provided by / (Used in) Financing Activities ...................................................... Effect of Exchange Rate Changes on Cash and Cash Equivalents ................................................... Net Increase / (Decrease) in Cash and Cash Equivalents............................................................ Cash and Cash Equivalents at the Beginning of the Year ................................................................ Cash and Cash Equivalents at the End of the Year .................................................................... Included in Cash and Cash Equivalents per the Balance Sheet ........................................................ Included in Assets of Disposal Group Classified as Held-for-Sale .................................................. 14 19 19 18 19 3 12 13 12 13

(68,952) 28,574 (40,378) (4,352) 56,433 24,470 17,889 47,693 777 (7,330) 17,402 2,504 146 17,569 9,536 1,845 276 476 (17,472) (11,106) (47,911) 68,467 (11,865) (54,498) 245 10,223 2,500 1,086 (52,309) 182,000 340,694 125,453 (33,701) (18,611) (1,559) (573,334) 20,942 (456) 36,644 28,448 65,092 49,695 15,397

(28,679) 12,573 (16,106) (8,762) 63,701 21,096 57,965 4,400 (1,822) (1,184) 1,736 572 22,101 6,088 13,306 111 3,697 (28,970) (135) (46,651) 91,143 (21,986) (21,992) (56,606) 3,590 1,174 (95,820) 110,000 (6,726) (9,404) (5,158) (68,642) 20,070 (485) 14,908 13,540 28,448 28,448

9,12 9,13 12 13 15 22

15 16 22,23,24

19

Summary of non-cash transactions: On March 5, 2008 the Group assumed net debt and finance lease obligations of EUR 34.3 million as part of the acquisition of Memorex.

254

On December 18, 2009 EUR 133.9 million of the New Shareholder Loan was contributed by HoldCo I. B.V. and Mid Europa as a capital contribution. The Group had unpaid capital expenditures in the amount of EUR 15,443 thousand and EUR 29,705 thousand as of December 31, 2009 and 2008, respectively. The accompanying notes form an integral part of the consolidated financial statements.

255

256

Magyar Telecom B.V. Consolidated Statement of Changes in Equity for the years ended December 31, 2009 and 2008
Attributable to equity holders of the parent Share Capital Capital Reserve Other Reserve Cumulative Translation Reserve Accumulated Losses Minority interest Total Equity

Total

(in thousands of EUR)

Balance as at 31 December 2007 ........................................................... Translation adjustment for the year.......................................................... Net income recognized directly in equity ................................................ Net result for the year............................................................................... Balance as at 31 December 2008 ........................................................... Capital increase........................................................................................ Change in functional currency ................................................................. Translation adjustment for the year.......................................................... Net income recognized directly in equity ................................................ Net result for the year............................................................................... Balance as at 31 December 2009 ...........................................................

92,201 92,201 92,201

122,110 122,110 133,937 133,937 133,937 256,047

(17,193) (17,193) (17,193)

(38,206) (3,579) (3,579) (3,579) (41,785) 1,428 2,474 3,902 3,902 (37,883)

(158,395) (25,737) (25,737) (184,132) (38,357) (38,357) (222,489)

517 (3,579) (3,579) (25,737) (29,316) (28,799) 133,937 1,428 2,474 137,839 (38,357) 99,482 70,683

12 5 5 17 1 1 18

529 (3,579) (3,579) (25,732) (29,311) (28,782) 133,937 1,428 2,474 137,839 (38,356) 99,483 70,701

The accompanying notes form an integral part of the consolidated financial statements.

257

258

Magyar Telecom B.V. Notes to the Consolidated Financial Statements for the years ended December 31, 2009 and 2008 1. General Information Magyar Telecom B.V. (Matel or the Company) was incorporated in the Netherlands on December 17, 1996 as a limited liability company and has its statutory seat in Amsterdam (Laan Kronenburg 8, 1183 Amstelveen, The Netherlands). Matel is engaged in investing in telecommunication related activities in Central and Eastern Europe, primarily through its telecommunications service provider companies, Invitel Tvkzlsi Zrt. (Invitel Zrt) providing telecommunications services to mass market and business customers and Invitel International Hungary Kft (Invitel International Kft), Invitel International AG and its subsidiaries (Invitel International AG) and Euroweb Romania S.A. (Euroweb Romania) providing wholesale data and capacity services (collectively, the International Business). All subsidiaries are majority owned and controlled subsidiaries of Matel (collectively, the Group). Matel, through its domestic business, is the second largest fixed line telecommunications services provider in Hungary and the incumbent provider of fixed line telecommunications services to residential and business customers in its historical concession areas, where it has a dominant market share. The historical concession areas cover an estimated 2.1 million people, representing approximately 21% of Hungarys population. It also provides fixed line telecommunications services as an alternative operator in the remainder of Hungary either by connecting business customers to its backbone network, or through the use of carrier pre-selection or wholesale DSL services for mass market customers. Matel, through its international business, is a leading alternative telecommunication infrastructure and bandwidth provider in Central and South Eastern Europe. It is the largest independent provider of wholesale data and capacity services in the Central and South-Eastern European region. The international business of the Group provides (i) data services including leased capacity services, dark fiber and wholesale Internet services and (ii) voice services including voice origination and voice termination services. The international business of the Group operates one of the largest fiber optic networks in the Central and South-Eastern European region with over 23,000 route kilometers of fiber and 40 major points of presence in 15 countries including Hungary, Austria, Turkey, Romania, Slovakia, Bulgaria, Serbia, Ukraine, Italy and the Czech Republic. It has approximately 330 customers, including incumbent telecommunications services providers, alternative fixed line telecommunications services providers, mobile telecommunications services providers, cable television operators, and Internet Service Providers. Its customers include U.S. and Western European telecommunications services providers as well as Eastern European incumbent telecommunications services providers. The 100% shareholder of Matel is Matel Holdings N.V. (Matel Holdings). Matel Holdings is incorporated on December 27, 2000 under the laws of the Netherlands Antilles. Matel Holdings is 100% owned by Invitel Holdings A/S, through its holding companies, as of December 31, 2009. As of December 31, 2008 Matel Holdings was 100% owned by Hungarian Telephone and Cable Corp. (HTCC), a majority owned subsidiary of TDC A/S (TDC). On March 5, 2008, Invitel Zrt acquired 95.7% of the outstanding equity in Austrian-based Memorex Telex Communications AG (Memorex). On August 28, 2008, Invitel Zrt also acquired the remaining 4.3% of Memorex from the minority shareholders in Memorex, which resulted in 100% ownership of the equity in Memorex. The total purchase consideration for Memorex (subsequently renamed Invitel International AG) was EUR 103.6 million including the assumption of debt and transaction costs and other directly related expenses. Memorex provides wholesale data and capacity services to leading global telecommunications providers and Internet companies between 14 countries in the region including Austria, Bulgaria, the Czech Republic, Italy, Romania, Slovakia, Turkey, and Ukraine. Memorex operates over 12,500 route km of fiber optic cable in the region which enables it to provide high quality wholesale services to large international carriers. On February 26, 2009, reorganization was completed, whereby HTCC effectively changed its place of incorporation from Delaware to Denmark by merging HTCC with and into MergeCo, which was the surviving company and become a wholly owned direct subsidiary of Invitel Holdings A/S. Invitel Holdings A/S is a Danish company established for the purpose of this reorganization. After completion of the reorganization, Invitel Holdings A/S became the successor to HTCC as the holding company for the group of companies that were subsidiaries of HTCC. On November 23, 2009, TDC and Mid Europa completed a transaction whereby Mid Europa Partners Limited (Mid Europa) acquired 10,799,782 of Invitel Holdings A/S shares held by TDC (64.67% of the outstanding shares, TDCs entire shareholding), for USD 1.00 per share. On November 27, 2009, Mid Europa completed the acquisition of an additional 9.87% of the shares of Invitel Holdings A/S (1,650,611 shares) from Straumur Burdaras Investment Bank for a purchase price of USD 4.50 per share, increasing MEPs ownership interest, through Hungarian Telecom (Netherlands) Cooperatief

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U.A. (HTC), to 74.4% as of December 31, 2009. Subsequent to December 31, 2009, MEP increased its ownership in Invitel Holdings A/S to 91.78% (see note 32 on subsequent events). On January 8, 2009 Invitel Telekomunkikacije d.o.o. was sold by Invitel Zrt to Memorex. On June 30, 2009 Invitel Telecom merged into Invitel Zrt. As of December 31, 2009 the Group includes the following subsidiaries: Invitel Zrt was incorporated on September 20, 1995 as a joint stock company under the laws of Hungary. The authorized share capital of Invitel as of December 31, 2009 is HUF 20 billion (approximately EUR 74 million). On March 18, 2010 the share capital of Invitel Zrt was reduced to HUF 16 billion. Invitel Technocom Kft. (ITC) was incorporated on September 28, 2001 as a limited liability company under the laws of Hungary. The authorized share capital of ITC as of December 31, 2009 is HUF 165 million (approximately EUR 610 thousand). Invitel International Holdings B.V. (Invitel International Holdings) was incorporated on March 26, 2009 in Amsterdam and has its statutory sear under Laan van Kronenburg 8, 1183AS Amstelveen, the Netherlands. The 100% owner of Invitel International Holdings is Invitel Zrt. On March 26, 2009, Invitel Zrt transferred ownership interest in Invitel International AG and Invitel International Kft to Invitel International Holdings. The authorized share capital of Invitel International Holdings as of December 31, 2009 is EUR 18,000. AT-Invitel GmbH was formed on December 17, 2009 under the Austrian law. The registered share capital of AT-Invitel GmbH as of December 31, 2009 is EUR 35 thousand. Invitel International Hungary Kft. (Invitel International Kft) was incorporated on November 24, 2008 as a joint stock company under the laws of Hungary. The authorized share capital of Invitel Kft as of December 31, 2009 is HUF 3,061 million (approximately EUR 11,302 thousand). Invitel International AG (formerly Memorex) was incorporated on April 20, 1967 as a joint stock company under the laws of Austria. The authorized share capital of Invitel International AG as of December 31, 2009 is EUR 36 million. Invitel International AG has a majority ownership of the equity capital of the subsidiaries set forth in the table below:
Name of Company As Defined Country of Incorporation

Invitel International Bulgaria EODD................. Invitel International CZ s.r.o.............................. Invitel Telecom d.o.o. Beograd.......................... Invitel Telecomunikacije d.o.o. ......................... Invitel International SK s.r.o.............................. MTCTR Memorex Telekomnikasyon Sanayi ve Ticaret Limited Sirketi .................................. Memorex Telex Communications UA Ltd. ....... Invitel International Italia S.R.L. .......................

Invitel International Bulgaria Invitel International Czech Republic Invitel International Serbia Invitel International Slovenia Invitel International Slovakia Invitel International Turkey Invitel International Ukraine Invitel International Italy Magyar Telecom B.V.

Bulgaria Czech Republic Serbia Slovenia Slovakia Turkey Ukraine Italy

Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 Euroweb Romania is domiciled in Romania and was registered with the Romanian Trade Register as a joint-stock company in March 1998 and commenced activities in November 1998. The authorized share capital of Euroweb Romania as of December 31, 2009 is RON 6,392,449 (approximately EUR 1,596 thousand). The shareholders of Euroweb Romania as of December 31, 2009 are Invitel (99.96%) and individuals (0.04%). On February 12, 2010, Invitel Zrt transferred its ownership interest in Euroweb Romania to Invitel International Holdings. 2. Significant Accounting Policies The significant accounting policies applied in the preparation of the consolidated financial statements are set out below. These policies set out below have been consistently applied by all Group entities to all periods presented in these

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consolidated financial statements, unless otherwise stated. Where it was necessary, accounting policies of the subsidiaries were modified to ensure consistency with the policies adopted by the Group. 2.1. Statement of Compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). 2.2. Basis of Preparation

The consolidated financial statements are presented in euro (EUR) rounded to the nearest thousand of EUR (TEUR). The EUR presentation currency was chosen based upon the currency of the primary economic environment in which the Group operates. The preparation of the consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the accounting policies. The areas involving a higher degree of judgement or complexity or areas where assumptions and estimates are significant to the consolidated financial statements are discussed in note 2.24. The Group has adopted the following new and amended IFRS as of January 1, 2009, which are relevant to the Groups consolidated financial statements: IAS 1 (revised) Presentation of financial statements effective January 1, 2009. The revised standard prohibits the presentation of items of income and expenses (that is, non-owner changes in equity) in the statement of changes in equity, requiring non-owner changes in equity to be presented separately from owner changes in equity in a statement of comprehensive income. As a result the group presents in the consolidated statement of changes in equity all owner changes in equity, whereas all non-owner changes in equity are presented in the consolidated statement of comprehensive income. Comparative information has been re-presented so that it also is in conformity with the revised standard. As the change in accounting policy only impacts presentation aspects, there is no impact on net income. IAS 23 (Amendment) Borrowing Costs effective from January 1, 2009, requires the capitalization of borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. The option of immediately expensing borrowing costs is removed. In respect of borrowing costs relating to qualifying assets for which the commencement date for capitalisation is on or after January 1, 2009, the Group capitalises borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. The Group previously recognised all borrowing costs as an expense immediately. This change in accounting policy was due to the adoption of IAS 23 Borrowing costs in accordance with the transition provisions of the standard; comparative figures have not been restated. The change in accounting policy increased the Groups net income by EUR 325 thousand for the year ended December 31, 2009. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 IAS 36 (Amendment) Impairment of assets effective January 1, 2009 requires that where fair value less costs to sell is calculated on the basis of discounted cash flows, disclosures equivalent to those for value-in-use calculation should be made. The Group adopted IAS 36 (Amendment) from January 1, 2009. The amendment did not have a material impact on the Groups consolidated financial statements. IAS 38 (Amendment) Intangible assets effective from January 1, 2009, requires that a prepayment may only be recognized in the event that payment has been made in advance of obtaining right of access to goods or receipt of services. The Group adopted IAS 38 (Amendment) from January 1, 2009. The amendment did not have a material impact on the Groups consolidated financial statements. IAS 39 (Amendment) Financial instruments: Recognition and measurement, which is effective from January 1, 2009, clarifies the definitions of financial asset or financial liability at fair value through profit or loss as it relates to items that are held for trading and movements into and out of the fair value through profit or loss category where a derivative commences or ceases to qualify as a hedging instrument. The amended standard also deals with changes in designating instruments as hedges and re-measuring the carrying amount of a debt instrument on cessation of fair value hedge

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accounting. The Group adopted IAS 39 (Amendment) from January 1, 2009. The amendment did not have a material impact on the Groups consolidated financial statements. IFRS 7 (Amendment) Financial instruments Disclosures effective January 1, 2009 requires enhanced disclosures about fair value measurement and liquidity risk. In particular, the amendment requires disclosure of fair value measurements by level of a fair value measurement hierarchy. As the change in accounting policy only results in additional disclosures, there is no impact on net income. IFRS 8 Operating Segments effective from January 1, 2009, requires segment disclosure based on the components of the entity that management monitors in making decisions about operating matters. Operating segments are components of an entity about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Group has applied the provisions of the new standards and altered the presentation and disclosure of its operating segments in the consolidated financial statements in accordance with IFRS 8. IFRS 2 (Amendment) Share-based payment effective January 1, 2009 and deals with vesting conditions and cancellations. It clarifies that vesting conditions are service conditions and performance conditions only. Other features of a share-based payment are not vesting conditions. These features would need to be included in the grant date fair value for transactions with employees and others providing similar services; they would not impact the number of awards expected to vest or valuation thereof subsequent to grant date. All cancellations whether by the entity or by the parties should received the same accounting treatment. The Group adopted IFRS 2 (Amendment) from January 1, 2009. The IFRS 2 (Amendment) did not have a material impact on the Groups financial statements. The following standards and amendments to existing standards, which are mostly relevant to the Groups consolidated financial statements, have been published and are mandatory for the Groups accounting periods beginning on or after January 1, 2010 or later periods, but the Group has not early adopted them: IFRIC 17 Distribution of non-cash assets to owners (effective for periods beginning on or after July 1, 2009). The interpretation is part of the IASBs annual improvements project published in April 2009. This interpretation provides guidance on accounting for arrangements whereby an entity distributes non-cash assets to shareholders either as a distribution of reserves or as dividends. IFRS 5 has also been amended to require that assets are classified as held for distribution only when they are available for distribution in their present condition and the distribution is highly probable. The Group will apply IFRIC 17 from January 1, 2010. This standard is not expected to have a material impact on the Groups consolidated financial statements. IAS 27 (revised) Consolidated and separate financial statements effective for periods beginning on or after July 1, 2009) requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is re-measured to fair value, and a gain or loss is recognised in profit or loss. The Group will apply IAS 27 (revised) prospectively to transactions with non-controlling interests from January 1, 2010. IFRS 3 (revised) Business combinations effective for periods beginning on or after July 1, 2009 continues to apply the acquisition method to business combinations, with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently remeasured through the income statement. There is a choice on an acquisition-by-acquisition basis to measure the noncontrolling interest in the acquiree either at fair vale or at the non-controlling interests proportionate share of the acquirees net assets. All acquisition-related costs should be expensed. The Group will apply IFRS 3 (revised) prospectively to all business combinations from January 1, 2010. IAS 38 (Amendment) Intangible Assets is part of the IASBs annual improvements project published in April 2009 and the International Business will apply IAS 38 (amendment) from the date IFRS 3 (revised) is adopted. The amendment clarifies guidance in measuring the fair value of an intangible asset acquired in a business combination and it permits the grouping of intangible assets as a single asset if each asset has similar useful economic lives. The amendment is not expected to have a material impact on the Groups consolidated financial statements. IFRS 5 (Amendment) Measurement of non-current assets (or disposal groups) classified as held-for-sale is part of the IASBs annual improvements project published in April 2009. The amendment provides clarification that IFRS 5 specifies the disclosures required in respect of non-current assets (or disposal groups) classified as held for sale or discontinued operations. It also clarifies that the general requirement of IAS 1 still apply, particularly paragraph 15 (to

