HUNGARIAN BROADCASTING CORP, 10KSB/A, 1998-04-17

HUNGARIAN BROADCASTING CORP
10KSB/A, 1998-04-17
TELEVISION BROADCASTING STATIONS

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HUNGARIAN BROADCASTING CORP.
(Exact Name of Registrant as specified in its charter)

DELAWARE 13-3787223
------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

445 PARK AVENUE, 15TH FLOOR, NEW YORK NY 10022
----------------------------------------------
(Address of principal executive offices)

FORM 10-KSB
AMENDMENT NO. 1

THIS AMENDMEMENT IS BEING FILED TO CORRECT A CLERICAL ERROR WHEREBY

INCORRECT FINANCIAL PAGES WERE INCLUDED IN THE ORIGINAL FILING

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-KSB

Amendment No. 1

[ X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934

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

For the year ended December 31, 1997

COMMISSION FILE NUMBER 0-26808

HUNGARIAN BROADCASTING CORP.
(Exact Name of Registrant as specified in its charter)

DELAWARE 13-3787223
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

445 PARK AVENUE, 15TH FLOOR, NEW YORK NY 10022
(Address of principal executive offices)

The Registrant's telephone number, including area code: (212) 758-9870

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

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

TITLE OF EACH CLASS
Common Stock, par value $.001 per share
Common Stock Purchase Warrants
Series A Preferred Stock, par value $.001 per share

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

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

Registrant had revenues of $2,981,260 for the year ended December 31, 1997. As
of April 3, 1998, 7,897,372 shares of Common Stock were outstanding of which
3,869,106 shares were held by non-affiliates of the Company. The aggregate
market value of the Common Stock held by non-affiliates of the Company as of
April 3, 1998 was $34,551,116 (based upon the closing price on such date on
NASDAQ).

DOCUMENTS INCORPORATED BY REFERENCE
None

Document contains 28 pages and 22 financial pages. Exhibits are on page 26.

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PART I

ITEM 1. BUSINESS

(A) GENERAL DEVELOPMENT OF BUSINESS

1. INDUSTRY OVERVIEW

Private commercial television stations (those which derive the majority of
their revenues from the sale of advertising and are owned by entities other than
government entities) generally began broadcasting in the United States in the
1940s, in parts of Western Europe in the 1950s, in Germany in the 1980s, and in
Scandinavia and Central Europe (including Hungary) in the 1990s. Commercial
television has become an important medium for advertisers in the more developed
advertising markets. For example, in 1996, television advertising expenditures
totaled about $38 billion in the United States and about $23 billion in 16
countries of Western Europe.

An advertising industry has been developing in Hungary since 1991. Based on
a report published by Saatchi & Saatchi/Zenith Media World Wide, television
advertising expenditures increased from $45 million in 1991 to $107 million in
1992, $128 million in 1993, $138 million in 1994, $157 million in 1995 and $191
million in 1996. In a February 1998 Newsletter, Zenith Media stated that
television advertising expenditures in Hungary for 1997 were $267 million, an
increase of 40% from the year earlier. This estimate has not been confirmed.
Members of the industry expect television advertising expenditures in Hungary to
increase at double-digit rates into the future.

The two basic methods of television transmission in use in Hungary are (i)
over-the-air television broadcasting, which can be either local or national in
scope (these operations are often referred to as "terrestrial" broadcast
operations) and (ii) satellite-to-cable broadcasting. In over-the-air
broadcasting, the station operator transmits its signal from a broadcasting
tower over a limited geographic range, where it can be received by household
antennas as well as cable network operators. In satellite-to-cable broadcasting,
the station operator transmits its programming signal to a satellite which
redirects the signal to either a ground based antenna which is connected to a
cable system or to a home television via a satellite dish ("direct-to-home").
While over-the-air broadcasters can typically be received by virtually all of
the television households in the geographic area reached by their broadcast
signals, satellite-to-cable broadcasters can only be received by television
households connected to a cable system or households that have satellite dishes
positioned to receive the broadcast signal.

Cable television growth in Hungary initially occurred in the most heavily
populated areas and has been extended to less populated areas. Households with
cable service in the most heavily populated areas in Hungary are sought after by
advertisers because these households tend to have higher disposable incomes and
greater access to advertised goods and services.

2. GENERAL

Hungarian Broadcasting Corp. (the "Company" or "HBC") was formed in
September 1994 to acquire majority interests in companies owning broadcasting
licenses and become the operator of the licensed broadcasting stations.

Hungary has three state owned and operated television channels - Magyar
Television I ("MTV 1"), which started broadcasting in 1957, Magyar Television 2
("MTV 2"), which started broadcasting in 1972 and DUNA TV, which started to
broadcast via satellite in 1993. The signals of MTV 1 are broadcast over-the-air
(terrestrial) and are transmitted by Antenna Hungaria, a state owned company

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which built, owns and operates a trunk network consisting of 19 transmitter
stations and 90 relay stations. In addition to transmitting by satellite, MTV 2
and DUNA TV transmit by terrestrial microwave transmission. It is estimated that
MTV 1 reaches 98% of the television households of Hungary, MTV 2, approximately
35% and DUNA TV, approximately 48%. The signals of MTV 1 can be received by
conventional home antennas. However, a satellite dish is required to receive the
satellite transmission of MTV 2 and DUNA TV, or a dish type microwave antenna is
required to receive their microwave transmissions.

The commercial national stations, TV2 and RTL Klub, were launched in
October 1997. TV2 reaches 93% of the population and RTL Klub reaches 86%. In
addition, the Company's station, MSAT, competes with two other
satellite-to-cable stations that are also carried by Budapest's MMDS
(multichannel multipoint distribution service) microwave system, TV3 with a
reach of about 35% and Sziv TV ("Sziv") with a reach of about 35%. In January
1998, Hungarian Broadcasting Corp. purchased the company that owns Sziv.

In 1994, based on a decree enacted by the Hungarian Parliament in July
1993, the Hungarian Ministry of Culture and Education made a tender offer open
only to holders of studio licenses for a license to broadcast over Channel A3
using AM-Micro technology over an area of Budapest plus 30 km (18 miles).
Fourteen contenders applied for the license. The licenses were given to three of
the contenders as follows, each for the time period specified below, from July
1, 1994 to July 1, 2000.

VI-DOK: Mondays, Wednesdays, Fridays and Sundays from 6:00 a.m.--
5:00 p.m. and 7:30 p.m.--6:00 a.m.
DNTV: Tuesdays, Thursdays and Saturdays from 6:00 a.m.--5:00 p.m. and
7:30 p.m.--6 a.m.
NAP TV: daily from 5:00 p.m.--7:30 p.m.

VI-DOK and DNTV (the "Licensees") had no prior television broadcasting
experience. DNTV was organized in February 1994 and VI-DOK was organized in
December 1991. The Ministry granted licenses to DNTV and to VI-DOK in March
1994. VI-DOK then organized Pest-Buda Televizio Kft ("Pest-Buda") in March 1994
as a vehicle from which to conduct the broadcasting operations under the
license. Between the date of grant and the commencement of broadcasting on A3
(since renamed "MSAT") in September 1994, DNTV and VI-DOK devoted their energies
to seeking an equity partner. The two companies started broadcasting in
September 1994 as a music channel using broadcasting facilities of others rather
than their own studios to provide programming and technical personnel.

VI-DOK and DNTV, acting jointly thereafter sought an equity partner. In
November 1994, the Company commenced negotiations to acquire majority interests
in each of the two licensed companies. At the same time, the Company agreed to
provide loans aggregating approximately $2.1 million to the Licensees to help
finance their operating and programming costs (which loans were to be deemed
capital contributions in the event the acquisitions were completed) until it
could complete its due diligence in connection with the acquisitions. The
Company then recruited a management staff, a sales staff and a station operating
staff and completed its acquisition as to DNTV in May 1995, and as to VI-DOK, in
June 1995. The Company acquired 90% and 80% of the capital interests of VI-DOK
and DNTV for $240,000 and $176,000, respectively, from the existing owners of
VI-DOK and DNTV and contributed the loans to the capital of the two Licensee
companies as additional acquisition costs, and assumed operational control in
May 1995.

In September 1996, the Company added satellite-to-cable broadcasting. In
September 1997 the Company's wholly owned subsidiary, Hungarian Broadcasting
Corporation Televizio Rt. ("HBC Rt."), was awarded a new 24-hour per day channel
for MSAT on the Budapest AM-Micro system (MMDS) for an indefinite period of
time. In October 1997, MSAT was awarded a national satellite license of
indefinite duration.

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Sziv received an AM Micro license in March 1994 for the period ending July
1, 2000. Discussions with Antenna Hungaria, the state-owned entity that provides
this Budapest service, and with the Hungarian National Radio and Television
Commission ("ORTT"), suggest that Sziv's right to use this broadcasting
transmission system will be extended into the future. Pursuant to the Media Law
of 1996, Sziv declared in writing to ORTT in the summer of 1997 that it would
commence satellite-to-cable broadcasting. The Media Law permits
satellite-to-cable broadcasting after notice to ORTT provided that that
regulatory body does not object within sixty days after the filing. ORTT made no
objection to Sziv's filing.

On January 5, 1998, pursuant to a Reorganization Agreement, the Company
acquired, all of the outstanding common stock of Global Television Networks,
Inc. ("Global") in exchange for 3.75 million shares of the Company's Common
Stock, 1.25 million of which are held in escrow and which will be delivered only
upon Global, excluding Sziv, meeting certain performance measures (See
"Management Discussion and Analysis"). On January 5, 1998 Global and Hungarian
Broadcasting Project Kft ("HBP") purchased 24% and 76%, respectively, of Sziv, a
national satellite-to-cable broadcaster currently reaching approximately 1.3
million television households through the AM Micro transmission system in
Budapest and about 150 cable companies via satellite distribution in Hungary.
Global is entitled to 99% of all profits from Sziv, and HBP is entitled to the
remaining 1%. In addition, Global has an option to purchase HBP at any time for
$15,000 or to appoint another investor to hold HBP upon the payment of $15,000.
Global is also a distributor of paid adult television programming, holding
exclusive 10-year contracts with NTV Plus DBS operators in Russia and contracts
with United Phillips cable operators in Vienna and Amsterdam.

Pursuant to the acquisition, the Company entered into employment agreements
(the "Employment Agreements") with Offer Assis ("Assis") and Shai Bar-Lavi
("Bar-Lavi"), who each became directors of the Company and were appointed Chief
Executive Officer and Chief Operating Officer, respectively.

Pursuant to the acquisition, the Company also entered into a Registration
Rights Agreement (the "Registration Rights Agreement") giving Assis and Bar-Lavi
the right, starting 24 months after the closing of the Reorganization Agreement,
to require the Company to register the shares granted to them thereunder with
the Securities and Exchange Commission.

3. NATURE OF HUNGARIAN CORPORATIONS

Three Hungarian subsidiaries of the Company were organized under the
Hungarian Law on Business Organizations as limited liability companies ("Kft").
Persons who provide the capital own percentages of the companies in proportion
to their respective capital contributions. All the capital of HBC Kft, which was
formed in November 1994, was provided by the Company. The Company, in May 1995,
purchased 80% of the ownership interest from the three owners of DNTV and, in
June 1995, purchased 90% of the ownership interests from the two owners of
VI-DOK. The owners of each of the two companies then held membership meetings to
approve the transfer of the interests and to appoint Peter E. Klenner and Imre
Kovats as the managing directors of each company. The ownership interests and
the names of the managing directors were registered by the Municipal Court of
Budapest in a registry that is available for public inspection. The Media Act of
1996 required that all broadcasting companies be converted from limited
liability companies (Kft's) to share capital corporations, "Reszveny Tarsasag"
(Rts) by the end of 1996. The Rt structure requires higher amounts of initial
capital and denominates ownership in common shares rather than in percentage
ownership. The Company converted each of its licensees to an Rt. in December
1996. MSAT currently operates in the HBC Rt corporate entity and Sziv TV
operates in the Sziv TV Rt corporate entity.

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4. BROADCASTING OPERATIONS

The Company's over-the-air signal is broadcast on the AM Micro system,
which transmits over microwave frequencies and is a low cost system for
consumers. The receiving equipment is limited to a dish antenna (smaller than a
comparable satellite receiver) and a converter. The equipment costs average $150
per receiver. However, equipment for one receiver can service up to four
households in the same building. Equipment for cable networks costs $200 per
receiver and for satellite antenna systems $350 per receiver. A monthly fee of
less than $1.00 is charged directly to households by Antenna Hungaria for
AM-Micro access. Cable systems charge between $3.00 and $10.00 per month
depending upon the package of channels subscribed for.

At the present time, the MSAT's satellite transmissions are conducted by
Antenna Hungaria uplink to the Amos 1 satellite in accordance with an eight-year
agreement entered into in June 1997. Receiving cable companies reach about 1.35
million television households, or about 84% of all cable television households
in Hungary. Some of these cable companies make MSAT available only on their
premium service, so that MSAT's currently reach is about 1.15 million television
households or about 85% of the cable subscribers from those cable companies that
carry MSAT. Sziv began its satellite broadcasting through Antenna Hungaria and
using the Amos 1 satellite in September 1997. In addition to cable subscribers,
the Company's broadcast signals for both channels are received by about 350,000
households via AM-Micro service in Budapest. These viewers receive programming
identical and simultaneous with the programming distributed via satellite. The
cable and AM-Micro markets are expected to grow both with general economic
growth and, also, as improved cable technology catches cable pirates and
converts them to customers.

Sziv is currently carried by approximately 150 Hungarian cable operators as
compared to about 490 operators for MSAT. Sziv currently requires a more
expensive receiving box than does MSAT and, accordingly, many of the smaller
cable operators have yet to make that investment. The Company believes that over
time Sziv will approach the broadcasting reach of MSAT.

5. POPULATION REACH AND DEMOGRAPHICS

It is estimated that 3.8 million households in Hungary (or 97% of total
households) have television and that of such total approximately 1.6 million
households or 42%, are connected to some form of cable network.

MSAT's over-the-air signal currently reaches approximately 350,000
households through the AM Microwave network. At present, subscribers of
approximately 490 cable companies totaling about 1.15 million households receive
MSAT's programming through its satellite transmission, for a total reach of 1.5
million households (39% of television households).

Sziv, acquired on January 1998, reaches approximately 350,000 households
through the AM Microwave network and approximately 950,000 households through
satellite-to-cable transmission, for a total reach of about 1.3 million
households (34% of television households).

6. ANIMATED FILM PRODUCTION

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for as a purchase and, accordingly, the results of Studio 2 Kft. have been
included in the Company's consolidated financial statements from the date of
acquisition. The purchase price of $743,819 has been fully allocated to the
underlying assets of Studio 2 Kft. based upon their respective fair values at
the time of acquisition. The excess of the purchase price over the equity of
Studio 2 Kft has been allocated to copyrights totaling $311,434. The feature
length animation film MISHY & MUSHY, which is the sole significant animation
project of Studio 2 Kft, has not completed production. Accordingly, the
amortization of the film costs have not begun. The unsecured note was
subsequently converted into equity in July 1997, when M&A Management Kft.
received 173,266 shares of unregistered common stock in the Company with a fair
market value of $605,368 at the conversion date, resulting in an extraordinary
loss of $151,342 from the early retirement of debt.

7. STRATEGY

The Company's strategy is to improve the operating results and market share
of MSAT and Sziv and to acquire additional channels elsewhere in Eastern and
Central Europe. Specific elements of the Company's operating strategy include:

+Expand Reach of the Stations Throughout Hungary --- provide
service to every cable TV household. In addition, the Company
is exploring the possibility of working with certain local
terrestrial stations to carry MSAT's and Sziv's broadcasts.

+Develop Niche Programming --- capture advertising
expenditures directed to specialized channels such as movies
and children's programming

+Increase Advertising Sales --- expand, motivate and train the sales
force.

+Control Station Operating Costs --- focus on fundamental cost
controls and operating efficiencies.

+Utilize Viewer Oriented Scheduling --- make it easier for
viewers to find the programs they prefer to watch by regular
and consistent scheduling of programming.

+Promote Programs --- advertise and promote its programming,
both on MSAT and Sziv and in other media, to increase ratings
and viewer identification.

+Expand the Company --- Expand in Hungary and in other
countries in Central and Eastern Europe through strategic
acquisitions of new stations.

8. PROGRAMMING

The Company's programming strategy is to broadcast specialized programming
targeted to specific groups such as children and movie viewers. In addition, the
Company believes that its strategy of emphasizing Hungarian oriented programming
will lead to an increase in market share among key demographic groups and
improve the image of the station among advertisers and viewers.

The Company's strategy in purchasing international programs for
broadcasting in Hungary is to acquire programs that were successful on United
States and United Kingdom prime time television. These programs are dubbed into
Hungarian by the Company and include television series, serials and soap operas.
Movies previously dubbed into Hungarian are also acquired. Popular international
programs currently broadcast by the Company include Beauty and the Beast,
Pacific Blue, LA Law, Murder One, Pacific Drive, Homicide, and The Benny Hill
Show. The Company also produces or plans to produce variety shows, magazine

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format shows, talk shows and game shows. New management is planning to
significantly improve the quality of programming for both MSAT and Sziv.

