UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 20-F

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

For the fiscal year ended December 31, 2005

Commission file number 1-14720

MAGYAR TELEKOM NYILVÁNOSAN MŰKÖDŐ RÉSZVÉNYTÁRSASÁG

(Exact Name of Registrant as Specified in Its Charter)

MAGYAR TELEKOM TELECOMMUNICATIONS PUBLIC LIMITED COMPANY

(Translation of Registrant’s Name Into English)

Hungary

(Jurisdiction of Incorporation or Organization)

Budapest, 1013, Krisztina krt. 55, Hungary

(Address of Principal Executive Offices)

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

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

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

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

Ordinary Shares……1,042,811,600
nominal value HUF 100 per share

(as of December 31, 2005)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

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

Indicate by check mark which financial statement item the registrant has elected to follow.

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

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

TABLE OF CONTENTS

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Explanatory Note

In the course of conducting their audit of our 2005 financial statements, PricewaterhouseCoopers Könyvvizsgáló és Gazdasági Tanácsadó Kft. (“PwC”) identified certain contracts the nature and business purposes of which were not readily apparent. PwC notified the Audit Committee of the Supervisory Board (the “Audit Committee”) and advised them to retain independent counsel to conduct an investigation into these contracts. Our Audit Committee retained the law firm of White & Case LLP (“White & Case”), as its independent legal counsel, to conduct the investigation. Based on the documentation and other evidence obtained by it, the White & Case investigation has preliminarily concluded that it was unable to determine a proper business purpose for four consulting contracts entered into in 2005, and further found that certain employees had destroyed evidence that was relevant to the investigation. We have taken and are taking remedial measures to address weaknesses in our control environment that were revealed by the investigation. The investigation and consequent delay in completing the audit of our 2005 financial statements has led to a delay in filing this annual report. See “Item 3—Risk Factors” and “Item 15—Controls and Procedures.”

Certain Defined Terms and Conventions

In this annual report the terms “Magyar Telekom”, the “Group”, the “Company”, “we”, “us” and “our” refer to Magyar Telekom Plc. and, if applicable, its direct and indirect subsidiaries as a group; the term “Magyar Telekom Plc.” refers to Magyar Telekom Plc. without its subsidiaries; the term “TMH” refers to T-Mobile Magyarország Távközlési Rt. (formerly known as Westel Mobil Távközlési Rt., “Westel”); the term “DT” refers to Deutsche Telekom AG.

On May 6, 2005, Magyar Távközlési Rt. (“Matáv”) changed its name to Magyar Telekom Távközlési Rt. (Magyar Telekom Telecommunications Co. Ltd.) and its abbreviated name became Magyar Telekom Rt.

On March 1, 2006, Magyar Telekom changed its name to Magyar Telekom Távközlési Nyilvánosan Működő Rt. (Magyar Telekom Telecommunications Public Limited Company) and its abbreviated name became Magyar Telekom Nyrt. (Magyar Telekom Plc.).

In this annual report, the term “Minister” refers to the Minister heading the Ministry of Informatics and Communications (Informatikai és Hírközlési Minisztérium, “IHM”), a ministry of the Hungarian government in charge of regulating the telecommunications industry. On June 1, 2006 the Ministry of Informatics and Communications merged into the Ministry of Economy and Transport.

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

Forward-looking Statements

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

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PART I

ITEM 1—IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2—OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3—KEY INFORMATION

SELECTED FINANCIAL DATA

This selected consolidated financial and statistical information should be read together with the consolidated financial statements, including the accompanying notes, included in this annual report. We derived these financial data from our consolidated financial statements as of and for the years ended December 31, 2001, 2002, 2003, 2004 and 2005 and the accompanying notes, which have been audited by PricewaterhouseCoopers Könyvvizsgáló és Gazdasági Tanácsadó Kft. (“PwC”). These consolidated financial data are qualified by reference to our consolidated financial statements and accompanying notes, which we have prepared in accordance with International Financial Reporting Standards (“IFRS”). IFRS differs from U.S. Generally Accepted Accounting Principles (“GAAP”). For a discussion of the principal differences between IFRS and U.S. GAAP as they relate to us, see Note 34 to the consolidated financial statements.

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(1)           Translated into U.S. dollars at the official exchange rate of the National Bank of Hungary on December 31, 2005 of U.S. dollar 1.00 = HUF 213.58. These translations are unaudited and presented for convenience purposes only.

(2)           Basic earnings per share under IFRS and basic earnings per share under U.S. GAAP are calculated by dividing net income by the weighted average number of shares outstanding during each period.

(3)           In December 2001, Magyar Telekom Plc. acquired a 49 percent interest in TMH and Westel Rádiótelefon Kft. (“Westel 0660”) from Deutsche Telekom AG. As Magyar Telekom Plc. is controlled by Deutsche Telekom AG this was a transaction between parties under common control. The financial statements have been restated as if TMH and Westel 0660 were wholly owned subsidiaries of Magyar Telekom since March 23, 2000, the date on which Deutsche Telekom AG acquired a 49 percent interest in TMH and Westel 0660.

Dividends

The following table sets forth the dividend per Magyar Telekom ordinary share for the years 2001, 2002, 2003, 2004 and 2005. The table shows the dividend amounts in Hungarian forints, together with U.S. dollar equivalents, for each of the years indicated.

(1)          Translated into U.S. dollars at the official exchange rate of the National Bank of Hungary on December 31, 2005 of U.S. dollar 1.00 = HUF 213.58; December 31, 2004 of U.S. dollar 1.00 = HUF 180.29; December 31, 2003 of U.S. dollar 1.00 = HUF 207.92; December 31, 2002 of U.S. dollar 1.00 = HUF 225.16 and on December 31, 2001 of U.S. dollar 1.00 = HUF 279.03.

EXCHANGE RATE INFORMATION

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

The National Bank of Hungary (“NBH”) quotes and publishes official exchange rates of the Hungarian forint for all major currencies based on prevailing market rates. Unless otherwise stated, conversion of Hungarian forint into U.S. dollars have been made at the rate of USD 1.00 to HUF 213.58, which was the official rate quoted and published on December 31, 2005.

The NBH has a policy to intervene in the foreign exchange market to stabilize the exchange rate of the Hungarian forint for the euro. On any given day, the market exchange rate of the Hungarian forint against euro may vary from the official rate of the NBH. Prior to May 4, 2001, the NBH had a policy of

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intervening in the foreign exchange market, if the market rate deviated more than 2.25 percent above or below the official rate. On May 4, 2001, the NBH announced that it had widened this intervention band to 15 percent above and below the official rate. This decision was taken as a step toward convergence with the European Union exchange rate regime and as a measure against inflation.

The following tables set forth, for the periods and dates indicated, the period-end, average, high and low official rates quoted and published by the NBH for Hungarian forint per U.S.$1.00 and EUR1.00.

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

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

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

RISK FACTORS

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

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

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

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

The NCA initiated the market analysis procedure on 17 out of 18 relevant markets identified in an applicable decree in 2004 and has reached its final findings on 16 of these markets by February 2006. Under these findings, Magyar Telekom was found to have SMP on 12 of the 16 markets (i.e., markets 1-9 and 11-13) and TMH was found to have SMP on one market (i.e., market 16). As a result, the NCA imposed various obligations on Magyar Telekom and TMH with respect to these markets. See “Item 4—Regulation and Pricing”.