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achieve a fair presentation) and paragraph 125 (sources of estimation uncertainty) of IAS 1. The Group will apply IFRS 5 (amendment) from January 1, 2010. IAS 1 (Amendment) Presentation of financial statements is part of the IASBs annual improvements project published in April 2009. The amendment provides clarification that the potential settlement of a liability by the issue of equity is not relevant to its classification as current or non current. By amending the definition of current liability, the amendment permits a liability to be classified as non-current (provided that the entity has an unconditional right to defer settlement by transfer of cash or other assets for at least 12 months after the accounting period) notwithstanding the fact that the entity could be required by the counterparty to settle in shares at any time. The Group will apply IAS 1 (amendment) from January 1, 2010. It is not expected to have a material impact on the Groups consolidated financial statements. IFRS 2 (Amendments) Group cash-settled and share-based payment transactions. In addition to incorporating IFRIC 8 Scope of IFRS 2 and IFRIC 11 IFRS 2 Group and treasury share transactions, the amendments expand on the guidance in IFRIC 11 to address the classification of group arrangements that were not covered by that interpretation. The new guidance is not expected to have an impact on the Groups consolidated financial statements. IFRS 9 Financial Instruments is part of the IASBs projects started in 2008. The standard is replacing IAS 39 Financial Instruments: Recognition and Measurement and shall apply for annual periods beginning on or after January 1, 2013. The Group is currently evaluating the impact of IFRS 9 on the consolidated financial statements. 2.3. Basis of Consolidation

2.3.1. Subsidiaries Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the group controls another entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of the transaction, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Groups share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the consolidated income statement. 2.3.2. Transactions eliminated on consolidation All inter-group balances, transactions, unrealized gains and losses on transactions between Group companies have been eliminated from the consolidated financial statements. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. The Group applies a policy of treating transactions with minority interests as transactions with parties external to the Group. 2.3.3. Transactions with entities under common control Business combinations arising from transfers of interests in entities that are under the common control of the shareholders that control the Group are accounted for by using predecessor accounting, at the date that the common control was established. The assets and liabilities are recorded at book values by the acquiree. The components of equity of the acquired entities are added to the same components within Group equity except that any share capital of the acquired entities is recognized as part of reserves. The difference between the consideration given and the aggregate book value of the assets and liabilities of the acquired entity as of the date of the transaction is recorded as an adjustment to other reserve equity. No additional goodwill is created by these transactions. 2.4. Foreign Currency

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2.4.1. Translation of financial statements Items included in the financial statements of each of the Groups entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The functional currency of Matel is the EUR. The functional currency of the Hungarian subsidiaries of Matel except for Invitel International Kft is the Hungarian forint (HUF), the functional currency of the non-Hungarian subsidiaries of Matel and Invitel International Kft is the EUR and the functional currency of the Romanian subsidiary of Matel is the Romanian Lei (RON). Invitel International Kft has changed its functional currency from HUF to EUR on January 1, 2009. The change in the functional currency of Invitel International Kft was accounted for prospectively from January 1, 2009 as required by IAS 21 and all non-monetary assets and liabilities were adjusted through equity. The functional currency was changed due to the legal separation of Invitel International Kft from Invitel Zrt which occurred in November 2008. The assets and liabilities of operations that are measured in functional currencies other than the EUR are translated into EUR at foreign exchange rates in effect at the balance sheet date. Revenues and expenses of transactions measured in currencies other than the EUR are translated into EUR at rates approximating to the foreign exchange rates in effect at the dates of the transactions. Equity amounts are translated at historical exchange rates. Exchange rate translation differences are reported as a component of equity as cumulative translation reserve. 2.4.2. Transactions and balances Transactions in foreign currencies are translated to the respective functional currencies at the foreign exchange rate in effect at the dates of the transactions. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to the functional currency at the foreign exchange rate in effect at that date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortized cost in foreign currency translated at the exchange rate at the end of the period. Foreign currency differences arising on translation are recognized in the consolidated income statement as net foreign exchange gain / (loss) in financial expenses. Non-monetary assets and liabilities denominated in foreign currencies other than the EUR that are stated at historical cost are translated using the exchange rate at the date of the transaction. 2.5. Cash and Cash Equivalents

Cash and cash equivalents is comprised of cash in bank balances and highly liquid call deposits with original maturities of three months or less and exclude all overdrafts that are shown within borrowings in current liabilities on the face of the consolidated balance sheet. Bank overdrafts that are repayable on demand are included as a component of cash and cash equivalents for the purpose of the consolidated statement of cash flows. 2.6. Financial Assets

Financial assets are classified in the following categories: at fair value through profit or loss, loans and receivables and available for sale. The classification depends on the purpose for which the financial asset was acquired. The classification of financial assets is determined at initial recognition. Financial assets at fair value through profit or loss are financial assets held for trading. These financial assets are acquired for the purpose of selling in short term. Derivatives are also classified as held for trading unless they are designated hedges. Assets in this category are classified as current assets, except for maturities more than twelve months after the balance sheet date, which are classified as non-current assets. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in active markets. They are included in current assets, except for maturities more than twelve months after the balance sheet date, which are classified as non-current assets.

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As of December 31, 2009 and 2008 the Group did not have any financial instruments in the available-for-sale category. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows from that asset. An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. Financial assets and liabilities are offset and the net amount reported in the consolidated balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. 2.7. Trade and Other Receivables

Receivables are recognized initially at fair value, and subsequently thereafter they are measured at amortized cost using the effective interest rate method less accumulated impairment losses. Receivables with a short duration are not discounted. The amounts of any impairment losses are included in operating expenses. Trade receivables and payables from other network operators are offset and the net amount is reported in the consolidated balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and liability simultaneously. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 2.8. Trade and Other Payables Trade and other payables are initially recognized at fair value and subsequently at amortized cost. 2.9. Inventories

Inventories consist of materials to be used in construction and repair of the telephone network. Inventories are carried at the lower of cost and net realizable value. Cost is based on the first-in, first-out principle and includes expenditures incurred in acquiring the inventories and bringing them to their existing condition and location. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. 2.10. Intangible Assets and Goodwill

Intangible assets are stated at cost less accumulated amortization and accumulated impairment losses except for goodwill and intangible assets with an indefinite useful life which are not amortized and are stated at cost less accumulated impairment losses. After initial recognition it is assessed whether an intangible asset has a finite or an indefinite useful life. The cost of intangible assets with a finite useful life is amortized on a straight-line basis over the period in which the asset is expected to be available for use. 2.10.1. Intangible assets with definite useful life

The Group has the following types of intangible assets with definite useful lives which are amortized over the following estimated useful lives: Concession rights............................................................................................................................ Software.......................................................................................................................................... Property rights ................................................................................................................................ Other ............................................................................................................................................... 1 year remaining 3 years 1-43 years 1-16 years

Concession rights represent amounts paid for the right to provide fixed line telecommunications services in certain geographical areas of Hungary (historical concession areas) and were amortized over the 25-year term provided for in the concession contracts signed in 1994 and 1995. As of January 1, 2008, due to the change in customer churn rates, the Group completed a review of the estimated amortization period of concession rights. As a result of this review, the remaining useful

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life of concession rights was reduced from 12 to 3 years. The change of useful life of concession rights qualifies a change in accounting estimate and accordingly is accounted for prospectively from January 1, 2008. Property rights represent amounts paid for the right to use third party property for the placement of telecommunication equipment and the useful lives are determined based on the underlying contracts. Other intangible assets include subscriber acquisition costs, which are sales commissions paid to internal sales force and third parties in relation to fixed term subscriber contracts and brand names that were acquired by the Group. Intangible assets included in assets held-for-sale include the value of contractual customer relationships and the value of the Vodafone contract, which was determined during the acquisition of Memorex by the Group. Contractual customer relationships represent the value of customers of the Group determined during the acquisitions undertaken by Matel. Amortization of intangible assets ceases at the earlier of the date that the asset is classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and the date the asset is derecognized. The amortization periods are reviewed annually at each financial year-end. Any changes arising from such review are accounted for as a change in an accounting estimate. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 2.10.2. Goodwill

All business combinations are accounted for by applying the purchase method. Goodwill arising in a business combination represents the excess of the cost of the acquisition over the fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree after a reassessment of such fair values. Goodwill on acquisition of subsidiaries is included among intangible assets. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the goodwill maybe impaired, in accordance with IAS 36 Impairment of Assets. Goodwill is allocated into cash generating units for the purposes of impairment testing. Cash generating units of the Group are Mass Market Voice In-Concession, Mass Market Voice Out-of-Concession, Mass Market Internet, IPTV, Business Voice In-Concession, Business Voice Out-ofConcession, Business Data and Internet and Domestic Wholesale. 2.11. 2.11.1. Property, Plant and Equipment Owned assets

Items of property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. The cost of self-constructed assets includes the cost of materials, direct labor and an appropriate proportion of overhead, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the cost of dismantling and removing the items and restoring the site on which they are located. Where an item of property, plant and equipment comprises major components having different useful lives, they are accounted for as separate items of property, plant and equipment. Beginning January 1, 2009 borrowing costs directly attributable to the acquisition, construction or production of assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Capital work in progress is stated at cost less accumulated impairment losses and represents property, plant and equipment that have not been completed and capitalized. 2.11.2. Leased assets

Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. An asset acquired by way of a finance lease is measured initially at an amount equal to the lower of its fair value and the present value of the minimum lease payments at inception of the lease. Leased assets are depreciated over the shorter of the lease term or their useful lives unless it is reasonably certain that ownership will be obtained by the end of the lease term. Other leases are operating leases and the leased assets are not recognized on the consolidated balance sheet.

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2.11.3.

Subsequent expenditure on property, plant and equipment

Expenditure incurred to replace a component of an item of property, plant and equipment that is accounted for separately, including major inspection and overhaul expenditure is included in the carrying amount if it is probable that future economic benefits embodied in that expenditure will flow to the International Business and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. All other expenditures are recognized in the consolidated income statement as an expense as incurred. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 2.11.4. Depreciation

Depreciation is charged to the consolidated income statement on a straight-line basis over the estimated useful lives of items of property, plant and equipment, and major components that are accounted for separately. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Land and capital work in progress are not depreciated. The estimated useful lives are as follows: Buildings................................................................................................................................................ Network and equipment......................................................................................................................... Other equipment .................................................................................................................................... 25-50 years 3-25 years 3-7 years

Depreciation of property, plant and equipment ceases at the earlier of the date that the asset is classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and the date the asset is derecognized. Depreciation methods, useful lives and residual values are reviewed annually at each financial year-end. Any changes arising from such review are accounted for as a change in an accounting estimate. 2.12. Impairment

The carrying amounts of the assets, other than inventories and deferred tax assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the assets recoverable amount is estimated. For goodwill and intangible assets with an indefinite useful life or not available for use, the recoverable amount is estimated annually, irrespective of whether any indication of impairment exists. An impairment loss is recognized whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. For an asset that does not generate largely independent cash flows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. A cash-generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups. Impairment losses are recognized in the consolidated income statement. Impairment losses recognized in respect of cashgenerating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. 2.12.1. Calculation of recoverable amount

The recoverable amount of financial assets carried at amortized cost is calculated as the present value of expected future cash flows, discounted at the original effective interest rate inherent in the asset. Receivables with a short duration are not discounted. The recoverable amount of the cash-generating units is the greater of their fair value less costs to sell and value-in-use. In assessing value-in-use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. The estimated value-inuse uses a 12.8% pre-tax discount rate, 0% growth and estimate cash flows until 2015. For assets held for sale, fair value less costs to sell was determined based on other market evidence including multiples implied by comparable companies. 2.12.2. Reversal of impairment

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An impairment loss on non-financial assets other than goodwill is reversed only to the extent that the assets carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 2.13. Non-Current Assets (or Disposal Groups) Held-for-Sale

Non-current assets (or disposal groups) are classified as held-for-sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable. They are stated at the lower of carrying amount and fair value less costs to sell if their carrying amount is to be recovered principally through a sale transaction rather than through continuing use. 2.14. Derivative Financial Instruments

The Group uses derivative financial instruments to manage its exposure to foreign exchange and interest rate risks arising from operational, financing and investing activities. In accordance with its treasury policy, the Group does not hold or issue derivative financial instruments for trading purposes. The derivative financial instruments held by the Group do not qualify for hedge accounting and are therefore designated as fair value through profit and loss. Derivative financial instruments are recognized at fair value. The gains or losses resulting from the changes in fair value of financial instruments are recorded in the consolidated income statement for the period to which they relate. The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the swap counter-parties. The fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price. The fair value of cross currency interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates, foreign exchange rates and the current creditworthiness of the swap counter-parties. Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and the combined instrument is not measured at fair value through profit or loss. Changes in the fair value of separable embedded derivatives are recognized immediately in the consolidated income statement. 2.15. Borrowings

Borrowings are recognized initially at fair value, less discounts and related transaction costs. Subsequent to initial recognition, borrowings are stated at amortized cost with any difference between cost and redemption value being recognized in the consolidated income statement over the period of the borrowings on an effective interest basis. Costs and expenses directly related to raising funds and borrowings or refinancing are deferred and amortized using the effective interest rate method. Deferred borrowing costs are disclosed in the consolidated balance sheet as a reduction of borrowings and current portion of borrowings. 2.16. Provisions

Provisions for restructuring costs and legal claims are recognized in the consolidated balance sheet when the Group has a legal or constructive obligation as a result of past events that can be measured reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the obligation. A provision for restructuring is recognized when a detailed and formal restructuring plan is approved, and the restructuring has either commenced or has been announced publicly. There is no provision for future operating costs or losses.

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Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 2.17. Revenue Recognition

Revenue from all goods and services are shown net of VAT, rebates and discounts. Revenue from services is recognized when services are provided. Revenue from the sale of goods is recognized when the significant risks and rewards of ownership of products sold have been transferred to the buyer. Revenue from connection fees are recognized upon service activation. Revenue from monthly fees charged for accessing the network is recognized in the month during which the customer is permitted to access the network. Traffic revenue is recognized in the period of the related usage. Leased line and data transmission revenue is recognized in the period of usage or of the service available to the customer. Revenue from prepaid call services is deferred when the prepaid package is sold to the customers and is recognized when the calls are made. Revenue from contracts relating to Indefeasible Rights of Use (IRU) comprises installation fees, one-off or up-front fees, monthly fees and maintenance fees. One-off or up-front fees of IRU contracts are deferred over the term of the related contract. Installation fees, monthly fees and maintenance fees are charged periodically as specified in the related contract and the revenue is recognized straight-line over the life of the related contract. Revenue from the sale of ducts and other network equipment is recognized in revenue and the related cost is recognized in cost of sales when significant risk and rewards of ownership has been transferred. Revenues and cost of sales from other network operators for IRU contracts are shown net where a right of set-off exists and the amounts are intended to be settled on a net basis. The Groups main operating revenue categories are as follows: Mass Market Voice. The revenue generated from the fixed line voice and voice-related services provided to massmarket customers in the historical concession areas (Mass Market Voice In) and out of the historical concession areas (Mass Market Voice Out). Mass Market Voice Revenue comprises time based call charges, subject to a minimum monthly fee charged for accessing the network and time based fixed-to-mobile, local, long distance and international call charges, interconnect charges on calls terminated in the Groups network, monthly fees for value added services, subsidies, one-off connection and new service fees, as well as monthly fees for packages with built-in call minutes. Mass Market Voice In revenue also includes access calls to dial-up ISPs networks at local call tariffs and revenue from providing DSL access to other ISPs, but revenue from bundled Internet call and Internet services is recorded under Mass Market Internet. Mass Market Internet. The revenue generated from dial-up and DSL Internet connections provided to mass-market customers nationwide both inside and outside the historical concession areas. Mass Market Internet comprises dial-up revenue, which is generated through a combination of time based and access fees, and DSL revenue, which is generated through a variety of monthly packages. Business. The revenue generated from the fixed line voice, data and Internet services provided to business, government and other institutional customers nationwide. Business revenue comprises access charges, monthly fees, time based fixed-tomobile, local, long distance and international call charges, interconnect charges on calls terminated in the Groups network, monthly fees for value added services, Internet access packages and regular data transmission services. Business revenues include the same components as Mass Market Voice In and Mass Market Internet revenues and include, in addition, revenue from leased line, Internet and data transmission services which is comprised of fixed monthly rental fees based on the capacity/bandwidth of the service and the distance between the endpoints of the customers. Domestic Wholesale. The revenue generated from voice and data services provided on a wholesale basis to a selected number of resellers to use the Groups excess network capacity. Wholesale revenue comprises rental payments for high bandwidth leased line services, which are based on the bandwidth of the service and the distance between the endpoints of the customers, and voice transit charges from other Hungarian and international telecommunications service providers, which are based on the number of minutes transited. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008

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2.18.

Pension Costs and Employee Benefits

Contributions are made to the Hungarian and Romanian pension, health and unemployment schemes at the statutory rates in force during the year, based on gross salary payments. The cost of social security payments is charged to the income statement in the same period when the related salary cost incurred. The Group has no obligation for pension or other post employment benefits beyond the government programs. Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A provision is recognized for the amount expected to be paid under short-term cash bonuses or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. 2.19. Share Capital and Share Based Compensation

Incremental costs directly attributable to issue of ordinary shares and share options are recognized as a deduction from equity. When share capital recognized as equity is repurchased, the amount of the consideration paid, including directly attributable costs, is recognized as a deduction from equity. Repurchased shares are classified as treasury shares and are presented as a deduction from total equity until cancelled. HTCC had three equity compensation plans: the stock option plan that was adopted by the Board of Directors in April 1992 (the 2002 Plan); the Non-Employee Director Stock Option Plan (the Directors Plan) which was established by the Board of Directors in 1997; and the 2004 Long-Term Incentive Plan (the 2004 Plan) which was approved by the stockholders in 2004. After the acquisition of the Group by HTCC on April 27, 2007 expenses and income relating to such stock option plans for the employees of the Group are pushed down to the Group. The Group established that such stock option awards are cashsettled awards and as such are recorded among other non-current liabilities (assets) in the consolidated balance sheet and revalued to fair value at each period end. Compensation expense relating to stock option grants and the mark to market revaluation of outstanding stock options is recorded in operating expense. When Invitel Holdings A/S took over as the parent company of the Group from HTCC, the outstanding equity commitments under the existing HTCC Option Plans were assumed by Invitel A/S and set out in Invitel Holdings A/Ss Articles of Association. The warrants from that time on are governed by the Articles of Association of Invitel holdings A/S and relate to the shares of Invitel Holdings A/S. 2.20. Financial Income and Expenses

Financial income includes dividend income, foreign exchange gains, interest income on funds invested and gains resulting from the changes in the fair values of derivative financial instruments. Interest income is recognized in the consolidated income statement as it accrues, taking into account the effective yield on the asset. Dividend income is recognized in the income statement on the date that the Groups right to receive payment is established, which in the case of quoted securities is the ex-dividend date. Financial expenses comprise of interest expense on borrowings, foreign exchange losses, losses resulting from the changes in the fair values of derivative financial instruments and impairment losses on financial investments. Beginning January 1, 2009, interest expense on borrowings directly attributable to the acquisition, construction or production of assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. All other borrowing costs are recognized in the consolidated income statement in the period in which they incur. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 2.21. Leases

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Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made in respect of operating leases are charged to the consolidated income statement on a straight-line basis over the lease term and included in operating expenses. The Group leases certain property, plant and equipment. Leases of property, plant and equipment, where the Group has substantially all the risks and rewards of ownership, are classified as finance leases. Finance leases are capitalized at the lesees commencement at the lower of the fair value of the leased property and the present value of future minimum lease payments. Lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding lease liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. 2.22. Current and deferred income taxes

Income tax expense is comprised of current and deferred taxes. Income tax expense is recognized in the consolidated income statement except to the extent that it relates to items recognized directly in equity, in which case it is recognized in other comprehensive income. Current tax is the expected tax payable on taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date in the countries where the Groups enterprises operate and generate income and any adjustment to tax payable in respect of previous years. Management periodically evaluates positions taken in tax returns with respect to situations in which the applicable tax regulations are subject to interpretations. It establishes provisions where amounts are expected to be paid to the tax authorities. These provisions are classified as other payables in the consolidated balance sheet. Deferred tax is provided for using the liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using the appropriate tax rate enacted or substantively enacted at the balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention or permissibility by tax authority to settle balances on a net basis. Deferred tax assets are recognized only to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. Deferred tax assets are reviewed at each reporting date and reduced to the extent that it is no longer probable that the related tax benefit will be realized. 2.23. Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segment, has been identified as the chief executive officer. The Group has four operating segments that are identified in the accounting policy relating to revenue (see accounting policy note 2.17 on revenue recognition). Allocation of revenues and cost of sales and other segment information into operating segments is based on management information collected in the information systems. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 2.24. Critical accounting estimates and judgements

The management of the Group makes estimates and assumptions concerning the future. The estimates and assumptions that have a significant risk of affecting the carrying amounts of assets and liabilities in the consolidated financial statements are described below.