MSAT programming from 2:00 a.m. to 12:00 p.m. consists principally of
computerized music clips of Western and Hungarian recording artists. From 12:00
p.m. to 6:00 p.m., MSAT broadcasts programming of general interest plus a movie.
From 6:00 p.m. to 2:00 a.m., the programming features acquired programming
dubbed into Hungarian, locally produced shows and movies dubbed into Hungarian.

Sziv broadcasts 19 hours per day. Its programming presently consists of
general entertainment with an emphasis on movies during prime time.

The Company receives video music clips directly from recording companies
such as Sony or EMI, or music-publishing companies without charge to the
Company. If and when the Company broadcasts a composition, the Company pays a
royalty on the use of the composition to the Hungarian Association of Record
Producers ("HARP"). In the case of its own productions, the Company's staff
selects the program and oversees the production. The Company believes its
production programming staff of 21 persons together with approximately 61
professionals employed on an as needed basis is adequate to produce its
programming. The Company acquires rights to international sitcoms and other
series for a limited number of showings together with videotapes and scripts of
the shows. The Company dubs the videotapes into the Hungarian language.

From time to time, MSAT and Sziv broadcast a special sporting or cultural
event and replaces the regularly scheduled program with this event.

The Company is continually working on new ideas for programming and intends
to change its schedule to specialized programming in 1998 in order to increase
"audience flow," so as to retain as many viewers as possible from one program to
the next. Specialized programming attracts similar audience demographics so as
to retain as many viewers as possible from one program to the next. These
scheduling practices are used widely in the United States and help build viewer
loyalty and overall market share. The Company also advertises and promotes its
programming on MSAT and Sziv.

The Company has not and does not expect to conduct, or to expend any funds
on, research or development activities.

9. ADVERTISING SALES

Advertising sales to international, national and local advertisers is the
principal source of revenue for the Company. The Company has been able to
implement a number of sales practices that have been effectively used in the
United States market and in other more developed television broadcasting
markets. The Company has cooperated with other broadcasters to implement
accurate, independent rating surveys in each of its markets. Second, the
Company's sales efforts focus on educating the media buying market on how to use
television as an effective advertising medium.

In Hungary, AGB-Hungarian Meter System began providing ratings information
in 1993 on a national basis and has been providing rating information for
certain local areas including Budapest since 1996. The Company believes that
accurate ratings information accelerates the development of commercial
television markets because advertisers with more accurate ratings information
are more willing to allocate a greater percentage of their advertising budget to
television advertising.

The Company employs an experienced advertising sales force under the
direction of a sales manager.

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In addition to advertising sales and programming sponsorship, the Company
collects a small annual fee from each cable operator at the time the cable
operator contracts to carry MSAT's and Sziv's broadcasts.

10. COMPETITION

MSAT and Sziv compete with MTV1, a government owned and operated national
television terrestrial stations, and with MTV2 and DUNA-TV, government owned and
operated satellite-to-cable stations, for audience, for programming and for
advertising. In addition, the Company's stations compete with two national
terrestrial stations, TV2 and RTL Klub. In the satellite-to-cable market, the
Company's stations compete with TV3, a privately owned commercial station with
an AM-Micro license similar to those of the Company. Other competitors include
localized stations in Budapest that broadcast to parts of the Budapest area
sporadically and have insignificant audiences.

Competition for viewers also comes from foreign stations transmitting
satellite-to-cable and satellite-to-home TV. These stations broadcast in
English, German or French. Currently, none broadcast regularly in Hungarian. The
Company does not consider such stations to be significant competitors.

MSAT and Sziv also compete for revenues with other media, such as
newspapers, radio, magazines, outdoor advertising, telephone directory
advertising and direct mail.

The increased competition following privatization may be somewhat offset by
an expanding advertising market and by more transparent and merit based pricing
practices. The high sales prices paid for the privatized stations suggest
significant future increases in advertising prices. The television advertising
market in Hungary has higher year-to-year percentage growth than in the West and
television's share of the total advertising market has increased, particularly
in relationship to print advertising.

11. REGULATION

The Company is required to be licensed to broadcast in Hungary, and it is
licensed to do so. MSAT is recognized as a national satellite broadcaster by the
ORTT. The national satellite license permits MSAT to broadcast its
satellite-to-cable signal without encoding which allows the cable companies to
receive MSAT's broadcasting signal with an inexpensive receiver. Sziv has an AM
Micro license and indefinite regulatory authority to broadcast by satellite to
Hungarian cable companies.

Under the Media Act, which was enacted in December 1995, the Company is
required to comply with a number of restrictions on programming and advertising.
The Company believes that it is currently complying with all the restrictions
provided for in the Act and that none of the restrictions has a material adverse
effect on its operations. Advertisements on MSAT and on Sziv may not exceed 15%
of daily broadcast time and 12 minutes per hour. At least 15% (20% beginning in
1999) of total broadcast time must be Hungarian produced. At least 10% (15%
beginning in 1999) of total broadcast time must be programming commissioned or
purchased from an independent Hungarian producer that is not more than five
years old. Six percent of total annual advertising revenues must be used for the
creation of new Hungarian films, or, in the alternative, 3% of annual
advertising revenues may be donated to a Hungarian film production fund.

If Hungary becomes a member of the European Union, the Company will be
subject to additional program content regulation.

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There are no specific environmental regulations in Hungary to which the
Company is subject, and the Company has not expended and does not expect to
expend any funds on environmental compliance costs.

12. EMPLOYEES

As of December 31, 1997, the Company had three executive officers and a
central staff of 33 full-time employees, consisting of 21 in production and in
programming, six in sales and six in finance and administration. None of the
Company's employees are covered by a collective bargaining agreement. The
Company also employs from time to time, on an as-needed basis, additional
temporary personnel drawn from a pool of approximately 61 production
professionals, such as directors, camera or lighting operators, and engineers
and 19 dubbing and voice over professionals. The Company believes that its
relations with its employees are good. Studio 2 Kft. has 11 employees.

In April 1998, the Sziv operations have been integrated into the operations
of MSAT at the Company's headquarters location. The Company currently has
approximately 12 more employees than at December 31, 1997 of which six formerly
worked with Sziv. The other Global operations have no employees.

ITEM 2. DESCRIPTION OF PROPERTY

The Company entered into a five year lease as of July 1, 1996 for
approximately 12,000 square feet on four floors at 1118 Budapest, Kelenhegyi ut
39, Hungary at a rental fee of $144,000 per year plus a 25% VAT and maintenance
fees. The Company may terminate the lease on six months notice. The Company is
using the third floor for its executive offices, the second floor for sales and
other offices, the first floor as a broadcast studio and offices for the
production group and the basement floor for archives, and an editing suite. The
basement floor also houses the master control.

Studio 2 Kft leases its offices from a company owned by the Chairman of the
Board on a month-to-month basis for a monthly rent of $2,800.

Both MSAT and Sziv lease transponder space on the Amos 1 satellite through
contracts with Antenna Hungaria, and the Company leases transponder space on the
Astra 1E satellite through a contract with Orion Atlantic.

Sziv owns fixed assets (primarily broadcasting equipment) with a book value
as of December 31, 1997 of $370,764.

In January 1998, the Company signed a five-year lease with EuroWeb
International Inc., a related party, at a monthly rent of $6,481. The payments
are for the rental of four apartments in a 14-unit modern apartment building
next to the offices of the Company. These apartments are used by the President,
the Chief Operating Officer and the General Manager of the station. A fourth
apartment is for use by consultants and business visitors to the Company. In
April 1998, the entire 14-unit building was leased to an independent company.
The Company is in contact with the new lessee about subleasing additional space.
The marketing department for the Company has moved into the building and will
pay rent at the same per-square-meter cost as reflected in the first four
apartments. It is anticipated that most, if not all, of the other space in the
building will be used by the Company or by others that do business with the
Company.

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ITEM 3. LEGAL PROCEEDINGS

LICENSE PROCEEDING
TV 3, a competitor of the Company, which was granted a six year, 24 hour
per day microwave license, applied to the Ministry of Culture to overturn the
grant of the A3 license to the Licensees and NAP TV made on March 29, 1994 on
the ground that proper procedures were not followed because the authority of the
committee that awarded the licenses had expired prior to the date the licenses
were granted. The Ministry of Culture denied the application and held that even
if a new committee were acting, it would also have granted the licenses to the
Licensees and to NAP TV. TV 3 thereafter instituted a legal action on December
1, 1994 against the Ministry of Culture, but not against either of the
Licensees, to overturn its decision in awarding the licenses in the Metropolitan
Court of Budapest. At a hearing held on December 1, 1994, the Municipal Court
ordered the Ministry to follow prescribed procedures and make a new decision.
The Ministry appealed this decision to the Appeals Court of Budapest. On April
25, 1995, the Company received a letter from the Ministry confirming that the
licenses had been granted to the Licensees and the Licensees may operate in
accordance with the terms of the licenses. On November 6, 1995, the Appeals
Court vacated the decision of the Metropolitan Court on the ground that no
notice of the hearing had been given to the Licensees (which had not had an
opportunity to appear at that hearing). The Appeals Court ruled that the only
issue to be decided by the Metropolitan Court is whether the Ministry's
committee was properly constituted to grant the licenses and remanded the matter
for a hearing in the Fall 1996 term. In particular, the Appeals Court ruled that
the Metropolitan Court does not have jurisdiction to revoke the grant of the
licenses or otherwise modify the decision of the Ministry's committee and,
accordingly, the Licensees may continue to operate under the licenses, pending a
final determination by the Ministry committee. In its ruling dated June 24,
1996, the Metropolitan Court ruled in favor of the Company. Subsequently, TV 3
has requested a review of this matter, which is currently pending. If this
ruling is overturned, this would have no adverse effect on the Company's ability
to continue broadcasting because the Company began broadcasting under a new
contract, granted by Antenna Hungaria, on a new AM Micro channel in September
1997.

SUBSIDIARY RECEIVERSHIP

In November 1997, the Company was notified by the Capital Court of Budapest
that one of its non-operating subsidiaries, HBC Kft, had been placed in
receivership due to the failure to pay an interest penalty of twenty-five ($25)
dollars. The Company had previously paid a nominal judgment. The Company's
Hungarian operating subsidiary, HBC Rt., paid this penalty interest and has
agreed to pay any remaining debt in HBC Kft. The Company expects that the
receivership of HBC Kft will be ended in the next few weeks. This event has had
no material impact on the operations or financial condition of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

NONE.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

In December 1995, the Company's Common Stock and certain Common Stock
Purchase Warrants commenced trading on the NASDAQ Small-Cap Market under the
symbols HBCO and HBCOW respectively. Prior to December 1995, there was no
established public trading market for the Company's Common Stock or Warrants.
Effective February 1997, the Company's Units commenced trading on the NASDAQ

10
<PAGE>

Small-Cap Market under the symbol HBCOU. Each Unit consisted of one share of
Series A Convertible Redeemable Preferred Stock and one Common Stock Purchase
Warrant. In September 1997, the Units were separated and the Company's Series A
Preferred Stock began trading on the NASDAQ Small-Cap Market under the symbol
HBCOP. Subsequently, nearly all of the Company's Series A Preferred Stock was
converted by holders into shares of Common Stock. Due to the decrease in trading
volume, market makers ceased trading that security and the Series A Preferred
Stock was delisted by NASDAQ.

The following table sets forth the range of high and low closing prices for
each quarter as reported by NASDAQ.

COMMON STOCK WARRANTS UNITS PREFERRED STOCK
1996 HIGH LOW HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1st quarter 9.000 8.000 4.375 2.750 --- --- --- ---
2nd quarter 11.875 7.875 5.500 2.750 --- --- --- ---
3rd quarter 10.000 5.500 3.750 1.750 --- --- --- ---
4th quarter 7.375 4.000 2.375 0.750 --- --- --- ---
1997
1st quarter 7.000 4.000 2.000 0.750 14.000 11.000 --- ---
2nd quarter 6.250 4.625 1.750 1.125 12.250 7.500 --- ---
3rd quarter 5.250 3.500 1.625 0.813 9.250 6.750 --- ---
4th quarter 9.125 4.375 3.250 1.375 13.375 8.875 20.00 11.00
1998
1st quarter 8.313 4.875 3.250 1.063 --- --- --- ---
2nd quarter (to 4/13) 9.500 8.625 3.688 3.350 --- --- --- ---

</TABLE>

SHAREHOLDERS

On April 3, 1998, there were 46 holders of record (and an estimated 1,500
beneficial holders) of the 7,897,372 outstanding shares of Common Stock, 35
holders of record of the 2,376,110 outstanding Common Stock Purchase Warrants
(exclusive of the Warrants in the Units) and four holders of record of the
23,830 Series A Preferred Stock. The closing prices of the Common Stock and
Common Stock Purchase Warrants on April 3, 1998 were $8.94 and $3.50,
respectively.

DIVIDEND POLICY

The Company has never paid any cash dividends on the Common Stock. The
Company anticipates that in the foreseeable future, earnings, if any, will be
retained for use in the business or for other corporate purposes, and it is not
anticipated that cash dividends will be paid either on the Preferred Shares or
Common Stock. Dividends on the Preferred Shares will be paid in Common Stock if
the Company is legally able to do so. The Company is dependent upon payment of
dividends from its Hungarian subsidiary companies as the source of cash for the
payment of dividends.

On December 31, 1997, the Company distributed shares of its wholly-owned
subsidiary, Central European Satellite Corp. ("CESAT"), to the shareholders of
Hungarian Broadcasting Corp. on a one share for one share basis. The only asset
of CESAT is a letter of intent signed with Magyarsat Kft in November 1997
authorizing the Company to finance and launch an Amos-class communications
satellite into the same terrestrial position as the current Amos 1 satellite.
Magyarsat Kft is owned on a 50:50 basis by state-owned Antenna Hungaria and
Israel Aircraft Industries Ltd. ("IAI"), Israel's state-owned aerospace company.
Terms of the planned venture are for CESAT to raise about $39 million of equity
capital and about $100 million of debt financing in exchange for an approximate

11
<PAGE>

94% ownership interest prior to raising new equity. The state of Hungary is
contributing their terrestrial space for the satellite and IAI will contribute
$1.0 million of cash. Existing Central European traffic on the Amos 1 satellite
(except for one transponder) will be transferred to the new satellite. The
Company's former Chief Executive Officer (and current Chairman of the Board) is
now Chief Executive Officer of this new business. The Company has no continuing
economic interest in this corporation.

A Hungarian company is permitted to pay annual dividends out of
profits, determined on the basis of Hungarian accounting principles, following
recommendation of its Board of Directors and a declaration by the Annual General
Meeting which must be held in the first five months of each year. Dividends are
payable to foreign investors, such as the Company, in forints, which may be
converted into United States dollars at the official rate of exchange announced
by the National Bank of Hungary.

ITEM 6. MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

The Company is a leading satellite-to-cable television broadcaster in
Hungary. The Company's two stations, MSAT and Sziv TV (acquired in January 1998)
distribute to approximately 1.5 million and 1.3 million households,
respectively, or about 39% and 35% of all television households in the country.
The Company's strategy is to continue to expand its broadcasting reach, promote
its Western-style programming and aggressively pursue additional advertising.
The Company expects to benefit from the projected high rates of growth for
television advertising in Hungary. In addition, a new management team, that
began operating the station in January 1998, has plans for significant
broadcasting expansion elsewhere in Central and Eastern Europe.

The Company was organized in September 1994. In November 1994, it obtained
a six month option to acquire majority interests in DNTV and VI-DOK, two
Hungarian corporations that were granted licenses in March 1994 for a six year
term (commencing July 1, 1994) to broadcast over Budapest Television channel
AM-Micro A3. Broadcasting began on a limited basis in September 1994 and
increased to 21 1/2 hours per day in December 1994. In May and June 1995, the
Company purchased 80% of DNTV and 90% of VI-DOK, respectively. Initially, the
station broadcast only music clips. After changing to a civic events format in
June 1995, the Company returned to the video music clip format in October 1995.

In December 1995, the Company sold shares in an initial public offering and
determined to relaunch its broadcasting as a Western-style station. In April
1996, the Company introduced new programming for the hours 7:30 p.m. to 11:00
p.m. featuring American and British syndicated series that had been previously
successful in prime time in those countries. The Company dubbed these programs
into Hungarian. Audience acceptance of these programs has been favorable.

In September 1996, the Company began transmitting its signal from the Astra
1E Satellite and in October 1996, the station was renamed "MSAT." In June 1997,
the Company switched its satellite transmission service from the Astra satellite
to the Amos 1 satellite with uplink services provided by Antenna Hungaria. In
September 1997, the Company contracted with a new AM Micro channel and began
broadcasting 24 hours per day on the Budapest microwave system. In November
ORTT, the television regulatory body in Hungary, awarded the Company a national
license to broadcast via satellite. The license permits the Company to send its
digital signal without encoding. Accordingly, cable television companies and
direct-to-home customers can receive the signal without having to acquire
expensive decoders.