The Recommendation of the European Commission on relevant product and service markets within the electronic communications sector susceptible to ex ante regulation in accordance with Directive 2002/21/EC of the European Parliament and of the Council on a common regulatory framework for electronic communication networks and services (2003/311/EC) (“Recommendation”), the regulation on which the market analysis procedure of the NCA is based, is also under review. The new recommendation is expected to enter into force in 2007.

In addition, our businesses in Macedonia and Montenegro are also subject to various regulatory developments.

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

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

The Electronic Communications Act was enacted to facilitate further competition and encourage new entrants to the market. Although identities of such entrants are already known to some degrees, the scope

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of competition and any adverse effect on our results will depend on a variety of factors that we currently cannot assess with precision and are for the most part not within our control. Among such factors are business strategies and capabilities of new competitors, prevailing market conditions, as well as the effectiveness of our efforts to prepare for new market conditions.

In the mobile communications business, we already face intense competition. As all telecommunications markets have become increasingly saturated, the focus of competition is starting to shift from customer acquisition to retention. Significant customer defections could have an adverse effect on results of operations, and customer acquisition and retention expenses are substantial. Due to the increased level of competition, prices for mobile telephone services have been declining over the past several years and may continue to decline. We expect the competition in the mobile sector to intensify in the near future, if Mobile Virtual Network Operators (“MVNOs”) win a regulatory approval to provide mobile telecommunications services in Hungary. MVNOs are mobile operators that do not own their own spectrum or often network infrastructure, buy the use of the spectrum and network infrastructure from traditional mobile operators and provide mobile telecommunications services to consumers based on such purchased capacity. MVNOs will likely target the lower segment of the market and such development will likely increase price-based competition.

We also face intense competition in the market for Internet services, as well as in the data communications markets from other fixed line, mobile and cable television service providers.

In Macedonia, the exclusive rights of Makedonski Telekommunikacii AD (“Maktel”) to provide fixed line telecommunications services expired at the end of 2004 as a result of the market liberalization. Competition posed by new entrants may result in a downward pressure on Maktel’s pricing, sales volume and profitability, which would have an adverse effect on our financial condition and results of operations. In addition, depending on the liberalization process in Macedonia, a new third mobile operator might enter the market as well.

In Montenegro the de facto exclusivity of Crnogorski Telekom in international voice traffic has come to an end as Promonte, the Montenegrin market leader in mobile telephony has acquired a license for international voice traffic valid from January 1, 2007. There are several public tenders ongoing in Montenegro that will have a significant long term effect on the telecommunication market. The Montenegrin Telecommunication Agency has announced a public tender for cable television services, and new cable television service providers may enter traditional telecommunications markets in 2007.

The Montenegrin Telecommunication Agency has also announced a public tender for providing Third Generation (“3G”) mobile services and a combined new license to provide 2G/3G mobile telephony services in Montenegro. The combined license is likely to be acquired by a new, third operator which would further increase competition in the Montenegrin mobile market.

The Montenegrin Telecommunication Agency has also announced a public tender for providing telecommunication services using World Interoperability for Microwave Access (“WiMAX”) technology. The outcome of this tender might further increase competition in Montenegro.

Competition posed by potential new entrants may result in a downward pressure on Crnogorski Telekom’s and T-Mobile Montenegro’s pricing, sales volume and profitability, which would have an adverse effect on our financial condition and results of operations.

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

We expect the number of fixed access lines and rates for fixed and mobile telephone services to decrease as competition increases. Our ability to sustain revenue growth will therefore depend on our ability to increase the amount of traffic over existing fixed lines and to increase revenues from value added

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and data services. We also plan to grow our mobile subscriber base and our related lines of business, such as Internet and cable television, and expand our coverage area. We may not be able to sustain revenue growth, if we are not able to offer attractive and affordable value added services in the future or if our customers do not purchase our services.

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

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

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

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

TMH launched 3G-based services in Hungary in 2005 before any of its competitors. TMH is currently upgrading the network infrastructure to better provide the new generation of services. However, new alternative technologies and standards, e.g., Wireless Fidelity (“WiFi”), WiMAX, or Voice over Internet Protocol (“VoIP”), may keep consumers from choosing 3G-based services. We are not able to predict at the moment which of these competing technologies will be the most widely accepted platform, however we think that High Speed Downlink Packet Access (“HSDPA”) and High Speed Uplink Packet Access (“HSUPA”) enabled 3G network is the most likely candidate.

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

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

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

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

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

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

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

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

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

Loss of key personnel could weaken our business.

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

Our independent registered public accounting firm identified two contracts for which it was unable to identify a proper business purpose. A subsequent independent investigation into these and other contracts revealed weaknesses in our internal controls, and we may not be able to remedy these weaknesses or prevent future weaknesses.

In connection with their audit of our consolidated financial statements for the year ended December 31, 2005, PwC, our independent auditor, identified two consulting contracts entered into by two of our subsidiaries for which it was unable to identify a proper business purpose. A subsequent independent investigation, carried out by the law firm of White & Case under the supervision of our Audit Committee, and which is still ongoing, concluded that four consulting contracts were entered into by us and our subsidiaries without there being adequate documentation of a proper business purpose for them.

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The investigation was also impeded by the destruction by certain employees of documents relevant to these four contracts.

The independent investigation revealed certain weaknesses in our internal controls and procedures, including a lack of consistent group-wide approval procedures for procurement and third-party contracts and a lack of a comprehensive group-wide compliance-training program.

The investigation delayed the finalization of our 2005 financial statements, and as a result we and some of our subsidiaries have failed and may fail to meet certain deadlines prescribed by applicable laws and regulations for preparing and filing audited annual results and holding annual general meetings. We have to date been fined HUF 13 million as a consequence of these delays and additional fines could be imposed in the future. For further discussion of the independent legal investigation, its conclusions and the steps that we are taking to remedy our control deficiencies, see “Item 15—Controls and Procedures.”

Notwithstanding the steps we are taking to address these issues, we may not be successful in remedying these weaknesses or preventing future weaknesses. If we are unable to remedy these weaknesses, there is a risk that we may not be able to prevent or detect improper third-party contracts that could cause a material misstatement of our annual or interim consolidated financial statements. In addition any failure to implement new or improved internal controls, or resolve difficulties encountered with their implementation, could harm our operating results or cause us to fail to meet our reporting obligations and consequently subject us to regulatory fines. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our shares and ADSs.

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

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

We have a substantial business interest based in Macedonia, where ethnic hostilities and economic pressures could reduce the value of our investment in that region.

We own a 100 percent interest in Stonebridge Communications AD (“Stonebridge”), which owns a 51 percent interest in Maktel, a formerly state-owned public telecommunications services provider in Macedonia. Maktel became a consolidated subsidiary of Magyar Telekom on January 15, 2001.

Ethnic hostilities, while getting better, continue to pose a significant risk to the economy of Macedonia. The negative pressure on the economy could lead to devaluation of the currency. In case of devaluation of the Macedonian denar, the value of our interest in Maktel would be reduced and our financial condition and results of operations could be adversely affected.

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

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

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Due to the substantial state budget deficit, the Hungarian government passed a stabilization package in June 2006. The stabilization program provides for significant tax hikes for both corporations and individuals, including the introduction of an additional income tax on high-income individuals, increases in corporate taxes and VAT, and a new tax on healthcare contributions and other benefits. The stabilization program also introduces material energy price increases. We expect this stabilization program could have the effect of increasing the CPI and decreasing GDP in 2007 and 2008 from the levels that might otherwise be attained without it. As an effect of any relative CPI increase and/or GDP decrease, disposable income may decrease accordingly in both the corporate and the residential segments. Any such decrease in disposable income could negatively affect spending on telecommunications, which could result in decreased revenues for Magyar Telekom.