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2.24.1.

Deferred tax assets

The Group recognizes deferred tax assets in its consolidated balance sheet relating to tax loss carry forwards. The recognition of such deferred tax assets is subject to the utilization of tax loss carry forwards. The utilization of certain amounts of such tax loss carry forwards is subject to statutory limitations and is dependent on the amount of future taxable income of the Group companies. The Group has recognized deferred tax assets relating to tax loss carry forwards based on estimated future taxable income according to approved business plans. If the future taxable income were to significantly differ from the amounts that were estimated, such differences could impact the amount of deferred tax assets and income tax expense of the Group. 2.24.2. Impairment provision for doubtful accounts

The Group maintains an impairment provision for doubtful accounts for estimated losses resulting from customers or carriers failure to make payments on amounts due. These estimates are based on a number of factors including: 1) historical experience; 2) aging of trade accounts receivable; 3) amounts disputed and the nature of the dispute; 4) bankruptcy; 5) general economic, industry or business information; and 6) specific information that we obtain on the financial condition and current credit worthiness of customers or carriers. The estimates used in evaluating the adequacy of the impairment provision for doubtful accounts receivable are based on the aging of the accounts receivable balances and historical write-off experience, customer credit-worthiness, payment defaults and changes in customer payment terms. The accounting estimate related to the impairment provision for doubtful accounts receivable is a critical accounting estimate since it involves assumptions about future customer behavior and the resulting future cash collections. 2.24.3. Depreciation and amortization

Property, plant and equipment and intangible assets are recorded at cost and are depreciated or amortized on a straightline basis over their estimated useful lives. The determination of the useful lives of assets is based on historical experience with similar assets as well as any anticipated technology evolution and changes in broad economic or industry factors. The appropriateness of the estimated useful lives is reviewed annually. The accounting estimate related to the determination of the useful lives of assets is a critical accounting estimate since it involves assumptions about technology evolutions in an innovative industry. Further, due to the significant weight of long-lived assets in the asset base, the impact of any changes in these assumptions could be material to the consolidated financial statements. 2.24.4. Impairment of property, plant and equipment, intangible assets, goodwill and assets held-for-sale

The Group tests annually whether property, plant and equipment, intangible assets and goodwill have suffered any impairment in accordance with the accounting policy stated in note 2.12. The recoverable amounts of cash generating units have been determined based on value-in-use and evaluations, which consider a number of factors, including, future cash flows, technological obsolescence and discontinuation of services and other market evidence. The recoverable amounts of assets and liabilities held-for-sale are based on other market evidence including multiples implied by comparable companies. The classification of the International Business as held-for-sale and discontinued operations was based on managements conclusion that the sale is highly probable as of December 31, 2009. Managements conclusion was based on facts known as of December 31, 2009 and through the issuance date of the consolidated financial statements. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 2.24.5. Fair value of derivative financial instruments

Derivative financial instruments are not traded on active markets, thus, the fair value of such instruments is determined by using valuation techniques. The Group uses its judgment to select a variety of methods and make assumptions that are based on market conditions at each balance sheet date. A sensitivity analysis of derivative financial instruments is included in note 20. 2.24.6. Transactions with entities under common control

Business combinations arising from transfers of interests in entities that are under the common control of the shareholders that control the Group are accounted for by using predecessor accounting, at the date that the common control was established. The assets and liabilities are recorded at book values by the acquiree. The components of equity of the acquired entities are added to the same components within Group equity except that any share capital of the acquired entities

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is recognized as part of reserves. The difference between the consideration given and the aggregate book value of the assets and liabilities of the acquired entity as of the date of the transaction is recorded as an adjustment to equity. No additional goodwill is created by these transactions. 3. Acquisitions

On March 5, 2008 Invitel Zrt acquired 95.7% of the outstanding equity in Austrian-based Memorex Telex Communication AG (Memorex). The preliminary purchase consideration for Memorex was EUR 30.1 million plus the assumption of debt and transaction costs and other directly related expenses. From the preliminary purchase price EUR 17.9 million was paid in cash and the remaining EUR 12.2 million was paid into escrow. Invitel and the selling shareholders of Memorex entered into an Escrow Agreement to set aside a portion of the purchase price cash consideration to cover any breach of the selling shareholders warranties or covenants and to cover any indemnity claims that we might have against the selling shareholders under the purchase agreement. The Escrow Agreement governed the terms and conditions under which the Escrow Amount is released to the selling shareholders of Memorex. Following negotiations, a Settlement Agreement was reached with the selling shareholders pursuant to which the Escrow Agent was directed to return EUR 11.2 million to Invitel and the remaining EUR 0.9 million was paid out to the selling shareholders. On August 28, 2008 Invitel acquired the remaining 4.3% of Memorex from the minority shareholders, which resulted in 100% ownership of the equity in Memorex. The final purchase price for the Memorex minority interest was EUR 1.9 million. The Group refinanced a significant portion of Memorexs debt at closing. The acquisition of Memorex and the refinancing of the Memorex debt was funded with a subordinated bridge loan facility, which was paid off as part of a refinancing completed on March 4, 2009. The following represents the allocation of the purchase price paid for Memorex based on the estimated fair values and carrying values of the acquired assets and liabilities assumed:
Fair value Carrying Value At 5 March 2008 (in thousands of EUR)

Current assets................................................................................................................... Property, plant and equipment ......................................................................................... Intangible assets............................................................................................................... Current and non-current liabilities, net ............................................................................ Long term debt assumed .................................................................................................. Net assets acquired ........................................................................................................ Cash paid to shareholders ................................................................................................ Cash paid for minority equity stake ................................................................................. Transaction costs and other directly related expenses ..................................................... Total purchase price ...................................................................................................... Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008

16,589 86,374 41,147 (46,262) (75,862) 21,986 18,803 802 2,381 21,986

17,002 114,477 31,093 (73,703) (75,861) 13,008

The following table presents the fair values of major components of the intangible assets acquired:
At 5 March 2008 (in thousands of EUR)

Concession rights and licences ................................................................................................ Customer relationships ............................................................................................................ Trademark................................................................................................................................ Property rights .........................................................................................................................

166 13,479 95 19,331

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At 5 March 2008 (in thousands of EUR)

Software................................................................................................................................... Vodafone contract.................................................................................................................... Total Intangible Assets ..........................................................................................................

118 7,958 41,147

A severance provision of EUR 1,263 thousand was recorded in restructuring expenses relating to the planned reorganization of Memorex after the acquisition. The reorganization mostly related to the former senior management of Memorex. All severance was paid as of December 31, 2008. The closing of the acquisition of Memorex took place on March 5, 2008 and the results of Memorex are included in these consolidated financial statements from that date. The following table presents unaudited condensed consolidated financial information, on a pro-forma basis, as though the acquisition of Memorex had occurred at the beginning of the year:
For the year ended 31 December 2008 (unaudited) (in thousands of EUR)

Revenue ..................................................................................................................... Income from operations ............................................................................................. Foreign exchange gains (losses), net ......................................................................... Interest expense ......................................................................................................... Net income (loss).......................................................................................................

386,647 60,793 (17,531) (62,782) (25,637)

During December of 2009, the Board of Directors and management of the Group announced that they were committed to a plan to sell Invitel International AG and its subsidiaries along with Invitel International Kft and Euroweb Romania (the International Business) in 2010. As such, Invitel International AG and its subsidiaries have been reclassified to assets held for sale as of December 18, 2009 (see note 4 for further discussion). 4. Assets Classified as Held-for-Sale and Discontinued Operations

The assets and liabilities related to the International Business of the Group have been presented as held-for-sale following the approval of the plan by the Groups Board of Directors on December 18, 2009 to sell the International Business. The completion date of the transaction is expected by June 2010. The International Business was previously included in the wholesale operating segment of the Group. The following table presents cash flows of discontinued operations:
For the year ended 31 December 2009 2008 (in thousands of EUR)

Operating cash flows ................................................................................................. Investing cash flows .................................................................................................. Financing cash flows ................................................................................................. Total Cash Flows from Discontinued Operations ................................................. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 The following summarizes the results of discontinued operations:

37,802 (21,116) (7,946) 8,740

17,826 (54,354) 41,687 5,159

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For the year ended 31 December 2009 2008 (in thousands of EUR)

Revenue ..................................................................................................................... Expenses .................................................................................................................... Profit before tax of discontinued operations .............................................................. Income tax (expense) / benefit................................................................................... Income / (Loss) from Discontinued Operations..................................................... The following table presents the assets of disposal group classified for as held-for-sale:

117,468 (88,894) 28,574 (2,784) 25,790

113,579 (101,006) 12,573 (4,867) 7,706

At 31 December 2009 (in thousands of EUR)

Property, plant and equipment ................................................................................................. Intangible assets....................................................................................................................... Cash and cash equivalents ....................................................................................................... Trade and other receivables ..................................................................................................... Other current assets.................................................................................................................. Total Assets of Disposal Group Classified as Held-For-Sale.............................................. The following table presents the liabilities of disposal group classified for as held-for-sale:

128,780 57,710 15,397 25,087 7,120 234,094

At 31 December 2009 (in thousands of EUR)

Borrowings .............................................................................................................................. Other non-current liabilities..................................................................................................... Trade and other payables ......................................................................................................... Deferred income ...................................................................................................................... Other current liabilities ............................................................................................................ Total Liabilities of Disposal Group Classified as Held-For-Sale ....................................... 4.1. Borrowings of the disposal group

18,748 8,782 24,579 28,207 12,656 92,972

Yappi Loan The Yappi Loan is a bank loan with a current variable interest rate that is adjusted quarterly and presently equal to EURIBOR plus 2.0%. The current interest rate is 3.08%. The lender may unilaterally alter or increase the rate of interest as permitted by applicable law. The Yappi Loan amortizes monthly and matures, with the principal to be repaid in full, in November 2013. The lender may, in at discretion, require early repayment upon three days written notice. Invitel International Turkey may prepay the loan in whole or in part on three days written notice. The Yappi Loan is collateralized by certain of Invitel International Turkeys trade receivables and guaranteed by Invitel International AG. The Yappi Loan also contains certain covenants including a change of control provision triggered by a change in the ownership of the International Business. 1st Preps Loan The 1st Preps Loan is an un-collateralized subordinated loan from a syndicated group of lenders. Invitel International AG has to make an annual interest payment at the rate of 0.75% per annum and a quarterly interest payment at the rate of 6.8% per annum. The 1st Preps Loan matures, with the principal to be repaid in full, in August 2012. The creditor or Invitel International AG may require early termination of the loan upon important reasons. Important reasons that would enable the creditor to terminate the loan agreement and require early repayment include, but are not limited to, certain events such as the liquidation of Invitel International AG, the institution of insolvency proceedings or a change-in-control of Invitel

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International AG under certain circumstances. If the loan is terminated prior to maturity, Invitel International AG would owe, in addition to the unpaid principal and accrued interest, the residual term interest consisting of the interest that would have been payable up to the original maturity date of the loan. Invitel International AG would receive a credit against such residual interest for the hypothetical amount which the loan principal would earn if it was reinvested in bonds issued by the Republic of Austria with a residual term equal to the time remaining to the original maturity date of the loan. The 1st Preps Loan also contains certain covenants including changing the ownership of the International Business. 2nd Preps Loan The 2nd Preps Loan is an un-collateralized subordinated loan from a syndicated group of lenders. Invitel International AG has to make an annual interest payment at the rate of 1.0% per annum and a quarterly interest payment at the rate of 6.9% per annum. The 2nd Preps Loan matures, with the principal to be repaid in full, in December 2012. The creditor or Invitel International AG may require early termination of the loan upon important reasons. Important reasons that would enable the creditor to terminate the loan agreement and require early repayment include, but are not limited to, certain events such as the liquidation of Invitel International AG, the institution of insolvency proceedings or a change-in-control of Invitel International AG under certain circumstances. If the loan is terminated prior to maturity, Invitel International AG would owe, in addition to the unpaid principal and accrued interest, the residual term interest consisting of the interest that would have been payable up to the original maturity date of the loan. Invitel International AG would receive a credit against such residual interest for the hypothetical amount which the loan principal would earn if it was reinvested in bonds issued by the Republic of Austria with a residual term equal to the time remaining to the original maturity date of the loan. The 2nd Preps Loan also contains certain covenants including changing the ownership of the International Business. 4.2. Contingent liabilities of the disposal group

Employment Litigation In June 2009, a former employee of Invitel International AG (Employment Plaintiff) initiated legal proceedings against Invitel International AG seeking EUR 363,000 plus VAT and 4% accrued interest since 2001. Employment Plaintiff claims that he entered into an agreement in 2001 with Invitel International AG to receive EUR 363,000 plus VAT for his services. Employment Plaintiff entered into a written waiver agreement in 2003 with Invitel International AG to waive the payment of such amounts. Employment Plaintiff is now claiming that he entered into the waiver agreement under false pretences. Invitel International AG has denied the claim and asserts that the legal time to pursue such claim has expired. The legal proceedings are ongoing and the next court hearing is scheduled for May 2010. Invitel International AG has not accrued any amount as a legal provision. While the timing and outcome of the legal proceedings cannot be ascertained with any certainty, the International Business believes that it will not incur any obligations as a result of these legal proceedings. Consulting Litigation An individual (Consulting Plaintiff) initiated legal proceedings in 2006 in Austria against Invitel International AG seeking approximately EUR 1.6 million in fees, plus 9.47% interest per annum accruing from January 1, 2006, from a consulting agreement entered into in 2000. Invitel International AG has accrued a EUR 2,332 thousand and EUR 2,071 thousand provision in connection with this matter at December 31, 2009 and 2008, respectively. In March 2010, the Austrian court ruled in favor of the Consulting Plaintiff. Invitel Zrt provided a loan to Invitel International AG in the amount of EUR 2.3 million which was used to pay the amounts due to the Consulting Plaintiff in March 2010. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 Maintenance Contract Litigation Invitel International AG entered into a maintenance contract in 2000 with a third party and this contract was suspended in 2001. A former executive officer of Invitel International AG (Maintenance Plaintiff) acquired the third partys rights under such maintenance contract and is claiming that the suspension of the maintenance contract was supposed to be temporary and the economic reasons for such suspension no longer exist. Therefore, Maintenance Plaintiff initiated litigation seeking approximately EUR 33,000. Invitel International AG contends that the maintenance contract was indefinitely suspended, and, therefore, effectively terminated. The court ruled in Invitel International AGs favor and dismissed the litigation. In May 2008 Maintenance Plaintiff filed a legal action to reopen those proceeding. In September 2008 the Maintenance Plaintiff initiated additional legal proceedings seeking an additional EUR 41,000 under the maintenance contract. This second case was suspended pending the outcome of the legal proceedings to reopen the initial legal case. In

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November 2009 Maintenance Plaintiff initiated a third set of legal proceedings related to the maintenance contract seeking an additional EUR 41,000. The first court hearing is scheduled for May 2010. The total amount that Maintenance Plaintiff could seek damages for is approximately EUR 463,000. Invitel International AG has not accrued any amount as a legal provision. While the timing and outcome of the various legal proceedings cannot be ascertained with any certainty, the International Business believes that it will not incur obligations as a result of these legal proceedings. Austrian Criminal Investigation The Austrian tax authorities notified Invitel International AG that the Austrian prosecutor was investigating criminal activity by certain third parties and by the prior management of Invitel International AG (prior to acquisition by the Parent Company). Under Austrian law, companies can be liable for the criminal acts of its management, which can lead to a fine with no maximum limit. Invitel International AG had a meeting with the state prosecutor currently responsible for the case. He informally stated that he does not intend to initiate criminal investigations against Invitel International AG, and only intends to do so against the former managers. Invitel International AG committed to provide all support to the state prosecutor in relation to the ongoing criminal investigation. Since then, Invitel International AG conducted detailed background searches, provided support for the investigation and submitted three criminal fact reports (Sachverhaltsdarstellungen) to the state prosecutor. Therefore, the International Business has not accrued any amount as a legal provision. Invitel Turkey Legal Case On March 10, 2008, Invitel International Turkey damaged the fiber cables of Turkish Telecommunication A.S. while conducting routine excavation. Turkish Telecommunication A.S. initiated a lawsuit against Invitel International Turkey for recovery of damages in the amount of TL 1,017,729.49 (approximately EUR 422 thousand). In the course of the litigation, the court ordered several expert reports for the calculation of losses, and in accordance with these expert reports, on January 13, 2010, the court rendered its decision wherein it only partially accepted the amount requested by Turkish Telecommunication A.S., instead declaring that TL 2,611 (approximately EUR 6 thousand) shall be paid by Invitel International Turkey. The detailed judgment has been issued and served on the parties. Turkish Telecommunication A.S. appealed the decision and Invitel International Turkey was served the appeal petition on March 29, 2010. The petition states that Turkish Telecommunication A.S.s loss is TL 1,013,702 as the interruption in business was twenty minutes rather than one second on the grounds that manually protected lines and non-protected does not repair themselves automatically. Invitel International Turkey is required to submit a reply to Turkish Telecommunication A.S. petition by April 8, 2010. Invitel International AG has not accrued any amount as a legal provision. Potential Board Litigation A former supervisory board member of Invitel International AG is claiming compensation of approximately EUR 387,000 in connection with a 2005 consulting agreement. Invitel International AG has rejected the claim and believes that the former supervisory board member may be liable for damages relating to such consulting agreement. While Invitel International AG believes that it will prevail in this matter, Invitel International AG has accrued a EUR 387,000 provision in connection with this matter as at December 31, 2009 and 2008. While the initiation, timing and outcome of any negotiations or legal proceedings cannot be ascertained with any certainty, the International Business believes that the amount provided for will be sufficient to cover amounts payable by Invitel International AG in connection with this matter. Additional Potential Board Litigation Invitel International AG entered into a 2008 agreement with a former board member to terminate his employment. The termination agreement provided for a series of payments by Invitel International AG. Invitel International AG had withheld approximately EUR 110,000. Invitel International AGs asserts that the former board member failed to perform his obligations under the termination agreement and has demanded that the former board member repay to Invitel International AG all amounts paid by Invitel International AG to the former board member to date and additional damage amounts. The former board member has threatened to initiate legal proceedings to collect the remaining unpaid amount (approximately EUR 110,000) under the consulting agreement. The International Business has not accrued any amount as a legal provision. While the initiation, timing and outcome of any negotiations or legal proceedings cannot be ascertained with any certainty, the International Business believes that it will not incur any obligations in connection with this matter. 4.3. Uncertain tax positions of the disposal group