<PAGE>

In January 1998, the Company acquired Global Television Networks, Inc.
("Global"). Global owned Sziv TV, one of the three satellite-to cable stations
in Hungary that are also on the AM Micro MMDS system in Budapest. Global is also
a distributor of paid adult television programming, holding exclusive long-term
contracts with NTV Plus DBS operators in Russia and contracts with United
Phillips cable operators in Vienna and Amsterdam. In addition, Global owns a
chatline service in the United States.

In April 1997, the Company purchased Studio 2 Kft, a Budapest-based
animation studio. The Company is currently producing a feature length animation
movie, MISHY AND MUSHY.

The Company's revenues are derived primarily from the sale of television
advertising to national, international and local advertisers. Billing is
determined by the program ratings as measured by AGB-Hungarian Meter System, an
independent audience rating service. The Company's direct customers are
generally fewer than a dozen international advertising agencies that arrange the
broadcast of commercials for their clients. The Company engages in certain
barter transactions in which it exchanges unsold commercial advertising for
services and goods. In addition, the Company receives small payments from the
cable operators who contract to carry MSAT's signal. The Company experiences
seasonality, with advertising sales tending to be lowest in January of each year
as the major advertising agencies negotiate the next year's buy and in the
summer months of July and August. The highest level of advertising activity is
during the fourth quarter of each calendar year as new programming often is
launched in the Fall and purchasing tends to increase as Christmas approaches.

The primary expenses incurred in operating a broadcasting station are
programming costs (buying, producing and editing), employee salaries, broadcast
transmission expenses and selling, general and administrative expenses.
The Company is currently operating with expenses (excluding non-cash items
such as: depreciation, barter expense, amortization of intangibles and foreign
exchange gains or losses) of approximately $600,000 per month and anticipates
this approximate level of expenses to continue for at least the next six months.
Revenues from the two Company stations are currently averaging $200,000 to
$300,000 per month. New specialized programming planned to begin in late summer
is expected to increase the stations' audience and advertiser demand. Partnering
with major programming producers could reduce programming costs in the near term
and the Company is now gaining the cost benefits of combining the two stations
at one location with one management and technical group.

Since MSAT was relaunched in April 1996, revenues have grown rapidly.
Revenues of nine million forints in May 1996 have risen to 39 million forints in
November 1996 and to 72 million forints ($360,000) in October 1997. Two new
private stations entered the market in October 1997, increasing competition for
both audience and advertising. This competition, particularly in pricing, has
hurt recent results. As this introductory period ends, there are indications
that the television market is improving for the established stations.

Once the impact of the new stations is absorbed in the market, management
believes that its growth in sales will continue. It now operates two stations
with the potential for cross promotion, improved marketing and more efficiency.
The Company is a recent entrant in the Hungarian television market, essentially
being available to viewers in Budapest only since Spring 1996 after the Company
was funded in an initial public offering. Since Fall 1996 others in Hungary
began to receive the Company's channel. The Company is working to increase its
reach to as many as 50% of Hungary's television households as it signs up
additional cable companies. DUNA-TV, a satellite-to-cable station begun in 1993,
currently has a broadcast reach of about 48%. The Hungarian television
advertising market in 1997 was over $200 million; over $170 million after agency
commissions. The Company's current rate of sales represents less than 2% of a
growing overall market. The Company's national viewership share is higher than
this percentage. The Company expects growth in the number of households
receiving MSAT's signal and increased viewing by households that currently watch
the station.

13
<PAGE>

The Company conducts its operations through its Hungarian subsidiaries.
Accordingly, the primary internal sources of the Company's cash are dividends
and other distributions from its subsidiaries. The Company's ability to obtain
dividends or other distributions is subject to, among other things, restrictions
on dividends under Hungarian law and foreign currency regulations in Hungary.
The subsidiaries' ability to make distributions to the Company is also subject
to legal availability of sufficient operating funds which are not needed for
operations, obligations or other business plans.

The Company's revenues and a majority of its expenses are denominated in
Hungarian forints. Accordingly, the business operations of the Company are
impacted only to a limited degree by foreign exchange fluctuations. Inflation
also is of limited direct importance to the operations of the Company. In
Hungary, advertising in general and television advertising in particular, have
consistently grown more rapidly than the rate of inflation. Of greater
importance, is the potential impact of currency fluctuations and inflation on
the health of the Hungarian economy. Growth in Hungarian television advertising
is directly impacted by the overall health and growth of the Hungarian economy.

The Company operates with studio licenses and AM-Micro licenses for both
MSAT and Sziv TV. In addition, MSAT has a national satellite-to-cable license,
and Sziv has authority to broadcast via satellite, from ORTT, the Hungarian
television regulatory authority.

The Company has built its business from a start up operation. On December
31, 1995, the Company emerged from its development stage. Although the Company
has displayed growth in sales, there is no assurance that the Company will
generate enough revenues to pay its costs.

RESULTS OF OPERATIONS

As of December 31, 1996, the Company changed its fiscal year end from June
30 to December 31. Accordingly, the Company has audited statements for the six
months period ended December 31, 1996 and for the year ended June 30, 1996. The
comparison below uses unaudited financial statements for the year ended December
31, 1996 and unaudited financial statements for the six months ended December
31, 1995.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996

The Company's revenues increased by $1,453,405 or 95% to $2,981,260 in the
year ended December 31, 1997 from $1,527,855 in the year ended December 31,
1996. The increase is attributable to the general increase in advertising volume
and improved reach at the station, particularly since the station's relaunch in
April 1996.

Other operating costs and expenses, including amortization of deferred
program costs, increased by $444,882 to $4,341,340 in the year ended December
31, 1997 from $3,896,458 in the year ended December 31, 1996. This increase
reflects the increased costs of the station, including a full year of higher
quality programming.

Amortization of broadcast license costs of $423,048 and $435,116 for the
two periods, respectively, reflects the amortization of the initial costs of the
licenses over the remaining life of the licenses ending in July 2000. In
September 1997, a 24-hour license of indefinite duration was awarded to HBC Rt.

Selling, general and administrative expenses increased $158,678 to
$2,383,382 for the year ended December 31, 1997 from $2,224,704 in the year

14
<PAGE>

ended December 31, 1996. This increase reflects a larger sales and management
staff and the increased cost of their support offset somewhat by more efficient
operation.

In the 1997 year, the Company received a contract cancellation fee of
$1,370,000 from Nethold, B.V. as a result of that company closing its business
activities in Hungary. Two hundred thousand dollars was placed in reserve to
settle contractual commitments with the Orion Atlantic satellite. The Company
contracted with alternative satellite service using uplink facilities of Antenna
Hungaria to the Amos 1 satellite.

Interest and other income declined by $77,596 to $116,086 for the year
ended December 31, 1997 form $193,682 for the year ended December 31, 1996. This
resulted primarily from higher Company cash balances for 1996 after its initial
public offering in December 1995.

Interest expense decreased $81,318 to $262,156 for the year ended December
31, 1997 from $343,474 for the year ended December 31, 1996. This reflected
borrowings in 1996 prior to the February 1997 secondary securities offering.

SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1995

The Company's revenues increased by $855,747 or 223% to $1,239,418 in the
six months ended December 31, 1996 from $383,671 in the six months ended
December 31, 1995. The increase is attributable to the general increase in
advertising at the station. In the prior six months period, the station had a
limited format and generated revenues largely by sponsored segments. Advertising
revenues have grown since the Company's initial public offering in December 1995
and the relaunch of the station in April 1996 as a Western-oriented,
entertainment channel. Barter revenues for the period were approximately
$225,000 compared to negligible barter revenues in the earlier period. Prior to
December 21, 1995, the Company was in development stage,

Other operating costs and expenses, including amortization of deferred
program costs, increased by $1,737,261 to $2,415,859 in the six months ended
December 31, 1996 from $678,598 in the six months ended December 31, 1995. This
increase reflects the higher programming and production costs inherent in an
entertainment station compared to the music, sponsored segment and civic formats
of the earlier period.

Amortization of broadcast license costs of $211,526 and $199,462 for the
two periods, respectively, reflects the amortization of the initial licenses
over the remaining lives of the licenses ending in July 2000.

Selling, general and administrative expenses increased $584,715 to
$1,428,982 for the six months ended December 31, 1996 from $844,267 in the six
months ended December 31, 1995. This increase reflects larger sales and
management staffs and a new headquarters building.

CHANGES IN ACCOUNTING POLICIES

In March 1997, the Company changed it fiscal year to a calendar year to
follow the practices of other broadcasters and to match the reporting periods
for its Hungarian subsidiaries. The Company adopted SFAS 128 for the first
quarter ended March 31, 1997. The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation." Accordingly, no compensation cost has been
recognized for the Company's Stock Option Plan.

15
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

The Company has historically derived its cash for capital expenditures,
working capital and operations primarily from the sale of securities to and
borrowings from investors. As the broadcasting station has established itself in
the market and as its broadcasting reach has expanded through satellite-to-cable
distribution, the Company's revenues and cash flows have risen, so that much of
cash needed to operate the Company is derived from operations.

Net cash used in operating activities was $480,824, $1,531,455 and
$3,223,645 for the year ended December 31, 1997, for the six months ended
December 31, 1996 and for the fiscal year ended June 30, 1996, respectively.
Starting in Spring 1996, the Company made significant expenditures in providing
an entertainment format and, beginning Fall 1996, in gaining satellite-to-cable
distribution. In recent months revenues have grown significantly to offset most
of these expenditures.

Net cash used in investing activities was $1,413,205, $957,953 and $851,252
for the year ended December 31, 1997, for the six months ended December 31, 1996
and for the fiscal year ended June 30, 1996, respectively. The year ended
December 31, 1997 investing activities were less on a monthly basis than in the
six months ended December 31, 1996 primarily due to a lower commitment to
Western series in favor of a greater commitment to Western films secured in the
Hungarian market. 1997 expenditures were increased by $228,648 primarily from
the cash portion of the purchase price of Studio 2 Kft.

Net Cash provided by financing activities was $2,084,577, $1,408,144 and
$5,242,270 for the year ended December 31, 1997, for the six months ended
December 31, 1996 and for the fiscal year ended June 30, 1996, respectively. As
mentioned above, the Company is frequently in the market to raise funds from
investors. Because it is in its early stages of development and because new
management is following a very aggressive growth strategy, the Company expects
to raise significantly greater funds in the future. In the year ended December
31, 1997 funds were primarily raised in an equity underwriting in February 1997.
For the six months ended December 31, 1996 funds were raised in a private
placement plus bridge financing for the 1997 underwriting. And for the year
ended June 30, 1996, most of the money raised was from the December 1995 initial
public offering.

Program rights cost as of December 31, 1997 were $687,614, a decrease of
$454,386 or 40% from $1,142,000 as of December 31, 1996. This reflects a reduced
commitment to Western series as requested by the new management group as they
prepare new programming strategies. The 1998 programming commitments tended to
end prior to June 30, 1998.

With the exception of acquisitions, the Company has only limited capital
spending requirements. It rents its operations building. While its current MSAT
studio equipment is rented, the Company through its acquisition of Global
Television Networks, Inc. owns the studio equipment of Sziv TV, subject to a
bank loan. The Company has tentatively secured equipment financing and plans to
make a major addition and upgrade to its broadcasting and editing equipment.

From its inception through November 1995, the Company sold 1,647,500 shares
of Common Stock in a series of private transactions for proceeds of $1,913,622,
net of issuance costs and, in addition, issued promissory notes in the aggregate
amount of $2,120,000.

In December 1995, the Company completed an initial public offering with
proceeds of $4,995,338, net of underwriting commissions and expenses.

In September 1996, the Company sold 100,000 units of convertible preferred
stock and warrants for proceeds of $329,972, net of issuance costs.

16
<PAGE>

In February 1997, the Company sold in a secondary public offering 426,500
units of convertible preferred stock and warrants for proceeds of $3,292,138,
net of underwriting commissions and expenses.

The Company is conducting a full review of its computer systems to identify
the systems that could be affected by the Year 2000 issue and is developing a
plan to resolve the issue. The Year 2000 problem is the result of computer
programs being written using two digits rather than four to define the
applicable year. The Company presently believes that the Year 2000 problem will
not pose significant operational problems for the Company's computer systems.
Management believes that the Year 2000 compliance costs and related effect on
the Company's earnings, if any, will be minimal.

The Company believes that its existing cash balances, cash from future
operations and the proceeds from a planned securities offering will be
sufficient to fund the Company's operations for the next twelve months. However,
there is no assurance that the planned offering will be consummated, or that
revenues will increase as expected. If the planned offering is delayed or
canceled, the Company may need to raise funds from financial institutions or
from other investors.

In particular, the Company has notes from investors that are due on June
30, 1998 of approximately $620,000 (exclusive of $400,000 owed to a related
party that is offset by a similar loan to the related part with similar terms
for $350,000) plus interest. The Company plans to repay these notes out of
proceeds of the planned offering mentioned above, or from financing from other
sources.

FOREIGN CURRENCY

The Company's broadcasting operations in Hungary incur both revenues and
operating expenses in Hungarian forints. A portion of the Company's expenses,
primarily programming, is denominated in United States dollars. Asset and
liability accounts are translated from Hungarian forints into United States
dollars at the period-end exchange rate; income and expense accounts are
translated at the average exchange rate for the period. The resulting
translation adjustment is reflected as a separate component of stockholders'
equity. Currency translation adjustments relating to transactions of the Company
and its subsidiaries in currencies other than the functional currency of the
entity involved are reflected in the operating results of the Company.

The Company does not hedge against foreign currency exchange risks.

SUBSEQUENT EVENTS

Since December 31, 1997, a number of events have occurred as described
below.

On January 5,1998, pursuant to a Reorganization Agreement, the Company
acquired all of the outstanding common stock of Global in exchange for 3.75
million shares of the Company's Common Stock, 1.25 million of which are held in
escrow which will be delivered only upon Global, exclusive of Sziv, meeting
certain performance measures. On January 5, 1998, immediately prior to the above
transaction, Global and Hungarian Broadcasting Project Kft ("HBP") purchased 24%
and 76%, respectively of Sziv Television, a national satellite-to-cable
broadcaster currently reaching approximately 1.25 million television households
through an AM Micro transmission system in Budapest and about 150 cable
companies via satellite distribution in Hungary, Global is entitled to 99% of
all profits from Sziv, and HBP is entitled to the remaining 1%. In addition,
Global has an option to purchase HBP at any time for $15,000 or to appoint
another investor to hold HBP upon payment of $15,000. Global is also a
distributor of paid adult television programming, holding exclusive long-term
contracts with NTV Plus DBS operators in Russia and long-term contracts with
United Phillips cable operators in Vienna and Amsterdam. In addition Global owns
a chatline service in the United States.

17
<PAGE>

Pursuant to the acquisition, the Company entered into a Registration
Rights Agreement giving the former shareholders of Global the right, starting 24
months after the closing of the Reorganization Agreement, to require the Company
to register the Common Shares granted to them thereunder with the Securities and
Exchange Commission.

Pursuant to the acquisition of Global, the Company also entered into
three-year employment agreements with five owners/executives/consultants of
Global. Total payments under these contracts will be $2.34 million. In addition,
these employees/consultants received 3.0 million five-year options exercisable
into common shares in the Company at $10 per share.

In a transaction related to the acquisition of Global, Global agreed to
allow Peter Klenner, former President, and director, of the Company, to put to
Global 300,000 common shares that he owned in the Company at a price of $7.50
per share on or after December 31, 1998. Upon the acquisition of Global by the
Company, the Company assumed this put obligation.

Immediately after the acquisition of Global, the Company accepted the
resignation of Justin Bodle as a director. Offer Assis, Shai Bar-Lavi, Ami
Shafrir and Fred Smithline were elected directors. Mr. Klenner was elected
Chairman of the Board, Mr. Assis was elected President and Chief Executive
Officer and Shai Bar-Lavi was elected Chief Operating Officer.

In January 1998, the Company entered into a five-year employment
agreement with its general counsel and Secretary. Total payments will be
$480,000 plus 80,000 five-year options exercisable into common shares in the
Company at $5.00 per share.

The owners/executives of Global own Top-Line Communications, Inc.
("Top-Line"), a television production studio in New York. As part of the due
diligence in the sale of Global to the Company, Top-Line financed certain
expenses including travel and lodging for persons associated with the
Global--Hungarian Broadcasting transaction, including the investigation of
broadcasting opportunities elsewhere in Europe. The Company agreed to reimburse
Top-Line for expenditure made in the due diligence process only if the Company
purchased Global. Top-Line has continued to advance expenses directly related to
the Company's activities.

In March 1998, the Company contracted with a New York-based investment
banker to sell on a "best efforts" basis from $3 million to $6 million of 6%
Convertible Preferred stock. In the event that the issue is not completed, the
Company would need to seek alternative sources of financing to fund continued
development and operations of the Company.