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

We are subject to currency translation risks, mainly relating to the results of our Macedonian and Montenegrin operations. Devaluation of the Macedonian denar or appreciation of the Hungarian forint may exert a negative influence on Maktel’s results that are converted into HUF. The conversion of Crnogorski Telekom’s results into HUF depends on the value of the HUF against the EUR. This is mainly a reporting risk, but through the dividend payments it has direct financial (cashflow) effects on us as well.

We are subject to risks resulting from fluctuations in interest rates.

We are subject to risks resulting from fluctuations in interest rates, which can affect costs associated with our interest bearing obligations and certain other payments. Our debt portfolio consists of approximately 25 percent floating rate and 75 percent fixed rate obligations. The floating rate loans decrease the predictability of our financing costs since interest is always paid according to the current market interest rates. Fixed rate loans also bear risks of fluctuating interest rates, as we may have to pay interest at a higher rate on fixed rate loans than the prevailing market interest rate, and we may not be able to refinance at a lower interest rate.

In 2002 and 2003, we refinanced our indebtedness denominated in euro and replaced it with indebtedness in Hungarian forint. As the interest rate volatility associated with the Hungarian forint is much higher than that associated with the euro, we may be exposed to higher interest rate volatility. To mitigate such volatility, our debt portfolio was modified to include a greater amount of fixed rate indebtedness. However, we cannot guarantee that such a strategy will sufficiently decrease our exposure to interest rate volatility. Such volatility may lead to an unexpected increase in interest payment obligations, which would adversely affect our financial positions and results of operations.

ITEM 4—INFORMATION ON THE COMPANY

ORGANIZATION

Until May 6, 2005, the legal name of the Company was Magyar Távközlési Rt. and it operated under its commercial name, “Matáv”. On May 6, 2005, Magyar Távközlési Rt. was rebranded as Magyar Telekom Távközlési Rt. (Magyar Telekom Telecommunications Co. Ltd.) and its commercial name became Magyar Telekom Ltd. On March 1, 2006, Magyar Telekom changed its name to Magyar Telekom Nyilvánosan Működő Rt. (Magyar Telekom Telecommunications Plc.).

Magyar Telekom is a limited liability stock corporation incorporated and operating under the laws of Hungary. Our shares are listed on the Budapest Stock Exchange, and our ADSs are listed on the New York Stock Exchange. Our headquarters are located at 55 Krisztina krt., 1013 Budapest, Hungary. Our telephone numbers are +36-1-458-0000 and +36-1-458-7000. Our agent for service of process in the United States is CT Corporation, 111 Eighth Avenue, New York, New York 10011, USA.

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HISTORY AND DEVELOPMENT

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

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

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

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

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

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

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

As of December 31, 2005, 59.21 percent of Magyar Telekom’s ordinary shares was held by MagyarCom, 40.55 percent publicly traded and 0.24 percent held as treasury shares. The Hungarian government owns one Series “B” voting preference share to which special rights attach.

On January 20, 2005, Magyar Telekom announced that the Board of Directors had made a decision to rename Matáv to Magyar Telekom. According to the resolution, the official name of the Company changed to Magyar Telekom Távközlési Rt. (Magyar Telekom Telecommunications Co. Ltd.) and its abbreviated name became Magyar Telekom Rt. (Magyar Telekom Ltd.). The Board of Directors’ decision was approved by the shareholders in the Extraordinary General Meeting on February 22, 2005.

On May 6, 2005, the change of the Company’s name was registered with the Court of Registry. At the same time, we changed and registered the name of two of our subsidiaries. Axelero, our Internet subsidiary, is now named T-Online Hungary Internet Service Provider Co. Ltd. (“T-Online Hungary”). MatávkábelTV, our cable television subsidiary is now named T-Kábel Hungary CableTV Servicing Limited Liability Company (“T-Kábel Hungary”).

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On December 20, 2005, Magyar Telekom’s Extraordinary General Meeting approved the decision on the merger of Magyar Telekom Plc. and TMH. The court registration of the merger took place on February 28, 2006. From March 1, 2006, Magyar Telekom is the legal successor of TMH. TMH continues its operations within Magyar Telekom under an independent brand and as an independent line of business.

On March 1, 2006, Magyar Telekom changed its name to Magyar Telekom Nyilvánosan Működő Rt. (Magyar Telekom Telecommunications Public Limited Company) and its abbreviated name became Magyar Telekom Plc.

For the details on our principal acquisitions during the last three years, see “Item 10—Material contracts”.

DESCRIPTION OF BUSINESS AND ITS SEGMENTS

We are the principal provider of fixed line telecommunications services in Hungary, with approximately 2.8 million fixed access lines as of December 31, 2005. We are also Hungary’s largest mobile telecommunications services provider, with almost 4.2 million mobile subscribers (including users of prepaid cards) as of December 31, 2005. We hold a 100 percent interest in Stonebridge Communications AD, which controls Maktel, the sole fixed line telecommunications services provider and, through its subsidiary T-Mobile Macedonia, the leading mobile telecommunications operator in Macedonia. We also hold a 76.53 percent ownership in Crnogorski Telekom, the principal fixed line telecommunications services provider and, through its subsidiary T-Mobile Crna Gora, the second largest mobile telecommunications operator in Montenegro.

Our consolidated revenues were HUF 620,697 million (U.S.$ 2,906 million), and our consolidated net income was HUF 78,564 million (U.S.$ 368 million) in 2005.

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

Fixed Line Telecommunications Services.   Our fixed line telecommunications services consist of local, long distance and international telephone as well as other telecommunications services, including data transmission, cable television and Internet services. Magyar Telekom Plc. had exclusive rights through December 2001 to provide domestic long distance and international public telephone services throughout Hungary and to provide local public fixed line telephone services in 31 of the 54 local primary areas in Hungary. Magyar Telekom Plc. had exclusive rights in five of the 54 local primary areas until May 2002, while its subsidiary, Emitel, had exclusive rights in an additional three concession areas through November 2002. Our 36 former local concession areas cover approximately 70 percent of Hungary’s geographic area and include Budapest as well as nearly all other major cities in Hungary. As there is limited competition for public telephone services even after the liberalization of the telecommunications market, we are still the dominant telephone service provider in these 36 areas. We also provide leased lines, data transmission services and corporate network services, sell telecommunications equipment and offer network construction and maintenance services. We are the market leader for most of these services in Hungary.

The fixed line telecommunications service segment also includes three Macedonian companies. Stonebridge is a holding company through which Magyar Telekom controls Maktel. Telemacedonia is a management company through which Magyar Telekom provides management and consulting services to Maktel, T-Mobile Macedonia and Stonebridge. Maktel is Macedonia’s leading fixed line telecommunications company. Its exclusive rights in fixed line telecommunications services expired in December 2004. These exclusive rights included local, national and international long distance public voice services, Voice-over Internet Protocol (“IP”) services, leased lines services and the construction and operation of public voice network services.

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In addition, the fixed line telecommunications service segment also includes our Montenegrin subsidiary, Crnogorski Telekom. Crnogorski Telekom is the principal fixed line telecommunications service provider in Montenegro.

