Press Releases

Budapest, August 10, 2006

On track to meet full year targets

Highlights:

• Revenues grew by 5.4% to HUF 316.1 bn (EUR 1,214 m) in H1 2006 compared with the same period last year. The higher mobile, internet and system integration & IT-related revenues compensated for the lower outgoing traffic revenues.
• EBITDA grew slightly by 0.5% to HUF 124.7 bn, with an EBITDA margin of 39.5%. Group EBITDA excluding investigation-related costs was HUF 126.5 bn with an EBITDA margin of 40%.
• Gross additions to tangible and intangible assets were HUF 43.8 bn. The portion relating to the fixed line segment reached HUF 19.1 bn with mobile at HUF 24.7 bn. Within the mobile segment, HUF 6.7 bn was spent on UMTS-related investments and HUF 6.5 bn on the EDR project.
• Fixed line segment: external revenues (after elimination of inter-segment revenues) increased by 3.4% to HUF 168.1 bn, mainly as increased internet broadband and system integration & IT-related revenues offset the decline, primarily in outgoing traffic revenues. EBITDA amounted to HUF 59.6 bn and the EBITDA margin on external revenues was 35.5%.
• Mobile segment: external revenues increased by 7.8% to HUF 148.1 bn driven by voice revenues and enhanced services revenues. EBITDA amounted to HUF 65.1 bn with the EBITDA margin on external revenues reaching a strong 44%.
• Profit attributable to equity holders of the company (net income) fell by 10.8%, from HUF 41.4 bn (EUR 167.2 m) to HUF 36.9 bn (EUR 141.8 m). Despite the slight EBITDA growth, net income declined primarily driven by higher depreciation and amortization, as well as increased net financial expenses (mainly as a result of the higher foreign exchange loss due to the weakening of HUF on account payables and receivables).
• Net cash from operating activities was HUF 91.7 bn due to the combined impact of a broadly stable EBITDA and increased income tax paid, partly offset by other cash flows from operations reflecting a lower severance payment in H1 2006. Net cash utilized in investing activities fell to HUF 74.7 bn. The TCG acquisition in Q1 2005 offset the increased spending on tangible and intangible asset (capex) in H1 2006. The higher capex is mainly due to the EDR/TETRA project investment at the Hungarian mobile operations. Net cash flows from financing activities reflect the absence of a dividend payment in H1 2006.
• Net debt decreased by HUF 24.2 bn compared to the end of December 2005, driven by the loan repayment during the first half of 2006. The net debt ratio (net debt to net debt plus equity plus minority interests) fell to 29.6% at June-2006 (33.1% at end-2005).

Elek Straub, Chairman and CEO commented:
“I am pleased to report an above 4% top line growth and a broadly stable EBITDA, excluding the one-time impact of the investigation-related expenses, in the second quarter of this year. These figures underline that we are on track to achieve our targets set for this year. In line with our strategy, we capitalized on inorganic growth opportunities in the second quarter through, for example, the purchase of Dataplex and KFKI (Hungarian IT companies). In the latter case, we are awaiting Competition Office approval for the acquisition. In the Hungarian fixed line business, the number of flat rate solutions continued to grow, increasing the access revenue stream. However, traffic erosion also continued. The successful ADSL sales campaign contributed to sustained growth in internet revenues. In the Hungarian mobile market, we preserved the strong leading position; underlying financial performance was stable. In the second quarter of this year, T-Mobile was the first in Hungary to launch a super-speed HSDPA mobile-internet service. By introducing broadband data transmission solutions in Hungary, T-Mobile once again demonstrated the Group’s clear leadership in the market. Regarding the EDR investment, the service started in Budapest in April 2006 and we accounted revenue for the service in the second quarter. Finally, international operations in Macedonia and Montenegro performed well, contributing to Group revenue and EBITDA in line with our expectations.”

Hungarian fixed line operations: growing IT and broadband revenues, continuous fall in traffic
Revenues before elimination grew by 2.5% to HUF 73.4 bn in Q2 2006 over the same period in 2005 with an EBITDA margin for the quarter at 31.6%. In Q2, excluding the HUF 1.5 bn cost of the investigation (accounted for within the Headquarter costs), EBITDA was HUF 24.6 bn with a 33.6% EBITDA margin. The segment EBITDA was negatively influenced by the retrospective application of the reduced interconnection fees (net HUF 1 bn) and positively influenced by a HUF 0.8 bn increase in receivables relating to reimbursements from the Universal Telecommunications Support Fund. Domestic and international traffic revenues combined declined by 22.4%, mainly due to mobile substitution and traffic loss to fixed line competitors. Fixed-to-mobile minutes fell but local traffic and domestic long distance traffic increased. Nevertheless, discounts and bundled minutes provided in our packages contributed to the revenue decline. At the same time, system integration & IT revenues grew from HUF 2.2 bn to HUF 6.1 bn. Internet revenues also increased, as a result of a significant increase in the number of installed ADSL lines. The total number of broadband connections (mainly ADSL and cable) reached almost 446 thousand at end-June 2006. Strong mobile substitution and number portability resulted in a continuous decline in the total number of fixed lines (down 4.6% at end-June 2006 compared to a year ago). Customised tariff packages at parent company represented around 80% of the total number of lines, with 1.9 million lines at the end of the second quarter of 2006.