18
<PAGE>

The Company is aware that, as of February 22, 1998, the listing
requirements for the NASDAQ Small Cap market were raised. In response to an
inquiry from NASDAQ, the Company provided additional information to them so that
they could determine whether the Company met the new requirements. NASDAQ
subsequently told the Company that it meets the new requirements, and that
subject to a review of this Form 10-KSB, NASDAQ would notify the Company in
writing of this decision.

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISION OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995

Except for historical information provided in the Management's Discussion
and Analysis, statements made throughout this document are forward-looking and
contain information about financial results, economic conditions, trends and
known uncertainties. The Company cautions the reader that actual results could
differ materially from those expected by the Company, depending on the outcome
of certain factors (some of which are described with the forward-looking
statements) including: 1) heightened competition, particularly price
competition, reducing margins; 2) slower growth than expected in the market for
television advertising in Hungary and (3) the Company's ability to raise
additional financing.

<PAGE>

ITEM 7 FINANCIAL STATEMENTS

HUNGARIAN BROADCASTING CORP.

FINANCIAL STATEMENTS
CONTENTS

Report of Independent Accountants. ................................ F-2

Consolidated balance sheets as of December 31, 1997 and 1996 ...... F-3

Consolidated statements of operations for the year ended
December 31, 1997, for the six months ended December 31, 1996
and for the year ended June 30, 1996 .............................. F-4

Consolidated statements of stockholders' equity for the year
ended June 30, 1996, for the six months ended December 31, 1996
and for the year ended December 31, 1997 .......................... F-5

Consolidated statements of cash flows for the year ended
December 31, 1997, for the six months ended December 31,1996
and for the year ended June 30, 1996............................... F-6

Notes to consolidated financial statements ....................... F-7, F-22

F-1

<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
and Stockholders of Hungarian Broadcasting Corp.

We have audited the accompanying consolidated balance sheets of Hungarian
Broadcasting Corp. and its subsidiaries (the "Company") as of December 31,1997
and 1996 and the related consolidated statements of operations, stockholders'
equity and cash flows for the year ended December 31, 1997, the six month period
ended December 31, 1996 and the year ended June 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Hungarian Broadcasting Corp. and its subsidiaries, as of December 31, 1997 and
1996, and the results of its operations and its cash flows for the year ended
December 31, 1997, the six month period ended December 31, 1996 and the year
ended June 30, 1996, in conformity with generally accepted accounting principles
in the United States of America.

Without qualifying our opinion, we draw to your attention, as explained
more fully in Note 17 to the financial statements describing certain subsequent
events, that the Company is not fully in compliance with the NASDAQ and the SEC
filing requirements. If the matters described in Note 17 are not successfully
resolved and ultimate confirmation obtained that the Company meets its listing
requirements, the Company's ability to obtain the required funds to finance its
operations and development would be impaired.

Coopers & Lybrand
Konyvvizsgalo es Vezetesi Tanacsado Kft.

Budapest, Hungary
April 14, 1998

F-2

<PAGE>

HUNGARIAN BROADCASTING CORP.

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996

DECEMBER 31
1997 1996
---------- ----------
Current Assets:
<S> <C> <C>
Cash and cash equivalents ......................... $ 406,733 $ 375,823
Accounts receivable, net of allowance of
$43,237 and $28,546 .............................. 469,163 605,826
Program rights costs, net of accumulated
amortization of $0 and 236,000................... $ 687,614 1,142,000
Prepaid expenses and other current asset ...... 177,026 117,331
Due from related parties .......................... 361,046 --
---------- ----------
Total current assets ........................ 2,101,582 2,240,980
Property, plant and equipment, net of accumulated
depreciation of $112,939 and $44,080 .............. 401,178 443,633
Production costs .................................. 432,886 --
Copyrights ........................................ 401,434 --
Broadcast license costs, net of accumulated
amortization of $1,092,979 and $669,931 ........... 1,057,535 1,480,583
Deferred financing and other intangibles,
net of accumulated amortization of $1,130 and
$28,870 7,683 46,329
Other ............................................. 251,605 89,680
---------- ----------
Total assets ................................. $4,653,903 $4,301,205

L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y

Current liabilities:
Current portion of notes payable ................ $ 1,027,306 $ 1,867,700
Accounts payable ................................ 676,191 763,821
Accrued expenses ................................ 945,538 387,844
VAT payable ..................................... 97,185 --
Due to related parties .......................... 932,123 1,731,737
Other ........................................... 247,394 60,852
------------ ------------
Total liabilities ........................... 3,925,737 4,811,954
Commitments and contingencies (Note 15)
Stockholders' equity:
Preferred stock, $.001 par value -
shares authorized 5,000,000; issued
and outstanding 38,530 and 100,000;
aggregate liquidation preference
approximately $385,000 .......................... 39 100
Common stock, $.001 par value - shares authorized
15,000,000; issued and outstanding 3,929,281 and
2,583,600 ....................................... 3,930 2,583
Additional paid-in capital ...................... 11,693,680 7,119,001
Accumulated deficit ............................. (11,105,715) (7,758,648)
Cumulative translation adjustment ............... 136,232 126,215
------------ ------------
Total stockholders' equity ........... 728,166 (510,749)
------------ ------------
Total liabilities and stockholders'
equity.............................. $ 4,653,903 $ 4,301,205
============ ============

</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-3

HUNGARIAN BROADCASTING CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997, FOR THE SIX MONTHS ENDED
DECEMBER 31, 1996 AND FOR THE YEAR ENDED JUNE 30, 1996

SIX MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 JUNE 30
1997 1996 1996
----------- ----------- ----------

<S> <C> <C> <C>
Net revenues .......................................... $ 2,981,260 $ 1,239,418 $ 672,108
Expenses:
Other operating costs and expenses .................... 3,397,336 1,679,859 2,038,828
Amortization of deferred program costs ................ 944,004 736,000 250,000
Amortization of broadcast license costs ............... 423,048 211,526 423,052
Selling, general and administrative expenses .......... 2,383,382 1,428,982 1,639,989
----------- ----------- -----------
7,147,770 4,056,367 4,351,869
----------- ----------- -----------

Operating loss ........................................ (4,166,510) (2,816,949) (3,679,761)
Income from contract cancellation ..................... 1,200,000 -- --
Interest and other income ............................. 116,086 146,968 11,317
Interest expense ...................................... (262,156) (78,588) (481,238)
Foreign currency exchange rate loss ................... (83,038) (30,039) --
----------- ----------- -----------
Loss before extraordinary item ........................ (3,195,618) (2,778,608) (4,149,682)
Extraordinary item from early extinguishment of debt .. (151,449) -- --
Net loss .............................................. $(3,347,067) $(2,778,608) $(4,149,682)
=========== =========== ===========
Basic loss per share:
Attributable to common stockholders.................... $ (2.06) $ (1.08) $ (2.01)
Extraordinary item .................................... (0.05) -- --
Net loss .............................................. $ (2.11) $ (1.08) $ (2.01)
Weighted average number of common shares outstanding 2,807,097 2,583,600 2,067,008

</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements.

F-4
<PAGE>

HUNGARIAN BROADCASTING CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1996, FOR THE SIX MONTHS ENDED DECEMBER
31, 1996 AND FOR THE YEAR ENDED DECEMBER 31, 1997

ADDITIONAL CURRENCY TOTAL
PREFERRED STOCK COMMON STOCK PAID-IN ACCUMU- TRANSLATIONS STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITOL LATED DEFICIT ADJUSTMENT EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1995 ............ 1,265,000 1,265 862,545 (830,358) 10,130 45,582

Issuance of common stock-July 1995 182,500 182 499,818 500,000
Issuance of common stock-August 1995 200,000 200 549,612 549,812
Shares contributed by
officers for cancellation-12/95 .. (220,000) (220) 220 --
Initial public offering
in Dec. 1995 .................... 1,150,000 1,150 5,990,590 5,991,740
Public offering costs ............ (1,150,286) (1,150,286)
Exercise of warrants
during year ..................... 6,100 6 36,530 36,536
Foreign currency
translation adjustment .......... 120,266 120,266
Net loss.......................... (4,149,682) (4,149,682)
--------- ------ --------- ---------- -------- ----------
Balance, June 30, 1996 .......... 2,583,600 2,583 6,789,029 4,980,040) 130,396 1,941,968
--------- ------ --------- ---------- -------- ----------

Issuance of preferred units ...... 100,000 100 329,972 330,072
Net loss for period .............. (2,778,608) (2,778,608)
Foreign currency
translation adjustment .......... (4,181) (4,181)
-------- ----- --------- ------ --------- ---------- --------- ----------
Balance, December 31, 1996 ....... 100,000 $100 2,583,600 $2,583 $7,119,001 $(7,758,648) $126.215 $(510.749)
-------- ----- --------- ------ --------- ---------- --------- ----------
Public offering of
preferred units .................. 426,500 427 3,289,692 3,290,119
Dividends declared ............... (631,800) (631,800)
Issuance of shares as payment
of dividends on preferred
unit holders ..................... 131,625 132 631.668 631.800
Shares issued for services ....... 12,000 12 71,988 72,000
Shares issued upon exercise
of warrants ...................... 16,290 16 97,642 97,658
Shares issued upon exercise
of options ....................... 36,500 37 168,963 169,000
Conversion of preferred stock
to common stock .................. (487,970) (488) 976,000 976 (488) --
Issuance of shares upon
cancellation of note payable ..... 173,266 174 606,338 606,512
Issuance of warrants to
private placement investors ...... 96,876 96,876
Issuance of warrants as
additional consideration
for grant of credit facility ..... 243.800 243,800
Net loss for period (3,347,067) (3,347,067)
Foreign currency
translation adjustment .......... 10,017 10,017
-------- ----- --------- ------ --------- ---------- --------- ----------
Balance, December 31, 1997 ....... 38,530 $39 3,929,281 $3,930 $11,693,680 $(11,105,715) $136,232 %728,166
-------- ----- --------- ------ --------- ---------- --------- ----------

</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements.

F-5

<PAGE>

HUNGARIAN BROADCASTING CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997, FOR THE SIX MONTHS
ENDED DECEMBER 31, 1996 AND FOR THE YEAR ENDED JUNE 30, 1996

Year ended Six months ended Year ended
December 31, December 31 June 30
---------- --------------- ----------
1997 1996 1996
---- ---- ----
<S> <C> <C> <C>

Cash flows from operating
activities:
Net loss............................... $(3,347,067) $2,778,608 $(4,149,682)
---------- --------- -----------
Adjustments to reconcile
net loss to net cash used
in operating activities:

Amortization of
intangibles........... ........... 1,413,078 1,044,264 724,757
Provision for doubtful
accounts.......................... 22,637 82,253 82,536
Depreciation....................... 102,077 30,913 13,798
Foreign exchange losses ........... 91,900 30,039 120,266
Amortization of discount
on notes payable ................. 42,300 -- --
Gain on repayment of notes payable (16,600) -- --
Provision for contingencies ....... 86,017 -- --
Loss on sale of fixed assests ..... 3,193 -- --
Extroadinary loss ................. 151,449 -- --
Issuance of equity instruments for
service .......................... 161,070 -- --
Minority interest ................. (27,995) -- --
Changes in operating assets
and liabilities, net of business
acquired:
Increase in accounts
receivable............ ........... (11,972) (513,874) (186,653)
Decrease in other receivable ...... 15,215 -- --
(Increase) decrease in VAT receivable -- 169,905 (39,746)
Increase in prepaid expenses and
expenses and other current assets.. (86,616) (76,902) (37,383)
Increase in other assets........... -- (89,680) --
Increase in accounts payable....... 35,172 505,467 214,935
Increase in accrued expenses....... 661,834 283,362 39,644
Increase (decrease) in VAT payable. 104,751 -- --
Increase(decrease) in other liabilities.. 256,651 (218,594) (6,117)
Increase in production costs ...... (122,545) -- --
--------- --------- -----------
Net cash used in operating
activities........................... (465,451) (1,531,455) (3,223,645)
--------- --------- -----------
Cash flows from investing activities:
Purchase of fixed assets,
net of disposal ................... (127,432) (346,054) (91,532)
Purchase of investments. -- -- (653)
Purchase of program and film rights. (1,072,498) (611,899) (750,000)

Net increase in deferred
financing costs........ ........... -- -- (9,067)
Acquisition of business, net of
cash acquired ..................... (228,648) -- --
Net cash used in investing
activities......................... 1,428,578 (957,953) (851,252)
--------- --------- -----------
Cash flows from financing activities:
Increase (decrease) in advances
from related parties .............. (590,198) 178,070 148,725
Proceeds from issuance
of common stock.................... -- -- 5,927,802
Proceeds from issuance
of preferred stock................. 4,265,000 450,000 --
Proceeds from issuance
of notes payable................... 7,999 850,000 --
Payments of notes payable,
net of issue discount ............. (890,000) -- (874,583)
Exercise of warrants and options ... 266,657 -- --
Payments for offering costs ........ (974,881) (69,926) --
Increase in liability
to minority
stockholders ...................... -- -- 40,326
--------- --------- -----------
Net cash provided by
financing activities ................ 2,084,577 1,408,144 5,242,270
--------- --------- -----------
Effect of exchange rate changes on
cash and cash equivalents ............ (159,638) (5,292) --
Net change in cash and
cash equivalents...................... 30,910 (1,086,556) 1,167,373
--------- --------- -----------
Cash and cash equivalents
at beginning of period ............... 375,823 1,462,379 295,006
--------- --------- -----------
Cash and cash equivalents
at end of period...................... $ 406,733 $ 375,823 $ 1,462,379
========== ========== ===========

Supplemental disclosures of
cash flow information:
Cash paid during the period for:
Interest ........................... $ 32,550 $ 0 $ 64,118
Noncash investing and
financing activities:
Capitalized program rights
costs payable in
installments through
December 1997 ..................... $ 599,266 $ 768,00 $ 0

</TABLE>

The accompanying notes are an integral part of these
consoli dated financial statements.

F-6
<PAGE>

HUNGARIAN BROADCASTING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BUSINESS

Hungarian Broadcasting Corp. (the "Company") which was incorporated in
the State of Delaware on September 14, 1994, was organized to acquire interests
in companies that have commercial broadcasting licenses to own, develop, expand
and operate television stations in Hungary. The Company initially operated in
Hungary through a wholly-owned subsidiary known as HBC Kft., which was organized
in November 1994. In May 1997, the Company organized Hungarian Broadcasting
Corporation Televizios Rt ("HBC Rt."), a wholly-owned subsidiary, for an initial
investment of $200,000. HBC Rt. has replaced HBC Kft. as the operating
subsidiary in Hungary. The Rt format, a corporate structure for larger companies
in Hungary, provides greater flexibility to the Company in conducting its
business and was required to meet changes in the Hungarian Media Law.

On June 16, 1995, the Company acquired a 90% interest in VI-DOK Video es
Filmgyarto studio Kft. ("VI-DOK") for $240,000, and on May 30, 1995 an 80%
interest in DNTV Kft. ("DNTV") for $176,000, two Hungarian companies (the
"Licensees") which had been granted television licenses by the Hungarian
Cultural Ministry in April 1994 to broadcast over Budapest Channel AM-micro A3
("A3") from July 1, 1994 through July 1, 2000. Broadcasting on A3 commenced in
September 1994. The acquisitions were accounted for as purchases and,
accordingly, the purchase price was allocated to the assets acquired and the
liabilities assumed based on their fair market values. The excess of the
purchase price over the fair value of net assets acquired is classified as
broadcast license costs. The Licensees effectively ceased operations shortly
after their acquisition and the Company's wholly-owned subsidiary HBC Kft
continued the broadcasting thereafter. In September 1996, the Company renamed
its station "MSAT." In December 1996, both VI-DOK and DNTV were converted from
Kfts to Rts.

The operations of the Company are essentially in Hungary where the majority
of revenues and expenditures are incurred. At December 31, 1997 and December 31,
1996, respectively, 76% and 62% of total assets, and 30% and 24% of total
liabilities of the Company were maintained in the Company's Hungarian
subsidiaries accounts.

In April 1997, the Company acquired a 77% interest in Studio 2 Kft,
incorporated in Budapest, Hungary. See Note 3 -- "Acquisition."

In September 1997, the Company, pursuant to a contract between HBC Rt.
and Antenna Hungaria, began broadcasting 24 hours per day on a newly available
channel in the AM Micro broadcasting system in Budapest. Terms of the contract
provide for broadcasting rights indefinitely into the future.

In November 1997, the Company was awarded a national television license
for its satellite operations. This license allows the Company to broadcast its
programming without code, which lowers the cost of reception by cable television
companies and by direct-to-home customers.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

(A) PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts
of the Company and all its subsidiaries (which are all majority owned and in
which the Company has control over their operations). All material intercompany
transactions and balances have been eliminated in consolidation. Minority
interests arising upon consolidation have not been separately disclosed, as they
are immaterial.