On November 29, 2005 Magyar Telekom concluded an agreement to acquire a 100 percent stake in Orbitel for EUR 8 million. Orbitel is an alternative Bulgarian telecommunications and internet service provider offering countrywide voice and data services to the business community utilizing IP technology. In 2005, the company generated revenues of EUR 11.5 million. The financial closing of the deal took place on February 3, 2006.

On December 12, 2005 Magyar Telekom agreed to acquire a 100 percent stake in Dataplex Kft. for HUF 5.1 billion, based on the net debt position of the company at the time of the agreement. Dataplex is an operator in the Hungarian Information Technology (“IT”) outsourcing market. The financial closing of the transaction took place following the approval by the Hungarian Competition Authority, on April 5, 2006.

In April 2006 Magyar Telekom acquired the 100 percent ownership of iWiW Kft., the leading Hungarian online social network, for a purchase price of HUF 1.1 billion. iWiW (‘who is who’) operates the leading online social network for existing friendships and relationships with more than a million registered members, making it the fourth most visited web page in Hungary. In 2005 iWiW generated revenues of HUF 5 million.

In May 2006 Magyar Telekom acquired the 100 percent ownership of Adnetwork Kft, the leading Hungarian online advertisement network for a purchase price of HUF 0.2 billion. Adnetwork was established in 2005 and generated revenues of HUF 28 million in 2005.

In June 2006 Magyar Telekom signed a share purchase agreement to acquire the 100 percent ownership of KFKI-LNX, one of the leading Hungarian IT companies for a purchase price of HUF 8.2 billion plus an optional earn-out payment of HUF 1.5 billion dependent on the 2006 financial performance. The acquisition was closed on September 15, 2006, from which date KFKI Group became consolidated in Magyar Telekom. In 2005, KFKI Group’s revenues amounted to approximately HUF 17 billion. KFKI-LNX has two 100 percent owned subsidiaries, ICON and IQSYS.

On December 13, 2006, Magyar Telekom agreed to acquire a 100 percent stake in MobilPress and a 75.05 percent stake in MFactory for a combined purchase price of HUF 1 billion. In addition, the company also has an option to increase its stake in MFactory to 100 percent from 2009. MobilPress is one of the major Hungarian mobile content providers and manages, among others, the t-zones portal. MFactory is one of the leading Hungarian mobile content producers and aggregators. This transaction will enable Magyar Telekom to enhance its presence in the mobile content business and develop a multi-channel multimedia service centre to capture opportunities in this growing segment. The transaction closed in January 2007.

On January 1, 2007, Magyar Telekom acquired an additional 2 percent of T-Systems Hungary for HUF 60 million, increasing its stake to 51 percent. Our intention is to further increase Magyar Telekom’s share in T-Systems Hungary to 100 percent by the end of the second quarter of 2007.

Mobile Telecommunications Services.   Our mobile telecommunications subsidiary, TMH, is a leading provider of mobile telecommunications services in Hungary. TMH is one of three digital mobile services providers in Hungary. Since December 7, 2004, TMH also has rights to operate 3G, or Universal Mobile Telecommunications System (“UMTS”), mobile telecommunications services. Mobile telecommunications services have contributed significantly to our revenues. The number of TMH’s subscribers increased from 3.4 million at the end of 2002 to 4.2 million at the end of 2005.

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The mobile telecommunications service segment also includes T-Mobile Macedonia, a leading mobile telecommunications services provider in Macedonia. T-Mobile Macedonia is a fully owned subsidiary of Maktel. The number of T-Mobile Macedonia’s subscribers increased from 366,348 at the end of 2002 to 877,142 at the end of 2005. In addition, the segment also includes T-Mobile Crna Gora, the second largest mobile telecommunications services provider in Montenegro, a fully owned subsidiary of Crnogorski Telekom.

STRATEGY

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

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

To adapt to these changes in the market, we are now moving from the traditional traffic-based revenue structure to an access-based revenue structure, which will allow us to substitute declining traffic revenues with content, entertainment and bundled access revenues. In addition we are seeking new revenue sources by entering into new non-traditional converged telecommunications markets.

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

To ensure our continuing success, we have been operating under our Value Creation Program since mid-2004. We believe that the successful implementation of this Program is critical to capturing new growth opportunities as the telecommunications market rapidly develops in new directions.

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

1.                Excellence

·        Service excellence—Provide best-in-class customer care, service delivery and provisioning to our customers in order to maintain our leadership on the market

·        Broadband push—Aggressively expand broadband relations, exploit multi-access cost-efficient broadband rollout and content service

2.                Efficiency

·        Operational efficiency—Exploit efficiency improvement potential in current operations and processes to improve our competitiveness

·        Integrated operations—Capture maximum revenue and cost potential in integrated operations and leverage economies of scale and synergies in a converging market

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3.                Expansion & Acquisition

·        Content and media—Move towards content and media businesses to support traditional access services and build new revenue streams/exploit new revenue sources

·        System integration—Focus on complex service offering via managed services, system integration and outsourcing through consultancy-based sales to corporate customers

·        New services expansion—Capture potential growth opportunities on new converged market areas by extending our service portfolio

·        International acquisitions—Seek value-creating core acquisition targets in the South-East European region with appropriate scale and leverage our regional presence

We have developed a comprehensive market-oriented program designed to improve operational performance on Group level and in every division. Our primary focus is on the following areas of business operations:

1.                Excellence

·        Service Excellence—As a service company operating on a competitive market, one of our major strategic focuses has been to maximize customer satisfaction in all areas of operation. In order to achieve further improvement in customer service, we are now developing a Group-level customer value-based Customer Relationships Management (“CRM”) system. Throughout the past years of servicing our mobile division, TMH has used a state-of-the-art customer value management system to track and monitor the value of each customer. We are now in the process of extending this system to Group level. This will enable us to retain and target customer segments and sub-segments even more accurately. In addition, we aim to radically improve service delivery/provisioning capabilities as it is a vital component in increasing our competitiveness.

·        Broadband Push—In 2004, we nearly doubled Hungary’s Asymmetrical Digital Subscriber Line (“ADSL”) access base to 200,000. In 2005 and 2006, we extended our ADSL customer base further to over 500,000. As the leading broadband provider in Hungary, we are committed to accelerating growth in country-wide broadband penetration. Ongoing promotions, a new differentiated product range and innovative broadband-specific content services are being developed to generate a strong increase in demand, while strategic pricing should allow optimal subscriber and profit growth. In November 2006 we launched IPTV services; in early 2007 we plan to double bandwidths on our network by utilizing ADSL2 technology and to further boost market development by introducing naked DSL services. Also, we believe different wireless broadband technologies will play an increasingly important role in the coming years. Applying the so-called “multi-access” (i.e., optimal combination of different wired and wireless broadband access technologies) approach provides the most cost-efficient means to expand broadband access base countrywide. Accordingly, leveraging first mover advantage on our newly built HSDPA capacities is one of TMH’s primary strategic focuses on the fast growing wireless broadband market.

2.                Efficiency

·        Operational Efficiency—We plan to improve our internal efficiency by prolonging the aggressive internal cost reduction program, which has been underway for several years. A set of specific operational efficiency targets has been set in place. Our initial 2006 goal to improve the efficiency of our workforce by increasing the fixed lines (B-channel equivalent) per employee ratio to over 500 (a ratio that corresponds to the best practice in Western Europe) was already reached by the end of February 2006. We are committed to further simplification and

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improvement of processes and connected systems, accelerating decision making and therefore speeding up time-to-market. In addition to organizational measures and process improvement, we seek cost savings by leveraging our group-wide synergies in procurement.