International fixed line operations: top line growth and EBITDA expansion
Revenues before elimination grew by 12.1% to HUF 17.2 bn in Q2 2006, reflecting the FX rate impact and the strong contribution of Telekom Montenegro. EBITDA increased to HUF 6.2 bn with an EBITDA margin of 35.7%. Despite lower traffic revenues, MakTel’s fixed line revenues grew by 5.2%, reflecting a favourable foreign exchange movement (6.5%), and growing subscription, international wholesale and internet-related revenues. EBITDA fell by 5.7% to HUF 4.7 bn, primarily as a result of the increased other operating expense. EBITDA margin was 42.4%. Telekom Montenegro’s fixed line operations contributed HUF 4.8 bn to Group revenues in the second quarter of 2006 (HUF 4.2 bn in Q2 2005). The growth was fuelled by higher IC and internet revenues. EBITDA contribution increased to HUF 1.5 bn (against a negative of HUF 0.4 bn in Q2 2005) as the higher payment to other network operators was compensated by a fall in employee-related expenses due to a severance provision of HUF 1.3 bn booked in Q2 2005.

Hungarian mobile operations: strong market position coupled with sound underlying financial performance
Revenues before elimination grew by 2.3% to HUF 70.1 bn in Q2 2006 as a result of higher enhanced service revenues and, to a lesser extent, higher traffic and access revenues. EBITDA was HUF 26.7 bn with an EBITDA margin of 38.1%, reflecting higher other operating expenses, partly offset by lower employee-related expenses. A major driver of the higher other operating expense in Q2 2006 was a HUF 1.1 bn accrual re-created for payments to the Universal Telecommunications Support Fund following an unfavourable Court decision in 2006. At the same time, receivables from the Fund shown in the Hungarian fixed line operations increased by HUF 0.8 bn. Average acquisition cost per customer continued to fall reflecting reduced subsidies in both prepaid and postpaid segments. When calculating subscriber acquisition cost, we include the connection margin (SIM card cost less the connection fee) and the sales-related equipment subsidy and agent fee. Although the introduction of new packages generated higher usage and growth in value added services, the discounts and bundled free minutes offered, combined with the impact of regulatory changes and the extensive use of closed user group offers, resulted in a slight reduction in ARPU (monthly average revenue per user). MOU (monthly average minutes of use per subscriber) grew to 142 in the second quarter of 2006, indicative of the improved price elasticity.

International mobile operations: impressive growth in Montenegro, very high EBITDA margin in Macedonia
Revenues before elimination grew by 15.1% to HUF 12.7 bn in Q2 2006, driven by the FX rate effect and the strong performance of Monet, the mobile subsidiary of Telekom Montenegro. EBITDA was HUF 6.7 bn with a high EBITDA margin of 52.9%. MakTel’s mobile business reported 10.6% revenue growth in a growing market characterised by strong tariff competition. EBITDA at Mobimak was HUF 5.3 bn with an outstanding EBITDA margin of 56.4%. Finally, Monet was a further contributor to international mobile operations with revenues of HUF 3.2 bn (up 31.3%) and an EBITDA of HUF 1.4 bn in Q2 2006 (against HUF 1 bn in Q2 2005).

(As disclosed in the full-year 2005 results announcement made on February 13, 2006, in the first quarter 2006 results announcement made on May 11, 2006 as well as in announcements made on March 30, 2006, on April 26, 2006, on July 3, 2006 and on July 27, 2006, the Company is still inquiring into certain contracts and certain actions taken subsequent to these contracts including potential interference with the investigation to determine whether they have been entered into in violation of Company policy or applicable law or regulation. This inquiry, which is being conducted by an independent law firm and supervised by the Audit Committee, is still ongoing and it is at this point still too early to determine its outcome. The Company also announced that due to the delay to the respective Annual General Meetings, the Company and some of its subsidiaries have failed and may fail to meet certain deadlines prescribed by the Hungarian and other applicable laws and regulations for preparing and filing audited annual results. The Company has notified the Hungarian Financial Supervisory Authority, the U.S. Securities and Exchange Commission and the U.S. Department of Justice of the investigation and is in contact with these authorities regarding the investigation. The Company is committed to complying fully with the requirements and requests of these and other authorities with jurisdiction over it. In its Resolution No J-III-B/86.332/2006, the Hungarian Financial Supervisory Authority ordered Magyar Telekom to prepare its annual report and to take all possible and necessary legal measures in order to comply with the statutory obligations. The Company is currently investigating the legal solutions to hold a GM and prepare the annual report as soon as possible. No assurance can be given that, as a result of the investigation, the audited financial statements for 2005 and financial statements for any other period will not vary from those published prior to the completion of the investigation.)