F-7

<PAGE>

HUNGARIAN BROADCASTING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The subsidiaries of the Company are as follows:

NAME COUNTRY OF
INCORPORATION PERCENTAGE OWNED
----------------------------------------------------------
HBC Kft............... Hungary 100%

VI-DOK Rt ............ Hungary 90%
DNTV Rt .............. Hungary 80%
HBC Rt................ Hungary 100%
Studio 2 Kft.......... Hungary 77%

(B) FISCAL YEAR
Effective March 14, 1997, the Company changed its fiscal year-end from
June 30 to December 31.

(C) REVENUE RECOGNITION
Revenue primarily results from the sale of advertising time. Advertising
revenue is recognized at the time the commercials are broadcast.

(D) BARTER TRANSACTIONS
Revenue from barter transactions (television advertising time provided in
exchange for goods and services) is recognized when commercials are broadcast;
merchandise or services received are charged to expense (or capitalized, as
appropriate) when received or used. The Company records barter transactions at
the estimated fair market value of the services and merchandise received unless
not readily determinable in which case the transaction is recorded at the
estimated fair market value of the advertising time provided. If services or
merchandise are provided prior to the broadcast of a commercial, a liability is
recorded. Likewise, if a commercial is broadcast first, a receivable is
recorded. There were no barter gains or losses, receivables or payables at
December 31, 1997, December 31, 1996 and June 30, 1996, respectively.

(E) PROGRAM AND FILM RIGHTS
Program and film rights acquired under license agreements and the related
obligations incurred are recorded as assets and liabilities when the license
period begins, the cost of each program is determinable, and the program is
available for telecast. The capitalized costs are amortized using the
straight-line method based upon the estimated period of usage generally ranging
from nine to fifteen months. Program rights are reported at lower of unamortized
cost or estimated net realizable value.

(F) PRODUCTION COSTS
Production costs for self-produced programs are capitalized and expensed
when the program is first broadcast, except where the program has potential to
generate future revenues. In that case, production costs are capitalized and
amortized on the same basis as programming obtained from third parties. For
animation production, costs are capitalized for each film and expensed based
upon estimated future revenues.

(G) COPYRIGHTS
Copyrights represent compensation to professional filmmakers in Hungary
under employment contracts, which transfer copyrights to the Company upon the
fulfillment of the employment contracts based on Hungarian law. These costs are
capitalized for each film and expensed based upon estimated future revenues.

F-8

<PAGE>

HUNGARIAN BROADCASTING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(H) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is
recorded following a straight-line method over the estimated useful lives of the
assets, which is five years for television broadcasting and production
equipment, three to five years for office equipment, fixtures and fittings and
five years for automobiles. The Company reviews for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. The Company evaluates recoverability using an undiscounted
cash flow approach over the remaining life of the assets. Leasehold improvements
are amortized over the life of the lease or the related asset, whichever is
shorter. When assets are retired or disposed of, the costs and accumulated
depreciation or amortization are removed from the respective accounts and any
related gain or loss is recognized. Maintenance and repairs are charged to
expense when incurred. Significant expenditures, which extend useful lives of
assets, are capitalized.

(I) BROADCAST LICENSE COSTS
The costs of acquiring licenses to broadcast are capitalized and
amortized over the life of the related licenses. Broadcast license costs
acquired for $2,150,514 are being amortized over the life of the relevant
licenses which terminate in July 2000. Broadcast license costs are reported at
the lower of unamortized cost or estimated net realizable value.

(J) INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). This Statement requires a liability approach for measuring deferred taxes
based on temporary differences between the financial statement and income tax
bases of assets and liabilities existing at each balance sheet date using
enacted rates for the years in which the taxes are expected to be paid or
recovered.

(K) DEFERRED FINANCING EXPENSES
Deferred financing expenses represent the costs associated with the debt
portion of a consummated private placement financing and are being amortized on
a straight-line basis over the expected term of the related borrowing.

(L) FOREIGN CURRENCY TRANSLATION
The functional currency is the United States dollar for the Company and
the Hungarian forint for its five Hungarian subsidiaries. Assets and liabilities
in foreign currencies are translated to each company's functional currency using
the corresponding exchange rate in effect at the balance sheet date with any
resulting gain or loss included in net income. Assets and liabilities of the
subsidiaries are translated into the reporting currency (U. S. dollar) using the
rate in effect at the balance sheet date and equity accounts using the
historical rate. The statement of operations and cash flows are translated using
the weighted average rate in effect for the period. Gains and losses from these
translations are recorded in a separate component of stockholders' equity. Gains
and losses resulting from transactions by the companies in currencies other than
their functional currency are included in net income.

(M) CASH EQUIVALENTS
The Company classifies as cash equivalents all highly liquid investments
with a maturity of three months or less at the time of purchase.

(N) DIVIDEND POLICY

The Company is dependent upon payment of dividends by its Hungarian
subsidiaries as the source of its own dividends. Dividends are payable to
foreign investors such as the Company in forints, which may be converted into U.
S. dollars at the official rate of exchange announced by the National Bank of
Hungary. At December 31, 1997, there were no significant distributable reserves
in the Hungarian subsidiaries of the Company.

F-9
<PAGE>

HUNGARIAN BROADCASTING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

In September 1996 and in February 1997, the Company issued shares of Series
A Convertible Cumulative Redeemable Preferred Stock. The Company may pay
dividends on this Preferred Stock either in cash or in shares of Common Stock.

(O) CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash and trade
receivables. The Company places its temporary cash and investments with high
quality financial institutions. At times, demand deposits and cash equivalents
may be in excess of the FDIC and National Depository Insurance Fund in Hungary
insurance limits. Concentration of credit risk with respect to trade receivables
are significant due to the Company's largest advertising customer representing
approximately 32%, 27% and 10% of total revenue and 48% and 25% of total
receivables at December 31, 1997, December 31 1996 and June 30, 1996,
respectively. Generally, the Company does not require collateral or other
security to support contract receivables.

(P) LOSS PER SHARE
In 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share." This statement simplifies the existing
computational guidelines, revising the disclosure requirements, and increasing
the comparability of earnings per share data on an international basis. Basic
loss per share has been calculated based on the weighted average number of
common shares outstanding. Where appropriate earnings and shares outstanding are
adjusted to include the effects of dilution of the interests of common
stockholders that might be caused by the ultimate conversion of warrants,
options and preference shares, except where such an effect would be
antidilutive.

(Q) LITIGATION
The Company provides for contingent liabilities in connection with
pending legal matters when losses are both probable and estimable.

(R) RECLASSIFICATIONS
Certain reclassifications were made to prior period amounts to conform to
current period classifications.

(S) CHANGE IN ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," is effective for fiscal years beginning after December
15, 1997, including interim periods. This statement establishes standards for
reporting and displaying comprehensive income and its components in a full set
of general-purpose financial statements. The Company intends to adopt SFAS 130
for the quarter ended March 31, 1998, but has not yet determined the impact of
the implementation of this statement.

3. ACQUISITION

In April 1997, the Company acquired 77% of the issued and outstanding stock of
Studio 2 Kft., a Budapest based animation studio. This company was purchased
from M&A Management Kft., a company wholly owned by the President and Chief
Executive Officer of the Company, for $743,819, of which $300,000 was paid in
cash and $443,819 was represented by an unsecured note with annual simple
interest of 8 1/2 % due December 31, 1997. The acquisition has been accounted
for as a purchase and, accordingly, the results of Studio 2 Kft have been
included in the Company's consolidated financial statements from the date of
acquisition. The purchase price of $743,819 has been fully allocated to the
underlying assets of Studio 2 Kft based upon their respective fair values at the
time of acquisition. The excess of the purchase price over the equity of Studio
2 Kft totaling $311,434 has been allocated to copyrights. The feature length
animation film MISHY & MUSHY, which is the sole significant animation project of
Studio 2 Kft, has not completed production. Accordingly, the amortization of the
film costs have not begun. The unsecured note was subsequently converted into
equity in July 1997, when M&A Management Kft received 173,266

F-10

<PAGE>

HUNGARIAN BROADCASTING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

shares of unregistered common stock in the Company with a fair market value of
$605,368 at the conversion date, resulting in an extraordinary loss of $151,449
from the early retirement of debt.

4. VAT RECEIVABLE/PAYABLE

Value-added taxes paid in Hungary for which a reimbursement claim was
submitted by the Company, have been included in current assets. When at a period
close VAT balances net to a payable, such balances are included in current
liabilities.

5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:

DECEMBER 31 DECEMBER 31
1997 1996
---- ----
Television broadcasting and
production equipment ............... $ 173,028 $ 133,709
Office equipment, fixtures and
fittings ........................... 133,814 160,457
Leasehold improvements .............. 170,419 186,278
Vehicles ............................ 36,856 7,269
---------- ----------
514,117 487,713
Less: Accumulated depreciation ..... (112,939) (44,080)
---------- ----------
$ 401,178 $ 443,633
---------- ----------

6. PROVISION FOR INCOME TAXES

The Company and its subsidiaries had approximate cumulative deferred tax
assets of $2,759,350 and $1,810,000 at December 31, 1997 and 1996, respectively,
arising from net operating losses from the current and prior periods. The
cumulative net operating losses of $10,797,336, at December 31, 1997, since the
Company's inception can be carried forward and applied to reduce taxable income
in the future. There are no deferred tax liabilities to be offset by those
future tax deductions, the future tax deductions cannot be realized by loss
carryback because no taxes have been paid, and the companies have had pretax
losses since their inception. Therefore, as there is not sufficient positive
evidence, as defined by SFAS 109, to overcome the negative evidence discussed
above regarding the recoverability of the deferred tax assets, the Company has
fully provided for the deferred tax asset of $2,759,350 and $1,810,000 at
December 31, 1997 and 1996, respectively.

7. NOTES PAYABLE

From November 1994 through March 1995, the Company sold (in a private
placement) units consisting of $2,120,000 aggregate principal amount of
unsecured promissory notes and 265,000 shares of common stock for an aggregate
purchase price of $2,120,000. The Company incurred $153,789 of financing
expenses relating to the private placement, of which $122,100 and $31,689 has
been allocated to debt and equity, respectively. The $153,789 includes legal
fees of $28,200 paid to the Company's secretary/stockholder. The notes bear
simple interest at 6% per annum and were originally due upon the earlier of
December 31, 1995 or the successful consummation of the initial public offering,
which was rescinded during November 1995. The revised terms require that only
one-half of the notes were due upon the earlier of December 31, 1995 or the
successful consummation of the subsequent initial public offering. The balance
of the notes were due on June 30, 1997. Consequently, the amortization expense
relating to the original issue discount and deferred financing expenses were
recomputed over the revised expected term of the notes. Total original issue
discount of $437,000 (an imputed interest rate of 19% per annum) has been
recorded and is being amortized over the expected term of the notes, along with
the $122,100 of financing expenses related to the debt portion of the private
placement. During January 1996, $1,060,000 of the notes were repaid.

F-11

<PAGE>

HUNGARIAN BROADCASTING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

In December 1996, the Company borrowed $850,000 by issuing promissory notes
payable upon the earlier of one year from the date of issuance or the
consummation of a public offering of securities by the Company with interest at
18% per annum. These notes were collateralized by a pledge of 370,000 shares of
common stock owned by the President of the Company, Peter E. Klenner, and 30,000
shares owned by Frank R. Cohen, Treasurer of the Company at that time. In
February 1997, these borrowings were repaid from proceeds of the February 1997
public offering by the Company.

On June 30, 1997, promissory notes totaling $1,060,000 were due. The
Company offered the note holders compensation to extend the notes for one year
to June 30, 1998. Note holders representing $740,000 of the outstanding debt
agreed in writing to extend the maturity date on the notes. Note holders
representing $40,000 of the outstanding debt requested immediate repayment and
the note holders comprising the remaining balance either agreed orally to the
extension or have not responded to the Company's inquiries. The Company agreed
to pay the note holders accepting the extension 50% of the interest accrued as
of June 30, 1997. All note holders, except a certain related party, received
2,500 Common Stock Purchase Warrants per unit on November 1, 1997; the market
value which equaled $2.00 per warrant at their date of grant. This additional
consideration totaling approximately $97,000 is being amortized over the
extension period of the notes. At December 31, 1997, the unamortized portion of
$48,438 is included in other assets. Note holders requiring immediate repayment
were paid at a price below the notes carrying value. The Company has recognized
a gain of $16,600 from the debt repayment.

8. PREFERRED STOCK AND COMMON STOCK PURCHASE WARRANTS

In September 1996, the Company sold 100,000 shares of Series A Convertible
Cumulative Redeemable Preferred Stock ("Preferred Stock") and 100,000 common
stock purchase warrants for $450,000 in a private offering. Proceeds of the
private placement, net of issuance costs, were $329,972.

Common stock purchase warrants ("Warrants") have the same terms as the
Common Stock Purchase Warrants issued during the initial public offering in
December 1995. Each Warrant entitles the holder to purchase until December 20,
2000 one share of Common Stock at an exercise price of $6.00. The Warrants are
subject to redemption at the Company's option after an initial period provided
that the closing price of the underlying Common Stock equals or exceeds $8.50
per share on at least 20 of 30 consecutive trading days prior to notice of
redemption.

In February 1997, the Company, in a public securities offering, sold
426,500 units of Preferred Stock and Warrants for $10.00 per unit. Net proceeds
to the Company after expenses from the Offering were $3,290,119. The fair market
value of these units, as represented by the underlying securities, was $14.62
per unit as at the date of the issue, resulting in an effective preferred
dividend of $1,970,000.

Each share of Preferred Stock is convertible into two shares of Common
Stock and is entitled to cumulative annual dividends of $1.20 payable on
September 15 of each year. The Company may, at its option, pay dividends in
shares of Common Stock, in lieu of cash. The Preferred Stock is redeemable at
the Company's option for a redemption price of $12.00 per share plus accumulated
dividends, but only after the closing price of the Common Stock equals or
exceeds $10.00 per share for 20 of 30 consecutive trading days prior to
redemption notice. Shares of Preferred Stock are entitled to one vote per share
voting together with the Common Stock. If dividends payable on the Preferred
Stock have been unpaid for two dividend periods, the holders of the Preferred
Stock, voting as a class, shall be entitled to elect two directors to the Board
of Directors. Preferred Stock will be entitled to a preference on liquidation
equal to $10 per share, plus accumulated unpaid dividends.

In September 1997, the Company issued 131,625 shares of unregistered common
stock with a fair market value of $631,800 at date of issue as payment in full
for the dividends due. As of December 31, 1997, 487,970 shares of Series A
convertible preferred stock were converted into common stock, leaving a balance
of 38,530 shares of Series A convertible preferred stock outstanding.

F-12

<PAGE>

HUNGARIAN BROADCASTING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

As of December 31, 1997 and December 31, 1996, the issued and outstanding
Warrants were 2,384,860 and 1,703,900, respectively.

9. COMMON STOCK

In July 1995, the Company sold 182,500 of common stock at a price of $3
per share for an aggregate of $547,500 ($500,000 net) of which 30,000 shares
were sold to a director and officer of the Company. In August 1995, the Company
sold 200,000 shares of common stock at a price of $3 per share for an aggregate
of $600,000 (approximate $550,000 net). The remaining stock subscription
receivable at September 30, 1995, of $100,000, was received on October 4, 1995.

In December 1995, three of the Company's officers contributed stock to
the Company for no consideration. In January 1998, in relation to the
acquisition referred to in Note 17 below, the Company agreed to reimburse these
founders and former officers for a portion of their losses suffered as a result
of the failure of Coleman Securities, Inc. ("Coleman") to complete a firm
commitment underwriting. The Company has an action against Coleman in the
Supreme Court of the State of New York to recover damages from the aborted
underwriting. The founders voluntarily cancelled 220,000 of their shares for no
compensation to permit the Company to successfully complete its initial public
offering with another underwriter at $5 per share. The Company will pay these
founders $250,000 in cash and $150,000 in stock at the time of a future equity
offering in excess of $2.0 million and a further $250,000 in cash at a future
date to be negotiated but not earlier than January 1, 1999. A further $300,000
in cash will be paid from any proceeds of the Coleman litigation but to be paid
only after full payment of the original investors' notes.

On December 20, 1995 the Company completed an initial public offering of
1,150,000 shares of its common stock at $5.00 per share and 1,610,000 Warrants
at $0.15 per warrant. The Company also issued to the underwriter other warrants
for the purchase of 100,000 shares of common stock at $8.25 per share and
140,000 common stock purchase warrants at $0.225 per warrant. The proceeds of
this offering amounted to $4,995,338, net of underwriting commissions and
expenses.

On June 21, 1996, the Company increased the number of authorized shares
of common stock from 5,000,000 to 15,000,000; authorized the issuance of up to
5,000,000 shares of preferred stock; and increased the number of shares of the
common stock available under the Company's 1994 Incentive Stock Option Plan, as
amended, from 100,000 shares to 350,000 shares for use as incentive awards to
certain key employees, directors and consultants. The Company has a policy to
retain sufficient authorized but unissued common shares to meet its conversion
and exercise obligations for convertible preferred shares, warrants and options.