Austrian Capital Contribution Tax Litigation In 2004, the capital of Invitel International AG was increased to EUR 36.4 million. The Austrian tax authority assessed capital contribution tax amounting to EUR 360 thousand. Invitel International AG issued an appeal with the tax authority that

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was not accepted. Subsequently, Invitel International AG has issued a second appeal and made adjustments to its appeals. The tax authority has not yet issued an assessment concerning the second appeal. EUR 360 thousand is provided for in Invitel International AG for the resolution on this matter. Austria Tax Litigation Invitel International AG filed two appeals with the Austrian Administrative Court challenging decisions of the Austrian Appellate Tax Court pursuant to which Austrian stamp duties in the amount of approximately EUR 230,000 were levied upon Invitel International AG in connection with certain agreements for the use of Invitel International AGs network by third parties. Invitel International AGs position is that such agreements should not be treated as lease agreements subject to stamp duties. Invitel International AG has already paid the stamp duties subject to these two legal proceedings. In addition to seeking a refund of such payments, Invitel International AG is seeking to overturn the potential precedent setting nature of the application of such stamp duties. If the Austrian Administrative Court were to allow the levying of stamp duties in such cases, Invitel International AGs other contracts with respect to the use of its network may also be subject to such stamp duties. Invitel International AG has not accrued any amount as a possible legal provision. At this point, the timing and outcome of Invitel International AGs appeals can not be predicted with any certainty. Austrian Capital Contribution Tax Contribution of equity by a direct shareholder to an Austrian corporate entity is subject to 1% Capital Contribution Tax (CCT). In 2004, the capital of Invitel International AG was increased by EUR 36.4 million and the tax authority assessed CCT amounting EUR 360 thousand. Invitel International AG issued an appeal and the tax authority did not accept the appeal. Invitel International AG issued a second appeal and made adjustments to the appeals submitted. The tax authority has not to this date issued an assessment concerning the second appeal and adjustment. A tax risk amounting EUR 360 thousand still exists and is provided for in Invitel International AGs for the resolution of this matter. Turkey Stamp Tax A framework agreement (Agreement) has been signed between a customer and Invitel International Turkey in 2007. No value has been specified on the contract and the value in the purchase orders can be considered as the contract value. Stamp tax may be payable under the Agreement, which however, requires the customer to pay any applicable stamp tax. Although the Agreement stipulates that the customer shall pay any stamp tax which may be payable with respect to the Agreement, under applicable Turkish law, the Turkish tax authorities could hold Invitel International Turkey and the customer jointly liable for any stamp tax under the Agreement if such taxes were not paid by the customer. In case the respective stamp tax was not paid by the customer and the Turkish tax authorities would claim payment of the stamp duty, Invitel International Turkey can seek compensation from the customer based on the terms of the Agreement. 4.4. Commitments of the disposal group

Governmental performance guarantees Yapi Kredi Bank issued a number of letters of guarantee at the instruction of Invitel International Turkey in favor of several governmental authorities. Upon a draw-down of any of these letters of guarantee by any beneficiary, Invitel International Turkey will be required to indemnify Yapi Kredi Bank up to the amount, which equals to the amount of the respective letter of guarantee drawn-down. Vodafone performance guarantee Invitel International AG provided Vodafone with a letter of comfort dated August 28, 2007, guaranteeing Invitel International Turkeys performance under the Vodafone until the earlier of the fulfillment of Invitel International Turkeys obligations there under by Invitel International Turkey itself or by Invitel International AG. The letter of comfort is governed by Turkish law and is subject to the exclusive jurisdiction of the Istanbul Central Courts and Execution Offices, as in the Vodafone. 4.5. Finance leases of the disposal group

Raiffeisen Leases Invitel International AG has three leases with Raiffeisen-IMPULS-Delta Mobilienleasing GmbH (Raiffeisen) pursuant to which Invitel International AG leases network equipment. The first lease dated March 1, 2005 provided for monthly lease payments of EUR 7,000 with acquisition costs of EUR 516,000. The second lease dated March 1, 2005 provided for monthly lease payments of EUR 27,000 with acquisition costs of EUR 1.9 million. The third lease dated August 1, 2005 provided for

278

monthly lease payments of EUR 79,000 with acquisition costs of EUR 5.7 million. In February 2010, Invitel International AG prepaid the leasing fees for the remaining period of the lease and purchased all the equipment of the three finance leases for EUR 546 thousand and the leases were terminated. Deutsche Leasing AG Lease In 2006 Invitel International AG entered into a finance lease agreement with Deutsche Leasing AG which provided for annual payments of EUR 502 thousand for equipment with a value of EUR 3.1 million. In February 2010, Invitel International AG terminated and prepaid the remaining leasing fees for the lease agreement and purchased the equipment for a total of EUR 643 thousand. Miller Leasing Leases In 2007 Invitel International AG entered into finance lease agreements with Miller Leasing Miete GmbH (Miller Leasing) which provided for monthly payments of EUR 85 thousand for installation materials and equipment with a value of EUR 3.7 million. In March 2010, Invitel International AG terminated and prepaid the leasing fees for the agreements and purchased the equipment for a total of EUR 1,208 thousand. Key Equipment Leases In 2005 Invitel International AG entered into a finance lease agreement with Key Equipment Finance International, Inc. (Key Equipment) which provided for annual payments of EUR 577 thousand for equipment with a value of EUR 2.7 million. The lease expired in November 2009. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 CHG-Meridian Leases Invitel International AG entered into a master lease agreement dated as of October 28, 2005 with CHG-MERIDIAN Computer Leasing Austria GmbH (CHG-MERIDIAN) pursuant to which Invitel International AG lease technical equipment from CHG-MERIDIAN pursuant to separate lease certificates dated December 1, 2005 and July 1, 2006. The lease certificates provide for minimum rental periods of 48 months each. In November 2009, Invitel International AG terminated all the leases. Invitel International AG paid EUR 1.7 million to CHG-MERIDIAN to reimburse CHG-MERIDIAN for lost VAT deductions in September 2007. The payments were conditioned on the obligation for CHG-MERIDIAN to return any portion of such payments if the tax authorities refunded any portion of the EUR 1.7 million to CHG-MERIDIAN. The tax authority did reimburse CHG-MERIDIAN in the amount of EUR 1.7 million and Invitel International AG has requested a reimbursement of such funds. CHG-MERIDIAN and Invitel International AG have agreed to a set-off of the VAT refund and the financial lease liability. The formal agreement has been signed by the end of March 2010. 5. Revenue
For the year ended 31 December 2009 2008 (in thousands of EUR)

Mass Market Voice.................................................................................................... Mass Market Internet ................................................................................................. Business ..................................................................................................................... Wholesale .................................................................................................................. Total Revenue........................................................................................................... 6. Cost of Sales

77,045 32,868 79,003 21,074 209,990

107,626 37,574 94,862 25,875 265,937

For the year ended 31 December 2009 2008 (in thousands of EUR)

279

For the year ended 31 December 2009 2008 (in thousands of EUR)

Sales commissions ..................................................................................................... Interconnect expenses ................................................................................................ Access type charges................................................................................................... Other cost of sales...................................................................................................... Network operating expenses ...................................................................................... Direct personnel expenses ......................................................................................... Total Cost of Sales, exclusive of Depreciation .......................................................

(2,391) (19,143) (11,131) (5,963) (19,593) (10,904) (69,125)

(2,482) (36,137) (16,070) (3,853) (19,924) (12,415) (90,881)

Network operating expenses include the maintenance costs of the telecommunication infrastructure of the Group and its network related license and rental fees. Such license and rental fees amounted to EUR 3,480 thousand and EUR 5,456 thousand for the years ended December 31, 2009 and 2008. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 7. Operating Expenses
For the year ended 31 December 2009 2008 (in thousands of EUR)

Indirect personnel expenses ....................................................................................... Headcount-related costs............................................................................................. Advertising and marketing costs................................................................................ IT costs ...................................................................................................................... Local operating and other taxes ................................................................................. Bad debt expense ....................................................................................................... Collection costs.......................................................................................................... Legal and audit fees ................................................................................................... Consultant expenses................................................................................................... Management fee......................................................................................................... Other cost, net............................................................................................................ Less: Capitalised costs ............................................................................................... Total Operating Expenses .......................................................................................

(17,166) (8,751) (2,804) (4,905) (2,087) (1,779) (641) (86) (5,109) (132) (878) (44,338) 3,797 (40,541)

(20,944) (10,461) (4,751) (7,650) (1,473) (1,614) (2,059) (71) (3,666) (107) (3,159) (55,955) 3,977 (51,978)

Consultant expenses for the year ended December 31, 2009 include legal costs incurred in relation to the municipality tax case amounting to EUR 450 thousand and expenses relating to the redomiciliation of the Group in the amount of EUR 2,993 thousand. Consultant expenses for the year ended December 31, 2008 include one-off expenses relating to the redomiciliation of the Group in the amount of EUR 615 thousand and due diligence expenses related to the acquisition of Memorex. Management fees relate to costs charged by the trustee of Matel. Other cost, net for the year ended December 31, 2009 include compliance expenses relating to the Groups US listing amounting to EUR 221 thousand as well as other project related costs of EUR 1,088 thousand and an expense relating to the mark-to-market revaluation of warrants in the amount of EUR 20 thousand. Other cost, net for the year ended December 31, 2008 include compliance expenses relating to the Groups US listing in the amount of EUR 996 thousand and expenses relating to ongoing projects of EUR 4,812 thousand offset by a gain on the mark-to-market revaluation of warrants in the amount of EUR 2,690 thousand.

280

Capitalized costs include labor and overhead expenses associated with the project of the construction of property, plant and equipment of the Group. 8. Indirect Personnel Expenses
For the year ended 31 December 2009 2008 (in thousands of EUR)

Salaries....................................................................................................................... Social security and other contributions...................................................................... Personnel related expenses ........................................................................................ Bonuses and charges.................................................................................................. Total Indirect Personnel Expenses .........................................................................

(9,527) (3,164) (3,166) (1,309) (17,166)

(11,182) (3,974) (3,607) (2,181) (20,944)

The number of employees of the Group was 1,142 and 1,236 as of December 31, 2009 and 2008, respectively. Indirect personnel related expenses include expatriate cost of EUR 1,495 thousand and EUR 1,429 thousand for the years ended December 31, 2009 and 2008, respectively. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 9. Depreciation and Amortization
For the year ended 31 December 2009 2008 (in thousands of EUR)

Amortization .............................................................................................................. Depreciation............................................................................................................... Impairment loss ......................................................................................................... Total Depreciation and Amortization ....................................................................

(14,179) (39,962) (694) (54,835)

(16,116) (47,272) (6,344) (69,732)

The impairment loss of EUR 694 thousand for the year ended December 31, 2009 mainly related to impairments accounted for in relation to buildings of EUR 288 thousand, public pay phones in the amount of EUR 153 thousand and for various small other projects in the amount of EUR 253 thousand. The impairment loss of EUR 6,344 thousand for the year ended December 31, 2008 mainly related to the impairment of a billing system as a result of the project being discontinued in the amount of EUR 5,331 thousand and the impairment of network buildings in the amount of EUR 796 thousand. 10. Cost of Restructuring
For the year ended 31 December 2009 2008 (in thousands of EUR)

Severance................................................................................................................... Cost of reorganization................................................................................................ Total Cost of Restructuring ....................................................................................

(1,474) (647) (2,121)

(3,904) (4,170) (8,074)

Severance expenses for the year ended December 31, 2009 mainly related to headcount reduction in Invitel Zrt. The cost of reorganization for the year ended December 31, 2009 mainly related to the cost of site migrations and billing system consolidations at Invitel Zrt. The cost of reorganization for the year ended December 31, 2008 represents reorganization and

281

restructuring expenses mainly related to the integration after the Hungarotel and Pantel merger into Invitel Zrt. Severance expenses for the year ended December 31, 2008 related to the termination of employees in Invitel Zrt, ITC and Invitel Telecom. 11. Financial Income and Expenses
For the year ended 31 December 2009 2008 (in thousands of EUR)

Interest income........................................................................................................... Fair value change of derivative financial instruments ............................................... Financial Income...................................................................................................... Related party interest expense.......................................................................... Third party interest expense ............................................................................. Amortization of bond discount......................................................................... Amortization of deferred borrowing costs ....................................................... Other interest expense ...................................................................................... Interest expense ......................................................................................................... Net foreign exchange gain (loss) ............................................................................... Fair value change of derivative financial instruments ............................................... Other financial expense ............................................................................................. Financial Expense .................................................................................................... Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 All interest income in 2009 and 2008 relates to cash and cash equivalents.

941 892 1,833 (10,667) (39,267) (866) (4,203) (629) (55,632) (15,651) (18,294) (106) (89,683)

912 17,433 18,345 (1,977) (47,077) (234) (5,885) (6,471) (61,644) (14,403) (16,249) (92,296)

The unrealized loss on the fair value change of derivative financial instruments amounted to EUR 5,587 thousand for the year ended December 31, 2009 and the unrealized gain on the fair value change of derivative financial instruments amounted to EUR 17,372 thousand for the year ended December 31, 2008. 12. Intangible Assets Movements during the period in the intangible assets of the Group were as follows:
Concession Rights and Licenses Property Rights Total Intangible Assets

Software

Goodwill

Other

( in thousands of EUR )

Cost as at 1 January 2008..................................... Acquisition of subsidiaries...................................... Additions during the year ....................................... Reclassification....................................................... Disposals during the year........................................ Effect of exchange rates.......................................... Cost as at 31 December 2008................................ Accumulated amortization as at 1 January 2008 .... Amortization charge for the year ............................ Impairment for the year .......................................... Disposals during the year........................................ Reclassification.......................................................

2,816 166 (90) 2,892 (155) (916)

48,074 118 5,330 799 (4) (2,396) 51,921 (40,402) (5,472) 2 (221)

55,665 19,331 8,723 1,606 (5,338) (2,812) 77,175 (15,919) (5,131) (427) 940 (525)

25,696 (1,004) 24,692

17,343 21,532 6,849 (963) (1,080) 43,681 (8,663) (9,150) 374

149,594 41,147 20,902 1,442 (5,342) (7,382) 200,361 (65,139) (20,669) (427) 942 (372)

282

Concession Rights and Licenses

Software

Property Rights

Goodwill

Other

Total Intangible Assets

( in thousands of EUR )

Effect of exchange rates.......................................... Accumulated amortization as at 31 December 2008 ................................................................... Carrying value as at 1 January 2008................... Carrying value as at 31 December 2008.............. Cost as at 1 January 2009..................................... Additions during the year ....................................... Disposals during the year........................................ Effect of exchange rates.......................................... Netting of IRU ........................................................ Reclassified as asset held-for-sale .......................... Cost as at 31 December 2009................................ Accumulated amortization as at 1 January 2009 ................................................................... Amortization charge for the year ............................ Impairment for the year .......................................... Disposals during the year........................................ Effect of exchange rates.......................................... Netting of IRU ........................................................ Reclassified as asset held-for-sale .......................... Accumulated amortization as at 31 December 2009 ................................................................... Carrying value as at 1 January 2009................... Carrying value as at 31 December 2009..............