·        Integrated Operations—Fixed-mobile convergence is fast developing in the telecommunications industry, particularly with respect to technology, customer needs, products/services and organizational structures. Telecommunications companies are heading towards further integration of fixed and mobile businesses driven primarily by the technological developments and the increasing customer demand for integrated services. We are expecting significant value generation through the gradual implementation of the integration by seizing additional revenues and optimizing operating and capital expenses. To ensure our competitiveness and our ability to create shareholder value in the long run, we decided to merge our mobile and fixed divisions effective from March 2006.

The integration of our fixed and mobile businesses will particularly enhance our competitiveness in the following areas:

·       Customer care and customer service (e.g., common chain of retail stores, one-stop shopping for corporate customers and marketing); unified T-Shop retail network was successfully set up in 2006;

·       Back-office and supporting systems (e.g., common use of functional services, procurement synergies, unified supporting systems);

·       Network infrastructure (e.g., unified IP-based backbone network, joint platform planning and development); and

·       Products and value propositions (e.g., fixed-mobile bundled products, value-added services based on broadband access and content).

Customers directly experience and benefit from the expansion of the service portfolio, easier access to products, and more competitive value propositions. Exploitation of the operational synergies, streamlined organizational structures and simplified processes will improve our corporate efficiency.

3.                Expansion & Acquisition

Traditional telecommunications markets of our core operations imply limited top line growth potential, whereas surrounding convergent market areas—such as mass media, transactional services, commerce and info-communications (“ICT”) services—imply stable growth over long term. Leveraging our relationship advantage, extended distribution network and strong brand awareness, we are in a strong position to enter these new markets and increase our market share in the extended marketplace. We also see significant growth potential in expanding our core operations further in the South-East European region, where we have gained hands-on experience with a good track record.

·        Content and media—content and innovative broadband-based services play a crucial role in further enhancing broadband market development. We aim to further advance and extend our presence in this market segment. Accordingly, in April 2006, we gained control of iWiW Kft., the leading Hungarian online social network currently registering more than a million users. In May 2006, we acquired Adnetwork Kft., the leading domestic online advertisement network, to leverage the online advertisement potential of T-Online and partner web pages.

·        Systems integration—the growth potential of traditional telecommunications services in the Hungarian corporate market is limited. IT services such as systems integration, managed

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network services, custom application development, IT outsourcing and consultancy services are becoming the new growth drivers in the corporate market. In line with changing customer demands we believe IT services will become the new “gateway” to sell integrated telecommunications services, and the winning telecommunications firms in the future Hungarian corporate market will be those that establish their credentials as trusted IT/telecommunications service partners. Therefore, to maintain sustainable competitiveness in the corporate sector, we have committed to further developing our IT competencies. Acquisitions are an important part of this program, as they offer the fastest means to build our position and improve our competency mix in the corporate IT/telecommunications market. As a major provider of System Integration (“SI”)/IT services in Hungary, the acquisition of KFKI Group in June 2006 was a major step towards this initiative. In April 2006, we acquired Dataplex, a major provider of info-communications infrastructure outsourcing. Also, by acquiring additional 2 percent of T-Systems Hungary in January 2007, we are now the majority stakeholders of the company.

·        New services expansion—to further leverage our core assets we are continuously exploring emerging business possibilities on new converging markets through expanding our service portfolio. We are considering entering new market segments such as transactional services and commerce to generate new revenue streams in case a potential business opportunity is arising.

·        International acquisitions—We acquired a 51.12 percent stake in the Crnogorski Telekom from the government of Montenegro in March 2005. At the same time, we acquired an additional 21.92 percent of Crnogorski Telekom’s shares from minority shareholders. As a result of a public offer, we acquired an additional 3.49 percent stake in Crnogorski Telekom, increasing our stake to 76.53 percent by May 24, 2005. In February 2006, we acquired a 100 percent stake in a Bulgarian alternative fixed line telecommunications and Internet services provider, Orbitel. Leveraging our hands-on experience and good track record in the region, we are committed to further strengthen and leverage our presence in the South-East European region. Therefore, we are continuously seeking for further value-creating acquisition and investment targets with even larger scale.

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OVERVIEW OF MAGYAR TELEKOM’S REVENUES AND PRINCIPAL ACTIVITIES

For the years ended December 31, 2003, 2004 and 2005, our total revenues by business segments were as follows:

Most of our revenues in 2003, 2004 and 2005 were derived from services provided within Hungary, except for the international fixed line and international mobile revenues, which were mainly derived from services provided in Macedonia in 2003 and 2004, and in Macedonia and Montenegro in 2005.

Our business is not materially affected by seasonal variations.

FIXED LINE TELECOMMUNICATIONS SERVICES SEGMENT

In 2005, our fixed line telecommunications services generated revenues of HUF 342,894 million before inter-segment eliminations. Fixed line telecommunications services consist of domestic and international services, leased lines, data transmission, cable television and Internet services, telecommunications equipment sales, construction, maintenance and other services.

The Hungarian fixed line operations include activities of Magyar Telekom in Hungary and South-Eastern Europe. Magyar Telekom provides international network and carrier services in South-Eastern Europe through PoPs. Magyar Telekom entered the Romanian market in July 2004, the Bulgarian market in September 2004, and the Ukrainian market in August 2005 to offer various wholesale services. Capitalizing on our experience in these markets, we have entered into the retail market segment in Romania with a full service portfolio and intend to do so in Bulgaria and Ukraine as soon as the regulatory environment becomes favorable.

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Hungarian Fixed Line Operations

Domestic Services

Revenues from domestic fixed line telephone services consist of:

·       subscriptions, connections and other charges;

·       outgoing domestic traffic revenues; and

·       incoming domestic traffic revenues.

Products and Services

Local and Long Distance Telephone Services.   We provide local, domestic and international long distance telephone services to our fixed line subscribers and to fixed line subscribers in other Local Telecommunications Operator (“LTO”) areas.

Public Switched Telephone Network (“PSTN”).   Due to the fierce competition and mobile substitution, the number of our PSTN lines decreased from 2,372,115 as of December 31, 2004 to 2,252,943 as of December 31, 2005.

Integrated Services Digital Network (“ISDN”).   ISDN allows a single access line to be used simultaneously for a number of purposes, including voice, data, facsimile and video transmission. ISDN also provides higher quality and faster transmission of signals while increasing the bandwidth capacity of the network. ISDN is available in our entire network. We offer both basic ISDN access lines with two channels and multiplex ISDN access lines with 30 channels. As of December 31, 2005, we had installed 176,863 ISDN access lines with two channels and 4,899 ISDN access lines with 30 channels, for a total of 500,696 ISDN channels. We intend to extend the life cycle of the ISDN product by offering various discounts to our customers.

Digifon Services.   At the end of 2005, our network was 100 percent digitalized, which enable us to provide value added services in our entire service area. We provide a number of value added services, such as call forwarding, call waiting and call conference, to a significant number of our fixed line subscribers. These services help increase fixed line usage as they make busy signals and unanswered calls less common. We also offer bundled packages of digifon services. The most popular of these packages is the Összhang, which contains five services at a discount price. Összhang package was introduced in May 2001 and had approximately 278,000 customers by the end of 2005.

Shared Cost/Toll Free Numbers.   To enable business customers to better meet the needs of their clients, we have introduced “blue” numbers, which are shared cost numbers, and “green” numbers, which are toll free access numbers.