10. DIVIDENDS -- DISTRIBUTION OF SHARES OF CENTRAL EUROPEAN SATELLITE CORP.
TO STOCKHOLDERS

On December 31, 1997, the Company distributed shares of its wholly-owned
subsidiary, Central European Satellite Corp. ("CESAT"), to the shareholders of
Hungarian Broadcasting Corp. on a one share for one share basis. The fair market
value of the dividend is insignificant due to the absence of a market for CESAT
stock. The only asset of CESAT is a letter of intent signed with Magyarsat Kft
in November 1997 authorizing the company to finance and launch an Amos-class
communications satellite into the same terrestrial position as the current Amos
1 satellite. Magyarsat Kft is owned on a 50:50 basis by state-owned Antenna
Hungaria and Israel Aircraft Industries Ltd. ("IAI"), Israel's state-owned
aerospace company. Terms for the venture are for CESAT to raise approximately
$39 million of equity capital and approximately $100 million of debt financing
in exchange for an approximate 94% ownership interest prior to raising new
equity. The state of Hungary is contributing its terrestrial space for the
satellite and IAI will contribute $1.0 million of cash. Existing Central
European traffic on the Amos 1 satellite (except for one transponder) will be
transferred to the new satellite. The Company's former Chief Executive Officer
(and current Chairman of the Board) is now Chief Executive Officer of this new
business. The Company has no continuing economic interest in this corporation.

F-13

<PAGE>

HUNGARIAN BROADCASTING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

11. EARNINGS PER SHARE

Earnings per share are calculated as follows:

FOR THE YEAR ENDED DECEMBER 31, 1997

PER
EARNINGS NUMBER SHARE
OF SHARES AMOUNT
--------- --------- -------
<S> <C> <C> <C>
Loss before extraordinary item.................... $(3,195,618)
Less: preferred stock dividends.................. (2,601,800)
-----------
BASIC EPS
Loss attributable to common stockholders....... (5,797,418) 2,807,097 $ (2.06)

</TABLE>

Basic earnings per share for the six months ended December 31, 1997 and
the year ended June 30, 1996 are not included in the reconciliation above as
there were no reconciling items to the Earnings or Number of shares for those
periods.

Dilutive earnings per share were not calculated as the effects of
including the common equivalent shares for the outstanding options, warrants and
convertible preferred stock would be antidilutive for loss periods.

12. STOCK OPTION PLAN

The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
Company's Stock Option Plan ("the Plan").

This Plan provides that incentive and non-qualified options may be granted
to officers, employees, directors and consultants to the Company for the purpose
of providing an incentive to those persons to work for the Company. Options are
generally fully vested upon granting. The Plan is administered by the Board of
Directors. The Board of Directors determines, among other things, the persons to
whom stock options are granted, the number of shares subject to each option, the
date or dates upon which each option may be exercised and the exercise price per
share. Options granted under the Plan are exercisable for a period of up to ten
years from the date of the grant. Options terminate upon the optionee's
termination of employment or consulting arrangement with the Company, except
that, under certain circumstances, an optionee may exercise an option within the
three-month period after such termination of employment. An optionee may not
transfer any options except that an option may be exercised by the personal
representative of a deceased optionee within the three-month period following
the optionee's death. Incentive options granted to any employee who owns more
than 10% of the Company's outstanding common stock immediately before the grant
must have an exercise price of not less than 110% of the fair market value of
all underlying stock on the date of the grant and the exercise term may not
exceed five years. The aggregate fair market value of common stock (determined
at the date of the grant) for which any employee may exercise incentive options
in any calendar year, may not exceed $100,000. In addition, the Company will not
grant a non-qualified option with an exercise price less than 85% of the fair
market value of the underlying common stock on the date of the grant.

Had compensation cost for the Company's Plan been determined based on the
fair value at the grant date of awards in 1995, 1996 and 1997 consistent with
the provisions of SFAS No. 123, the Company's net loss and net loss per share
would have been increased to the pro forma amounts indicated below:

f-14

<PAGE>

HUNGARIAN BROADCASTING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts. SFAS 123 does not apply to awards prior to 1995, and
additional awards in future years are anticipated.

PERIOD AS REPORTED PRO FORMA
------ ----------- ----------

YEAR ENDED
DECEMBER 31, 1997
-----------------
Net loss $ (3,347,067) $ (3,428,397)
Net loss per share $ (1.19) $ (1.22)

SIX MONTHS ENDED
DECEMBER 31, 1996
Net loss $ (2,778,608) $ (3,222,808)
Net loss per share $ (1.08) $ (1.25)

YEAR ENDED
JUNE 30, 1996
Net loss $ (4,149,682) $ (4,742,932)
Net loss per share $ (2.01) $ (2.29)

A summary of the status of the Company's stock options as of December 31,
1997, December 31, 1996 and June 30, 1996 and changes during the periods ended
on those dates is presented below:
<TABLE>
<CAPTION>

YEAR ENDED SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 JUNE 30, 1996
----------------- ----------------- -------------
WGTD. AVE. WGTD. AVE. WGTD. AVE.
SHARES EXER. PRICE SHARES EXER. PRICE SHARES EXER. PRICE
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period 345,000 $5.44 185,000 $7.91 --- $ ---
Granted 50,000 4.10 285,000 5.53 225,000 7.39
Exercised (36,500) 4.63 --- --- --- ---
Cancelled (90,000) 6.00 (125,000) 9.30 (40,000 5.00
----------- --------- ---------- ----- --------- ---------

Outstanding at end of period 268,500 $5.11 345,000 $5.44 185,000 $7.91

Options exercisable at end of period 268,500 $5.11 345,000 $5.44 185,000 $7.91
Options available for future grant 81,500 5,000 165,000
Weighted average fair value of options
Granted during the period $1.63 $2.67 $3.67

</TABLE>

F-15

<PAGE>

HUNGARIAN BROADCASTING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The fair value of each option granted during 1995, 1996 and 1997 is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following average assumptions: (I) dividend yield 0%, (ii) expected
volatility of 50%, (iii) 6.21% interest rate, and (iv) expected term of three
years.

In 1997, the model was applied using criteria different from those used
in computing figures in 1996. In particular, vesting is now assumed to occur
upon the initial grant of the option and it is assumed there will be zero
forfeitures. As a consequence, the pro-forma net loss disclosed above for the
six months ended December 31,1996 and for the year ended June 30, 1996 have been
increased by $293,080 and $249,228, respectively, compared to relevant figures
disclosed in the financial statements drawn up as at December 31, 1996.

The following table summarizes information about the Company's stock
options outstanding at December 31, 1997 and December 31, 1996, respectively.

EXERCISE PRICES OPTIONS OUTSTANDING OPTION EXERCISABLE
NUMBER WGTD. AVE. WGTD. AVE. NUMBER WGTD. AVE.
OUTSTANDING REMAIN. LIFE EXERC. PRICE EXERCISABLE EXER. PRICE
AT DECEMBER 31, 1997: ----------- ------------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
$3.50 10,000 4.5 $3.50 10,000 $3.50
$5.00 215,000 3.6 5.00 215,000 5.00
$6.00 43,500 3.5 6.00 43,500 6.00

AT DECEMBER 31, 1996:
$5.00 195,000 4.6 $5.00 195,000 $5.00
$6.00 150,000 4.5 6.00 150,000 6.00

</TABLE>

13. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments for which it is
practical to estimate that value:

CASH AND CASH EQUIVALENTS
The carrying amount reported in the balance sheet for cash and cash
equivalents approximates their fair values due to the short-term maturity of
those instruments.

NOTES PAYABLE
The carrying amount of the Company' s borrowings under its notes payable
approximates its fair value since the imputed interest rate on the notes payable
is comparable to the interest rate the Company could currently obtain on
borrowings with similar terms.

14. RELATED PARTY TRANSACTIONS

Mr., Klenner, Chairman of the Board of the Company, was formerly Chief Executive
Officer of EuroWeb International Corp. ("EuroWeb") that purchased $800,000 of
unsecured promissory notes and 100,000 shares of common stock in the November
1994 private placement (Note 7). As additional compensation, EuroWeb received an
option (which was exercised in March 1995) to purchase 150,000 shares of common
stock at $3 per share and the right of first refusal for a three-year period to
act as general contractor for all broadcast facilities to be built by the
Company. The amount outstanding relating to the unsecured promissory notes was
$400,000 as of December 31, 1997 and has been included in notes payable in the
balance sheet. In February 1997, the Company loaned EuroWeb $350,000 bearing 6%
interest due June 30, 1998 secured by the above-mentioned outstanding note to
the company. Prior to December 31, 1996, EuroWeb made interest free short-term
loans to the Company for operational purposes. The total amount due to EuroWeb
pursuant to these loans was approximately $57,000 and $64,000 at December 31,

F-16

<PAGE>

HUNGARIAN BROADCASTING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

1997 and 1996, respectively.

On June 30, 1995, the minority shareholders of two of the Company's
subsidiaries were owed $416,000, as a result of the Company's purchase of their
stock in those subsidiaries. In February 1996, $189,800 was paid and in March
1997 an additional $50,000 was paid leaving a balance due of $176,200 at
December 31, 1997.

In February 1996, the Company purchased a license, for $750,000, for the
exclusive Hungarian rights to certain programming for MSAT for the period April
through December 1996 from Power Television Limited ("Power TV"). This company
is owned by Justin Bodle, a director of the Company until January 1998. In July
1996, the Company agreed to license, for $1,378,000, the exclusive rights to
additional programming for the period October 1, 1996 through December 31,1997
from Power TV. In October 1997, the Company agreed to license, for $467,500, the
exclusive rights for additional programming for the period January 1, 1998
through December 31, 1998 from Power TV. Amounts payable totaling $373,500 and
$1,151,500 are included in due to related parties at December 31, 1997 and
December 31, 1996, respectively, relating to the purchase of program rights from
Power TV.

Beginning in July 1996, the Company hired Justin Bodle as a consultant for
a two-year period at a fee of 1,000 shares of non-registered common stock per
month. Beginning in January 1997, the monthly payment was increased to 1,500
shares. The parties agreed to terminate the consulting contract on July 1, 1997
and the Company agreed to pay Mr. Bodle an additional 3,000 shares. The Company
records compensation expense based on the fair value of these securities at each
month-end. Compensation expense relating to these consultant services totaled
$30,000 for the six-month period ended December 31, 1996 and $60,000 for the
year ended December 31, 1997. The Company has fully provided for this amount, as
these securities were not paid to the consultant as of December 31, 1997. Mr.
Bodle was paid in full for these services in January 1998.

In November 1996, Justin Bodle was granted options to purchase 40,000
share of Common Stock at $5.00 per share as partial inducement to defer
approximately $700,000 due to Power TV under the July 1996 license agreement
described above.

The amount due to related parties at December 31, 1996 includes $40,000 due
to Mr. Klenner. This amount was repaid in February 1997.

In November 1996, Mr. Klenner advanced $200,000 as short-term financing
to the Company. As partial inducement for this loan, the Company awarded to this
officer/director five-year options to purchase 95,000 shares of Common Stock at
$5.00 per share. The Company had approximately $201,000 outstanding in
connection with this loan, including accrued interest at December 31, 1996. This
amount was repaid from proceeds of the Company's public offering in February
1997.

In November 1997, the Company entered into a loan facility due December
31, 1998 with a company owned by Mr. Klenner for up to $300,000 at an interest
rate of 6% per year. As partial inducement for this loan, the Company awarded
Mr. Klenner 100,000 unregistered Warrants with a fair market value of $243,800
at date of grant. This amount is being amortized over the loan term. At December
31, 1997, the unamortized portion of $203,167 is included in other assets. As of
December 31, 1997, $275,000 was outstanding pursuant to this loan facility.

In July 1997, the Company granted the Chief Accountant and the Chief
Financial Officer 10,000 and 20,000 stock options, respectively, pursuant to the
Company's stock option plan as amended in June 1996. The options, which have a
five-year expiration, were granted at their fair market value of $3.50. Each
option may be exchanged for one share of the Company's common stock.

F-17

<PAGE>

HUNGARIAN BROADCASTING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

15. COMMITMENTS AND CONTINGENCIES

CONSULTING AND COMPENSATION AGREEMENTS

The Company has an employment agreement with Mr. Klenner for the period
ending December 31, 2000 at $120,000 per year.

In January 1996, Robert Genova resigned and forfeited remaining payments on
an employment contract and canceled an option to purchase 40,000 shares of
Common Stock. At that time, the Company agreed to pay Mr. Genova $144,000 if
there were a change in control of the Company prior to January 17, 1998. In
December 1997, Mr. Genova agreed to serve as a consultant to the Company for
1998 for a fee of $3,000 per month and further agreed to forfeit his rights to
the above mentioned change of control fee.

In September 1997, the Company contracted with an investment-banking firm
to manage and arrange the private placement of a convertible debt offering of up
to $5.0 million. As a result of its purchase of Global Television Networks, Inc.
in January 1998, the Company suspended the offering. Discussions with the
investment bank by the new management are continuing.

As compensation to outside directors, the Company pays directors' fees equal
to $2,000 per meeting, minimum of four meetings per year, and reimburses their
travel and other out-of-pocket expenses. Officers do not receive any
compensation for serving as directors.

LEASES

The Company formerly had a five year lease agreement with Nethold Central
Europe B.V. ("Nethold"), ending October 6, 2001, whereby Nethold transmitted the
Company's program signals by satellite throughout Hungary. During the first
quarter of 1997, Nethold notified the Company of its plan to reduce its
activities in Hungary and expressed its desire to terminate the satellite
contract. In May 1997, the Company and Nethold entered into an agreement whereby
Nethold's services ended on June 30, 1997. Pursuant to the contract Nethold paid
$1,200,000 in cash to the Company and $200,000 in forgiveness of service charges
for the period January 1, 1997 through June 30, 1997. The Company paid $30,000
to Nethold for the late return of their equipment. To replace this service, the
Company contracted with Antenna Hungaria for satellite-to-cable broadcast
services using the Amos satellite, which began in late-June 1997.

The Company has a nine year lease agreement with Orion Atlantic Satellite
Services ("Orion Atlantic"), commencing on August 31, 1996 and extending through
August 31, 2005, at a monthly rental fee of $27,240, whereby Orion Atlantic
provides the Company with space on its Satellite to transmit its broadcast
signal to Nethold's uplink facilities in the Netherlands. In May 1997, Nethold
and the Company agreed to terminate Nethold's services and thus the Company no
longer has any use for the channel leased from Orion Atlantic. The Company is
exploring possibilities for others to take over the Orion Atlantic contract.

The Company leases office facilities in Budapest, Hungary under an operating
lease, with monthly payments of $12,000, plus value added tax, expiring June 30,
2001.

In May 1997, the Company signed an eight-year contract with Antenna Hungaria
for transmission of MSAT's broadcasting signal via the Amos 1 satellite and also
transmission on the AM Micro system in Budapest for a monthly rental fee of
$67,000.

F-18

<PAGE>

HUNGARIAN BROADCASTING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

At December 31, 1997, the aggregate minimum rental payments required under
all operating leases that had initial or remaining terms in excess of one year
were as follows:

YEAR AMOUNT
---- ------

1998 $ 1,367,496
1999 1,367,496
2000 1,352,880
2001 1,339,380
2002 1,334,880
Thereafter 3,391,680
----------
$10,153,812

Total rent expense for all operating leases amounted to $1,617,764,
$641,538 and $762,135 for the year ended December 31, 1997, the six months ended
December 31, 1996 and the year ended June 30, 1996, respectively.

LICENSE PROCEEDING

TV3, a competitor of the Company, which was granted a six year, 24 hour
per day microwave license on the AM Micro system in Budapest, applied to the
Ministry of Culture to overturn the grant of the licenses to the Licensees and
NAP TV made in March 1994 on the ground that proper procedures were not followed
because the authority of the committee that awarded the licenses had expired
prior to the date that the licenses were granted. The Ministry of Culture denied
the application and held that even if a new committee were acting, it would also
have granted the licenses to the Licensees and to NAP TV. TV3 thereafter
instituted a legal action in December 1994 against the Ministry of Culture, but
not against either of the Licensees, to overturn its decision in awarding the
licenses in the Metropolitan Court of Budapest. At a hearing, the Municipal
Court ordered the Ministry to follow prescribed procedures and make a new
decision. The Ministry appealed this decision to the Appeals Court of Budapest.
In April 1995, the Company received a letter from the Ministry confirming that
the licenses had been granted to the Licensees and that the Licensees may
operate in accordance with the terms of the licenses. In November 1995, the
Appeals Court vacated the decision of the Metropolitan Court on the ground that
no notice of the hearing had been given to the Licensees (which had not had an
opportunity to appear at the hearing). The Appeals Court further ruled that the
only issue to be decided by the Municipal Court is whether the Ministry's
committee was properly constituted to grant the licenses and remanded the matter
for a hearing in the Fall 1996 term. In particular, the Appeals Court ruled that
the Metropolitan Court does not have jurisdiction to revoke the grant of the
licenses or otherwise modify the decision of the Ministry's committee and,
accordingly, the Licensees may continue to operate under the licenses, pending
final determination by the Ministry committee. In its ruling in June 1996, the
Metropolitan Court ruled in favor of the Company. Subsequently, TV3 has
requested a review of this matter by the Supreme Court, which is currently
pending.. If this ruling is overturned, this would have no adverse effect on the
Company's ability to continue broadcasting because the Company began
broadcasting under a new contract, granted by Antenna Hungaria, on a new AM
Micro channel in September 1997.