53 (1,018) 2,661 1,874 2,892 (2) (47) (177) 2,666 (1,018) (822) 2 (13) 47 (1,804) 1,874 862

2,042 (44,051) 7,672 7,870 51,921 4,878 (1,126) (1,044) (780) 53,849 (44,051) (5,516) (106) 1,122 835 472 (47,244) 7,870 6,605

935 (20,127) 39,746 57,048 77,175 2,985 (1,690) (936) (5,373) (32,869) 39,292 (20,127) (4,240) 672 308 1,252 3,954 (18,181) 57,048 21,111

25,696 24,692 24,692 (550) (8,212) 15,930 24,692 15,930

762 (16,677) 8,680 27,004 43,681 4,001 (177) (23,673) 23,832 (16,677) (7,205) 137 3,528 (20,217) 27,004 3,615

3,792 (81,873) 84,455 118,488 200,361 11,864 (2,818) (2,754) (5,373) (65,711) 135,569 (81,873) (17,783) (106) 1,796 1,267 1,252 8,001 (87,446) 118,488 48,123

Concession rights and licenses as of December 31, 2009 and 2008 include the value of the Hungarotel concession contract in the amount of EUR 1,659 thousand and EUR 1,874 thousand, respectively. The remaining useful life of concession rights as at December 31, 2009 is one year. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 Goodwill relates to acquisitions undertaken by the Group. The Group performed the annual goodwill impairment test according to its accounting policy for the years ended December 31, 2009 and 2008 and determined that no goodwill impairment should be accounted for. Other intangible assets mainly include capitalized customer acquisition costs (mainly sales commissions), the value of customer relationships and trademarks. The net book value of capitalized subscriber acquisition costs which are internally generated amounts to EUR 3,615 thousand and EUR 4,212 thousand as of December 31, 2009 and 2008, respectively. The net book value of customer relationships amounts to EUR 15,192 thousand as of December 31, 2008 and is classified as heldfor-sale as of December 31, 2009. The net book value of the Vodafone contract amounts to EUR 7,601 thousand as of December 31, 2008 and is classified as held-for-sale as of December 31, 2009. 13. Property, Plant and Equipment Movements in property, plant and equipment of the Group were as follows:

283

Land and Buildings

Network and Equipment

Other

Capital Work In Progress

Total Property, Plant and Equipment

( in thousands of EUR )

Cost as at 1 January 2008....................................... Additions during the year ......................................... Acquisition of subsidiaries........................................ Reclassification......................................................... Transfers from capital WIP....................................... Disposals during the year.......................................... Effect of exchange rates............................................ Cost as at 31 December 2008.................................. Accumulated depreciation as at 1 January 2008.. Depreciation charge for the year............................... Impairment for the year ............................................ Reclassification......................................................... Disposals during the year.......................................... Effect of exchange rates............................................ Accumulated depreciation as at 31 December 2008 ..................................................................... Carrying value as at 1 January 2008..................... Carrying value as at 31 December 2008................ Cost as at 1 January 2009....................................... Additions during the year ......................................... Transfers from capital WIP....................................... Disposals during the year.......................................... Effect of exchange rates............................................ Reclassified as asset held-for-sale ............................ Cost as at 31 December 2009.................................. Accumulated depreciation as at 1 January 2009.. Depreciation charge for the year............................... Impairment for the year ............................................ Disposals during the year.......................................... Effect of exchange rates............................................ Reclassified as asset held-for-sale ............................ Accumulated depreciation as at 31 December 2009 ..................................................................... Carrying value as at 1 January 2009..................... Carrying value as at 31 December 2009................

14,894 4,555 (8,820) 1,426 (1,153) (313) 10,589 (2,581) (648) (5) 2,144 282 49 (759) 12,313 9,830 10,589 1,387 (741) (119) (5,742) 5,374 (759) (723) (287) 598 7 630 (534) 9,830 4,840

654,011 70,619 1,155 73,442 (3,956) (31,281) 763,990 (294,251) (48,415) (1,007) 5,446 3,288 14,496 (320,443) 359,760 443,547 763,990 69 46,155 (4,828) (13,659) (125,098) 666,629 (320,443) (43,676) (172) 2,257 5,786 7,416 (348,832) 443,547 317,797

24,263 937 (503) 3,013 (12,091) (567) 15,052 (20,120) (2,552) (1) 701 11,863 370 (9,739) 4,143 5,313 15,052 1 3,706 (1,725) (254) (2,860) 13,920 (9,739) (2,693) (14) 1,621 192 1,257 (9,376) 5,313 4,544

23,205 72,962 10,263 (1,193) (77,881) (5,332) (465) 21,559 (5,331) 5,331 23,205 21,559 21,559 40,675 (51,248) (203) (505) (4,383) 5,895 (128) 128 21,559 5,895

716,373 72,962 86,374 (9,361) (22,532) (32,626) 811,190 (316,952) (51,615) (6,344) 8,291 20,764 14,915 (330,941) 399,421 480,249 811,190 40,745 (7,497) (14,537) (138,083) 691,818 (330,941) (47,092) (601) 4,604 5,985 9,303 (358,742) 480,249 333,076

Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 Network and equipment includes all tangible assets associated with the telecommunication network and related equipment. Network and equipment include cost of EUR 3,124 thousand and EUR 27,538 thousand and accumulated depreciation of EUR 61 thousand and EUR 12,990 thousand as of December 31, 2009 and 2008, respectively, when the Group is the lessee under a finance lease. Other assets include other non-telecom equipment, fixtures and fittings, vehicles and computers.

284

Capital work in progress includes property, plant and equipment in the course of construction. After completion, such assets are put into operation (capitalized) and are transferred to the appropriate fixed asset categories. No depreciation is charged on capital work in progress. The Group expenses low value assets upon acquisition. The low value assets recorded in depreciation and amortization expense were EUR 1 thousand and EUR 6 thousand for the years ended December 31, 2009 and 2008, respectively. 14. Cash and Cash Equivalents
At 31 December 2009 2008 (in thousand of EUR)

Cash on hand and in banks ........................................................................................................ Cash deposits ............................................................................................................................. Total Cash and Cash Equivalents ..........................................................................................

9,086 40,609 49,695

11,328 17,120 28,448

Out of the total of cash and cash equivalents of EUR 49,695 thousand at December 31, 2009, the EUR denominated part is EUR 32,632 thousand or 65%, the USD denominated part is EUR 45 thousand or 1% and the HUF denominated part is EUR 17,018 thousand or 34%. Out of the total of cash and cash equivalents of EUR 28,448 thousand at December 31, 2008, the EUR denominated part is EUR 10,039 thousand or 35%, the HUF denominated part is EUR 17,854 thousand or 63%, the USD denominated part is EUR 98 thousand or 1%, the RON denominated part is EUR 457 thousand or 1%. The effective interest rate for cash and cash equivalents was 3.9% for the year ended December 31, 2009 and 7.72% for the year ended December 31, 2008. 15. Trade and Other Receivables
At 31 December 2009 2008 (in thousands of EUR)

Trade accounts receivable........................................................................................................ Impairment provision............................................................................................................... Receivables from related parties.............................................................................................. Other receivables ..................................................................................................................... Total Trade and Other Receivables .....................................................................................

26,213 (6,635) 2,832 2,975 25,385

55,941 (11,584) 2,645 11,842 58,844

The decrease in trade and other receivables is primarily due to trade and other receivables of discontinued operations (see note 4). Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 Receivables from related parties as of December 31, 2009 mainly related to receivables from Invitel Holdings A/S and Mid Europa in the amount of EUR 2,358 thousand and EUR 290 thousand, respectively. Receivables from related parties as of December 31, 2008 include EUR 2,437 thousand receivable from HTCC, EUR 173 thousand receivable from TDC and EUR 35 thousand receivable from HoldCo. I. B.V., a 100% subsidiary of HTCC. Other receivables as of December 31, 2009 and 2008 mainly include corporate tax and VAT receivables. The decrease in other receivables as of December 31, 2009 compared to 2008 is due to receivables classified as held-for-sale. The carrying amounts of trade and other receivables of the Group are denominated in the following currencies:

285

At 31 December 2009 2008 (in thousands of EUR)

Currency in HUF ..................................................................................................................................... in EUR ..................................................................................................................................... in CZK ..................................................................................................................................... in BGN..................................................................................................................................... in RON..................................................................................................................................... in SKK ..................................................................................................................................... in UAH .................................................................................................................................... in TRY ..................................................................................................................................... Total Trade and Other Receivables ..................................................................................... The aging analysis of trade receivables of the Group are as follows:

20,622 4,763 25,385

36,017 15,161 5,529 695 689 358 248 147 58,844

At 31 December 2009 2008 (in thousands of EUR)

Not past due ............................................................................................................................. past due by less than 30 days ................................................................................................... past due by 30-90 days ............................................................................................................ past due by 91-180 days........................................................................................................... past due by 181-360 days......................................................................................................... past due by over 360 days........................................................................................................ Total Trade Accounts Receivable......................................................................................... Movements in the impairment provision of the Group are as follows:

8,856 7,127 2,477 1,455 1,557 4,741 26,213

22,669 14,559 6,915 2,208 2,500 7,090 55,941

At 31 December 2009 2008 (in thousands of EUR)

Opening at 1 January Addition due to acquisition of enterprises .................................................................................. Provision for receivables impairment ......................................................................................... Receivables written off during the year as uncollectible ............................................................ Effect of exchange rates.............................................................................................................. Reclassified as asset held-for-sale .............................................................................................. Closing at 31 December............................................................................................................ Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008

(11,584) (2,504) 6,144 280 1,029 (6,635)

(12,014) (3,724) (501) 4,229 426 (11,584)

Movements in the impairment provision are included as bad debt expense within operating expenses. The creation and release of provision for impaired receivables are included in bad debt expense in the consolidated income statement. Amounts charged to the allowance account are generally written off, when there is no expectation of recovering additional cash. 16. Other Current Assets

286

At 31 December 2009 2008 (in thousand of EUR)

Inventories .................................................................................................................................. Prepayments and accrued income............................................................................................... Total Other Current Assets ..................................................................................................... 17. Share Based Compensation

1,436 584 2,020

2,336 2,397 4,733

HTCC had three equity compensation plans: the stock option plan that was adopted by the Board of Directors in April 1992 (the 2002 Plan); the Non-Employee Director Stock Option Plan (the Directors Plan) which was established by the Board of Directors in 1997; and the 2004 Long-Term Incentive Plan (the 2004 Plan) which was approved by the stockholders in 2004. Upon the approval of the 2004 Plan, no more options were issued from either the 2002 Plan or the Directors Plan. The 2004 Plan authorized 1,000,000 shares of common stock for awards. In addition to such 1,000,000 shares, the 2004 Plan includes any shares of common stock that remained available for issuance under the 2002 Plan and the Directors Plan as of the date the 2004 Plan was approved. As of the adoption of the 2004 Plan, 424,410 shares of common stock which were then available for issuance under the 2002 Plan were rolled over and available for issuance under the 2004 Plan and 88,716 shares of common stock, which were then available for issuance under the Directors Plan, were rolled over and available for issuance under the 2004 Plan. In addition, any shares of common stock subject to awards outstanding under the 2002 Plan or the Directors Plan at the time of the adoption of the 2004 Plan which subsequently lapse, expire or otherwise terminate without the issuance of such shares of common stock are also available for awards under the 2004 Plan. Stock options from the 2004 Plan may be either incentive stock options or options not intended to qualify as incentive stock options. The term of an option cannot exceed ten years from the date of grant. All options must have an exercise price that is not less than the fair market value of a share of common stock on the date of grant. Stock options are fully vested when granted. Upon exercise of an option, the participant may pay the option price in cash, by delivering shares of common stock or by having the Company withhold shares otherwise deliverable to the participant upon exercise (net exercise). An option may also be exercised through a cashless exercise procedure involving a broker or dealer that affords the employees the opportunity to sell immediately some or all of the shares underlying the exercised portion of the option in order to generate sufficient cash to pay the option price and/or to satisfy withholding tax obligations related to the option. In the event such option price is paid in whole or in part with shares, the portion of the option price so paid shall be equal to the value, as of the date of the exercise of the option, of such shares. The value of such shares shall be equal to the number of such shares multiplied by the fair market value of such shares on the trading day coincident with the date of exercise of such option (or immediately preceeding trading day of the date of the exercise os not a trading day). When Invitel Holdings A/S took over as the parent company of the Group from HTCC in February 2009, the outstanding equity commitments under the existing HTCC Option Plans were assumed by Invitel A/S and set out in Invitel Holdings A/Ss Articles of Association. The options from that time on are governed by the Articles of Association of Invitel holdings A/S. As of December 31, 2009, there were outstanding warrants to purchase 80,000 shares issued from the 2002 Plan; outstanding warrants to purchase 80,000 shares issued from the Directors Plan; and outstanding warrants to purchase 430,000 shares under the 2004 Plan. Upon the approval of the 2004 Plan, no more options were issued from either the 2002 Plan or the Directors Plan. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 There are sufficient shares reserved for issue upon exercise of the outstanding warrants. The Group calculates the fair value of outstanding warrants by using the Black-Scholes model. The following is a summary of warrants under the 2002 Plan, the Directors Plan or the 2004 Plan, which were granted, exercised or have expired for the year ended December 31, 2009 and 2008:

287

Outstanding Warrants

Weighted Average Exercise Price (in EUR)

December 31, 2007 .................................................................................................. Granted ..................................................................................................................... Exercised .................................................................................................................. Cancelled .................................................................................................................. December 31, 2008 .................................................................................................. Granted ..................................................................................................................... Exercised .................................................................................................................. Expired...................................................................................................................... December 31, 2009 ..................................................................................................

570,000 20,000 (15,000) 575,000 20,000 (5,000) 590,000

7.31 12.16 4.63 7.55 5.35 4.17 7.35

The following table summarizes information about shares subject to outstanding warrants as of December 31, 2009, which were issued to current or former employees, or directors pursuant to Invitel Holdings A/S plan:
At 31 December 2009 Warrants Outstanding Range of Exercise Price (in EUR) Weighted Average Exercise Price (in EUR) Weighted Average Remaining Life in Years Warrants Exercisable Weighted Average Exercise Price (in EUR)

Number Outstanding

Number Exercisable

40,000 60,000 220,000 175,000 75,000 20,000 590,000

3.28-3.28 4.01-4.51 5.18-6.52 7.56-9.03 10.17-10.87 11.90-11.90 3.28-11.90

3.28 4.28 6.17 8.86 10.66 11.90 7.35

2.00 1.42 4.22 4.82 6.27 8.00 4.37

40,000 60,000 220,000 175,000 75,000 20,000 590,000

3.28 4.28 6.17 8.86 10.66 11.90 7.35

The following table summarizes information about shares subject to outstanding stock options as of December 31, 2008, which were issued to current or former employees, or directors pursuant to the HTCC 2002 Plan, Directors Plan or the 2004 Plan:
At 31 December 2008 Stock Options Outstanding Range of Exercise Price (in EUR) Weighted Average Exercise Price (in EUR) Weighted Average Remaining Life in Years Stock Options Exercisable Weighted Average Exercise Price (in EUR)

Number Outstanding

Number Exercisable

40,000 65,000 200,000 175,000 75,000 20,000 575,000

3.35 4.10-4.81 5.29-6.66 7.73-9.23 10.39-11.09 12.16-12.16 3.35-12.16

3.35 4.36 6.39 9.06 10.90 12.16 7.55 Magyar Telecom B.V.

3.00 2.26 4.80 5.82 7.27 9.00 5.17

40,000 65,000 200,000 175,000 75,000 20,000 575,000

3.35 4.36 6.39 9.06 10.90 12.16 7.55

Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008

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For the year ended December 31, 2009 and 2008, a compensation expense was recorded in the amount of EUR 111 thousand and EUR 234 thousand, respectively, related to stock options granted. For the year ended December 31, 2009 and 2008, a fair value benefit was recorded in operating expenses relating to the push down accounting for the mark to market revaluation of outstanding stock options in the amount of EUR 20 thousand and EUR 2,456 thousand, respectively. The assumptions in determining the fair value of the awards include:
For the year ended 31 December 2009 2008

Dividend yield ........................................................................................................... Risk free rate.............................................................................................................. Expected option / warrant life (years)........................................................................ Volatility.................................................................................................................... 18. Equity

0.0% 2.9% 4.3 147.3%

0.0% 1.5% 5.2 52.6%

As of December 31, 2009 and 2008 the authorized share capital of Matel was EUR 408,600,000 divided into 90,000,000 ordinary shares with a par value of EUR 4.50 each. As of December 31, 2009 and 2008 the issued share capital of Matel was EUR 92,201 thousand. The issued capital is fully paid in. The balance of capital reserve as of December 31, 2009 includes the amounts of share capital of former legal entities merged into Matel in the amount of EUR 122,110 thousand and a capitalized shareholder loan that was provided to the Group during 2009 in the amount of EUR 133,937 thousand. There are no restrictions for distribution regarding these amounts (see note 19 and 30 for further disclosures). The balance of other reserves as of December 31, 2009 and 2008 includes the equity adjustment relating to the acquisition of Hungarotel and Pantel by Matel on April 27, 2007. This acquisition was accounted for as a transaction between entities under common control at predecessor value and the equity adjustment represents the difference between the value of the investment and the net assets acquired by Matel. The balance of cumulative translation reserve comprises all foreign exchange differences arising from the translation into EUR of the financial statements of foreign operations whose functional currency is not EUR. As of December 31, 2009 minority interest related to the 0.02% investments held in Invitel by local municipalities and the 0.04% investments held in Euroweb Romania by individuals. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 19. Borrowings
At 31 December 2009 2008 (in thousands of EUR)

Current Portion of Borrowings Amended senior facilities agreement denominated in HUF............................................................................................. denominated in EUR............................................................................................. Yapi loan.................................................................................................................................. Deferred borrowing costs......................................................................................................... Total Current Portion of Borrowings ....................................................................................... Borrowings

4,252 33,566 9,672 (2,116) 45,374

289

At 31 December 2009 2008 (in thousands of EUR)

Amended senior facilities agreement denominated in HUF............................................................................................. denominated in EUR............................................................................................. Related party subordinated loan............................................................................................... 2004 Notes ............................................................................................................................... 2007 Notes ............................................................................................................................... 2009 Notes ............................................................................................................................... Bridge loan agreement ............................................................................................................. Preps loan ................................................................................................................................ Deferred borrowing costs......................................................................................................... Total Borrowings ...................................................................................................................