Voice-mail.   We offer a voice-mail service including call return and call capture. We also offer voice-mail Short Message Service (“SMS”), which provides an SMS alert to the mobile handset of the customer each time he or she receives a voice-mail message. These services allow better usage of the network, provide convenience to our customers and decrease the ratio of uncompleted calls.

Fixed SMS.   In September 2002, we launched a new messaging service called Fixed SMS. From a fixed line terminal, short text messages can be sent with an SMS-capable telephone and SMS termination is available for every subscriber. If the addressee does not have an SMS-capable telephone, the text message is converted and sent as a voice message. The service has other useful functions as well: SMS to fixed fax machines, SMS redirection and multi-SMS transmission. In 2005, we launched a new Internet-based SMS sender application, iSMS.

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Private Branch Exchange (“PBX”) Services.   We offer PBX services through one of our subsidiaries, BCN Rendszerház Kft. (“BCN Kft.”, formerly Matávcom Kft.). The vast majority of the leased equipment is digital and meets the demands of developing technologies such as ISDN and digitally enhanced cordless telecommunications.

Directory Assistance.   We offer directory inquiry services. The domestic directory assistance database includes all fixed line and postpaid mobile subscribers’ data in Hungary. We offer a call completion option to subscribers, whereby calls may be connected automatically. We also offer increasingly popular Directory Assistance-Plus (“DA-Plus”) service. DA-Plus offers a wide range of information including Yellow Pages, residential classified advertisements, encyclopedia- and dictionary-based information, recipes, poems, as well as telephone numbers, postal, e-mail and website addresses without any quantity restrictions. The requested information may be provided verbally, by e-mail or by fax. The fees for the service are based on per minute usage. In 2005, we received the Best European Directory Assistance Service award.

Subscribers

The following table sets forth information regarding total fixed access lines and penetration rates in the service areas of Magyar Telekom Plc. and Emitel:

Our domestic fixed line subscribers can be classified into two categories: residential customers and business customers, which include our customers in the public sector. As of December 31, 2005, 75 percent of our access lines was utilized by our residential customers and 24 percent by our business customers. The remaining one percent of access lines was used for public payphones.

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

Fees and Charges

We charge fixed line subscribers a one-time connection fee, monthly subscription charges and call charges based on usage. A call charge contains two elements: a call set-up charge and a traffic charge measured in seconds based on the call’s duration. In accordance with the Act LXXXVII of 1990 on Pricing (the “Pricing Act”), as modified by the Electronic Communications Act, the Minister, together with the

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Minister of Finance, is responsible for establishing the maximum rates for universal services. We may, however, offer services at prices lower than those established by the Minister.

Our one-time connection fee and monthly subscription charges are different for residential and business customers. We do not, however, charge our business and residential customers different traffic charges if they use the same price plan.

In 2005, we increased the number of price plans to allow customers in different market segments to choose plans that best suit their calling patterns. These price plans also serve as a tool to maintain our customer base in the fully liberalized market as those customers who select us as the operator for every traffic direction (local, long distance and international) receive the highest discounts. In 2005, we introduced flat rate price plans that offer free unlimited calls to customers during a certain period of the day for an additional monthly fee. At the end of December 2005, approximately 70 percent of Magyar Telekom Plc.’s customers chose customized price plans, the most popular of which are the Felező (Halving) price plan with over 530,000 subscribers and the flat rate Favorit plan with over 320,000 customers.

Public Telephones

As of December 31, 2005, Magyar Telekom operated 22,112 public payphones. The call charges for calls from public payphones are at a premium to those charged to fixed line subscribers.

International Telephone Services

International telephone services consist of outgoing and incoming international calls, including voice and switched transit traffic through Hungary.

Products and Services

We provide international calling access to our fixed line subscribers and to subscribers of other local telephone operators and mobile service providers. Our Hungary Direct and Country Direct services permit customers to charge calls made from 50 foreign countries to their home phone numbers in Hungary.

International toll free service was launched in 1998. This service enables the caller to make international calls free of charge to and from 38 countries, while the subscriber of the toll free number is billed for these calls. Universal international toll free service was launched in 2003. This service enables the subscriber to be called free of charge from 22 foreign countries with the same telephone number.

In June 2000, we introduced the international prepaid calling card, “Barangoló”, which allows customers to make phone calls, including IP-based calls, in approximately 40 countries. This service enables customers to make international calls from touch-tone payphones in Hungary and abroad.

Fees and Charges

The call charge for an international call consists of two elements: a call set-up charge and a traffic charge measured in seconds based on the call’s duration. Although the published prices of our international rates did not change in 2005, the average per minute rates decreased as a result of discounts given in various optional price plans.

Settlement Arrangements.   Under bilateral settlement arrangements, we pay other carriers for the use of their networks for outgoing international calls and receive payments from other carriers for the use of our network for incoming international calls. In Europe, such settlement arrangements fall under the general auspices of the International Telecommunications Union. Settlement payments are generally denominated in Special Drawing Rights (“SDR”), based on a currency basket in which U.S. dollars have the greatest weight. Due to the large exchange rate fluctuations of the SDR caused by the recent volatility

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of the U.S. dollar, we started to shift our accounting rate agreements to euro-based arrangements. Most new international carrier partners prefer to use the euro as a settlement currency.

International Telecommunications Hub

We believe that Hungary is geographically well positioned to serve as a telecommunications gateway between Eastern and Western Europe. We have two state-of-the-art international gateways as well as fiber optic cable connections serving 12 border crossings. These fiber optic cable connections use synchronous digital hierarchy transmission facilities. We have X.25 links, which are used for packet switched data transmission with 83 international networks. We also have ISDN connections with more than 50 international networks. To increase the utilization of our transmission network, we offer attractive price schedules for dedicated transit services through Hungary. We have launched our own Dense Wavelength-Division Multiplexing (“DWDM”) backbone network and are DT’s partner in Delivery of Advanced Network Technology to Europe (“DANTE”), which provides 10 Gbit/s transmission path interconnecting Budapest and Vienna and connection to the European research and educational network, GEANT.

To seize the opportunities presented by the liberalization of the telecommunications market in Romania, we established interconnection arrangements with major Romanian alternative service operators and network service providers to offer transit services to Western Europe. In addition, we use our own point of presence in Austria, which enables us to engage in telephone and Internet business with alternative telecommunications carriers located in Vienna. We are present at the Vienna Internet Exchange (with a dedicated circuit for Internet data exchange) and have peering arrangements with approximately 60 Internet Service Providers (“ISPs”) there. We have direct Internet peering connections with Serbia and Slovakia and provide high-capacity international Internet transit service to ISPs in Ukraine, Bosnia-Herzegovina and Macedonia.

Leased Lines

We are the principal provider of leased lines in Hungary.

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

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

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

Flex-Com.   Since 1996, we have offered Flex-Com, domestic and international digital leased lines with managed back-up systems that are dedicated to data transmission. The number of Flex-Com connections decreased from 10,939 as of December 31, 2004 to 10,289 lines as of December 31, 2005. However, during the same period the aggregate sum of the bandwidths of the connections has increased by 14.6 percent from 3.02 Gbit/s to 3.46 Gbit/s, which led to higher revenues.

Frame-Flex.   We also use our managed leased line network to offer Frame-Flex, a public frame relay service that is particularly suited to customers who transmit data in bursts, such as connections between local area networks. In 2000, we introduced LANConnect, a frame relay-based managed router service. LANConnect is primarily targeted at small- and medium-size enterprises allowing them to seamlessly interconnect their Local Area Networks (“LANs”). As of December 31, 2005, we had 344 Frame-Flex connections.