SUBSIDIARY RECEIVERSHIP

In November 1997, the Company was notified by the Capital Court of
Budapest that one of its non-operating subsidiaries, HBC Kft, had been placed in
receivership due to the failure to pay an interest penalty of approximately
twenty-five ($25) dollars. The Company had previously paid a nominal judgment.
The Company's Hungarian operating subsidiary, HBC Rt., paid this penalty
interest and has agreed to pay any remaining debt in HBC Kft. The Company
expects that the receivership of HBC Kft will be ended in the next few weeks.
This event has had no material impact on the operations or financial condition
of the Company.

F-19

<PAGE>

HUNGARIAN BROADCASTING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

16. COMPARISON OF YEAR ENDED DECEMBER 31, 1997 WITH DECEMBER 31, 1996
(UNAUDITED) AND SIX MONTHS ENDED DECEMBER 31, 1996 WITH SIX MONTHS ENDED
DECEMBER 31, 1995 (UNAUDITED)

In March 1997, the Company changed its fiscal year-end from June 30 to
December 31. The following figures for the year ended December 31, 1997 and
1996(unaudited) and the six months ended December 31, 1996 and 1995 (unaudited)
for the transition period resulting from the change in fiscal year-end are
presented for comparative purposes:

YEAR ENDED YEAR ENDED SIX MONTHS SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31 ENDED DECEMBER 31 DECEMBER 31
1997 1996 1996 1995
---- ---- -------------- --------------
(UNAUDITED) (UNAUDITED)

<S> <C> <C> <C> <C>
Net revenues $ 2,981,260 $ 1,527,855 $ 1,239,418 $ 383,671
Expenses
Other operating costs and expenses .................... 3,397,336 2,910,458 1,679,859 678,598
Amortization of deferred program costs................. 944,004 986,000 736,000 ---
Amortization of broadcast license costs................ 423,048 435,116 211,526 199,462
Selling, general and administrative expenses........... 2,383,382 2,224,704 1,428,982 844,267
--------- --------- --------- -------
7,147,770 6,556,278 4,056,367 1,722,327
--------- --------- --------- ---------

Operating loss ........................................ (4,166,510) (5,028,423) (2,816,949) (1,338,656)
Income from contract cancellation ....................... 1,200,000 --- --- ---
Interest and other income ............................... 116,086 193,682 146,968 2,957
Interest expense ........................................ (262,156) (343,474) (78,588) (254,706)
Foreign currency exchange rate loss ..................... (83,038) (30,039) (30,039) ---
Write-off of deferred offering costs .................... --- --- --- (129,631)
Loss before extraordinary item .......................... (3,195,618) (5,208,254) (2,778,608) (1,720,036)
Extraordinary item ...................................... (151,449) --- --- ---

Net loss $(3,347,067) $(5,208,254) $(2,778,608) $(1,720,036)
=========== =========== =========== ===========
</TABLE>

17. SUBSEQUENT EVENTS

ACQUISITION OF GLOBAL TELEVISION NETWORKS, INC.
On January 5,1998, pursuant to a Reorganization Agreement, the Company
acquired all of the outstanding common stock of Global Television Networks, Inc.
("Global") in exchange for 3.75 million shares of the Company's Common Stock,
1.25 million of which are held in escrow which will be delivered only upon
Global meeting certain performance measures. The value of this purchase,
exclusive of the escrowed shares, is approximately $16.5 million. On January 5,
1998, immediately prior to the above transaction, Global and Hungarian
Broadcasting Project Kft ("HBP") purchased 24% and 76%, respectively of Sziv
Television, a national satellite-to-cable broadcaster currently reaching
approximately 1.3 million television households through an AM Micro transmission
system in Budapest and about 140 cable companies via satellite distribution in
Hungary, Global is entitled to 99% of all profits from Sziv, and HBP is entitled
to the remaining 1%. In addition, Global has an option to purchase HBP at any
time for $15,000 or to appoint another investor to hold HBP upon payment of
$15,000. Global is also a distributor of paid adult television programming,
holding exclusive long-term contracts with NTV Plus, DBS (direct broadcasting
system) operators in Russia, and long-term contracts with United Phillips cable
operators in Vienna and Amsterdam. In addition Global owns a chatline service in
the United States.

In a transaction related to the acquisition of Global, Global agreed to
allow Peter Klenner, President and director of the Company, to put to Global
300,000 common shares that he owned in the Company at a price of $7.50 per

F-20

<PAGE>

HUNGARIAN BROADCASTING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

share on or after December 31, 1998. Upon the acquisition of Global by the
Company, the Company assumed this put obligation.

The former owners/executives of Global own Top-Line Communications, Inc.
("Top-Line"), a television production studio in New York. As part of the due
diligence in the sale of Global to the Company, Top-Line financed certain
expenses including travel and lodging for persons associated with the
Global-Hungarian Broadcasting transaction, including the investigation of
broadcasting opportunities elsewhere in Europe. The Company agreed to reimburse
Top-Line for expenditures made in the due diligence process only if the Company
purchased Global. Top-Line has continued to advance expenses directly related to
the Company's activities. As of March 25, 1998 Top-Line has been reimbursed
$285,000 for expenses incurred on the Company's behalf. In addition,
approximately $70,000 of legal expenses incurred by the sellers have been or
will be paid by the Company.

EMPLOYMENT AGREEMENT
In January 1998, the Company entered into a five-year employment
agreement with its general counsel and Secretary. Total payments will be
$480,000 plus 80,000 five-year options exercisable into common shares in the
Company at $5.00 per share.

RENTAL AGREEMENTS
In January 1998, the Company signed a five-year lease with EuroWeb
International Inc., a related party, at a monthly rental of $6,481. The payments
are for the rental of four apartments in a 14-unit modern apartment building
next to the offices of the Company. These apartments are used by the President,
the Chief Operating Officer and the General Manager of the station. A fourth
apartment is for use by consultants and business visitors to the Company. In
April 1998, the entire 14-unit building was leased to an independent company.
The Company is in contact with the new lessee about subleasing additional space.
The marketing department for the Company has moved into the building and will
pay rent at the same per-square-meter cost as reflected in the first four
apartments. It is anticipated that most, if not all, of the other space in the
building will be used by the Company or by others that do business with the
Company. The Company believes that the rental charges are no higher than the
costs for comparable facilities.

PLANNED ISSUANCE OF SECURITIES
In March 1998, the Company contracted with a New York-based investment
banker to sell on a "best efforts" basis from $3 million to $6 million of 6%
Convertible Preferred stock. In the event that the issue is not completed, the
Company would need to seek alternative sources of financing to fund the
continued development and operations of the Company.

LISTING REQUIREMENTS
The Company is aware that, as of February 22, 1998, the listing
requirements for the NASDAQ Small Cap market were raised. In response to an
inquiry from the NASDAQ, the Company provided additional information to them so
that they could determine whether the Company met the new requirements. The
NASDAQ subsequently informed the Company that it meets the new requirements, and
that subject to a review of documents to be filed in respect to the 1997
financial position of the Company, the NASDAQ would notify the Company in
writing of this decision.

Relative to the acquisition of Global referred to above, the Company
filed an initial Form 8K with the Securities and Exchange Commission ("SEC"). As
permitted by relevant regulations, this initial filing did not include all

F-21

<PAGE>

HUNGARIAN BROADCASTING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

required financial data related to the companies acquired. Such data should have
been filed no later than March 20, 1998 but, due to difficulties in compiling
the relevant data, this deadline could not be met. Furthermore, NASDAQ has
requested the Company to provide other data related to documents previously
filed by the Company. The Company, with its attorneys, is working with the SEC
and the NASDAQ to assure that all filing and listing requirements are fully
complied with. Were the NASDAQ or the SEC to take any action that would cause
suspension in trading or negative action such as delisting from the NASDAQ Small
Cap market, the Company's ability to seek alternative sources of financing to
fund its continuing development and operations would be severely impaired.

F-22

<PAGE>

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

None
PART III

ITEM 9. EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY

As of March 31, 1998, the directors and executive officers of the
Company were:

NAME AGE POSITION

Offer Assis 36 President, Chief Executive Officer, and
Director
Peter E. Klenner 39 Chairman of the Board and Director
Shai Bar-Lavi 39 Chief Operating Officer and Director
James H. Season 54 Chief Financial Officer, Treasurer and
Director
Ami Shafrir 42 Director
Frederick E. Smithline 66 Director
Ronald Scott Moss 40 Secretary

Offer Assis has served as President, Chief Executive Officer and director
of the Company since January 5, 1998. From 1997 to 1998 Mr. Assis was President
and Chief Executive Officer of Global Television Networks, Inc., a New York
based television programming distributor operating in Russia, Vienna and
Amsterdam. Mr. Assis was previously a principal in a number of businesses
involving television and film production, television subscription channels,
telecommunications and the Internet. From 1984 to 1993 Mr. Assis was President
and Chief Executive Officer of M.D.S. Stores, Inc., a children's wear retail
chain. Mr. Assis attended Tel Aviv University. He devotes his full time to the
affairs of the Company.

Peter E. Klenner is Chairman of the Board of Directors since January 5,
1998. He previously served as President, Chief Executive Officer and a director
since the Company's inception in 1994. Mr. Klenner is President and Chief
Executive Officer of Central European Satellite Corp. since January 1, 1998. Mr.
Klenner has also served as President, Chief Executive Officer and a director of
Hungarian Teleconstruct Corp. ("Teleconstruct"), a publicly traded construction
corporation from 1993 to October 1996. In February 1992, Mr. Klenner founded
Hungarian Telephone and Cable Corp. ("HTCC"), an owner of local telephone
exchanges, and served as President, Chief Executive Officer, and Chief Financial
Officer from February 1992 until May 1995. From June 1991 to May 1992 he served
as Chairman of the Board of Montavid Engineering AG, a Budapest based building
and engineering firm. Mr. Klenner attended the University of Munich.

Shai Bar-Lavi has served as Chief Operating Officer and director of the
Company since January 5, 1998. From 1991 to 1998 Mr. Bar-Lavi was President of
Top-Line Communications, Inc., a television production company in New York City.
He devotes his full time to the affairs of the Company.

James H. Season was appointed Chief Financial Officer in August 1996. He
was elected a director and appointed Treasurer in April 1997. Mr. Season was
managing director of RHL Management Group, Inc. from 1990 to August 1996, which
was engaged in financial consulting. From 1986 to 1990, Mr. Season was a Group
Vice President and Chief Investment Officer of Golodetz Trading Corporation, an
international trading firm. Prior to 1986, Mr. Season was a Managing Director of
Chase Manhattan Bank, N.A. He also serves as a director of Hungarian Telephone
and Cable Corp. Mr. Season holds a J.D. degree from the University of Virginia
and an M.B.A. from the University of Michigan. Mr. Season devotes his full time
to the affairs of the Company.

Ami Shafrir was elected a director on January 5, 1998. Mr. Shafrir, an
Israeli national, resides in the United States and for the last 15 years has
owned and operated a number of businesses in the multimedia and
telecommunications industries, including a leading Internet service provider
serving the entertainment industry. His businesses also are leaders in combining
state-of-the-art technical platforms and business models facilitating electronic
commerce and Internet billing.

Frederick E. Smithline was elected a director on January 5, 1998. He has
practiced law in New York since 1957 and has been an associate and a partner in
several New York City law firms, specializing in corporate and finance law. He
is currently Chairman of the Board of Directors of DVL Corporation, a
publicly-traded REIT, a founding shareholder of International Isotopes, a
publicly-traded company, director of Robin Medical, Inc., a heart device
technology company and a consultant to TEAM, a joint venture with the Russian
Space Agency. He is also a Board member of the Alzheimer's Association and a
Trustee of The Chemotherapy Foundation and The Billy Smithline Foundation. Mr.
Smithline is a graduate of New York University and Harvard Law School.

Ronald Scott Moss was appointed Secretary in April 1997. From 1994 to 1997,
Mr. Moss was General Counsel to Integrated Media, Inc., an Internet applications
developer in New York City. From 1993 to 1994, he was a consultant to the
Motorola Software Group in Beijing, China. From 1988 to 1993, he was General
Counsel to Total Solutions. Inc., a computer-aided-design services company in
New York City. Mr. Moss graduated from the University of Miami School of Law and
is admitted to practice in New York and Florida. Mr. Moss devotes substantially
all his time to the affairs of the Company.

Directors are elected annually and hold office until the next annual
meeting of the stockholders of the Company and until their successors are
elected and qualified. Officers are elected annually and serve at the discretion
of the Board of Directors. Officers do not receive any compensation for serving
as directors.

SECTION 16(A) REPORTING

As of the filing date of this report, Messrs. Assis, Bar-Lavi, Smithline
and Shafrir have not yet filed Form 3 with the SEC. Peter Klenner has not yet
filed a Form 4 with respect to his sale of 300,000 shares to Mr. Assis on
January 5, 1998 in connection with the reorganization with Global.

ITEM 10. EXECUTIVE COMPENSATION

Prior to January 1996, no officer or director received any compensation
from the Company.

The following table sets forth the compensation earned by or paid to the
officers and directors of the Company for the calendar years 1997, 1996 and
1995:

<PAGE>

NAME AND PRINCIPAL POSITION YEAR SALARY OPTIONS

<S> <C> <C> <C>
Peter E. Klenner, Chairman, President, CEO 1997 $122,500 ---*
and Director 1996 120,000 95,000
1995 --- 50,000

James H. Season, Treasurer and Director 1997 96,000 20,000
1996 49,000 ---
1995 --- ---

Ronald Scott Moss, Secretary 1997 72,000 20,000
1996 --- ---
1995 --- ---
- -------------------------
</TABLE>

* Excludes 100,000 Common Stock Purchase Warrants received for a $300,000 loan
commitment to the Company.

In July 1995, the Company entered into a five-year employment agreement
with Peter E. Klenner, effective January 1, 1996, providing for a monthly salary
of $10,000. He is entitled to receive reimbursement of ordinary and necessary
business expenses. Beginning December 1, 1997, Mr. Klenner's salary was
increased to $12,500 per month.

In August 1996, the Company retained James H. Season as its Chief
Financial Officer. In April 1997, he became Treasurer. He is receiving a fee of
$8,000 per month on a month to month basis plus living expenses.

In April 1997, the Company retained Ronald Scott Moss as a consultant for a
fee of $6,000 per month for a period of two years. He is entitled to receive
reimbursement of ordinary and necessary business expenses. In December 1997 Mr.
Moss' fee was increased to $8,000 per month. Mr. Moss has options to purchase
100,000 shares of the Company's Common Stock at a price of $5.00 per share.

In January 1998, the Company entered into an employment agreement with
Offer Assis, whereby Mr. Assis agreed to serve as President and Chief Executive
Officer of the Company, for a salary of $300,000 per year until January 2, 2000,
and which granted Mr. Assis a signing bonus consisting of 2.4 million five-year
warrants to purchase shares of the Company's common stock for a price of $10.00
per share.

In January 1998, the Company entered into an employment agreement with
Shai Bar-Lavi, whereby Mr. Bar-Lavi agreed to serve as Chief Operating Officer
of the Company, for a salary of $300,000 per year until January 2, 2000, and
which granted Mr. Bar-Lavi a signing bonus consisting of 360,000 five-year
warrants to purchase shares of the Company's common stock for a price of $10.00
per share.

LIMITATION OF LIABILITY FOR DIRECTORS

The Company's Certificate of Incorporation provides that its directors
shall not be liable for monetary damages for breach of the directors' fiduciary
duty of care to the Company and its stockholders as a director except in the
case of (i) any breach of a director's duty of loyalty to the Company or its
stockholders, (ii) acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) payments of
dividends or approvals of stock repurchases or redemptions that are unlawful
under Delaware law, or (iv) any transactions from which the directors derived an
improper personal benefit. Currently under Delaware law, such provisions do not
eliminate the duty of care, and in appropriate circumstances, equitable remedies
such as injunctive or other forms of relief will remain available under Delaware
law. This provision does not affect a director's responsibilities under federal
securities laws. Pursuant to the Company's Certificate of Incorporation, current
and former directors and officers are indemnified to the maximum extent
permitted, from time to time, by the Delaware General Corporation Law.