24,568 125,675 340,721 (15,433) 475,531

6,909 38,288 22,386 141,156 200,000 100,000 11,000 (12,600) 507,139

During 2009 the Group undertook three refinancings on March 4, on November 2, 2009 and on December 16, 2009. The details of such refinancings are described below. The net costs and expenses related to such refinancings are detailed in the following table:
For the year ended 31 December 2009 (in thousands of EUR)

Refinancing cost 2009 March................................................................................................................ 2009 November ......................................................................................................... 2009 December.......................................................................................................... Total loss on extinguishment of debt...................................................................... 2009 March Refinancing

13,192 2,168 9,110 24,470

On March 4, 2009 the Group completed a refinancing which included (i) an amendment to the existing Senior Facilities Agreement to increase the amount of credit available under such agreement, and (ii) entering into two additional loan agreements, the Subordinated Loan Agreement and the TDC PIK Loan, the proceeds of which were used for the repayment of the funds borrowed under, and termination of, the Bridge Loan Agreement (the 2009 March Refinancing). The funds borrowed under the 2009 March Refinancing comprise (i) a EUR 165.0 million term and revolving facility (the Amended Senior Facilities Agreement) with Invitel Zrt as borrower, and Matel and certain of its subsidiaries as guarantors, (ii) a EUR 32.0 million subordinated term loan with Matel as borrower (the Subordinated Term Loan) and (iii) a EUR 34.1 million subordinated PIK loan from one of TDCs affiliates to Matel (the TDC PIK Loan and, together with the Amended Senior Facilities Agreement and the Subordinated Term Loan, the 2009 Amended Facilities). Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 A loss on extinguishment of debt of EUR 13,192 thousand was recorded in connection with the 2009 March Refinancing relating to the loss from the write down of deferred borrowing costs of EUR 3,624 thousand and transaction costs in the amount of EUR 9,568 thousand. The 2009 November Refinancing On November 2, 2009 a series of transactions were completed, which resulted in a change in the Groups ownership structure and a deleveraging of cash-pay debt. On November 2, 2009 Mid Europa, concurrently with becoming the controlling shareholder of the Group, purchased all of TDCs rights and obligations under the EUR 34.1 million TDC PIK Loan and amended and restated it to increase the loan by EUR 91.4 million, on terms substantially similar to the existing loan, which became a new shareholder loan of EUR 133.9 million including accrued interest provided by Mid Europa to

290

Matel (Advance 1). Part of the funds under Advance 1 were used by Matel to purchase EUR 74.3 million or 37.2% of the 2007 Notes and EUR 10.7 million or 7.5%, of the 2004 Notes and to repay EUR 10.7 million out of the outstanding amount of the Subordinated Term Loan. The 2007 Notes and the 2004 Notes purchased by Matel were subsequently cancelled. In connection with the 2009 November Refinancing a loss on extinguishment of debt was recorded in the amount of EUR 2,168 thousand, comprising of a gain of EUR 747 thousand and EUR 11,892 thousand which was recognized on the repurchase of the 2004 Notes and the 2007 Notes, respectively, offset by a loss relating to the write off of deferred borrowing costs of EUR 2,657 thousand and transaction costs of EUR 12,150 thousand. In connection with the 2009 November Refinancing, Hungarian Telecom Finance International Limited (HTFI), a company controlled by Mid Europa also purchased approximately EUR 154.6 million or 87% of the outstanding aggregate principal amount of the 2006 PIK Notes issued by Holdco I. B.V. in a tender offer (the 2006 PIK Notes Tender Offer). Concurrently with the consummation of the 2006 PIK Notes Tender Offer, holders of the 2006 PIK Notes consented to eliminate substantially all of the covenants and related events of default under the indenture governing the 2006 PIK Notes. See further discussion on the off-balance sheet 2006 PIK Notes in note 27.3. The 2009 December Refinancing On December 16, 2009 the Group completed a refinancing which included the issuance of Senior Secured Bonds in the notional amount of EUR 345 million due 2016 (the 2009 Notes), the proceeds of which were used for the (i) repayment of the Amended Senior Facilities Agreement, (ii) repayment of the remaining balance of the Subordinated Term Loan, (iii) repayment of the remaining outstanding balance of the 2004 Notes. The intercreditor deed of the Group was amended and restated to take into account the impact of the 2009 December Refinancing (the The Intercreditor Agreement). A loss on extinguishment of debt of EUR 9,110 thousand was recorded in connection with the 2009 December Refinancing relating to the loss on the write down of deferred borrowing costs of EUR 4,199 thousand and transactions costs of EUR 4,911 thousand. Concurrently with the 2009 December Refinancing, all of the 2006 PIK Notes held by HTFI were converted into as a new shareholder loan by Mid Europa to Holdco I. B.V. (Advance 2). Advance 1 and Advance 2 were granted a new subordinated shareholder loan between Mid Europa and Holdco I. B.V. (the New Shareholder Loan). The New Shareholder Loan is non-cash pay and has a 15 year maturity. The rights under the New Shareholder Loan were contributed by Holdco I. B.V. as a capital contribution to Matel Holdings and then from Matel Holdings to Matel after which Matels obligations under the New Shareholder Loan were automatically extinguished by operation of law (the Shareholder Debt Conversion). The extinguishment of Matels obligation under the New Shareholder Loan was recorded in equity as an increase to capital reserve. Following the Shareholder Debt Conversion, approximately EUR 288.5 million aggregate principal amount of the New Shareholder Loan remained outstanding between Holdco I. B.V. and Mid Europa. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 The 2004 Notes In August 2004, Matel issued the 2004 Notes pursuant to an Indenture (the 2004 Notes Indenture) with a trustee, and, as subsidiary guarantors, Matels subsidiaries Invitel Zrt and V-Holding Zrt (merged into Invitel Zrt). Interest on the 2004 Notes was payable semi-annually at an annual rate of 10.75% on February 15 and August 15 of each year, from February 15, 2005. Matels obligations under the 2004 Notes were guaranteed on a senior subordinated basis by some of its subsidiaries that guaranteed its obligations under the 2007 Notes and were collateralized by the same collateral securing the 2007 Notes. During November 2009, Matel redeemed EUR 10.7 million or 7.5% of the 2004 Notes and on December 16, 2009 the remaining 2004 Notes were repaid and cancelled as part of the 2009 December Refinancing. The 2007 Notes On April 27, 2007, Matel completed the issuance of the 2007 Notes. Net proceeds of EUR 189 million were received following the payment of financing costs associated with the issuance of the 2007 Notes in the amount of EUR 11 million,

291

which costs were deferred and are amortized to interest expense using the effective interest method over the term of the 2007 Notes. The 2007 Notes mature on February 1, 2013 and bear interest at a rate of EURIBOR plus 3.0% per annum, payable quarterly in arrears on February 1, May 1, August 1 and November 1 of each year, beginning on August 1, 2007. The 2007 Notes are guaranteed by some of our subsidiaries. The 2007 Notes and subsidiary guarantees are collateralized by secondpriority liens over certain inter-company funding loans, the capital stock of some of our subsidiaries, which liens rank pari passu with the liens over such assets collateralizing our obligations under the 2004 Notes described below. Matel has the option to redeem the 2007 Notes, as a whole or in part, at any time or from time to time, at redemption prices specified in the 2007 Notes indenture (the 2007 Notes Indenture). In the event of a change of control, Matel must make an offer to purchase the 2007 Notes at a purchase price equal to 101% of the principal amount thereof. Matel is also required to offer to purchase the 2007 Notes with the excess proceeds following certain asset sales at a purchase price equal to 100% of the principal amount thereof. The 2007 Notes Indenture contains covenants restricting Matels ability to, among other things, (i) incur additional indebtedness or issue preferred shares, (ii) make investments and certain other restricted payments, (iii) issue or sell shares in subsidiaries, (iv) agree to restrictions on the payment of dividends by subsidiaries, (v) enter into transactions with affiliates, (vi) create certain liens, (vii) merge, consolidate or combine with other entities, (viii) layer debt, (ix) designate subsidiaries as unrestricted subsidiaries, (x) engage in unrelated business activities and (xi) impair any security interests. The 2007 Indenture also contains customary events of default, including non-payment of principal, interest, premium or other amounts, violation of covenants, bankruptcy events, cross-defaults, material judgments and invalidity of any guarantee, security document or security interest. In November 2009 Matel redeemed and cancelled 37.2% of the 2007 Notes in the notional amount of EUR 74.3 million as part of the 2009 November Refinancing. The Amended Senior Facilities Agreement On March 4, 2009, an amendment was made to the Senior Facilities Agreement, dated August 6, 2004, between Matel, Invitel Zrt, as borrower, certain subsidiary companies as original guarantors, and certain financial institutions. The Amended Senior Facilities Agreement provided for facilities of up to: EUR 165 million, comprised of an EUR amortizing term loan of EUR 103.1 million, a HUF amortizing term loan of HUF 14,094 million (approximately EUR 46.9 million), a revolving credit facility of EUR 11.9 million and HUF 929 million (approximately EUR 3.1 million). The term facilities were amortizing term loans with a maturity date of December 31, 2011. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 Advances under the Amended Senior Facilities Agreement bore interest for each interest period at annual rates equal to EURIBOR or BUBOR (based on the Budapest interbank offer rates) plus an applicable margin. The applicable margin was set based on the ratio of all of the senior debt to EBITDA, based on the most recently delivered quarterly management accounts and financial statements. Under the Amended Facilities Agreement, the Group was obligated to pay customary fees to the lenders, including an up-front fee and a commitment fee in relation to available and undrawn commitments under the revolving facility and the liquidity facility. The Groups obligations under the Amended Senior Facilities Agreement were guaranteed and collateralized by (i) a first ranking pledge of all the share capital of the obligors, (ii) assignments of intercompany loans and any relevant cross guarantees of the obligors from time to time, (iii) a pledge of accounts by the obligors, and (iv) floating charges over all assets. Such security interests also collateralize, on a pari passu basis, all hedging obligations with respect to the Amended Senior Facilities Agreement, the 2007 Notes and the 2004 Notes. The Amended Senior Facilities Agreement contained certain negative covenants that restrict the Groups activities. Additionally, the Amended Senior Facilities Agreement required the Group to maintain specified consolidated financial ratios, such as leverage ratios (total senior debt to EBITDA and total debt to EBITDA), an interest coverage ratio (EBITDA to total debt interest charges) and a fixed charge coverage ratio (EBITDA minus capital expenditure minus cash taxes to total debt charges). Also, under the terms of the Amended Senior Facilities Agreement, the Group was required to observe certain affirmative undertakings.

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On December 16, 2009 the Amended Senior Facilities Agreement was extinguished when it was repaid as part of the 2009 December Refinancing. The Subordinated Loan Agreement The Subordinated Term Loan had terms substantially similar to those contained in the Amended Senior Facilities Agreement. It ranked and was secured as per the previously existing Bridge Loan Agreement. The Subordinated Term Loan was drawn down in full and was to be terminated on March 31, 2012. The Subordinated Term Loan bore interest at a rate per annum of the sum of the applicable margin plus EURIBOR plus Mandatory Costs, if any (as defined in the definitive Subordinated Term Loan Agreement). The applicable margin was 12% per annum increasing to 13.5% per annum after 24 months. On December 16, 2009 the Subordinated Term Loan was extinguished when it was repaid as part of the 2009 December Refinancing. The TDC PIK Loan Agreement The TDC PIK Loan was entered into by Matel as borrower, Invitel Holdings A/S as parent and TDCH III ApS, an affiliate of TDC A/S, as lender. The TDC PIK Loan ranked behind the Amended Senior Facilities Agreement, the Subordinated Term Loan, the 2004 Notes and the 2007 Notes and was unsecured. The entering into the TDC PIK Loan was a condition precedent to the Amended Senior Facilities Agreement and the Subordinated Term Loan. The TDC PIK Loan was drawn down in full and had a maturity date of March 1, 2013. The TDC PIK Loan bore interest at a rate of 20% per annum above EURIBOR and, if requested by the lender, the interest accrued was capitalized. If the lender did not request that the interest accrued would be capitalized then the borrower had to pay to the lender the accrued interest in full together with a fee equal to the amount the lender would have received had such interest had been capitalized. The borrower also had to pay an additional repayment fee of 4.5% of the principal amount of the loan prepaid or repaid. The receivable under the TDC PIK Loan was assigned by the lender in favor of BNP Paribas Trust Corporation UK Limited as Security Trustee as security for the Amended Senior Facilities Agreement and the Subordinated Term Loan. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 On November 2, 2009 as part of the 2009 November Refinancing, Mid Europa purchased all of TDCs rights and obligations under the TDC PIK Loan, which was later recapitalized as part of the 2009 December Refinancing. The Bridge Loan Agreement In connection with the acquisition of Memorex, the Group entered into the Bridge Loan Agreement in the amount of EUR 100 million on March 3, 2008 with Matel as borrower and Invitel Zrt, Tele2 Hungary (merged into Invitel Zrt during 2009), Invitel Technocom, Invitel International AG and Invitel International AGs Turkish subsidiary as guarantors. On March 5, 2008, the closing date of the Memorex acquisition, Matel borrowed the full EUR 100 million pursuant to which EUR 30.1 million was used to fund the purchase price for 95.7% of the outstanding equity in Memorex and EUR 46.6 million was used to refinance some of Memorexs existing debt that was assumed at closing. EUR 7.6 million was used to pay fees and expenses in connection with the Bridge Loan Agreement and transaction costs in connection with the Memorex acquisition and the remaining amount of EUR 15.7 million was set aside for working capital purposes. The Bridge Loan Agreement loans (the Bridge Loans) matured one year following the completion of the Memorex acquisition, on March 5, 2009 (the Initial Maturity Date). The Bridge Loans accrued interest at a rate per annum equal to the sum of EURIBOR plus the applicable margin plus the Mandatory Cost (if any, as defined in the Bridge Loan Agreement), which was set at the beginning of each three month interest period. The interest rate could not exceed 11.5% per annum for any interest period. Obligations under the Bridge Loan Agreement were collateralized by the same collateral securing the 2004 Notes and the 2007 Notes.

293

On March 4, 2009 the Bridge Loan Agreement was terminated when the Bridge Loans was repaid as part of the 2009 March Refinancing. The 2009 Notes On December 9, 2009 as part of the 2009 December Refinancing, Matel issued senior secured notes in the principal amount of EUR 345,000,000 (the 2009 Notes). The 2009 Notes mature in 2016 and are subject to the indenture dated December 16, 2009 (the 2009 Notes Indenture). The 2009 Notes are listed on the Luxembourg Stock Exchange, and are governed by New York law. The proceeds from the issuance of the 2009 Notes were used to refinance certain indebtedness including redeeming the remaining of the 2004 Notes and to make a consent payment to the holders of the 2007 Notes who consented to certain proposed waivers and amendments to the 2007 Notes Indenture. Interest on the 2009 Notes is payable semi-annually at an annual rate 9.50% on June 15 and December 15 of each year, beginning on June 15, 2010. The 2009 Notes have been guaranteed, by some of Matels subsidiaries, which guarantee ranks senior in right of payment to any existing and future guarantee of Matel and the subsidiary guarantors that is subordinated in right of payment to the 2009 Notes (including the 2007 Notes). The obligations of Matel and the subsidiary guarantors are secured by first priority liens over, inter alia, all shares or quotas (as applicable), bank accounts and assets of certain of our subsidiaries. Pursuant to the 2009 Notes Indenture, if the sale of Invitel International is not completed within 18 months following the issuance of the 2009 Notes, certain Invitel International companies also have to provide asset security (bank account pledges, a pledge over intra-group receivables and a pledge over all of its assets). Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 Prior to December 15, 2012, Matel has the option to redeem all or part of the 2009 Notes by paying a make-whole amount specified in the 2009 Notes Indenture and following such date at the redemption prices set forth under in the 2009 Notes Indenture. In the event of a change of control at any time, Matel is required to offer to repurchase the 2009 Notes at a purchase price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of the purchase. Matel is also required to offer to purchase the 2009 Notes with the excess proceeds following certain asset sales at a purchase price equal to 100% of the principal amount thereof. The 2009 Notes Indenture contains covenants restricting Matels ability to, among other things, (i) incur additional indebtedness or issue preferred shares, (ii) make investments and certain other restricted payments, (iii) issue or sell shares in certain restricted subsidiaries, (iv) agree to restrictions on the payment of dividends by subsidiaries, (v) enter into transactions with affiliates, (vi) create certain liens, (vii) transfer or sell assets, (viii) enter into sale and leaseback transactions, (ix) merge, consolidate, amalgamate or combine with other entities, (x) designate subsidiaries as unrestricted subsidiaries, (xi) de-list, (xii) impair any security interests and (xiii) engage in any business other than specifically enumerated activities. The 2009 Notes Indenture also contains customary events of default, including non-payment of principal, interest, premium or other amounts, violation of covenants, failure to make required offers, certain cross-defaults, invalidity of any guarantee, material judgments, bankruptcy insolvency, receivership or reorganization events, and invalidity or unenforceability of any security document or security interest. The Intercreditor Agreement In order to reflect the new obligations under the 2009 Notes and establish the relative rights of certain creditors under Matels financing arrangements (including priority of claims and subordination) the existing Intercreditor Deed was amended (the Intercreditor Agreement). The Intercreditor Agreement was concluded with, among others, the security trustee, the trustee for the 2007 Notes, the trustee for the 2009 Notes and certain hedging counterparties. The Intercreditor Agreement provides that if there is an inconsistency between the provisions of the Intercreditor Agreement (regarding subordination, turnover, ranking and amendments only), and certain other documents, including the 2009 Notes Indenture governing the 2009 Notes, the Intercreditor Agreement will prevail.

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The Group was in compliance with all of its financial debt covenants as at December 31, 2008. There are no financial debt covenants as a result of the 2009 December Refinancing. The Groups borrowings are payable as at December 31, 2009 as follows:
Borrowings (in thousands of EUR)

1 Year or Less.......................................................................................................................... 2-3 Years.................................................................................................................................. 4-5 Years.................................................................................................................................. After 5 Years ........................................................................................................................... Deferred borrowing costs......................................................................................................... Total ........................................................................................................................................ 20. Financial Instruments and Risk Management

150,243 340,721 490,964 (15,433) 475,531

Financial instruments carried on the consolidated balance sheet include cash and cash equivalents, trade and other receivables, other non-current financial assets and borrowings. The Group also has derivative financial instruments that reduce the exposure to fluctuations in foreign currency exchange and interest rates and manage credit risk. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 The Groups financial instruments by category are as follows as at December 31, 2009:
Assets at fair value through the profit and loss Loans and receivables

Available-for-sale

Total

(in thousand of EUR)

31 December 2009 Assets as per consolidated balance sheet Derivative financial instruments ................................ Trade and other receivables ....................................... Other non-current financial assets ............................. Cash and cash equivalents ......................................... Total .......................................................................... 13,387 13,387
Liabilities at fair value through the profit and loss

25,385 74 49,695 75,154

13,387 25,385 74 49,695 88,541

Other financial liabilities (in thousand of EUR)

Total

Liabilities as per consolidated balance sheet Borrowings ................................................................ Derivative financial instruments ................................ Total .......................................................................... 25,860 25,860 490,964 490,964 490,964 25,860 516,824

The Groups financial instruments by category are as follows as at December 31, 2008:

295

Assets at fair value through the profit and loss

Loans and receivables

Available-for-sale

Total

(in thousand of EUR)

31 December 2008 Assets as per consolidated balance sheet Derivative financial instruments ................................ Trade and other receivables ....................................... Other non-current financial assets ............................. Cash and cash equivalents ......................................... Total .......................................................................... 7,663 7,663
Liabilities at fair value through the profit and loss

58,844 1,103 28,448 88,395

7,663 58,844 1,103 28,448 96,058

Other financial liabilities (in thousand of EUR)

Total

Liabilities as per consolidated balance sheet Borrowings ................................................................ Derivative financial instruments ................................ Total .......................................................................... 14,549 14,549 567,229 567,229 567,229 14,549 581,778

The Groups activities expose it to a variety of financial risks: customer credit risk, liquidity risk, interest rate risk and foreign currency risk. The Groups risk management programs focuses on the unpredictability of the financial markets and seeks to minimize potential adverse effects of the Groups financial performance. Risk management is carried out by the executive management team under the policies approved by the Board of Directors. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 Customer credit risk Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations are performed on all customers requiring credit over a certain amount. The Group generally does not require collateral in respect of financial assets. The Group is not exposed to any significant concentration of credit risk as its customer base is widely spread. Investments are allowed in EUR or HUF denominated securities, which are freely negotiable, marketable and (1) are rated at least AA by Standard & Poors Corporation or Aa2 by Moodys Investor Services, Inc. or (2) are issued by the Republic of Hungary. Transactions involving derivative financial instruments are with counter-parties with whom the Group has a signed netting agreement as well as high credit ratings. Given their high credit ratings, management does not expect any counter-party to fail to meet its obligations with respect to its derivative financial instruments. The Group has made provisions of EUR 6,635 thousand and EUR 11,584 thousand for overdue receivables at December 31, 2009 and 2008, respectively. Besides the risk on receivables the maximum exposure to credit risk is represented by the carrying amount of each financial asset, including derivative financial instruments, in the consolidated balance sheet. Due to the nature of the services provided by the Group there are no significant concentrations of credit risk. Management does not expect any losses from non-performance of the financial institutions. Liquidity risk In accordance with the Treasury Policy of the Group as approved by the Board of Directors, a prudent liquidity management is maintained by means of holding sufficient amounts of cash that are available for making all operational and debt service related payments when those become due. Investments are only kept in highly liquid assets, which are readily convertible into cash.

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The table below provides the information on the Groups financial liabilities classified into relevant maturity groupings based on the remaining period to the contractual maturity date as at December 31, 2009 and 2008. The amounts disclosed in the table are contractual cash flows.
Less than 1 year Between 1 and 2 years Between 2 and 5 years After 5 years

31 December 2009 Borrowings ............................................ Finance lease liabilities.......................... Trade and other payables .......................

192 27,117
Less than 1 year

427
Between 1 and 2 years

150,243 503
Between 2 and 5 years

340,721 3,592
After 5 years

31 December 2008 Borrowings ............................................ Finance lease liabilities.......................... Trade and other payables ....................... Interest rate risk

45,374 5,714 65,783

31,681 3,589

353,072

122,386

The Groups investments in fixed-rate debt securities and its fixed-rate borrowings are exposed to a risk of change in their fair value due to changes in interest rates. The Groups investments in variable-rate debt securities and its variable-rate borrowings are exposed to a risk of change in cash flows due to changes in interest rates. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 The Group is exposed to interest rate risk since a portion of the interest of its borrowings is based on variable inter-bank rates. To reduce its interest rate cash flow risk the Group entered into interest rate swap agreements based on standard ISDA agreements in which the floating EURIBOR rates were swapped for fixed EUR rates. Under the terms of the interest rate swaps, the Group receives variable interest rate payments from the counterparty and makes fixed interest rate payments in the same currency, thereby creating the equivalent of fixed-rate debt. Based on the existing hedging policy not less than 50 percent of the outstanding amount of the Secured Bank Facility Loan has to be hedged to cover interest rate risk, for the period of a minimum of two years. Foreign currency risk The majority of the Groups recurring revenue is denominated in HUF, but its debt is 100% EUR denominated. To limit the impact of fluctuations between the HUF and the EUR, the Group has entered into currency swap agreements and foreign exchange forward agreements, to receive euro and pay Hungarian forint, thereby creating the equivalent of Hungarian forint debt obligations. In addition, the Group uses cross-currency interest rate swaps to manage both the interest rate and the currency exposure inherent in foreign currency denominated debt instruments bearing variable interest. By entering into such transactions the Group receives variable interest payments in foreign currency and makes fixed interest payments in Hungarian forint, thereby creating the equivalent of fixed rate debt in the functional currency of the Hungarian subsidiaries. The cross currency interest rate swaps in effect are the same as the combination of interest rate swaps and foreign exchange forward contracts applied to the same underlying item. Fair values The carrying amounts of financial assets including cash and cash equivalents, trade and other receivables and trade and other payables reflect reasonable estimates of fair value due to the relatively short period to maturity of the instruments. The Group estimates the fair values of derivative financial instruments by using a model which discounts future contractual cash-flows determined based on market conditions (foreign exchange rates, yield curves in the functional currency and in the foreign currency) prevailing on the date of the valuation. The model is regularly tested against third party

297

prices for reasonableness. The fair value represents the estimated amounts that the Group would pay or receive to terminate the contracts as of December 31, 2009 and 2008. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments. The market value of the 2004 Notes was 107.1% or EUR 152.1 million as of December 31, 2008 as quoted on the Luxembourg Stock Exchange. The market value of the 2007 Notes was 82% or EUR 103.1 million and 48.0% or EUR 96.0 million as of December 31, 2009 and 2008, respectively, as quoted on the Luxembourg Stock Exchange. The market value of the 2009 Notes as of December 31, 2009 approximates fair value as the 2009 Notes were issued on December 19, 2009. The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximize the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 The following table represents the Groups assets and liabilities that are measured at fair value as of December 31, 2009:
Level 1 Level 2 Level 3 Total (in thousands of EUR)

31 December 2009 Assets as per consolidated balance sheet Derivative financial instruments .......................................................................... Total Assets ........................................................................................................ 31 December 2009 Liabilities as per consolidated balance sheet Derivative financial instruments .......................................................................... Total Liabilities .................................................................................................. Reconciliation of derivative fair values The tables below provide a reconciliation of the fair value of the derivative contracts outstanding at the reporting date to the consolidated balance sheet. As at the reporting date the fair value of derivatives were recognized in the consolidated balance sheet as derivative financial instruments among current assets or as other non-current asset or liability depending on the maturity of the contracts.
At 31 December 2009 Asset Liability (in thousands of EUR)

13,387 13,387

13,387 13,387

25,860 25,860

25,860 25,860

Fair value of cross currency interest rate swaps current ...................................................... Fair value of cross currency interest rate swaps non current ............................................... Fair value of foreign currency forward contracts current .................................................... Fair value of foreign currency forward contracts non current ............................................. Fair value of interest rate swap contracts current................................................................. Fair value of interest rate swap contracts non-current .........................................................

11,053 877 350 1,107 13,387

(11,967) (7,247) (3,450) (3,196) (25,860)

298

At 31 December 2009 Asset Liability (in thousands of EUR)

Fair value of cross currency interest rate swaps current ...................................................... Fair value of cross currency interest rate swaps non current ............................................... Fair value of foreign currency forward contracts current .................................................... Fair value of interest rate swap contracts current................................................................. Fair value of interest rate swap contracts non-current .........................................................

4,416 3,111 55 81 7,663

(12,346) (2,203) (14,549)

Fair value of current and non-current derivative financial instruments is presented in the consolidated balance sheet as of December 31, 2009 and 2008 are follows:
At 31 December 2009 2008 (in thousands of EUR)

Fair value of cross currency interest rate swaps current ....................................................... Fair value of fx forward contracts current ............................................................................ Fair value of IRS contracts current ....................................................................................... Current Derivative Financial Instruments Assets ........................................................... Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008

11,053 11,053

4,416 55 81 4,552

At 31 December 2009 2008 (in thousands of EUR)

Fair value of cross currency interest rate swaps current ....................................................... Fair value of fx forward contracts current ............................................................................ Fair value of IRS contracts current ....................................................................................... Current Derivative Financial Instruments Liabilities .....................................................

(11,967) (3,450) (3,196) (18,613)

(12,346) (12,346)

At 31 December 2009 2008 (in thousands of EUR)

Fair value of cross currency interest rate swaps non-current ................................................ Fair value of fx forward contracts non-current ..................................................................... Fair value of IRS contracts non-current................................................................................ Non-Current Derivative Financial Instruments Assets ...................................................

877 350 1,107 2,334

3,111 3,111

At 31 December 2009 2008 (in thousands of EUR)

Fair value of cross currency interest rate swaps non-current ................................................ Non-Current Derivative Financial Instruments Liabilities.............................................

(7,247) (7,247)

(2,203) (2,203)

299

The following table summarizes the notional amounts and respective fair values of our floating to fixed interest rate swaps, which mature at varying dates, as of December 31, 2009:
Asset (Liability) Notional Amount Fair Market Value Maturity Interest rate

(in thousand of EUR)

Amended Senior Facilities Agreement ........................................ Amended Senior Facilities Agreement ........................................ 2004 Notes ................................................................................... 2004 Notes ................................................................................... 2007 Notes ................................................................................... 2007 Notes ................................................................................... 2007 Notes ................................................................................... Bridge Loan Agreement............................................................... Bridge Loan Agreement............................................................... Amended Senior Facilities Agreement ........................................ Amended Senior Facilities Agreement ........................................ Total Interest Rate Swaps .........................................................

38,288 (19,765) 73,301 (73,301) 143,179 (143,179) 200,000 16,000 16,000 42,010 42,010 334,543

877 (1,068) (4,180) 1,574 (7,831) 3,344 (1,581) (77) (71) (169) (191) (9,373)

2011-06-30 2011-06-30 2012-08-17 2012-08-17 2012-08-03 2012-08-03 2012-11-05 2011-12-31 2011-12-31 2011-12-31 2011-12-31

9,379% 9,379% 5,900% 6,115% 5,900% 6,115% 2,330% 2,100% 2,080% 1,870% 1,915%

In January and February of 2010, Invitel Zrt undertook an unwinding of its derivative financial instruments relating to various facilities and notes which have been previously redeemed or repurchased as well as a restructuring of existing forwards in order to match current debt service. A loss of EUR 1.7 million was realized on these transactions. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 The following table shows the sensitivity of our debt instruments and the related hedge transactions to foreign currency exchange rate and interest rate changes as of December 31, 2009:
1% p.a. increase in interest rates CF impact on debt service CF impact on underlying hedge 10% increase in HUF/EUR fx rate CF impact on debt service CF impact on underlying hedge

Instrument

Net CF impact

Net CF impact

(in thousand of EUR)

2009 Notes ......................................................... 2007 Notes ......................................................... Total ..................................................................

(1,257) (1,257)

2,000 2,000

743 743

(3,287) (396) (3,683)

396 396

(3,287) (3,287)

The above table shows the impact of a 1% increase in interest rates (e.g. BUBOR and EURIBOR) and a 10% increase in the EUR/HUF exchange rate on debt service related cash flow due in the next 12 months until December 31, 2010. In late April 2009 the Group entered into several interest rate swap agreements with BNP Paribas and Calyon pursuant to which some of the floating rate EUR interest payment obligations were swapped for fixed rate EUR interest payment obligations. The Group expects that the impact of the interest rate swaps will be cash neutral in the near term. Therefore, the exposure to interest rate risk has been limited. 21. Other Non-Current Liabilities
At 31 December 2009 2008 (in thousands of EUR)

Deferred income ...................................................................................................................... Share based payments.............................................................................................................. Financial lease liabilities..........................................................................................................

6,563 1,536 4,522

27,124 1,516 3,589

300

At 31 December 2009 2008 (in thousands of EUR)

Other non-current liabilities..................................................................................................... Total Other Non-Current Liabilities....................................................................................

857 13,478

5,473 37,702

Deferred income at December 31, 2009 and 2008 include the long-term part of deferred income related to IRU contracts. IRU deferred income relating to the International Business has been classified as liabilities held-for-sale as of December 31, 2009. Other non-current liabilities at December 31, 2008 include the non-current portion of advance payments from Vodafone relating to a construction project in Turkey in the amount of EUR 5,202 thousand, which is classified as liabilities held-forsale as of December 31, 2009. 22. Provisions for Other Liabilities and Charges
At 31 December 2009 2008 (in thousands of EUR)

Provision for restructuring ....................................................................................................... Provision for legal cases .......................................................................................................... Other provision ........................................................................................................................ Total Provisions for Other Liabilities and Charges............................................................ Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008

103 164 267

2,287 6,486 501 9,274

The provision for restructuring in 2008 relates to the estimated costs relating to the reorganization of operations of Memorex after its acquisition by the Group. The provision for legal cases at December 31, 2008 relates to provisions recorded for Invitel International AGs legal cases. These legal cases are expected to be closed during the next two years and have been classified as liabilities held-forsale as of December 31, 2009. See note 4 for further discussion on legal cases. The amount of provisions made approximates the expected outflows of economic benefits. Movements in the balance of provisions were as follows:
At 31 December 2009 2008 (in thousands of EUR)

At 1 January........................................................................................................................... Acquisition of subsidiaries....................................................................................................... Additional provisions............................................................................................................... Used during the year ................................................................................................................ Reclassified to liabilities held-for-sale..................................................................................... Exchange differences............................................................................................................... At 31 December...................................................................................................................... 23. Trade and Other Payables

9,274 146 (6,244) (2,832) (77) 267

3,010 9,467 3,526 (6,577) (152) 9,274

301

At 31 December 2009 2008 (in thousands of EUR)

Trade payables ......................................................................................................................... Payables to related parties........................................................................................................ Other payables ......................................................................................................................... Total Trade and Other Payables ..........................................................................................

18,640 621 7,856 27,117

43,044 533 22,206 65,783

Other payables as of December 31, 2008 include a provision recorded for a legal case relating to municipality taxes in the amount of EUR 7.8 million (see note 29) and Invitel International AGs finance lease liabilities in the amount of EUR 5.4 million classified as liabilities held-for-sale as of December 31, 2009. 24. Accrued Expenses and Deferred Income
At 31 December 2009 2008 (in thousands of EUR)

Accrued expenses .................................................................................................................... Accrued interest ....................................................................................................................... Deferred income ...................................................................................................................... Total Accrued Expenses and Deferred Income ...................................................................

12,459 2,158 2,122 16,739

39,962 9,292 9,880 59,134

Accrued expenses at December 31, 2009 and 2008 are mainly related to access type charges, tax related amounts and operating expenses. Accrued interest includes EUR 589 thousand and EUR 537 thousand accrued interest due to related parties at December 31, 2009 and 2008, respectively. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 25. Operating Leases

The Group leases various telecommunication network equipment and rights and other equipment under non-cancellable operating lease agreements. Non-cancellable future operating lease rental payments are as follows:
At 31 December 2009 2008 (in thousands of EUR)

1 year or less ............................................................................................................................ 2-3 years .................................................................................................................................. 4-5 years .................................................................................................................................. After 5 years ............................................................................................................................ Total Non-Cancellable Future Lease Payments.................................................................. 26. Finance Leases As of December 31, 2009 the present value of the minimum finance lease payments are as follows:

7,288 10,628 8,652 24,193 50,761

10,354 16,289 8,896 25,146 60,685

At 31 December 2009 2008 (in thousands of EUR)

302

At 31 December 2009 2008 (in thousands of EUR)

1 year or less ............................................................................................................................ 2-3 years .................................................................................................................................. 4-5 years .................................................................................................................................. After 5 years ............................................................................................................................ Total Non-cancellable Finance Leases Payable................................................................... Less Current Portion ................................................................................................................ Non-Current Portion of Non-cancellable Finance Leases Payable.................................... 27. 27.1 Commitments Capital commitments

192 427 503 3,592 4,714 (192) 4,522

5,714 3,589 9,303 (5,714) 3,589

During the year ended December 31, 2009 and 2008 the Group entered into several purchase contracts and commitments for future capital expenditures (including the purchase of new equipment or upgrading existing equipment). Current projects to which such capital commitments relate to include investment in information systems and customer service related infrastructure, number portability compliance, data and voice transmission equipment, and access network construction. Capital commitments are expected to be realized during the course of the following year. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 27.2 Performance guarantees and payment guarantees

Guarantees and claims arise during the ordinary course of business from relationships with suppliers and customers when the Group undertakes an obligation to guarantee our performance if specified triggering events occur. Nonperformance under a contract could trigger an obligation for the Group. These potential claims can arise from late or non-payment to suppliers (payment guarantees) and/or late or incomplete delivery of services to customers (performance guarantees). The Group also provides bid guarantees to new or existing customers in connection with bids on commercial projects. Our potential future payments under these guarantees as of December 31, 2009 are summarized as follows:
At 31 December 2009 2008 (in thousands of EUR)

Payment guarantees ................................................................................................................. Performance guarantees........................................................................................................... Total Payment and Governmental Guarantees................................................................... 27.3 Off-balance sheet obligations

1,502 1,502

1,580 272 1,852

The 2006 PIK Notes On October 30, 2006, Invitel Holdings, former owner of Matel Holdings, issued the 2006 PIK Notes pursuant to an Indenture, dated as of October 30, 2006 (the 2006 PIK Notes Indenture). Upon the closing of the sale of Matel Holdings to Hungarian Telephone and Cable Corp. (HTCC) on April 27, 2007, HTCC entered into a supplemental indenture with Invitel Holdings and the 2006 PIK Notes Indenture trustee. Pursuant to such supplemental indenture, Holdco I. B.V., a 100% subsidiary of HTCC replaced Invitel Holdings as the issuer of the 2006 PIK Notes and assumed all of the rights and obligations of the issuer under the 2006 PIK Notes Indenture. Obligations under the 2006 PIK Notes are general unsubordinated obligations and are collateralized by a first priority lien over the shares of Matel Holdings and are effectively subordinated to all existing and future debt of the subsidiaries of the Group. This is an obligation of the parent company and as such has not been reflected in these consolidated financial statements.