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High Speed Leased Line (“HSLL”).   The HSLL service provides permanent, digital, transparent, point-to-point leased line service between service access points (“SAPs”). The connections are established by a service provider according to the needs of its customers. Transmission rates provided by the HSLL service are 2, 34, 45, 140 and 155 Mbit/s. We increased our HSLL connections from 930 at December 31, 2004 to 1,355 by December 31, 2005.

As an addition to the High Speed Leased Line portfolio, we introduced a Wavelength Division Multiplexing (“WDM”) technology-based premium service, Gigalink, which provides leased line service at a higher speed (622 Mbit/s) to business customers and to other service providers. In 2004, we expanded the speed of Gigalink from 2.5 Gbit/s to 10 Gbit/s for the Campus backbone network (a link between universities and academic institutions).

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

Data Transmission and Related Services

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

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

Internet.   T-Online Hungary, our fully-owned ISP subsidiary, offers Internet services based on dial-up, ADSL technology as well as access through cable television, wireless LAN (“WLAN”) and leased lines to provide residential and business customers with narrowband or broadband Internet services at affordable prices.

In 2005, T-Online Hungary increased its subscriber base by 23.5 percent to 328,535. T-Online Hungary is the largest Internet service provider in Hungary with an estimated 42 percent market share based on the number of dial-up subscribers. The number of T-Online Hungary’s broadband (ADSL, cable television, WLAN and leased line) customers reached 247,597 as of December 31, 2005 compared to 154,382 a year earlier.

In 2005, the number of Internet users increased significantly. Internet penetration rate among the population aged 14 and above reached 33 percent in 2005 compared to 26 percent in 2004. By the end of 2005, 19 percent of Hungarian households were connected to the Internet compared to 15 percent at the end of 2004. T-Online Hungary is committed to accelerating Internet penetration growth and has invested a significant amount of resources to develop attractive and innovative content and value added services, such as [origo] Téka video-on-demand, Zeneáruház (music download), T-Online Internet Security and Klip, our Voice-over Internet (“VoIN”) service.

In October 2005, T-Online and Magyar Telekom Plc. introduced a co-branded VoIP service, Klip. Within the first month of operation, approximately 10,000 users registered for this service.

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T-Online began developing an innovative Internet Protocol-based TV (“IPTV”) over Digital Subscriber Line (“DSL”) product in 2005. This new product line will have a great impact on Hungarian viewers’ habits, with pushing passive TV-watching towards interactive content. We believe that the new services will help us better compete against Cable Television (“CATV”) operators, which are able to offer “triple-play” packages of broadband Internet access, cable television and fixed line telephone services, based on a single access platform.

T-Online’s portal, [origo] held its leading position. The daily average number of visitors reached 666,000 in December 2005, representing a 42 percent increase from December 2004.

Datex-P.   We offer Datex-P, a packet-switched data transmission service based on the X.25 protocol. The service provides low to medium speed domestic switched data communications services with international connectivity to business customers. As a result of the proliferation of new technologies, growth in the number of subscribers has stopped. Between 2003 and 2005, our major objectives were to extend the lifecycle of the product, maintain profitability, optimize the network and reduce costs. In 2005, we assessed and commenced migration of customers to other data transmission services. Full service withdrawal is planned for 2008-2009.

rEDInet.   This service allows editing of business documents electronically, quickly, accurately, remotely and with full security. The technology behind the Electronic Data Interchange (“EDI”) service is used worldwide. We also provide professional training and consultation services to the users of our rEDInet service. The rEDInet covers more than 80 percent of the traditional EDI market in the Fast Moving Consumer Goods (“FMCG”) sector. In recent years the growth of the traditional EDI market has slowed in terms of new participants, but the number and type of transferred messages are growing. Further growth opportunities may appear with introduction of e-invoice solutions and Internet-based services with lower costs. The Internet-based solution allows customers of the Small Office/Home Office (“SOHO”) and Small and Medium size Enterprises (“SME”) segment without IT background to become a member of the electronic trading community. For our large customers and other service providers we introduced Virtual Private Network (“VPN”) access via Internet.

Magyar Telekom ADSL.   ADSL is a continuous, high-speed Internet access service based on the Asymmetric DSL technology. The service offers cost efficient broadband Internet access together with telephone service over existing copper wires. We sell these services mainly on a wholesale basis to ISPs, which in turn resell the services to residential and small business customers. The service has been available in certain parts of Budapest since September 1, 2000. In 2005, this service saw a significant growth with the number of ADSL connections reaching 329,314 by December 31, 2005 from 205,886 at December 31, 2004.

In 2005, we implemented a major infrastructure expansion project to accomplish our Internet market goals. A large amount of investment was used for the roll-out of broadband Internet. As a result of these steps, over 450 additional settlements were connected to the service in 2005.

To better satisfy customer demand, we increased the maximum download speed of our ADSL connections at no extra charge in May 2005. As a result, the maximum download bit-rate was increased by one third for the least expensive price plan and doubled for all other price plans at the same prices, terms and conditions. The higher bandwidth contributes to the faster roll-out of ADSL and also encourages customers to download enriched broadband content. We also introduced a new low-end bandwidth to provide entry-level ADSL with a favorable monthly subscription fee.

Volume-dependent ADSL.   On February 1, 2005, we introduced a new wholesale ADSL billing concept, the volume-based billing. Our ISP partners can now choose between flat rate billing and volume-based billing. In case of volume-based billing the monthly fee of the wholesale ADSL consists of access fee and traffic charges, based on the volume of the ADSL user traffic. This new pricing structure enable the ISP partners to offer a much wider choice of services better suited to the end users’ requirements.

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Do-it-yourself ADSL.   On August 20, 2005, we introduced a new wholesale ADSL product, the Do-it-yourself ADSL (ADSL without end-user devices). The Do-it-yourself ADSL does not contain modem and on- site installation and these parts are supplied separately. With Do-it-yourself ADSL, we reduce installation time, costs and also lower the ADSL price level.

Magyar Telekom HotSpot.   Magyar Telekom HotSpot is a wireless broadband Internet solution, based on the WiFi technology for public sites (i.e., hotels, conference centers and restaurants). The HotSpot payment methods include T-Com HotSpot cards, which are available in four levels of access time (0.5-hour, 1-hour, 5-hour and 24-hour). The T-Com HotSpot service is also available for T-Online Internet access subscribers, for whom the usage fee is paid through T-Online’s Internet access monthly bill. Customers with a valid T-Mobile HotSpot access identification may also use the T-Com HotSpot service. The HotSpot service is also available online by bank card payment. At the end of 2005, there were 207 public HotSpot sites in operation (68 hotels, 17 T-Ponts and 122 others).

Magyar Telekom DataLink.   In 2004, we launched a new data transmission product that offers technology independent data transmission between business customers’ locations. The customer only needs to define three main parameters, bandwidth, Service Level Agreement (“SLA”) and interface. This service provides data connection below 2 Mbit/s, with X.21 or Ethernet interfaces. With the introduction of this service, we can better utilize our spare data transmission capacity. In 2005, we significantly increased the number of endpoints as a result of two campaigns.