In addition, the By-laws of the Company provide that the Company shall
indemnify any and all of its directors and officers or former directors and
officers or any person who may have served at its request as a director or
officer of another corporation in which it owns shares of capital stock or of
which it is a creditor against expenses actually and necessarily incurred by
them in connection with the defense of any action, suit or proceeding in which
they, or any of them, are made parties, or a party, by reason of being or having
been directors or a director or officer of the Company, or such other
corporation, except, in relation to matters as to which any such director or
officer or person shall be adjudged in such action, suit or proceeding to be
liable for negligence or misconduct, in the performance of duty.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and persons controlling the
Company pursuant to the foregoing provisions or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable.

STOCK OPTION PLAN

In 1994, the Company adopted a Stock Option Plan (the "Plan"). An
aggregate of 350,000 shares of Common Stock are authorized for issuance under
the Plan. The Plan provides that incentive and non-qualified options may be
granted to officers, employees, directors and consultants to the Company for the
purpose of providing an incentive to those persons to work for the Company. The
Plan is administered by the Board of Directors. The Board of Directors
determines, among other things, the persons to whom stock options are granted,
the number of shares subject to each option, the date or dates upon which each
option may be exercised and the exercise price per share.

Options granted under the Plan are exercisable for a period of up to ten
years from the date of grant. Options terminate upon the optionee's termination
of employment or consulting arrangement with the Company, except that under
certain circumstances an optionee may exercise an option within the three-month
period after such termination of employment. An optionee may not transfer any
options except that an option may be exercised by the personal representative of
a deceased optionee within the three-month period following the optionee's
death. Incentive options granted to any employee who owns more than 10% of the
Company's outstanding Common Stock immediately before the grant must have an
exercise price of not less than 110% of the fair market value of all underlying
stock on the date of the grant and the exercise term may not exceed five years.
The aggregate fair market value of Common Stock (determined at the date of
grant) for which any employee may exercise incentive options in any calendar
year may not exceed $100,000. In addition, the Company will not grant a
non-qualified option with an exercise price less than 85% of the fair market
value of the underlying Common Stock on the date of the grant. Options to
purchase an aggregate of 345,000 shares of Common Stock have been granted and
are outstanding under the Plan, including options to purchase 145,000, 30,000,
90,000 and 10,000 shares granted to Messrs. Klenner, Kovats, Bodle and Cohen,
respectively. The options granted to Messrs. Klenner and Cohen, exercisable
currently at $5 per share and the other options at prices between $5 and $6 per
share are exercisable currently.

The Company also granted an option to Mr. Robert Genova, former Chairman
of the Board, for 40,000 shares of Common Stock, which option expired upon his
leaving the Company. Mr. Genova acts as a consultant to the Company at a monthly
fee of $3,000 ending December 31,1998.

<PAGE>

The following table sets forth information regarding exercised options and
the value of unexercised options held by the President of the Company as of
December 31, 1997 and December 31, 1996:

<TABLE>
<CAPTION>
VALUE OF
NUMBER OF SECURITIES IN-THE-MONEY
SHARES ACQUIRED UNDERLYING UNEXERCISED OPTIONS
NAME ON EXERCISE OPTIONS AT FISCAL PERIOD
- -------------------------------------------------------------------------------------------------------------
AT FISCAL PERIOD END

DECEMBER 31, 1997
<S> <C> <C>
Peter E. Klenner --- 145,000* $217,500

DECEMBER 31, 1996
Peter E. Klenner --- 145,000 ---
- -------------------------

</TABLE>

* Excludes 100,000 Common Stock Purchase Warrants received as a commitment fee
for a $300,000 loan facility to the Company.

The Company has no pension or profit sharing plan. The Company has not
obtained and does not intend to obtain any key-man life insurance covering the
life of Mr. Assis or any of its other officers.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

The following table sets forth information with respect to the beneficial
ownership of the Common Stock as of April 3, 1998 by (i) each person known by
the Company to own beneficially more than 5% of the outstanding Common Stock;
(ii) each director of the Company; and (iii) all directors and officers as a
group. Except as otherwise indicated below, each of the entities or persons
named in the table has sole voting and investment powers with respect to all
shares of Common Stock beneficially owned by it or him as set forth opposite its
or his name:

NAME AND ADDRESS SHARES BENEFICIALLY OWNED
NUMBER PERCENT
- -----------------------------------------------------------------------------------

<S> <C> <C>
OFFER ASSIS (3) 4,700,000 42.41%
Kelenhegyi ut. 39
Budapest, Hungary

SHAI BAR-LAVI (3) 660,000 5.96%
Kelenhegyi ut. 39
Budapest, Hungary

FREDERICK E. SMITHLINE (3) 330,000 2.98%
250 Park Avenue
New York, New York

PETER E. KLENNER (1)(2) 408,266 3.68%
Kelenhegyi ut. 39
Budapest, Hungary

RONALD SCOTT MOSS (2) 100,000 0.90%
445 Park Avenue
New York, NY 10022
All officers and directors as a group (4 persons)(2) 6,198,266 55.93%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Mr. Klenner may be deemed to be a "promoter" or "parent" of the Company,
as those terms are defined in the rules and regulations as adopted under
the Securities Act of 1933, as amended.
(2) Messrs. Klenner and Moss, the Company's Secretary, hold options for 145,000
and 100,000 shares, respectively. Such options are presently exercisable
and, accordingly, such shares are included in this table.
(3) Messrs. Assis, Bar-Lavi and Smithline hold options to purchase options for
2,400,000, 600,000 and 300,000 shares, respectively. Such options are
presently exercisable, and, accordingly, such shares are included in this
table. Messrs. Assis, Bar-Lavi and Smithline have ownership interests in
shares held in escrow of 1,150,000, 150,000 and 75,000 shares,
respectively. These shares are excluded from this table.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company maintains a policy of not entering into any transaction
with any officer, director, principal stockholder or affiliate of the Company,
unless such transaction is approved by a resolution of at least a majority of
the independent members of the Board of Directors of the Company. Any
transaction with an affiliate will be on terms no less favorable to the Company
than could be obtained from an independent third party. The Company believes
that all previous transactions with affiliates were on terms no less favorable
to the Company than could be obtained from an independent party.

On September 14, 1994, the Company sold 480,000 shares to Peter E.
Klenner, president of the Company for $4,800 ($.01 per share); 320,000 shares to
Robert Genova, formerly Chairman of the Board for $3,200 ($.01 per share); and
50,000 shares to Frank R. Cohen, Secretary, Treasurer, Director and Counsel to
the Company for $500 ($.01 per share) for an aggregate of $8,500.

In December 1994 and March 1995, the Company borrowed $800,000 from
Hungarian Teleconstruct Corp. ("HTEL"), at 6% per annum interest. Fifty percent
of the loan was repaid in January 1996. As an additional consideration, the
Company issued 100,000 shares of its Common Stock to HTEL and granted HTEL an
option to purchase 150,000 additional shares of Common Stock at $3 per share.
HTEL exercised its option to purchase 150,000 additional shares in March 1995.

In February 1996, the Company licensed, for $750,000, the exclusive
rights to programming for MSAT for the period April through December 1996 from
Power Television Limited ("Power TV"), a company owned by Justin Bodle, then one
of the Company's directors. The programming included rights to the TV series
"Beauty and the Beast," "Sirens," "Pacific Blue," "Benny Hill Show" and others.
In July 1996, the Company agreed to license for $1,378,000 the exclusive rights
to programming for the period October 1, 1996 through December 31, 1997 from
Power TV. The programming included rights to such series as "LA Law," "Murder
One," "Cops" and "Homicide." In October 1997, the Company contracted for
programming with Power TV for the period January 1, 1998 through June 30, 1998
at a cost of $467,500.

In October 1996, in order to provide working capital to the Company,
Mr. Klenner loaned the Company $200,000 at bank interest rates and Mr. Bodle
deferred payments for the programming. In consideration of the foregoing,
Messrs. Klenner and Bodle were granted options to purchase 95,000 and 40,000
shares, respectively, from the Company's 1994 Stock Option Plan exercisable at
$5 per share, which was the closing price of the shares of Common Stock on the
date of grant.

In addition to the $200,000 loan made in October, 1996, Mr. Klenner had
previously made loans from time to time to the Company for general working
capital purposes, which aggregated $165,000 at December 31, 1996 (in addition to
the loan mentioned above). These loans were repaid in February 1997.

In July 1997, the Company agreed to issue 173,266 shares of
unregistered common stock with a fair Market value of $605,368 to M&A Management
Kft ("M&A"), a company wholly owned by the Peter Klenner, in exchange for
cancellation a debt of $454,822 owed by the Company to M&A, resulting in an
extraordinary loss of $151,449 from the early retirement of debt.

In July 1997, James Season, the Company's Chief Financial Officer, and
Beatrix Bedo were awarded options to purchase 20,000 and 10,000 shares,
respectively, of the Company's Common Stock at a price of $3.50 per share.

In October 1997, the Company agreed in principle with a nonaffiliated
entity (on a 50-50 ownership basis) to form a provider of teletext services in
Hungary. The business is to be named Sat-Text Kft The amount of funding and
other terms are being negotiated.

In November 1997, the Company entered into an agreement with M&A
whereby M&A agreed to provide a loan facility of up to $300,000 to the Company
at an interest rate of 2% over LIBOR and due December 31, 1998. The Company paid
M&A a commitment fee consisting of 100,000 of the Company's Common Stock
Purchase Warrants. In October, November and December 1997, M&A advanced $250,000
to the Company and an additional $25,000 to Studio 2 Kft pursuant to this loan
commitment. These advances were used to fund operations.

In November 1997, Mr. Klenner's salary was increased to $12,500 per
month.

In November 1997, the Company transferred its right to participate in a
joint venture with plans to launch a communications satellite to serve Central
Europe to Central European Satellite Corp. ("CESAT") in exchange for 4.0 million
shares in that company. This company is controlled by the Company's Chairman of
the Board. All but 70,778 of these shares of common stock of CESAT were then
distributed on a one-for-one basis to stockholders of record of the Company as
of December 31, 1997.

The owners/executives of Global own Top-Line Communications, Inc.
("Top-Line"), a television production studio in New York. As part of the due
diligence in the sale of Global to the Company, Top-Line financed certain
expenses including travel and lodging for persons associated with the
Global--Hungarian Broadcasting transaction, including the investigation of
broadcasting opportunities elsewhere in Europe. The Company agreed to reimburse
Top-Line for expenditure made in the due diligence process only if the Company
purchased Global. After the closing, Top-Line was reimbursed $54,300 for these
expenses. In addition, approximately $73,200 of legal expenses incurred by the
sellers will be paid by the Company. Top- Line has continued to advance expenses
directly related to the Company's activities.

In January 1998, the Company signed a five-year lease with EuroWeb
International Inc., a related party, at a monthly rent of $6,481. The payments
are for the rental of four apartments in a 14-unit modern apartment building
next to the offices of the Company. These apartments are used by the President,
the Chief Operating Officer and the General Manager of the station. A fourth
apartment is for use by consultants and business visitors to the Company. In
April 1998, the entire 15-unit building was leased to an independent company.
The Company is in contact with the new lessee about subleasing additional space.
The marketing department for the Company has moved into the building and will
pay rent at the same per-square-meter cost as reflected in the first four
apartments. It is anticipated that most, if not all, of the other space in the
building will be used by the Company or by others that do business with the
Company. The Company believes that the rental charges are no higher than the
costs for comparable facilities.

In December 1995, three of the Company's officers contributed stock to
the Company for no consideration. In January 1998, the Company agreed to
reimburse these founders and former officers for a portion of their losses
suffered as a result of the failure of Coleman Securities, Inc. ("Coleman") to
complete a firm commitment underwriting. The Company has an action against
Coleman in the Supreme Court of the State of New York to recover damages from
the aborted underwriting. The founders voluntarily cancelled 220,000 of their
share for no compensation to permit the Company to successfully complete its
initial public offering with another underwriter at $5 per share. The Company
will pay these founders $250,000 in cash and $150,000 in stock at the time of a
future equity offering in excess of $2.0 million and another $550,000, in cash
from proceeds of the Coleman litigation after the original investors' notes are
paid in full.

<PAGE>

. PART IV

ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(A)(1) LIST OF FINANCIAL STATEMENTS
Reference is made to Item 7 for a list of all financial
statements filed as part of this Form 10-K.

(A)(2) LIST OF REPORTS ON FORM 8-K Change of Fiscal Year - filed March
4, 1997 Acquisition - filed January 8, 1998

(A)(3) LIST OF EXHIBITS (numbers below reference Regulation S-B)
(3) (a) Certificate of Amendment to Certificate of
Incorporation filed June 28, 1996(3)
(b) Certificate of Incorporation filed September 14, 1994(1)
(c) Proposed Corrected Certificate of Designation
Relating to the Series A Convertible Preferred
Stock (3)
(d) By-laws (1)
(4) (a) Form of Warrant Agreement (2)
(b) Amendment to Warrant Agreement, including Form of
Common Stock Purchase Warrant Certificate (3)
(c) Form of Series A Preferred Stock Certificate (3)
(d) Form of Underwriter's Unit Warrant (3)
(e) Form of Unit Certificate (3)
(10)
(a) Employment agreement between Registrant and Peter E.
Klenner (1)
(b) Employment agreement between Registrant and Imre M.
Kovats (1)
(c) Financial Consultant agreement between Registrant
and Robert Genova (1)
(d) 1994 Incentive Stock Option Plan (1)
(e) Sharing agreement for space and facilities between
Registrant and Hungarian Telephone & Cable Corp.
(1)
(f) Agreement to Purchase Shares in DNTV (1)
(g) Agreement to purchase shares in VI-DOK (1)
(h) Letter of intent with KableCom (1)
(i) Offer from OKK Kft to Registrant to rent satellite
space to Company (1)
(j) Agreement with Land Studios Kft. (1)
(k) Lease agreement with HAKON Ltd. for space at Szamado,
Budapest (3)
(l) Form of 6% Bridge Note (1)
(m) License to broadcast on A3 (1)
(n) Consulting Agreement with J.W. Barclay & Co., Inc., dated
December, 1996(3)
(o) Amendment to Mergers and Acquisitions Agreement with
J.W. Barclay & Co., Inc. (3)
(p) Contracts for purchase of programming between Power
TV Ltd. and Registrant
dated February 28 and July 29, 1996(4)
(q) Agreement between Nethold Central Europe BV and
Registrant dated July 5, 1996(4)
(r) Management consulting agreement between Registrant
and Justin Bodle dated June 15, 1996(4)
(s) Agreement between Registrant and Banknet dated June 26,
1996(4)
(t) Rental lease between Registrant and Investor
Holding Rt. dated June 25, 1996(2)
(u) Agreement between the Company and Orion Atlantic,
L.P., dated July 31, 1996(3)
(v) Settlement Agreement with
Nethold Development B.V., dated May 22, 1997
(w) Reorganization Agreement among HBC, Global Television
Networks, Inc. and Offer
Assis, Shai Bar-Lavi, Shlomo Kot and Frederick E.
Smithline individually (6)
(x) Transfer and Distribution Agreement, dated as of
November 18, 1997, between the Registrant and
Hungarian Satellite Corporation (6)
(16) Letter from prior accountants Todman & Co. (5)
(21) Subsidiaries of the Registrant (1)
- -----------------
(1) Incorporated by reference to corresponding exhibit in the Company's
Registration Statement on Form SB-2 (SEC file No. 33-96674).
(2) Incorporated by reference to corresponding exhibit in the Company's
Registration Statement on Form SB-2 (SEC file No. 33-80177).
(3) Incorporated by reference to corresponding exhibit in the Company's
Registration Statement on Form SB-2 (SEC File No. 333-13371
(4) Incorporated by reference to the corresponding exhibit in the Company's
report on form 10K for the year
ended June 30, 1996.
(5) Incorporated by reference to exhibit in the Company's report on Form 8-K
dated April 11, 1996. (6) Incorporated by reference to exhibit in the
Company's report on Form 8-K dated January 8, 1998

<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of New York, State of New York, on the day of 1997.

HUNGARIAN BROADCASTING CORP
(Registrant)

By /S/ OFFER ASSIS
---------------
Offer Assis, President

Pursuant to the requirements of the Securities Exchange of 1934, as amended,
this Report has been signed below by the following persons in the capacities and
on the dates indicated:

SIGNATURE TITLE DATE

<S> <C> <C>
/s/Offer Assis President, CEO and Director April 15, 1998
- --------------------
Offer Assis

/s/Peter E. Klenner Chairman of the Board of Directors April 15, 1998
- --------------------
Peter E. Klenner

/s/Shai Bar-Lavi Chief Operating Officer, Director April 15, 1998
- --------------------
Shai Bar-Lavi

/s/James H. Season Chief Financial Officer, Treasurer April 15, 1998
- -------------------- and Director
James H. Season

/s/Ami Shafrir Director April 15, 1998
- ---------------------
Ami Shafrir

/s/Frederick E. Smithline Director April 15, 1998
- --------------------
Frederick E. Smithline

</TABLE>

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