303

Interest on the 2006 PIK Notes is payable quarterly in cash or in the form of additional 2006 PIK Notes at an annual rate of EURIBOR plus 8.25%, reset quarterly, plus a ratchet margin. Interest on the PIK Notes is due on January 15, April 15, July 15 and October 15 of each year beginning on January 15, 2007. The ratchet margin is zero for the period to but excluding October 15, 2009 and 2.00% if the consolidated leverage ratio of Matel is greater than 2.50 to 1.00 for any interest period beginning on or after October 15, 2009. The maturity date of the 2006 PIK Notes is April 15, 2013. The Group has the option to redeem the 2006 PIK Notes, as a whole or in part, at any time or from time to time, at redemption prices specified in the 2006 PIK Notes Indenture. In the event of a change of control, an offer have to be made to purchase the 2006 PIK Notes at a purchase price equal to 101% of the principal amount thereof. The Group is also required to make an offer to purchase the 2006 PIK Notes with the excess proceeds following certain asset sales at a purchase price equal to 100% of the principal amount of thereof. The 2006 PIK Notes Indenture contains covenants restricting the Groups ability to, among other things, (i) incur additional indebtedness or issue preferred shares, (ii) make investments and certain other restricted payments, (iii) enter into transactions with affiliates, (iv) create certain liens, (v) enter into sale and leaseback transactions, (vi) issue or sell shares of subsidiaries, (vii) merge, consolidate or combine with other entities, (viii) designate subsidiaries as unrestricted subsidiaries, (ix) engage in unrelated business activities and (x) impair any security interests. The 2006 PIK Notes Indenture also contains customary events of default, including, among other things, non-payment of the principal, interest or premium, if any, on any 2006 PIK Notes, certain failures to comply with any covenant of the 2006 PIK Notes Indenture, certain defaults under other indebtedness, failure to pay certain indebtedness or judgments, bankruptcy or insolvency events and invalidity of any security document or security interest. The New Shareholder Loan In connection with the 2009 November Refinancing, Hungarian Telecom Finance International Limited (HTFI), a company controlled by Mid Europa purchased approximately EUR 154.6 million or 87% of the outstanding aggregate principal amount of the 2006 PIK Notes issued by Holdco I. B.V. in a tender offer (the 2006 PIK Notes Tender Offer). Concurrently with the consummation of the 2006 PIK Notes Tender Offer, holders of the 2006 PIK Notes consented to eliminate substantially all of the covenants and related events of default under the indenture governing the 2006 PIK Notes. Concurrently with the 2009 December Refinancing, all of the 2006 PIK Notes held by HTFI were converted into the second tranche of a new shareholder loan by Mid Europa to Holdco I. B.V. (Advance 2). Advance 1 provided by Mid Europa to Matel and Advance 2 provided by Mid Europa to Holdco I. B.V. were converted into a new subordinated shareholder loan (the New Shareholder Loan) between Mid Europa and Holdco I. B.V. (the Shareholder Debt Conversion). Holdco I. B.V. owns 100% of the equity of Matel Holdings and Matel Holdings owns 100% of the equity of Matel. The New Shareholder Loan is non-cash pay and have a 15 year maturity. Following assignment to Holdco I. B.V. the New Shareholder Loan of EUR 133.9 million was contributed as a capital contribution to Matel Holdings and then from Matel Holdings to Matel after which Matels obligations under the New Shareholder Loan was automatically extinguished by operation of law. Following the Shareholder Debt Conversion, approximately EUR 279.7 million aggregate principal amount of the New Shareholder Loan remained outstanding for Holdco I.B.V. This is an obligation of the parent company and as such has not been reflected in these consolidated financial statements. 28. Contingencies

The Group is involved in legal proceedings in the normal course of business. Based on legal advice, management made appropriate provisions in its December 31, 2009 and 2008 consolidated balance sheet for the potential future cash outflows relating to certain ongoing legal matters. The Group accounts for termination services provided by mobile operators at regulated interconnection rates. The mobile service providers have ongoing legal cases against the regulator with respect to such termination fees. Management of the Group believes that the outcome of such disputes will not have a significant impact on the consolidated financial statements of Matel, and accordingly no provision has been recorded in the consolidated financial statements for the possible return of amounts arising from reduced regulated interconnection rates. 29. Taxation The income tax (expense) / benefit for the year ended December 31, 2009 and 2008 comprises:

304

For the year ended 31 December 2009 2008 (in thousands of EUR)

Current tax ................................................................................................................. Local tax .................................................................................................................... Deferred tax ............................................................................................................... Income Tax (Expense) / Benefit .............................................................................. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008

(141) (3,646) 8,593 4,806

2,044 (8,213) 1,410 (4,759)

Matel is resident for tax purposes in the Netherlands and is subject to Dutch corporate income tax on its net worldwide income. For the year ended December 31, 2009 and 2008 the corporate income tax rate for Matel was 25.5% in both years. Since Matels subsidiaries are subject to the participation exemption in Article 13 of the Dutch Corporate Income Tax Act, dividends received from the subsidiaries will not be subject to Dutch corporate income tax upon meeting the relevant criteria. Matel is required to remit 8.3% withholding tax on dividends paid to its shareholders. Invitel Zrt, Invitel International Kft and ITC are tax residents in Hungary and were taxed at a flat corporate income tax rate of 16% for the years 2009 and 2008. As of September 1, 2006, a new tax type the Solidarity Tax was introduced in Hungary in addition to the 16% corporate income tax. The rate of Solidarity Tax was 4%. The basis of Solidarity Tax is the unconsolidated adjusted pre-tax profit. Tax losses carried forward cannot be offset against the basis of the Solidarity Tax. As of January 1, 2010, the corporate income tax rate increased to 19% and at same time the 4% Solidarity Tax was abolished. Euroweb Romania is a tax resident in Romania. The Romanian corporate income tax rate is 16% in both 2009 and 2008. Invitel International AG is a tax resident in Austria. The Austrian corporate income tax rate is 25% both in 2009 and 2008. Invitel International Turkey is tax resident in Turkey. The Turkish corporate income tax rate is 20% both in 2009 and 2008. Deferred tax assets and liabilities are determined by the legal entities. Deferred tax is calculated at the respective statutory tax rates where the entities of the Group are tax resident. For the Netherlands income tax purposes the Group has unused net operating loss carry forwards as of December 31, 2009 of approximately EUR 77,922 thousand, out of which EUR 9,547 thousand expires in 2016, EUR 16,177 thousand expires in 2017 and EUR 52,198 thousand expires in 2018. No deferred tax asset has been recorded for such unused tax losses as the realization of those is not probable. For Hungarian corporate income tax purposes, the Group has unused net operating loss carry forwards as of approximately EUR 67,289 thousand as of December 31, 2009. These tax losses are not subject to any statutory expiry limitations. The Group also has unused net operating loss carry forwards as of December 31, 2009 for Austria, Czech, Serbia, Slovenia, Bulgaria, Italy and Slovakia. Austrian net operating tax loss carryforwards are not subject to statutory limitations. The other net operating tax loss carryforwards in other jurisdictions expire various dates through 2014. No deferred tax assets have been created for these tax losses as future realizability is not probable. The Group has not provided any deferred taxes for undistributed earnings of subsidiaries. The distribution of such income would not result in any incremental tax liability due to valuation allowance. Such undistributed earnings of subsidiaries against tax loss carryforwards in the Netherlands amounted to EUR 45,379 thousand as of December 31, 2009 and EUR 47,840 thousand as of December 31, 2008. Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 Deferred tax assets are attributable to the following items:

305

Assets 31 December 2009 31 December 2008 (in thousands of EUR)

Liabilities 31 December 2009 31 December 2008 (in thousands of EUR)

Tax loss carried forward ......................... Derivative financial instruments ............. Interest bearing borrowings .................... Intangible assets...................................... Trade and other receivables .................... Provisions ............................................... Trade and Other Payables ....................... Finance Leases........................................ Property, plant and equipment ................ Intangible assets...................................... Deferred foreign exchange loss .............. Net Deferred Tax Assets.......................

12,787 2,682 147 1,315 442 1,168 896 3,783 23,220 16,811

5,315 1,388 300 1,373 1,426 1,814 9,674 513 21,803 11,262

2,364 2,791 14 984 256 6,409

2,658 2,546 4,086 413 838 10,541

Deferred tax liabilities are attributable to the following items:

Assets 31 December 2009 31 December 2008 (in thousands of EUR) Liabilities 31 December 2009 31 December 2008 (in thousands of EUR)

Tax loss carried forward ......................... Provisions ............................................... Intangible assets...................................... Property, plant and equipment ................ Net Deferred Tax Liabilities ................ Reconciliation of effective tax rate is as follows:

248 108 356

298 675 973 617

For the year ended 31 December 2009 (in thousands of EUR) 2008

Net profit / (loss) before tax.............................................................................. Income tax using the parent company corporate tax rate.................................. Solidarity tax paid............................................................................................. Valuation allowance ......................................................................................... Effect of tax rates in foreign jurisdictions......................................................... Tax on non-taxable income and non-deductible expenses................................ Effect of change in tax rate ............................................................................... Local business and other taxes paid, net of tax benefit..................................... Under / (over) provided in prior years .............................................................. Income Tax (Expense) / Benefit ..................................................................... Magyar Telecom B.V.

(68,952) 17,583 (109) (15,031) (709) 4,067 2,132 (3,028) (99) 4,806

(28,679) 7,313 277 (3,253) (1,941) (465) (6,899) 209 (4,759)

Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008 Municipality tax legal case

306

Three Hungarian municipalities initiated court proceedings against the Group in the Metropolitan Court of Budapest seeking payment in connection with an ambiguous provision in some of the concession contracts regarding the payment of local municipality taxes. On May 15, 2008 the Metropolitan Court ruled on behalf of the Group and denied the claims of the municipalities. On October 30, 2008 the Metropolitan Court of Appeal overturned, in part, the lower courts ruling and awarded the municipalities HUF 2.1 billion (approximately EUR 7.8 million) including interest, which was recognized as a provision in the consolidated balance sheet as of December 31, 2008 (see note 23). The Group applied to the Hungarian Supreme Court for a special review and a suspension of the judgment. During the fourth quarter of 2008, we subsequently entered into settlement negotiations and reached a final settlement in which we agreed to pay a total of HUF 1,951 million (approximately EUR 7.2 million) to the three municipalities, which payments are made according to a pre-determined time schedule, with the final payment due in June 2010. The balance of such provision as of December 31, 2009 is HUF 421 million (approximately EUR 1.6 million). The other municipalities that made claims to us, which were rejected by the Group, did not initiate formal legal proceedings and, therefore, lost their ability to initiate such legal proceedings. 30. Related Party Transactions

Related parties at December 31, 2009 include the Groups subsidiaries, as well as MEP, Invitel Holdings A/S, Invitel Hungary Holdings Kft, Matel Holdings, Holdco I. B.V., Holdco II. B.V., and key management personnel of the Group. Related parties at December 31, 2008 include the Groups subsidiaries, as well as HTCC, Matel Holdings, HoldCo I. B.V., HoldCo II. B.V., TDC and its subsidiaries as well as key management personnel of the Group. HTCC, after the Invitel acquisition by HTCC, recharged to the Group certain expenses. The Group had a net outstanding payable of EUR 2,437 thousand to HTCC at December 31, 2008 and zero balance with HTCC as of December 31, 2009 as HTCC was liquidated in March, 2009. TDC, after the Invitel acquisition by HTCC, provided telecommunications related services to the Group and charged EUR 37 thousand and EUR 478 thousand for such services for the period ended December 31, 2009 and 2008, respectively. The Group charged EUR 13 thousand and EUR 458 thousand to TDC for such services for the period ended December 31, 2009 and 2008, respectively, as well as management fee in the amount of EUR 35 thousand for the year ended December 31, 2009. Matel had a net receivable of EUR 157 thousand from TDC as of December 31, 2008. Matel Holdings charged to the Group the cost of the 2004 refinancing. The outstanding payable balance relating to these charges was EUR 628 thousand both as of December 31, 2009 and 2008, respectively. Matel have incurred interest expense on related party subordinated loans in the amount of EUR 2,183 thousand and EUR 1,994 thousand for the years ended December 31, 2009 and 2008, respectively. The interest was payable to Matel Holdings and is capitalized onto the outstanding loan balance on an annual basis. The outstanding balance of the related party subordinated loan was EUR 24,568 thousand and EUR 22,386 thousand as of December 31, 2009 and 2008, respectively. As part of the 2009 November Refinancing, Mid Europa, concurrently with becoming the controlling shareholder of the Group, purchased all of TDCs rights and obligations under the EUR 34.1 million TDC PIK Loan and amended and restated it to increase the loan by EUR 91.4 million, on terms substantially similar to the existing loan, which became a new shareholder loan of EUR 133.9 million including accrued interest provided by Mid Europa to Matel (Advance 1). Concurrently with the 2009 December Refinancing, all of the 2006 PIK Notes held by HTFI were converted into a new shareholder loan by Mid Europa to Holdco I. B.V. (Advance 2). Advance 1 and Advance 2 were granted as a new subordinated shareholder loan between Mid Europa and Holdco I. B.V. (the New Shareholder Loan). The rights under the New Shareholder Loan were contributed by Holdco I. B.V. as a capital contribution to Matel Holdings and then from Matel Holdings to Matel after which Matels obligations under the New Shareholder Loan were automatically extinguished by operation of law. The extinguishment of Matels obligation under the New Shareholder Loan was recorded in equity as an increase to capital reserve. Salaries and other short-term employee benefits paid to key management personnel amounted to EUR 1,991 thousand and EUR 2,620 thousand for the years ended December 31, 2009 and 2008, respectively. Share based compensation granted to key management personnel amounted to EUR 111 thousand and zero for the years ended December 31, 2009 and 2008, respectively. There have been no termination benefits, post-employment benefits or other long-term benefits paid to key management personnel during the years ended December 31, 2009 and 2008. There have been no loans or guarantees provided to key management personnel during the years ended December 31, 2009 and 2008.

307

31.

Segment Reporting

The following table presents a summary of the Groups operating segment financial information for the years ended December 31, 2009 and 2008. The International Business has been excluded from the 2009 and 2008 information below as the amounts have been included in discontinued operations (see note 4).
For the year ended 31 December 2009 2008 (in thousands of EUR)

Revenue Mass Market Voice.................................................................................................... Mass Market Internet ................................................................................................. Business ..................................................................................................................... Domestic Wholesale .................................................................................................. Inter-segment elimination .......................................................................................... Total Revenue........................................................................................................... Segment Cost of Sales Mass Market Voice.................................................................................................... Mass Market Internet ................................................................................................. Business ..................................................................................................................... Domestic Wholesale .................................................................................................. Inter-segment elimination .......................................................................................... Total Segment Cost of Sales.................................................................................... Network operating expenses ...................................................................................... Direct personnel expenses ......................................................................................... Total Cost of Sales, exclusive of Depreciation ....................................................... Segment Gross Margin Mass Market Voice.................................................................................................... Mass Market Internet ................................................................................................. Business ..................................................................................................................... Domestic Wholesale .................................................................................................. Inter-segment elimination .......................................................................................... Total Segment Gross Margin.................................................................................. Network operating expenses ...................................................................................... Direct personnel expenses ......................................................................................... Depreciation and Amortization.................................................................................. Operating Expenses ................................................................................................... Cost of Restructuring ................................................................................................. Total Income from Operations ............................................................................... Magyar Telecom B.V. Notes to the Consolidated Financial Statements (continued) for the years ended December 31, 2009 and 2008

77,062 32,868 80,912 33,504 (14,356) 209,990 (13,022) (6,229) (20,408) (8,321) 9,352 (38,628) (19,593) (10,904) (69,125) 64,040 26,639 60,504 25,183 (5,004) 171,362 (19,593) (10,904) (54,835) (40,541) (2,121) 43,368

108,044 37,574 96,210 28,702 (4,593) 265,937 (22,877) (6,527) (26,677) (3,085) 624 (58,542) (19,924) (12,415) (90,881) 85,167 31,047 69,533 25,617 (3,969) 207,395 (19,924) (12,415) (69,732) (51,978) (8,074) 45,272

The chief operating decision maker considers the Group from a revenue service perspective and assesses the performance based on segment gross margin. This measurement primarily focuses on the variable costs associated with this business. Other fixed and non-cash charges are excluded from this measure. Segment liabilities are not regularly reviewed by the chief operating decision maker.

308

The following table presents a summary of total assets of the Group by operating segment at December 31, 2009 and 2008:
At 31 December 2009 2008 (in thousands of EUR)

Assets Mass Market Voice................................................................................................................... Mass Market Internet ................................................................................................................ Business .................................................................................................................................... Domestic Wholesale ................................................................................................................. Inter-segment elimination ......................................................................................................... Total segment assets ................................................................................................................. Unallocated assets..................................................................................................................... Total Assets ............................................................................................................................. Assets held-for-sale .................................................................................................................. Total Assets ............................................................................................................................. 32. Subsequent Events

269,869 160,946 437,452 136,931 (585,033) 420,165 68,406 488,571 234,094 722,665

316,549 132,682 224,362 460,420 (482,738) 651,275 59,515 710,790 710,790

MEP announced, on December 7, 2009, the commencement of a tender offer (the Tender Offer) to purchase any and all outstanding shares and any and all outstanding American Depositary Shares (ADS) of Invitel Holdings A/S at a price of USD 4.50 per share. As a result of the Tender Offer, which closed on January 22, 2010, MEP holds approximately 91.78% of the shares of Invitel Holdings A/S (including shares represented by ADS). Following the completion of the Tender Offer, MEP initiated steps to acquire the remaining shares of Invitel Holdings A/S not owned by it (1,375,351 or 8.22% of the shares) in a compulsory acquisition procedure under the Danish Companies Act at the same per share cash price offered and paid in the Tender Offer (USD 4.50 per share). The procedure was commenced on February 22, 2010, by MEP requesting the remaining minority shareholders of Invitel Holdings A/S to transfer their shares and upon its expiry (expected on July 5, 2010), MEP, through HTC, will become the sole shareholder of Invitel Holdings A/S. On January 20, 2010 Matel repurchased 2007 Notes in the aggregate principal amount of EUR 25.0 million at purchase price equal to 102% of the principal amount thereof plus accrued interest up to but excluding the date of settlement. After this transaction, the aggregate principal amount outstanding of the 2007 Notes is EUR 100.7 million. In January and February of 2010, Invitel Zrt undertook an unwinding of its derivative financial instruments relating to various facilities and notes which have been previously redeemed or repurchased as well as a restructuring of existing forwards in order to match current debt service. A loss of EUR 1.7 million was realized on these transactions.

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Registered Office of the Issuer Magyar Telecom B.V. Locatellikade 1 1076 AZ Amsterdam The Netherlands Legal Advisers to the Issuer As to U.S. federal, Hungarian and New York law: White & Case LLP 5 Old Broad Street London EC2N 1DW United Kingdom Legal Advisers to the Initial Purchaser As to U.S. federal and New York law: Latham & Watkins (London) LLP 99 Bishopsgate London EC2M 3XF United Kingdom As to Hungarian law: Burai-Kovcs & Partners Andrssy t 100 H-1062 Budapest Hungary Independent Auditors PricewaterhouseCoopers Kft. Wesselnyi u. 16 H-1077 Budapest Hungary Security Trustee BNP Paribas Trust Corporation UK Limited 55 Moorgate London EC2R 6PA United Kingdom Trustee BNY Mellon Corporate Trustee Services Limited One Canada Square London E14 5AL United Kingdom Principal Paying Agent and Transfer Agent The Bank of New York Mellon One Canada Square London E14 5AL United Kingdom

Luxembourg Listing Agent, Transfer Agent, Registrar and Paying Agent The Bank of New York Mellon (Luxembourg) S.A. Vertigo Building, Polaris 2-4 rue Eugne Ruppert L-2453 Luxembourg

Legal Advisor to the Trustee Berwin Leighton Paisner LLP Adelaide House London Bridge London EC4R 9HA United Kingdom

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Printed by RR Donnelley, 157165

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