IP Connect.   IP Connect service, a complete solution for ISPs providing transport and access facilities to IP traffic, includes the provision of ports in the service area, required for the subscribers of ISPs to dial-in from analog or ISDN lines. The service also enables leased line access, and ensures that traffic will be forwarded to both domestic and international switches as well as to the domestic switch of a particular ISP. The domestic switch of the ISP is connected to our IP network via a leased line. To maintain our market share and competitive position, a new product offering, called Symmetrical Internet was introduced in 2003, which includes access and IP/Internet service. After the introduction of this new service, many of our customers switched from IP Connect to Symmetrical Internet.

IP Complex Plus.   IP Complex Plus is an IP-based Virtual Private Network (“IP-VPN”) service. IP Complex Plus service is offered to retail and wholesale customers having multiple remote sites. This service enables them to establish secure data traffic between sites without the need of setting up “point-to-point” connections between two sites. The development of supplementary services, such as ISDN back-up, integrated voice/data, ADSL/Single-Pair High-Speed Digital Subscriber Line (“SHDSL”) access and dial-up access to IP-VPNs make this product more attractive to a growing number of business customers. In 2004, monthly and online report services were introduced to allow users to check the service quality. In October 2005, we launched new option to our integrated voice/data product. In addition to the current function, we provide value-added Integrated voice/data service. Using this service, customers can transmit the voice and data traffic between their premises through the same connection, independently from the public telephone networks and they can establish calls to the Public Services Telephone Network as well.

MultiLAN.   Our system integration services are designed primarily for business customers with separately located branch offices. They include the installation of LANs at customer premises and the provision of Wide Area Network (“WAN”) services. We provide integrated network management, fault clearance and customer support for the LAN and WAN segments.

Magyar Telekom Háttértár.   Magyar Telekom Háttértár, launched in October 2004, allows users to automatically back-up files on their personal computers (“PCs”) on our background server. If customer’s PC crashes and the content of the hard disk cannot be recovered, the back-up files on our server can be accessed.

International data products.   We provide signaling links for mobile operators to facilitate international roaming. We also sell international leased lines, including international managed leased lines,

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international ISDN, X.400, X.25 and telegraph services. The sales of international leased lines are steadily growing, partly due to the introduction of one-stop-shopping agreements, whereby customers can order from and pay for the service at one end-point of the connection, which eliminate the need to deal with multiple service providers. International Internet connectivity was enhanced in 2004 to provide services for Internet service providers. By the end of 2004, the capacity of international Internet connections reached 3 Gbit/s.

Fixed Line Telecommunications Equipment Sales

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

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

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

Other Revenues

Other revenues include cable television, construction and maintenance services and other miscellaneous revenues.

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

Through network development and acquisitions, our CATV group significantly increased its number of cable television customers during the past five years. The CATV group had approximately 404,000 subscribers as of December 31, 2005 compared to 384,000 a year earlier. Our CATV group is the second largest cable television provider in Hungary.

T-Kábel Hungary offers 44 television and radio channels in three program packages in its network. During 2005, T-Kábel Hungary launched a new VoIP service (Kábeltel) in a limited service area and had approximately 13,000 subscribers as of December 31, 2005. At the end of 2005, T-Kábel Hungary also launched digital CATV packages in Budapest. Where the networks allow, our CATV firms—in cooperation with ISPs—offer broadband Internet services. In most cases, CATV firms provide a network service for ISPs. The number of Internet subscribers through our cable television network was approximately 29,000 on December 31, 2005. T-Kábel Hungary’s cable television activities benefit from our long-term relationship with the customers, our thorough market knowledge as well as our strong brand name. Our main goals in this area are to increase market share through further acquisitions, connect new customers in the existing service areas, improve the quality of network and increase Average Revenue per User (“ARPU”).

In 2002, we introduced the Audiofix (Drop Charge) product, which is an Intelligent Network (“IN”) premium rate service enabling content providers to offer content services for fixed call rates. The product is mainly used in the media’s call-in programs. The product has been very successful due to the introduction of reality shows and other interactive programs on Hungarian television channels.

We construct fixed line telecommunications networks and offer network maintenance services to other telecommunications operators in Hungary. These construction and maintenance services are ancillary to the construction and maintenance of our networks.

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Magyar RTL Televízió ZRt. (“M-RTL”) is a Hungarian television broadcast company, in which Magyar Telekom has a 25 percent interest. M-RTL is entitled to provide commercial television programs but not to engage in broadcast diffusion or distribution activities. M-RTL has a concession for a period of ten years with an option for a five-year extension. The Program Provision Agreement was signed on July 9, 1997, being the starting date of the license. On July 20, 2005, M-RTL has extended the license for an additional five years which will be effective from July 10, 2007. M-RTL operates a channel under a brand name, RTL KLUB.

Since its launch in 1997, RTL KLUB has rapidly established a strong position in Hungary’s television market, being the market leader for the last five years. Market share among the targeted age 18-49 audience remained stable, 31 percent in 2005 compared to 32 percent in 2004 for the whole day and 37 percent in both years for the prime-time (between 7 and 11 p.m.). M-RTL has successfully converted its leading audience result into television advertising market share.

RTL KLUB seeks to maintain and increase audience share through investing in local productions, as well as successful internationally licensed programs, and through its continued long-term relationships with major film distributors, including Warner Brothers, Fox, Buena Vista and Columbia. M-RTL is strategically concentrating on sport events, such as Formula One races, Paris-Dakar rally, National League and National Team football matches and boxing.

International Fixed Line Operations

Macedonian Fixed Line Operations

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

Maktel is the primary fixed line service provider in Macedonia. Its exclusive rights in fixed line telecommunications services expired in December 2004. These exclusive rights included local, national and international long distance public telephone services, VoIP services, leased line services and building and operating public telephone network services.

Subscribers

The following table sets forth information regarding the total fixed access lines and penetration rates of Maktel:

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Maktel has an 81 percent market share in the Macedonian Internet market. The number of Internet subscribers and the time they spend on the Internet are gradually increasing. Maktel provides Internet access via the public switched telephone network, leased lines and ADSL. By the end of 2005, Maktel had 91,865 Internet customers, including 7,798 ADSL connections.

Historically, Maktel, like government-owned operators in other countries, maintained relatively low domestic charges and high rates for international calls. Since November 1999, however, Maktel has been gradually rebalancing its rates. International rates are expected to decrease further, bringing them in line with the EU standards. Local rates and basic access charges are expected to increase.

Montenegrin Fixed Line Operations

Following a successful privatization tender, between March and May 2005, Magyar Telekom obtained a 76.53 percent interest in Crnogorski Telekom.

For details on the Crnogorski Telekom acquisition, see “Item 10—Material contracts”.

Crnogorski Telekom is the principal fixed line service provider in Montenegro. Its exclusive rights in fixed line telecommunications services expired in December 2003. Crnogorski Telekom provides local, national and international services, in addition to a wide range of telecommunications services involving leased line circuits, data networks, telex and telegraph services.

For the past three years, Crnogorski Telekom’s major operational goals were to digitalize the fixed line network and to increase the number of subscribers. The digitalization rate reached nearly 100 percent by the end of 2005.

On June 26, 2006 the Shareholders Assembly of Telekom Montenegro approved the proposal of the Board of Directors to adopt the “T” brand. On September 26, 2006, the fixed line operations became T-Com Crna Gora (“T-Com CG”) and the mobile business changed its name to T-Mobile Crna Gora (“T-Mobile CG”), while the fixed line parent company and the group was renamed to Crnogorski Telekom.

Subscribers

The following table summarizes key operational information of Crnogorski Telekom: