CENTRAL EUROPEAN MEDIA ENTERPRISES LTD - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2004

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

For the transition period from _______ to _______

Commission File Number 0-24796

CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.

(Exact name of registrant as specified in its charter)

	BERMUDA		N/A
	(State or other jurisdiction of incorporation and organization)		(IRS Employer Identification No.)
	Clarendon House, Church Street, Hamilton		HM CX Bermuda
	(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code: 441-296-1431

Indicate by check mark whether 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 each shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act)

Yes þ No o

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

	Class		Outstanding as of July 30, 2004
	Class A Common Stock, par value $0.08		20,699,100
	Class B Common Stock, par value $0.08		7,334,736

CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.

FORM 10-Q

For the quarterly period ended June 30, 2004

INDEX

Page

Part I. Financial information

Item 1. Financial Statements

Consolidated Balance Sheets as at June 30, 2004 and December 31, 2003

3

Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2004 and 2003

5

Consolidated Statement of Shareholders' Equity for the Six Months from December 31, 2003 to June 30, 2004

7

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003

8

Notes to the Consolidated Financial Statements

9

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

26

Item 3. Quantitative and Qualitative Disclosures About Market Risk

45

Item 4. Controls and Procedures

46

Part II. Other Information

Item 1. Legal Proceedings

47

Item 4. Submission of Matters to a Vote of Security Holders

48

Item 6. Exhibits and Reports on Form 8-K

48

Signatures

49

Exhibit Index

49

Page 2

Part I. Financial Information

Item 1. Financial Statements

CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.

CONSOLIDATED BALANCE SHEETS

(US$ 000's, except share and per share data)

(Unaudited)

June 30, 2004

December 31, 2003 (1)

ASSETS

Current Assets

Cash and cash equivalents

$

165,307

$

192,246

Restricted cash

5,453

5,429

Accounts receivable (net of allowances of $5,664, $5,625, respectively)

32,238

29,812

Other receivable (Note 13)

20,326

20,103

Program rights

14,047

10,160

Loans to related parties

1,600

3,849

Other short-term assets

8,838

5,292

Total Current Assets

247,809

266,891

Loans to related parties

1,154

1,883

Investments in associated companies

29,616

24,413

Property, plant and equipment (net of depreciation $60,184, $55,850, respectively)

18,863

18,003

Other receivable (Note 13)

18,200

18,200

Program rights

12,560

9,682

Goodwill (Note 5)

29,236

17,821

Other intangibles (Note 5)

22,962

9,554

Other assets

788

2,305

Total Assets

$

381,188

$

368,752

(1) Restated to reflect the adoption of FASB Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities" ("FIN 46 (R)").


	Page 3

CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.

CONSOLIDATED BALANCE SHEETS (continued)

(US$ 000's, except share and per share data)

(Unaudited)

June 30, 2004

December 31, 2003 (1)

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities:

Accounts payable and accrued liabilities

$

36,361

$

37,748

Duties and other taxes payable

19,383

20,192

Income taxes payable

4,807

12,991

Credit facilities and obligations under capital leases

1,946

185

Total Current Liabilities

62,497

71,116

Non-Current Liabilities:

Credit facilities and obligations under capital leases

14,082

16,891

Income taxes payable

6,760

6,000

Provision for losses in investments in associated companies

-

227

Deferred tax

5,078

-

Total Non-Current Liabilities

25,920

23,118

Minority interests in consolidated subsidiaries

1,452

994

SHAREHOLDERS' EQUITY:

Class A Common Stock, $0.08 par value: authorized: (2)

100,000,000 shares at June 30, 2004 and December 31, 2003; issued and outstanding : 20,699,100 at June 30, 2004 and 19,269,766 at December 31, 2003

1,656

1,542

Class B Common Stock, $0.08 par value: authorized: (2)

15,000,000 shares at June 30, 2004 and December 31, 2003; issued and outstanding: 7,334,736 at June 30, 2004 and December 31, 2003

587

587

Additional paid-in capital

380,387

372,662

Accumulated deficit

(94,796

)

(105,999

)

Accumulated other comprehensive income

3,485

4,732

Total shareholders' equity

291,319

273,524

Total liabilities and shareholders' equity

$

381,188

$

368,752

(1) Restated to reflect the adoption of FIN 46 (R).

(2) All Class A and Class B Common Stock has been retrospectively adjusted to reflect the two-for-one stock splits which occurred on January 10, 2003 and November 5, 2003.


	Page 4

CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

(US$ 000's, except share and per share data)

(Unaudited)

For the three months

ended June 30,

For the six months

ended June 30,

2004

2003 (1)

2004

2003 (1)

Net revenues

$

44,886

$

33,307

$

80,734

$

57,905

STATION EXPENSES:

Operating costs

7,338

7,245

13,409

13,161

Cost of programming

15,950

12,660

29,563

23,565

Depreciation of station fixed assets and other intangibles

1,336

1,388

2,798

2,703

Total station operating costs and expenses

24,624

21,293

45,770

39,429

Station selling, general and administrative expenses

4,322

4,267

7,884

7,396

Operating income before corporate expenses

15,940

7,747

27,080

11,080

CORPORATE EXPENSES:

Corporate operating costs

4,738

4,140

7,971

6,855

Stock based compensation (Note 9)

2,369

5,977

4,254

6,624

Amortization of intangibles

62

-

62

-

Operating income/(loss)

8,771

(2,370

)

14,793

(2,399

)

Equity in income of unconsolidated affiliates

4,304

2,628

5,199

2,059

Interest income

786

2,909

2,240

3,284

Interest expense

(667

)

(6,931

)

(885

)

(11,922

)

Foreign currency exchange loss, net

(1,289

)

(8,252

)

(1,922

)

(10,333

)

Other expense

(10

)

(2,754

)

(781

)

(3,265

)

Income/(loss) before provision for income taxes, minority interest and discontinued operations

11,895

(14,770

)

18,644

(22,576

)

Provision for income taxes

(5,769

)

(2,797

)

(6,939

)

(3,082

)

Income/(loss) before minority interest and discontinued operations

6,126

(17,567

)

11,705

(25,658

)

Minority interest in income of consolidated subsidiaries

(379

)

-

(457

)

(84

)

Net income/(loss) from continuing operations

5,747

(17,567

)

11,248

(25,742

)

Discontinued operations - Czech Republic (Note 12):

Post-tax income/(loss) from discontinued operations (Czech Republic)

285

348,393

(45

)

345,281

Net income

$

6,032

$

330,826

$

11,203

$

319,539

(1) Restated to reflect the adoption of FIN 46 (R).


	Page 5

CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS (continued)

(US$ 000's, except share and per share data)

(Unaudited)

For the three months

ended June 30,

For the six months

ended June 30,

2004

2003 (1)

2004

2003 (1)

PER SHARE DATA:

Net income/(loss) per share (Note 8)

Continuing operations - Basic

$

0.21

$

(0.66

)

$

0.40

$

(0.97

)

Continuing operations - Diluted

0.19

(0.66

)

0.38

(0.97

)

Discontinued operations - Basic

0.01

13.17

-

13.05

Discontinued operations - Diluted

0.01

11.65

-

11.54

Total net income - Basic
0.22 12.50 0.40 12.08

Total net income - Diluted

$

0.20

$

11.06

$

0.37

$

10.68

Weighted average common shares used in computing per share amounts (2):

Basic (000's) (3)

28,034

26,459

28,034

26,459

Diluted (000's) (3)

29,977

29,911

29,977

29,911

(1) Restated to reflect the adoption of FIN 46 (R).

(2) All per share data has been adjusted for the two-for-one stock splits which occurred on January 10, 2003 and November 5, 2003.

(3) Diluted EPS for the six and three months ended June 30, 2004 includes the impact of 1,943,151 options to purchase common stock then outstanding. Diluted EPS for the six and three months ended June 30, 2003 includes the impact of 3,451,716 options to purchase common stock then outstanding.


	Page 6

CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

(US$ 000’s)

(Unaudited)

Comprehensive Income/(Loss)

Class A Common Stock

Class B Common Stock

Additional Paid-In Capital

Accumulated Deficit

Accumulated Other Comprehensive Income/(Loss)

Total Shareholders' Equity

BALANCE, December 31, 2003 (1)

$

1,542

$

587

$

372,662

$

(105,999

)

$

4,732

$

273,524

Stock-based compensation

4,254

4,254

Stock options exercised

114

3,471

3,585

Comprehensive income:

Net income

11,203

11,203

11,203

Other comprehensive income:

Unrealized translation adjustments

(1,247

)

(1,247

)

(1,247

)

Comprehensive income

$

9,956

BALANCE, June 30, 2004

$

1,656

$

587

$

380,387

$

(94,796

)

$

3,485

$

291,319

(1) Restated to reflect the adoption of FIN 46 (R).

Page 7

CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(US$ 000’s) - (Unaudited)

For the Six Months

Ended June 30,

2004

2003 (1)

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income/(loss)

$

11,203

$

319,539

Adjustments to reconcile net income/(loss) to net cash used in operating activities:

(Income)/loss from discontinued operations

45

(345,281

)

Equity in (income)/loss of unconsolidated affiliates

(5,199

)

(2,059

)

Depreciation and amortization

20,431

19,217

Interest income on loans

(828

)

-

Stock-based compensation

4,254

6,624

Minority interest in loss of consolidated subsidiaries

457

84

Foreign currency exchange (gain)/loss, net

1,922

10,333

Net change in:

Restricted cash

(24

)

(72,056

)

Accounts receivable

(2,744

)

3,047

Program rights costs

(21,009

)

(17,681

)

Other short-term assets

(3,256

)

776

Accounts payable and accrued liabilities

(5,633

)

(4,521

)

Income and other taxes payable

1,016

(1,354

)

Net cash provided by/(used in) continuing operating activities

635

(83,332

)

CASH FLOWS FROM INVESTING ACTIVITIES:

Acquisition of fixed assets

(3,438

)

(4,405

)

Proceeds from disposal of fixed assets

-

62

Investments in subsidiaries and affiliates (2)

(17,084

)

(5,188

)

Loans and advances to related parties

400

1,787

License costs, other assets and intangibles

904

-

Net cash provided by/(used in) investing activities

(19,218

)

(7,744

)

CASH FLOWS FROM FINANCING ACTIVITIES:

Cash facilities and payments under capital leases

(622

)

(20,157

)

Repurchase of Senior Notes

-

(38,136

)

Issuance of stock

3,583

-

Other long-term liabilities

-

(256

)

Net cash received from/(used in) financing activities

2,961

(58,549

)

NET CASH RECEIVED FROM/(USED IN) DISCONTINUED OPERATIONS

(9,274

)

345,927

IMPACT OF EXCHANGE RATE FLUCTUATIONS ON CASH

(2,043

)

580

Net increase/(decrease) in cash and cash equivalents

(26,939

)

196,882

CASH AND CASH EQUIVALENTS, beginning of period

192,246

51,773

CASH AND CASH EQUIVALENTS, end of period

$

165,307

$

248,655

SUPPLEMENTAL INFORMATION OF CASH FLOW INFORMATION:

Cash paid for interest

$

144

$

8,647

Cash paid for income taxes (net of refunds)

$

14,089

$

4,758

(1) Restated to reflect the adoption of FIN 46 (R).

(2) For the six months ended June 30, 2004, Investments in subsidiaries and affiliates excluded non-cash investing activities of US$ 3.4 million relating to our increased investment in our Romanian operations. For further information, see Note 4, "Acquisitions and Disposals".


	Page 8

CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.

Notes to the Consolidated Financial Statements

June 30, 2004

1. Basis of Presentation

Central European Media Enterprises Ltd. is a Bermuda company that, together with its subsidiaries and affiliates, invests in, develops and operates national and regional commercial television stations and networks in Central and Eastern Europe. As at June 30, 2004, we have operations in Romania, the Slovak Republic, Slovenia and Ukraine. Subsequently, on July 16, 2004, we acquired 100% of Nova TV d.d. ("Nova TV") and Operativna Kompanija d.o.o. ("OK") in Croatia (for further information, see Part I, Note 14, "Subsequent Events").

The interim statements for the six months ended June 30, 2004 should be read in conjunction with the Notes to the Consolidated Financial Statements contained in our December 31, 2003 Form 10-K filed with the Securities and Exchange Commission ("SEC") on February 25, 2004 as amended by our Form 10-K/A filed with the SEC on March 12, 2004. In the opinion of management, the interim unaudited financial statements included herein reflect all adjustments necessary, consisting of normal recurring adjustments, for a presentation in conformity with United States Generally Accepted Accounting Principles ("US GAAP"). The consolidated results of operations for interim periods are not necessarily indicative of the results to be expected for a full year.

The preparation of financial statements in conformity with US GAAP 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 year. Actual results could differ from those estimates. Our significant accounting policies have not materially changed since our disclosure in Part II, Item 8, "Financial Statements and Supplementary Data" of our December 31, 2003 Form 10-K filed with the SEC on February 25, 2004 as amended by our Form 10-K/A filed with the SEC on March 12, 2004.

The consolidated financial statements include the accounts of Central European Media Enterprises Ltd. and investments in entities over which we have control. We consolidate the financial statements of entities in which we hold more than a majority voting interest and also those entities which are deemed to be a Variable Interest Entity of which we are the primary beneficiary as defined by FASB Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities" ("FIN 46 (R)"). Entities in which we hold less than a majority voting interest but over which we have the ability to exercise significant influence are accounted for using the equity method. Other investments are accounted for using the cost method.

Following the adoption of FIN 46 (R), we now consolidate Studio 1+1, a license holding and broadcasting company in Ukraine. Studio 1+1 is within the Ukraine operations and trades with the other companies within the group. Studio 1+1 has been consolidated retrospectively within the presented financial statements. The effect of restatement on the balance sheet for the comparable period is to remove from the balance sheet the net liabilities of Studio 1+1, previously classified under "Provision for losses in investments in associated companies" and this is replaced by the separable assets and liabilities of the entity. The effect of restatement on the Income Statement for the comparable period is to remove from the income statement the one line adjustment of our share of Studio 1+1’s results for the period previously classifie d under "Equity in income/(loss) of unconsolidated affiliates" and this is replaced by amounts within the separable income and expense


	Page 9

lines. For further information, see Note 2, "Group Operations" and Note 3, "Recent Accounting Pronouncements".

Certain reclassifications were made to prior period amounts to conform to current period classifications.

We, like other television operators, experience seasonality, with advertising sales tending to be lowest during the third quarter of each calendar year, which includes the summer holiday period (typically July and August), and highest during the fourth quarter of each calendar year.

On June 19, 2003, the Board of Central European Media Enterprises Ltd. decided to withdraw from our Czech operations. The revenues and expenses of the Czech operations and the income from an arbitration award relating to our former Czech operations and related legal expenses have therefore all been treated as discontinued operations and have been reclassified. For additional information, see Note 12, "Discontinued Operations".

Stock-based Compensation

Stock-based compensation costs are determined when options are issued and are measured under the fair value method as defined in SFAS 123, "Accounting for Stock-based Compensation" ("SFAS 123"). We adopted SFAS 123 prospectively for employee stock option awards granted, modified, or settled beginning January 1, 2003, as contemplated by SFAS 148, "Accounting for Stock-based Compensation - Transition & Disclosure" ("SFAS 148"). In prior periods, we used the intrinsic method of accounting as defined in APB 25, "Accounting for Stock Issued to Employees" ("APB 25").

Pro Forma Disclosures

Had compensation costs for employee stock option awards granted, modified or settled prior to January 1, 2003 been determined consistent with the fair value approach required by SFAS 123 for all periods presented, using the Black-Scholes option pricing model with the assumptions as estimated on the date of each grant, our net income/(loss) and net income/(loss) per common share would decrease/(increase) to the following pro forma amounts:

For the Three Months Ended June 30,

For the Six Months Ended June 30,

(US$ 000’s, except per share data)

2004

2003

2004

2003

Net Income

As Reported

$

6,032

$

330,826

$

11,203

$

319,539

Add: Stock-based compensation expense included in reported net income, net of related tax effects

As Reported

2,369

5,977

4,254

6,624

Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects

Pro Forma Expense

(2,422

)

(6,134

)

(4,361

)

(6,908

)

Net Income

Pro Forma

$

5,979

$

330,669

$

11,096

$

319,255

Net Income Per Common Share - Basic:

As Reported

$

0.22

$

12.50

$

0.40

$

12.08

Pro Forma

$

0.21

$

12.50

$

0.40

$

12.07

Net Income Per Common Share -Diluted:

As Reported

$

0.20

$

11.06

$

0.37

$

10.68

Pro Forma

$

0.20

$

11.06

$

0.37

$

10.67

Page 10

2. Group Operations

Central European Media Enterprises Ltd. was incorporated on June 15, 1994 under the laws of Bermuda. Our assets are held through a series of Dutch and Netherlands Antilles holding companies. In each market, we have interests both in license companies and in operating companies. License companies have been authorized by the relevant local regulatory authority to engage in television broadcasting in accordance with the terms of a particular license. Revenues are generated primarily through operating companies which acquire programming for broadcast by the corresponding license holding company and have agreements to sell advertising time on behalf of the license company to third parties. In Romania and Ukraine, the license company also acts as an operating company. Our share of profits in the operating companies corresponds with our voting interest other than in the Slovak Republic, where we are entitled by contract to a share of profits that is in excess of our voting interest. Below is an overview of our operating structure, the accounting treatment for each entity and a chart entitled "Simplified Corporate Structure - Continuing Operations".

Key Subsidiaries and Affiliates

as at June 30, 2004

Voting Interest

Share of Profits

Accounting Treatment

TV Network

Continuing Operations

Romania

Operating Companies:

Media Pro International S.A. (MPI)

80%

80%

Consolidated Subsidiary

Media Vision S.R.L. (Media Vision)

70%

70%

Consolidated Subsidiary

License Companies:

Pro TV S.A. - formerly Pro TV S.R.L. (Pro TV)

80%

80%

Consolidated Subsidiary

PRO TV, ACASA, PRO CINEMA and PRO TV INTERNATIONAL

Media Pro S.R.L. (Media Pro)

20%

20%

Equity Accounted Affiliate

PRO FM (radio)

Slovenia

Operating Company:

Produkcija Plus, d.o.o. (Pro Plus)

96.85%

96.85%

Consolidated Subsidiary

License Companies:

Pop TV d.o.o. (Pop TV)

96.85%

96.85%

Consolidated Subsidiary

POP TV

Kanal A d.o.o. (Kanal A)

96.85%

96.85%

Consolidated Subsidiary

KANAL A

Slovak Republic

Operating Company:

Slovenska Televizna Spolocnost, spol. s.r.o. (STS)

49%

70%

Equity Accounted Affiliate

License Company:

Markiza-Slovakia s.r.o. (Markiza)

34%

0.1%

Equity Accounted Affiliate

MARKIZA TV

Page 11

Ukraine

Operating Companies:

Innova Film GmbH (Innova)

60%

60%

Consolidated Subsidiary

International Media Services Ltd. (IMS)

60%

60%

Consolidated Subsidiary

Enterprise "Inter-Media" (Inter-Media)

60%

60%

Consolidated Subsidiary

License Company:

Broadcasting Company "Studio 1+1" (Studio 1+1)

18%

18%

Consolidated Variable Interest Entity

STUDIO 1+1

Subsequently, on July 16, 2004, we acquired 100% of Nova TV and OK in Croatia (for further information, see Part I, Note 14, "Subsequent Events"). The table below illustrates the operating structure and the accounting treatment for these entities from July 16, 2004.

Voting Interest

Share of Profits

Accounting Treatment

TV Network

Croatia

Operating Company:

Operativna Kompanija d.o.o. (OK)

100%

100%

Consolidated Subsidiary

License Company:

Nova TV d.d. (Nova TV)

100%

100%

Consolidated Subsidiary

NOVA TV

Page 12

Page 13

Romania

During March 2004 Adrian Sarbu, a local shareholder and the General Director of our Romanian operations acquired control of Rootland Trading Limited from Ion Tiriac, the other key local shareholder in our Romanian operations. On March 29, 2004 we acquired an additional 14% of MPI and Pro TV from Rootland Trading Limited to increase our stake in both companies from 66% to 80%.

We now have an 80% voting interest in Pro TV, the television license and operating holding company. We also have an 80% voting interest in MPI, a service providing company. For both companies we are entitled to an 80% share of their profits. Pro TV holds 21 of the 22 PRO TV licenses as well as the licenses for ACASA, PRO TV INTERNATIONAL and PRO CINEMA. We have the right to appoint three of the five members of the Council of Administration of each company, which directs the affairs of Pro TV SA and MPI. Although we have majority voting power in MPI and Pro TV, with respect to certain financial and corporate matters, the affirmative vote of Adrian Sarbu is required. These minority rights are in the nature of protective rights which are not an impediment to operation of the business or consolidation for accounting purposes.

In addition, in Romania, we have a 70% voting interest and share of profits in Media Vision, a production and subtitling company.

The licenses for the PRO FM and PRO AM radio networks are held by Media Pro, in which we hold 20% of the voting interest and share of profits. This stake was reduced from 44% on March 29, 2004 in order to comply with the Romanian media law. The remainder is owned by Mr. Sarbu and Rootland Trading Limited.

Slovenia

We have a 96.85% voting interest in Pro Plus, the operating company for our Slovenian operations, and are entitled to a 96.85% share of its profits. Pro Plus has a 100% voting interest and share of profits in Pop TV and Kanal A, giving us a 96.85% voting interest and share of profits in these companies. Pop TV holds all of the licenses for the operation of the POP TV network and Kanal A holds all licenses for the KANAL A network. Pro Plus has entered into an agreement with each of Pop TV and Kanal A under which Pro Plus provides all programming to the POP TV network and the KANAL A network and sells advertising on behalf of each network.

Slovak Republic

We have a 49% voting interest and are entitled to a 70% share of profits in STS, the operating company for the MARKIZA TV network. We have a 34% voting interest in Markiza, the license holding company for the MARKIZA TV network, and are entitled to a 0.1% share of its profits.

Ukraine

Innova, IMS, Inter-Media and Studio 1+1 comprise "The Studio 1+1 Group". Through our 60% voting interest in Innova which in turn holds 100% of Inter-Media we control Inter-Media's 30% voting interest in Studio 1+1, the license holding company for the STUDIO 1+1 network and have an 18% economic interest in Studio 1+1. We are entitled to a 60% share of the profits in the operating companies servicing Studio 1+1 (Innova, IMS and Inter-Media).

3. Recent Accounting Pronouncements

Variable Interest Entities

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46") which requires all variable interest entities ("VIEs") to be consolidated by the primary beneficiary. The primary beneficiary is the entity that holds the majority of the beneficial interests in the VIE. In addition, the interpretation expands disclosure requirements both


	Page 14

for VIEs that are consolidated and for VIEs in which the entity holds a significant but not a majority beneficial interest.

In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities" ("FIN 46 (R)"). We determined that one entity (Studio 1+1) should be consolidated. Studio 1+1 has been consolidated retrospectively within the presented financial statements.

Studio 1+1 is a license holding and broadcasting company in Ukraine. It is within the Ukraine operations and trades with the other companies within the group.

The adoption of FIN 46 (R) has not resulted in a cumulative effect of an accounting change. However, below is a summary of the impact of the adoption of FIN 46 (R) on our consolidated balance sheet as at December 31, 2003 and our consolidated statements of operations for the three months and the six months ended June 30, 2003.

Consolidated Balance Sheet Financial Statement Caption

Balance as at December 31, 2003 prior to adjustment

Impact of FIN 46 (R)

Adjusted Balance

(US$ 000's)

Total current assets

264,743

2,148

266,891

Total assets

365,801

2,951

368,752

Total current liabilities

66,286

4,830

71,116

Total non-current liabilities

24,997

(1,879

)

23,118

Total shareholders' equity

273,524

-

273,524

Consolidated Statement of Operations Financial Statement Caption

For the Three Months ended June 30, 2003

Balance prior to adjustment

Impact of FIN 46 (R)

Adjusted Balance

(US$ 000's)

Net revenues

31,926

1,381

33,307

Total station operating costs and expenses

20,854

439

21,293

Operating income/(loss)

(2,534

)

164

(2,370

)

Net loss from continuing operations

(17,567

)

-

(17,567

)

Net income

330,826

-

330,826

Consolidated Statement of Operations Financial Statement Caption

For the Six Months ended June 30, 2003

Balance prior to adjustment

Impact of FIN 46 (R)

Adjusted Balance

(US$ 000's)

Net revenues

55,448

2,457

57,905

Total station operating costs and expenses

38,350

1,079

39,429

Operating income/(loss)

(2,562

)

163

(2,399

)

Net loss from continuing operations

(25,742

)

-

(25,742

)

Net income

319,539

-

319,539

Page 15

EITF Issue No. 03-1

EITF Issue No. 03-1 "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" is effective for fiscal years ending after December 15, 2003. The Abstract determines the meaning of other-than-temporary impairment and its application to investments classified as either available-for-sale or held-to-maturity under Statement 115 and investments accounted for under the cost method. The adoption of the provisions of EITF Issue No. 03-1 has had no effect on our results of operations and financial position.

EITF Issue No. 03-11

The Emerging Issues Task Force of the Financial Accounting Standards Board (EITF) at its July 2003 meeting came to a consensus concerning EITF Issue No. 03-11, "Reporting Realized Gains and Losses on Derivative Instruments That Are Subject to FASB Statement No. 133 and Not ‘Held for Trading Purposes’ as Defined in Issue No. 02-03." The consensus reached was that determining realized gains and losses on physically settled derivative contracts not held for trading purposes reported in the income statement on a gross or net basis is a matter of judgment that depends on the relevant facts and circumstances. The adoption of the provisions of EITF Issue No. 03-11 has had no effect on our results of operations and financial position.

4. Acquisitions and Disposals

Romania

Acquisition of MPI and Pro TV SA

On March 29, 2004, we acquired an additional 14% share in each of our consolidated subsidiaries MPI and Pro TV from Rootland Trading Limited for purchase consideration of US$ 20.3 million. Rootland Trading Limited is controlled by Mr. Adrian Sarbu, who is the General Director of our Romanian operations. This acquisition brought our total voting interest and share of profits to 80% in both companies.

The consideration for the acquisition consisted of US$ 16.9 million cash and the settlement of loans receivable from companies controlled by Mr. Adrian Sarbu that he had personally guaranteed (Inter-Media srl: US$ 1.8 million and Media Pro Pictures: US$ 1.6 million).

The purchase price was agreed by reference to an independent valuation report which was based on a multiple of MPI's and Pro TV's future earnings. In accordance with FAS 141, we have allocated US$ 3.7 million to broadcast licenses, US$ 5.5 million to trademarks and US$ 2.0 million to customer relationships, all of which were preliminarily allocated to goodwill. We have recognized a corresponding deferred tax liability on the tax basis difference arising from these assets. Both trademarks and broadcast licenses have been assigned an indefinite life, whilst customer relationships are deemed to have an economic useful life of, and are amortized on a straight-line basis over, eight years. The finalization of the purchase price allocation is subject to the completion of the assessment of the fair value of MPI's program library. Curre ntly, the remaining consideration of US$ 11.9 million is recorded as goodwill.

Disposal of Interest in Media Pro

In light of our acquisition of MPI and Pro TV and in order to comply with Romanian Media Council regulations it was necessary to reduce our holding in Media Pro, a radio license holding company, from 44% to 20%. Therefore on March 29, 2004, we sold a 24% holding in Media Pro to Mr. Adrian Sarbu for consideration of US$ 40,000 with a resulting loss on disposal of US$ 18,000. The consideration was determined by an independent valuation of Media Pro.


	Page 16

5. Goodwill and Intangible Assets

The carrying amount of goodwill and other intangibles as at June 30, 2004 and December 31, 2003 is as follows:

Goodwill:

Slovenian operations

Ukrainian operations

Romanian operations

Total

(US$ 000’s)

Carrying amount as at December 31, 2003

$

13,725

$

4,096

$

-

$

17,821

Additions in the period

-

-

11,921

11,921

Foreign exchange movements

(506

)

-

-

(506

)

Carrying amount as at June 30, 2004

$

13,219

$

4,096

$

11,921

$

29,236

Other intangibles:

License acquisition cost

Broadcast license

Trademarks

Customer relationships

Total

(US$ 000’s)

Carrying amount as at December 31, 2003 (1)

$

1,628

$

5,447

$

2,479

$

-

$

9,554

Additions in the period

-

5,537

6,344

1,974

13,855

Amortization in the period

-

-

-

(62

)

(62

)

Foreign exchange movements

-

(306

)

(79

)

-

(385

)

Carrying amount as at June 30, 2004

$

1,628

$

10,678

$

8,744

$

1,912

$

22,962

(1) Restated to reflect the adoption of FIN 46 (R).

All license costs, broadcast licenses and trademarks are assets with indefinite useful lives and are subject to annual impairment reviews. Customer relationships are deemed to have an economic useful life of, and are amortized on a straight-line basis over eight years. The estimated amortization expense is US$ 0.18 million for 2004 and US$ 0.25 million for each of the years 2005-2008.

6. Segment Data

We manage our business on a geographic basis, and review the performance of each geographic segment using data that reflects 100% of operating and license company results. Our segments are comprised of Romania, the Slovak Republic, Slovenia and Ukraine.

We evaluate the performance of our segments based on Segment EBITDA. Segment EBITDA includes STS and Markiza (our operating and license companies in the Slovak Republic) and certain Romanian operations which are not consolidated under US GAAP.

Segment EBITDA is determined as segment net income/loss, which includes costs for program rights amortization, before interest, taxes, depreciation and amortization of intangible assets. Items that are not allocated to our segments for purposes of evaluating their performance, and therefore are not included in Segment EBITDA, include:

· expenses presented as corporate expenses in our consolidated statements of operations (i.e., corporate operating costs and stock-based compensation);

· changes in the fair value of derivatives;

Page 17

· foreign currency exchange gains and losses;

· certain unusual or infrequent items (e.g., gains and losses/impairments on assets or investments); and

· amortization of intangibles.

Segment EBITDA is also used as a target for management bonuses.

Below is a table showing our Segment EBITDA by operation and reconciling these figures to our consolidated US GAAP results for the three and six months ended June 30, 2004 and 2003:

	SEGMENT FINANCIAL INFORMATION
	For the Three Months Ended June 30,
	(US $000's)

Segment Net Revenues (1)

Segment EBITDA

2004

2003 (2)

2004

2003 (2)

Country

Romania (3)

$

18,702

$

13,760

$

5,920

$

3,588

Slovak Republic (MARKIZA TV)

17,448

14,698

8,393

5,524

Slovenia (POP TV and KANAL A)

13,751

11,100

6,860

4,354

Ukraine (STUDIO 1+1)

13,248

8,447

4,895

1,193

Total Segment Data

$

63,149

$

48,005

$

26,068

$

14,659

Reconciliation to Consolidated Statement of Operations:

Consolidated Net Revenues / Income/(loss) before provision for income taxes, minority interest and discontinued operations

$

44,886

$

33,307

$

11,895

$

(14,770

)

Corporate operating costs

-

-

4,738

4,140

Stock-based compensation

-

-

2,369

5,977

Amortization of intangibles

-

-

62

-

Unconsolidated Equity Affiliates (4)

18,263

14,698

8,792

5,524

Station Depreciation

-

-

1,336

1,388

Equity in (income)/loss of unconsolidated equity affiliates

-

-

(4,304

)

(2,628

)

Interest income

-

-

(786

)

(2,909

)

Interest expense

-

-

667

6,931

Foreign currency exchange (gain)/loss, net

-

-

1,289

8,252

Other (income)/expense

-

-

10

2,754

Total Segment Data

$

63,149

$

48,005

$

26,068

$

14,659

(1) All net revenues are derived from external customers. There are no inter-segmental revenues.

(2) Restated to reflect the adoption of FIN 46 (R).

(3) Romanian networks are PRO TV, PRO CINEMA, ACASA, PRO TV INTERNATIONAL and PRO FM.

(4) Unconsolidated equity affiliates are STS in the Slovak Republic and Media Pro in Romania.


	Page 18

	SEGMENT FINANCIAL INFORMATION
	For the Six Months Ended June 30,
	(US $000's)

Segment Net Revenues (1)

Segment EBITDA

2004

2003 (2)

2004

2003 (2)

Country

Romania (3)

$

32,787

$

23,008

$

10,238

$

5,061

Slovak Republic (MARKIZA TV)

29,343

24,186

9,724

6,436

Slovenia (POP TV and KANAL A)

23,408

18,909

10,787

6,350

Ukraine (STUDIO 1+1)

25,354

15,988

9,252

2,372

Total Segment Data

$

110,892

$

82,091

$

40,001

$

20,219

Reconciliation to Consolidated Statement of Operations:

Consolidated Net Revenues / Income/(loss) before provision for income taxes, minority interest and discontinued operations

$

80,734

$

57,905

$

18,644

$

(22,576

)

Corporate operating costs

-

-

7,971

6,855

Stock-based compensation

-

-

4,254

6,624

Amortization of intangibles

-

-

62

-

Unconsolidated Equity Affiliates (4)

30,158

24,186

10,123

6,436

Station Depreciation

-

-

2,798

2,703

Equity in (income)/loss of unconsolidated equity affiliates

-

-

(5,199

)

(2,059

)

Interest income

-

-

(2,240

)

(3,284

)

Interest expense

-

-

885

11,922

Foreign currency exchange (gain)/loss, net

-

-

1,922

10,333

Other (income)/expense

-

-

781

3,265

Total Segment Data

$

110,892

$

82,091

$

40,001

$

20,219

(1) All net revenues are derived from external customers. There are no inter-segmental revenues.

(2) Restated to reflect the adoption of FIN 46 (R).

(3) Romanian networks are PRO TV, PRO CINEMA, ACASA, PRO TV INTERNATIONAL and PRO FM.

(4) Unconsolidated equity affiliates are STS in the Slovak Republic and Media Pro in Romania.

7. Summary Financial Information for Significant Unconsolidated Affiliates

STS (MARKIZA TV)

As at June 30, 2004

As at December 31, 2003

(US$ 000's)

(US$ 000's)

Current assets

$

27,408

$

21,224

Non-current assets

14,289

14,831

Current liabilities

(23,291

)

(13,249

)

Non-current liabilities

(2,300

)

(2,457

)

Net Assets

$

16,106

$

20,349

Page 19

STS (MARKIZA TV)

For the Three Months Ended June 30,

For the Six Months Ended June 30,

2004

2003

2004

2003

(US$ 000's)

(US$ 000's)

Net revenues

$

17,448

$

14,698

$

29,343

$

24,186

Operating income

7,897

4,415

8,607

4,362

Net income

6,691

3,749

7,494

3,875

Movement in accumulated other comprehensive income/(loss)

(230

)

(1,332

)

(169

)

(2,069

)

Our share of income in Unconsolidated Affiliates for STS was US$ 4.8 million and US$ 2.7 million for the first six months of 2004 and 2003, respectively.

Following the adoption of FIN 46 (R), we now consolidate Studio 1+1 which was previously accounted for as an unconsolidated affiliate.

8. Earnings Per Share

We account for earnings per share pursuant to FAS No. 128, "Earnings Per Share". Basic net income per common share ("Basic EPS") is computed by dividing net income by the weighted average number of common shares outstanding. Diluted net income per common share ("Diluted EPS") is computed by dividing net income by the weighted average number of common shares and dilutive common share equivalents then outstanding. FAS No. 128 requires the presentation of both Basic EPS and Diluted EPS on the face of the consolidated statement of operations. A reconciliation between the numerator and denominator of Basic EPS and Diluted EPS is as follows:

For the Three Months Ended June 30,

Net Income/(Loss) (US$ 000's)

Common Shares (000's)

Net Income/(Loss) per Common Share

2004

2003

2004

2003

2004

2003

Basic EPS

Net income/(loss) attributable to common stock

$

6,032

$

330,826

28,034

26,459

$

0.22

$

12.50

Effect of dilutive securities : stock options

-

-

1,943

3,452

(0.02

)

(1.44

)

Diluted EPS

Net income/(loss) attributable to common stock

$

6,032

$

330,826

29,977

29,911

$

0.20

$

11.06

Page 20

For the Six Months Ended June 30,

Net Income/(Loss) (US$ 000's)

Common Shares (000's)

Net Income/(Loss) per Common Share

2004

2003

2004

2003

2004

2003

Basic EPS

Net income/(loss) attributable to common stock

$

11,203

$

319,539

28,034

26,459

$

0.40

$

12.08

Effect of dilutive securities : stock options

-

-

1,943

3,452

(0.03

)

(1.40

)

Diluted EPS

Net income/(loss) attributable to common stock

$

11,203

$

319,539

29,977

29,911

$

0.37

$

10.68

Diluted EPS for the six and three months ended June 30, 2004 includes the impact of 1,943,151 options to purchase common stock then outstanding. Diluted EPS for the six and three months ended June 30, 2003 includes the impact of 3,451,716 options to purchase common stock then outstanding.

On a fully diluted basis, we would have 22,484,251 shares of Class A Common Stock and 7,492,736 shares of Class B Common Stock as at June 30, 2004, and 21,833,484 shares of Class A Common Stock and 8,076,736 shares of Class B Common Stock as at June 30, 2003.

9. Stock-based Compensation

Stock-based compensation costs are determined when options are issued and are measured under the fair value method as defined in SFAS 123. We adopted SFAS 123 prospectively for employee stock option awards granted, modified, or settled beginning January 1, 2003, as contemplated by SFAS 148. In prior periods, we used the intrinsic method of accounting as defined in APB 25.

2004 Option Grants

Pursuant to the 1995 Amended Stock Option Plan, the Compensation Committee of our Board of Directors awarded employees 10,000 stock options, with vesting periods of 3 years, on May 3, 2004 and 20,000 stock options, with vesting periods of 3 years on May 5, 2004. On June 2, 2004, an automatic grant of 112,000 non-incentive stock options was made to non-executive directors, with a vesting period of 4 years pursuant to the 1995 Stock Option Plan. The fair value of the option grants is estimated on the date of the grant using the Black-Scholes option pricing model, with the following assumptions used:

	Date of Option Grant		Risk Free Interest Rate
	May 3, 2004 - 3 year rate		2.86%
	May 5, 2004 - 3 year rate		2.91%
	June 2, 2004 - 5 year rate		3.91%

Expected dividend yields for these awards are assumed to be 0%; the expected lives are estimated at 6 years; expected stock price volatility is calculated as 31.9% based on the preceding one year's daily closing prices. We consider this basis to represent the best indicator of expected volatility over the life of the option. The weighted average fair value of the above grants made in the three months ended June 30, 2004 is US$ 8.14 per option. The weighted average fair value of all grants made in the six months ended June 30, 2004 is US$ 8.62 per option.


	Page 21

In accordance with SFAS 123 the total fair value for the awards made in the three months ended June 30, 2004 of US$ 1.2 million is recognized in the Statement of Operations using straight line amortization over the vesting period of the award.

In the three and six months to June 30, 2004 total charges of US$ 0.2 million and US$ 0.4 million respectively were recognized, including charges made for awards in previous periods. In the three and six months to June 30, 2003, total charges of US$ 0.1 million were recognized.

For certain options issued in 2000, our stock-based compensation charge is calculated according to FASB Interpretation 44, "Accounting for Certain Transactions involving Stock Compensation" ("FIN 44"). This requires that compensation costs for modified awards are adjusted for increases and decreases in the intrinsic value in subsequent periods until that award is exercised, forfeited or expires unexercised; subject to a minimum of the original intrinsic value at the original measurement date. For the three and six months to June 30, 2004 there were charges of US$ 2.1 million and US$ 3.9 million, respectively in respect of variable plan accounting. For the three and six months to June 30, 2003 there were charges of US$ 5.9 million and US$ 6.6 million, respectively. These were a result of the increases in our stock price from US$ 17.30 to US$ 22.63 in the first six months of 2004 and from US$ 5.75 to US$ 11.25 in the first six months of 2003.

Prior to the adoption of SFAS 123 we followed APB 25, "Accounting for Stock Issued to Employee", for all employee stock option awards granted, modified or settled before January 1, 2003.

The charge for stock-based compensation in our consolidated income statement can be summarized as follows:

For the Three Months Ended June 30,

For the Six Months Ended June 30,

(US$ 000’s)

2004

2003

2004

2003

Stock-based compensation charged under FIN 44 (Variable Plan Accounting)

$

2,147

$

5,912

$

3,873

$

6,559

Stock-based compensation charged under SFAS 123

222

65

381

65

Total stock-based compensation

$

2,369

$

5,977

$

4,254

$

6,624

10b5-1Trading Plan

Fred T. Klinkhammer, our Vice-Chairman, advised the Board that he intends to sell up to 900,000 shares of Class A common stock between March 1 and December 31, 2004 under a 10b5-1 Trading Plan entered into pursuant to our insider trading policy. Fred T. Klinkhammer sold 500,000 shares of Class A common stock through July 30, 2004.

10. Warrants

As a result of our 2002 transaction with GoldenTree Asset Management LLC, the resale of shares issuable on exercise of warrants to purchase 696,000 Class A shares with an exercise price of US$ 2.504 was registered with the SEC on February 4, 2004 and the warrants were exercised on February 19, 2004. We received US$ 1.7 million on exercise and the stock issued is included in our 20,699,100 shares of Class A Common Stock outstanding as at July 30, 2004.


	Page 22

11. Commitments and Contingencies

Litigation

Ukraine

In our Form 10-K filed with the SEC for the year ended December 31, 2003 as amended by our Form 10-K/A filed with the SEC on March 12, 2004, we reported that AITI, a television station in Ukraine, commenced a second court action in Ukraine against the Ukraine Media Council challenging certain aspects of the granting to Studio 1+1 its television broadcast license in Ukraine. Studio 1+1 was involved in this litigation as a third party acting together with the Ukraine Media Council. The claim was almost identical to one which was previously brought by AITI and was dismissed on April 5, 2001 by the Supreme Arbitration Court of Ukraine. On July 1, 2004 the Supreme Court of Ukraine, the final court of appeal in Ukraine, dismissed AITI's new claim, thereby concluding this court action in favor of the Ukraine Media Council and Studio 1 +1.

Slovenia

On November 20, 2002, we received notice of a claim filed by Mrs. Zdenka Meglic, the founder and a former shareholder of MMTV 1 d.o.o (MMTV), against MMTV, a subsidiary of CME Slovenia BV. In her claim against MMTV, Mrs. Meglic is seeking damages in the amount of SIT 190 million (approximately US$ 1.0 million) for repayment of monies advanced to MMTV from 1992 to 1994 (in the amount of approximately SIT 29 million (approximately US$ 0.1 million)) plus accrued interest. We believe Mrs. Meglic’s claim is without merit and will defend the claim vigorously.

General

We are, from time to time, a party to litigation that arises in the normal course of our business operations. Other than those claims discussed above, we are not presently a party to any such litigation which could reasonably be expected to have a material adverse effect on our business or operations.

Licenses

We believe that the licenses for all of our television license companies will be renewed prior to expiry. In Romania, the Slovak Republic and Slovenia local regulations do contain a qualified presumption for extensions of broadcast licenses; however, there can be no assurance that any of the licenses will be renewed upon expiration of their initial term. The failure of any such license to be renewed could adversely affect the results of our operations. However, to date, licenses have been renewed in the ordinary course of business. Access to the available frequencies is controlled by regulatory bodies in each country in which we operate.

Station Programming Rights Agreements

We had program rights commitments of US$ 15.9 million and US$ 3.6 million in respect of future programming, which includes contracts signed with license periods starting after June 30, 2004 and 2003, respectively. US$ 4.6 million of our program rights commitments as at June 30, 2004 related to our Ukrainian operations and US$ 11.0 million related to our Romanian operations. This increase is as a result of our Ukrainian and Romanian operations entering into longer term contracts with programming providers.

Operating Lease Commitments

For the periods ended June 30, 2004 and 2003 we paid aggregate rent on all facilities of US$ 0.6 million and US$ 0.6 million, respectively. Future minimum operating lease payments at June 30, 2004 for non-cancelable operating leases with remaining terms in excess of one year (net of amounts to be recharged to third parties) are payable as follows:


	Page 23

		As at June 30, 2004 (US$ 000’s)
2004		$ 1,415
2005		1,172
2006		1,172
2007		1,172
2008		739
2009 and thereafter		465
Total		$ 6,135

Dutch Tax

On February 9, 2004 we entered into an agreement with the Dutch tax authorities to settle all outstanding years up to and including 2003, including receipts in respect of our arbitration award, for a payment of US$ 9 million. We expect to continue to pay tax in the Netherlands of between US$ 1.0 and US$ 2.5 million for the foreseeable future and therefore have also agreed to a minimum tax payable of US$ 2.0 million per year for the years 2004-2008 and US$ 1.0 million for 2009. Should the Dutch Ministry of Finance later rule that such arbitration awards are not taxable, we will be entitled to claim a tax loss, which can be offset against other taxable income, but will not reduce our minimum payment commitments.

We provided US$ 6.0 million of Dutch tax as the difference between our obligation under this agreement and our estimate of the Dutch tax that may fall due over this period from business operations, based on current business structures and economic conditions.

12. Discontinued Operations

Czech Republic

For the Three Months Ended June 30,

For the Six Months Ended June 30,

(US$ 000's)

2004

2003

2004

2003

Net revenues of discontinued operation

$

-

$

51

$

-

$

66

Expenses of discontinued operation

-

(136

)

-

(242

)

Arbitration related proceeds

-

358,635

-

358,635

Arbitration related costs

285

(9,867

)

(45

)

(13,010

)

Write down in value of asset held for sale

-

(350

)

-

(350

)

Other income/(expense) of discontinued operation

-

60

-

182

Pre-tax income/(loss) from discontinued operations

$

285

$

348,393

$

(45

)

$

345,281

On May 19, 2003, we received US$ 358.6 million from the Czech Republic in final settlement of our UNCITRAL arbitration. On June 19, 2003, our Board of Directors decided to withdraw from Czech operations.

In the six months ended June 30, 2004, we incurred US$ 0.05 million of legal costs relating to our negotiations with the Dutch Tax Authorities with respect to Czech Republic operations. In the six months ended June 30, 2003, we incurred US$ 11.4 million of legal costs relating the arbitration proceedings against the Czech Republic and to the ICC Arbitration Tribunal against Dr Zelezny and US$ 1.6 million of legal costs relating to our negotiations with the Dutch Tax Authorities.

Page 24

13. Other Receivable

	As at June 30, 2004		As at December 31, 2003
	US$ (000's)
Short-term	$	20,326	$	20,103
Long-term		18,200		18,200
Total	$	38,526	$	38,303

On October 23, 2003 we sold our 93.2% participation interest in CNTS, our Czech operating company, for US$ 53.2 million. The first installment of US$ 7.5 million was received on October 8, 2003, the second US$ 7.5 million installment was received on October 23, 2003, the third installment of US$ 20.3 million, classified as other receivable (short-term) in our balance sheet as at June 30, 2004, was received on July 14, 2004. The remainder of the purchase price of US$ 18.2 million plus all accrued interest is due to be settled on or before July 15, 2005.

The outstanding payment is secured by 250,000 shares of Ceska pojistovna, a.s., a leading insurance company in the Czech Republic. Ceska pojistovna, a.s. is listed on the Prague Stock Exchange and as at June 30, 2004 these shares were valued at Czech Koruna 2.8 billion (approximately US$ 105 million).

14. Subsequent Events

Croatia

On July 16, 2004, we acquired 100% of Nova TV d.d. ("Nova TV") and Operativna Kompanija d.o.o. ("OK") in Croatia. The purchase price is currently estimated to be Euro 20.8 million (approximately US$ 25.3 million), payable in three installments. 75% of the estimated amount was paid at closing. An additional 10% will be paid following a post-completion audit, which is expected to occur by the end of August. The remaining 15% will be held back for a one-year period to cover potential liabilities which may arise.

Nova TV holds a ten-year national terrestrial broadcasting license that was granted in April 2000 and OK provides services to Nova TV, including the acquisition of programming for broadcast by Nova TV and assistance in selling advertising time. Nova TV is currently the third ranked broadcaster in Croatia.

Ukraine

Studio 1+1 broadcasts for 15 hours a day on the UT-2 frequency and during the quarter ended June 30, 2004, the Ukrainian Media Council opened a tender for the remaining 9 hours. On June 12, 2004, we submitted a bid for the remaining nine hours available on the UT-2 frequency. On July 21, 2004 the Ukrainian Media Council decided to award us the license to broadcast for the remaining nine hours per day. Upon Studio 1+1 paying the necessary additional broadcasting transmission costs associated with the license, Studio 1+1 will be able to utilize the time periods 04:00-07:00 and 10:00-16:00 for a period of nine years in addition to the existing 15 hour per day license tha t it holds for the remaining time.

Romania

During the negotiations to purchase our additional interest in MPI and Pro TV (for further information, see Note 4, "Acquisitions and Disposals"), we agreed to enter into a put option arrangement with Mr. Adrian Sarbu which, if exercised by Mr. Sarbu, would oblige us to acquire the remaining minority interests in MPI and Pro TV held by Mr. Sarbu and Rootland Trading Limited during periods subsequent to 2006. These options were written on July 30, 2004. We are currently assessing their accounting impact.


	Page 25

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Contents

I.

Executive Summary

II.

Analysis of Segment Results

III.

Critical Accounting Policies and Estimates

IV.

Analysis of the Results of Consolidated Operations

V.

Liquidity and Capital Resources

VI.

Forward-looking Statements

I. Executive Summary

Continuing Operations

The following table provides a summary of our consolidated results for the three and six months ended June 30, 2004 and 2003:

For the Three Months Ended June 30, (US$ 000's)

2004

2003 (1)

Movement

Net Revenues

44,886

33,307

11,579

Operating income before corporate expenses

15,940

7,747

8,193

Operating income/(loss)

8,771

(2,370

)

11,141

Net income/(loss) from continuing operations

5,747

(17,567

)

23,314

Net income

6,032

330,826

(324,794

)

(1) Restated to reflect the adoption of FIN 46 (R).

For the Six Months Ended June 30, (US$ 000's)

2004

2003 (1)

Movement

Net Revenues

80,734

57,905

22,829

Operating income before corporate expenses

27,080

11,080

16,000

Operating income/(loss)

14,793

(2,399

)

17,192

Net income/(loss) from continuing operations

11,248

(25,742

)

36,990

Net income

11,203

319,539

(308,336

)

Net cash provided by/(used in) continuing operating activities

635

(83,332

)

83,967

(1) Restated to reflect the adoption of FIN 46 (R).

The principal events for the six months ended June 30, 2004 are as follows:

· In the six months ended June 30, 2004, our total Operating Segments achieved a Segment EBITDA margin (defined as the ratio of Segment EBITDA to Segment Net Revenues) of 36% compared to 25% for the six months ended June 30, 2003 (Segment EBITDA is defined and reconciled to our consolidated US GAAP results in Part I, Note 6, "Segment Data").

Page 26

· We increased our holding in our Romanian operations to 80.0% for a total consideration of US$ 20.3 million.

· The Euro is the most likely currency in which we will make acquisitions and/or investments and during the first quarter we bought US$ 100 million worth of Euros for this purpose.

· On April 19, 2004 our Romanian operation launched a second cable channel, the PRO Cinema Network. This channel will focus on the broadcasting of acquired series and films.

Additionally, since June 30, 2004:

· On July 16, 2004, we acquired 100% of Nova TV and OK in Croatia. The purchase price is estimated to be Euro 20.8 million (approximately US$ 25.3 million), payable in three installments (for further information, see Part I, Note 14, "Subsequent Events").

· On July 21, 2004 the Ukrainian Media Council awarded Studio 1+1, our Ukrainian operation, the license to broadcast for the remaining nine hours per day (for further information, see Part I, Note 14, "Subsequent Events").

· On July 22, 2004, the Supreme Court of Ukraine rejected an appeal lodged by AITI, a Ukrainian broadcasting company, which had sought to challenge the validity of the initial 15-hour a day broadcasting license owned by Studio 1+1 (for further information, see Part II, Item 1, "Legal Proceedings").

Future Trends

· All of the markets in which we operate are evidencing growth as we enter the second half of 2004. Anticipated growth in each market is disclosed in our analysis of segment results commencing on page 28. We also anticipate continued growth over the medium term based on Zenith Optimedia projections for the television advertising markets in the region.

· During 2003 our Board, after extensive discussions with both management and outside advisors, agreed a strategic plan focusing on expansion through acquisition of additional shares in our existing stations and of appropriate additional businesses in new markets. It was decided that our geographic focus would remain in Central and Eastern Europe, and that our core business would be television. We are also prepared to consider relevant opportunities in related media.

The strategic plan set out the following:

acquisition of additional ownership in our present operations, which is regarded as the strategy with the least risk due to our knowledge of the value of these operations;

acquisition of one or more established businesses in the Balkans, in particular states of the former Yugoslavia; and

acquisition of a broadcaster in one of the substantially larger markets of Central or Eastern Europe, which may give rise to a significant step change in the scale of our business.

In the second half of 2003 we conducted research throughout the Central and Eastern European market to assess possible acquisition opportunities. The general review is now complete and management continues to assess specific opportunities.

Pursuant to this strategic plan, on March 29, 2004, we acquired an additional 14% share in each of our consolidated subsidiaries MPI and Pro TV in Romania from Rootland Trading Limited for a purchase consideration of US$ 20.3 million (for further information, see Part I, Note 4, "Acquisitions and Disposals") and on July 16, 2004, we acquired 100% of Nova TV and OK in Croatia. The purchase price of Nova TV and OK is currently estimated to be Euro 20.8 million (approximately US$ 25.3 million), payable in three installments (for further information, see Part I, Note 14, "Subsequent Events").


	Page 27

Our strategy is to make one or more acquisitions of significant businesses in major Central or Eastern European markets. Such acquisitions would require funding beyond our current available internal resources. This could be achieved through funds raised in one or more public or private offerings of debt or equity related securities.

II. Analysis of Segment Results

OVERVIEW

For a full reconciliation of our Segment Net Revenues and Segment EBITDA by operation to our consolidated US GAAP results for the three and six months ended June 30, 2004 and 2003 see Part I, Note 6, "Segment Data".

A summary of our total Segment Net Revenues, Segment EBITDA and Segment EBITDA Margin is as follows.

SEGMENT FINANCIAL INFORMATION

For the Three Months Ended June 30, (US$ 000's)

2004

2003

Movement

Total Segment Net Revenues

63,149

48,005

15,144

Total Segment EBITDA

26,068

14,659

11,409

Total Segment EBITDA Margin (1)

41

%

31

%

10

%

(1) Segment EBITDA Margin is Segment EBITDA expressed as a percentage of Segment Net Revenues.

SEGMENT FINANCIAL INFORMATION

For the Six Months Ended June 30, (US$ 000's)

2004

2003

Movement

Total Segment Net Revenues

110,892

82,091

28,801

Total Segment EBITDA

40,001

20,219

19,782

Total Segment EBITDA Margin (1)

36

%

25

%

11

%

(1) Segment EBITDA Margin is Segment EBITDA expressed as a percentage of Segment Net Revenues.

ANALYSIS BY GEOGRAPHIC SEGMENT

(A) ROMANIA

Market Background: Romania continues to have one of the fastest growing television advertising markets in Eastern Europe. We currently expect that Romania’s preparations to enter the European Union sometime after 2007 will support good growth rates in the period running up to entry as has been experienced by earlier entrants. Television advertising market growth in 2004 is expected to be 15% to 20% over 2003.

PRO TV and ACASA (a cable channel) are second and fifth in the market (of seven stations ranked), with all-day national audience shares in the first six months of 2004 of 16.3% and 6.7%, respectively. The major competitors are the state channel TVR1, with 23.4%, and Antena 1, an independent channel with 12.5% share. TVR1 has a higher share because it is the only broadcaster with full


	Page 28

national coverage. Advertisers, however, evaluate audience share within a network’s coverage area and by this measure PRO TV ranks first and ACASA fourth in all-day audience with shares of 18.6% and 9.7%, respectively. Both our stations cover the important urban markets.

On April 19, 2004 our Romanian operation launched a second cable channel, the PRO Cinema Network. This channel focuses on the broadcasting of acquired series and films, and expects to achieve significant cable distribution in the second half of 2004.

Three months ended June 30, 2004 compared to three months ended June 30, 2003

SEGMENT FINANCIAL INFORMATION

For the Three Months Ended June 30, (US$ 000's)

2004

2003

Movement

Romanian Net Revenues

18,702

13,760

4,942

Romanian Segment EBITDA

5,920

3,588

2,332

Romanian Segment EBITDA Margin

32

%

26

%

6

%

· Net Revenues for the three months ended June 30, 2004 increased by 36% compared to the three months ended June 30, 2003. This was primarily driven through increased prices, and supported by a higher proportion of available minutes being sold, approximately 30% of which is due to new clients, and to improved ratings.

· Romanian Segment EBITDA for the three months ended June 30, 2004 increased by 65% compared to the three months ended June 30, 2003, to deliver a Segment EBITDA margin of 32%.

Costs charged in arriving at Segment EBITDA for the three months ended June 30, 2004 increased by 26% compared to the three months ended June 30, 2003. The cost of programming increased by US$ 3.0 million or 64% versus the three months ended June 30, 2003 primarily due to a US$ 2.8 million increase in the charge for amortization of acquired programming rights attributable to increasing costs per hour and to additional Pro Cinema volume. Partly offsetting this, last year's renegotiation of satellite transmission fees saved US$ 0.2 million compared to the three months ended June 30, 2003, and further reversals of the provision against older debts meant the charge for bad debts was US$ 0.3 million lower than in the three months ended June 30, 2003.

Six months ended June 30, 2004 compared to six months ended June 30, 2003

SEGMENT FINANCIAL INFORMATION

For the Six Months Ended June 30, (US$ 000's)

2004

2003

Movement

Romanian Net Revenues

32,787

23,008

9,779

Romanian Segment EBITDA

10,238

5,061

5,177

Romanian Segment EBITDA Margin

31

%

22

%

9

%

· Net Revenues for the six months ended June 30, 2004 increased by 43% compared to the six months ended June 30, 2003. This was primarily driven through increased prices, and supported by a higher proportion of available minutes sold, approximately 30% of which is due to new clients, and to improved ratings.

· Romanian Segment EBITDA for the six months ended June 30, 2004 increased by 102% compared to the six months ended June 30, 2003, to deliver a Segment EBITDA margin of 31%.

Costs charged in arriving at Segment EBITDA for the six months ended June 30, 2004 increased by 26% compared to the six months ended June 30, 2003. The cost of programming increased by


	Page 29

US$ 4.7 million or 55% versus the first six months of 2003 due to a US$ 3.4 million increase in the charge for amortization of acquired programming rights and a US$ 1.3 million increase for local production costs. The increase in amortization of programming rights was driven by increasing costs per hour and to additional Pro Cinema volume. Partly offsetting this, renegotiation of last year's satellite transmission fees saved US$ 0.6 million compared to the six months ended June 30, 2003, and further reversals of the provision against older debts meant the charge for bad debts was US$ 0.3 million lower than the six months ended June 30, 2003.

(B) SLOVAK REPUBLIC

Market Background: The Slovak Republic joined the European Union on May 1, 2004. The television advertising market has shown signs of modest growth in the first half of 2004, and growth for the full year is expected to be 5% to 10%. Peoplemeters, a more accurate method of measuring audience share, will be introduced to the market during the second half of 2004.

TV MARKIZA is the premier broadcaster with a national all-day audience share of 41.1% for the first half of 2004 compared to 45.4% in the same period of 2003. STV, a public broadcaster, re-branded at the end of 2003 and has increased its all-day share from 16.6% in the first half of 2003 to 20.0% in 2004. TV JOJ, the only other significant independent television station, increased their share from 9.9% to 12.7% in the same period.

Three months ended June 30, 2004 compared to three months ended June 30, 2003

SEGMENT FINANCIAL INFORMATION

For the Three Months Ended June 30, (US$ 000's)

2004

2003

Movement

Slovak Republic Net Revenues

17,448

14,698

2,750

Slovak Republic Segment EBITDA

8,393

5,524

2,869

Slovak Republic Segment EBITDA Margin

48

%

38

%

10

%

· Net Revenues for the three months ended June 30, 2004 increased by 19% compared to the three months ended June 30, 2003. Approximately US$ 1.7 million of this increase was due to the weaker US dollar. Local currency net revenues increased by 7% primarily as a result of increased Audiotext and Teletext revenues.

· Slovak Republic Segment EBITDA for the three months ended June 30, 2004 increased by 52% compared to the three months ended June 30, 2003, to deliver a Segment EBITDA margin of 48%. In local currency, Segment EBITDA increased by 34%.

Costs charged in arriving at Segment EBITDA for the three months ended June 30, 2004 decreased by 1% compared to the three months ended June 30, 2003. In local currency, costs charged in arriving at Segment EBITDA decreased by 10%. Costs charged in arriving at EBITDA for the three months ended June 30, 2004 include the write-back of a US$ 1.1 million provision for a shareholder disagreement, originally taken in the twelve months ended December 31, 2003. On a constant exchange rate basis, staff costs have decreased by US$ 0.3 million due to a reduction in the consultancy headcount which has offset the effect of salary increases. This saving has been more than offset by an increase in selling, general and administrative expenses, in particular US$ 0.1 million on marketing costs and US$ 0.1 million more on bad debt provisions.


	Page 30

Six months ended June 30, 2004 compared to six months ended June 30, 2003

SEGMENT FINANCIAL INFORMATION

For the Six Months Ended June 30, (US$ 000's)

2004

2003

Movement

Slovak Republic Net Revenues

29,343

24,186

5,157

Slovak Republic Segment EBITDA

9,724

6,436

3,288

Slovak Republic Segment EBITDA Margin

33

%

27

%

6

%

· Net Revenues for the six months ended June 30, 2004 increased by 21% compared to the six months ended June 30, 2003. Approximately US$ 3.6 million of this increase was due to the weaker US dollar. Local currency net revenues increased by 7% due to US$ 0.5 million of additional sponsorship and game show revenues, and a European Union campaign by the Slovak government which increased spot advertising sales by 3%.

· Slovak Republic Segment EBITDA for the six months ended June 30, 2004 increased by 51% compared to the six months ended June 30, 2003, to deliver a Segment EBITDA margin of 33%. In local currency, Segment EBITDA increased by 33%.

Costs charged in arriving at Segment EBITDA in the six months ended June 30, 2004 increased by 11% compared to the six months ended June 30, 2003. On a constant exchange rate basis, costs charged in arriving at Segment EBITDA decreased by 3%. Costs charged in arriving at EBITDA for the six months ended June 30, 2004 include the write-back of a US$ 1.1 million provision for a shareholder disagreement, originally taken in the twelve months ended December 31, 2003. This is partially offset by an increase of US$ 0.1 million in salary costs due to higher bonus provision and salary increases.

(C) SLOVENIA

Market Background: Slovenia is our most prosperous market with the highest per capita GDP of any Eastern European country. Slovenia joined the European Union on May 1, 2004. The television advertising market is experiencing renewed growth compared to 2003, and growth in 2004 is expected to be 5% to 10%.

POP TV and KANAL A are ranked first and fourth (of four stations ranked) in the market with national all day audience shares of 27.8% and 8.5% for the first six months in 2004,respectively. The main competitors are state broadcasters SLO1 and SLO2 with national all day audience shares of 25.6% and 11.6%, respectively.

Three months ended June 30, 2004 compared to three months ended June 30, 2003

SEGMENT FINANCIAL INFORMATION

For the Three Months Ended June 30, (US$ 000's)

2004

2003

Movement

Slovenian Net Revenues

13,751

11,100

2,651

Slovenian Segment EBITDA

6,860

4,354

2,506

Slovenian Segment EBITDA Margin

50

%

39

%

11

%

· Net Revenues for the three months ended June 30, 2004 increased by 24% compared to the three months ended June 30, 2003. Approximately US$ 0.7 million of this increase is due to the weakening of the US dollar. Local currency net revenues increased by 18%, or US$ 2.0 million on a constant exchange rate basis. This was driven, in approximately equal portions, by increased average spot prices and by an increase in the number of available minutes sold as major

Page 31

advertisers spent greater proportions of their annual advertising commitments in the earlier parts of the year.

· Slovenian Segment EBITDA for the three months ended June 30, 2004 increased by 58% compared to the three months ended June 30, 2003, to deliver a Segment EBITDA margin of 50%. In local currency Segment EBITDA increased by 49%.

Costs charged in arriving at Segment EBITDA for the three months ended June 30, 2004 increased by 2% compared to the three months ended June 30, 2003. In local currency, costs charged in arriving at Segment EBITDA decreased by 2%. This reflects management’s ability to control costs while affording an incremental US$ 0.2 million investment in staff. Expenditure on programming was reduced by US$ 0.3 million through changes to the program schedule and the weaker US dollar providing more favorable programming purchasing conditions.

Six months ended June 30, 2004 compared to six months ended June 30, 2003

SEGMENT FINANCIAL INFORMATION

For the Six Months Ended June 30, (US$ 000's)

2004

2003

Movement

Slovenian Net Revenues

23,408

18,909

4,499

Slovenian Segment EBITDA

10,787

6,350

4,437

Slovenian Segment EBITDA Margin

46

%

34

%

12

%

· Net Revenues for the six months ended June 30, 2004 increased by 24% compared to the six months ended June 30, 2003. Approximately US$ 1.7 million of the increase in net revenues is due to the weakening of the US dollar. Local currency net revenues increased by 15% due to major advertisers spending greater proportions of their annual advertising commitments in the first half of the year. This growth is primarily due to higher average spot prices and also an increase in the number of available minutes sold.

· Slovenian Segment EBITDA for the six months ended June 30, 2004 increased by 70% compared to the six months ended June 30, 2003, to deliver a Segment EBITDA margin of 46%. In local currency Segment EBITDA increased by 57%.

Costs charged in arriving at Segment EBITDA for the six months ended June 30, 2004 increased by 0.5% compared to the six months ended June 30, 2003. In local currency, costs charged in arriving at Segment EBITDA decreased by 7%. This reflects management’s ability to control costs while affording an incremental US$ 0.4 million investment in staff. Specifically, expenditure on programming was reduced by US$ 0.6 million through changes to the program schedule and the weaker US dollar providing more favorable programming purchasing conditions. Resolution of uncertainties affecting transmission fees also resulted in both lower costs and a provision write-back which together generated a saving of US$ 0.7 million compared to the first six months of 2003.

(D) UKRAINE

Market Background: Ukraine has the highest population (48.7 million) of all markets in which we operate, but is the least developed. Market growth in 2004 is expected to be 25% to 30%.

STUDIO 1+1 is the number one station of the six stations ranked in Ukraine despite having a license to broadcast for only 15 hours per day (for further discussion, see Part I, Note 14, "Subsequent Events"). STUDIO 1+1 has an all-day audience share for the first five months of 2004 of 23.3% within its coverage area where it reaches approximately 95% of Ukraine's population. This is compared to 18.7% for the same period in 2003. The number two position is held by Inter which holds a license permitting it to broadcast for 24 hours per day. Inter’s all-day audience share was 23.2% for the first


	Page 32

five months of 2004. Novi Kanal is the number three station with a 10.6% all-day audience share in the same period and generates effective national coverage through a collection of regional licenses.

Three months ended June 30, 2004 compared to three months ended June 30, 2003

SEGMENT FINANCIAL INFORMATION

For the Three Months Ended June 30, (US$ 000's)

2004

2003

Movement

Ukrainian Net Revenues

13,248

8,447

4,801

Ukrainian Segment EBITDA

4,895

1,193

3,702

Ukrainian Segment EBITDA Margin

37

%

14

%

23

%

· Net Revenues for the three months ended June 30, 2004 increased by 57% compared to the three months ended June 30, 2003 primarily due to two very successful prime-time series resulting in an increased share of a growing television advertising market. The two Russian prime time series, Poor Nastya and Undina achieved approximately 55% audience share and 25% and 18% ratings respectively, supporting increased prices.

· Ukrainian Segment EBITDA for the three months ended June 30, 2004 increased by 310% compared to the three months ended June 30, 2003, to deliver a Segment EBITDA margin of 37%.

Costs charged in arriving at Segment EBITDA for the three months ended June 30, 2004 increased by US$ 1.1 million or 15% compared to the three months ended June 30, 2003. The cost of programming increased by US$ 0.6 million or 13% due to increased investment in local programming, which accounts for a growing share of the schedule, and higher program syndication charges as a result of the higher cost of acquired Russian programming. Broadcasting costs have increased by US$ 0.2 million or 26% due to an increase in transmission fees and selling, general and administrative costs increased by US$ 0.3 million or 22% mainly due to increased withholding tax on higher progra mming payments.

Six months ended June 30, 2004 compared to six months ended June 30, 2003

SEGMENT FINANCIAL INFORMATION

For the Six Months Ended June 30, (US$ 000's)

2004

2003

Movement

Ukrainian Net Revenues

25,354

15,988

9,366

Ukrainian Segment EBITDA

9,252

2,372

6,880

Ukrainian Segment EBITDA Margin

36

%

15

%

21

%

· Net Revenues for the six months ended June 30, 2004 increased by 59% compared to the six months ended June 30, 2003 due to the two very successful prime time series referred to in the three months ended June 30, 2004 compared to three months ended June 30, 2003 analysis above. These ratings have helped Studio 1+1 achieve a prime-time audience share within its coverage area of 31.5% for the first five months of 2004 compared to 25.4% for the same period in 2003, supporting increased prices.

· Ukrainian Segment EBITDA for the six months ended June 30, 2004 increased by 290% compared to the six months ended June 30, 2003, to deliver a Segment EBITDA margin of 36%.

Costs charged in arriving at Segment EBITDA for the six months ended June 30, 2004 increased by US$ 2.7 million or 19% compared to the six months ended June 30, 2003. The cost of programming increased by US$ 1.4 million or 16% due to increased investment in local programming, which accounts for a growing share of the schedule and higher program syndication charges as a result of the higher cost of acquired Russian programming. Salary


	Page 33

costs have increased by US$ 0.3 or 29%, primarily due to bonuses for 2003 that had not previously been accrued. Broadcasting costs have increased by US$ 0.3 million or 24% due to an increase in transmission fees and selling, general and administrative costs increased by US$ 0.5 million or 19% mainly due to increased withholding tax on higher programming payments.

PROGRAMMING PAYMENTS AND PROGRAM AMORTIZATION

Our cost of programming for the first three months of 2004 and 2003 are as follows:

For the Three Months Ended June 30,

For the Six Months Ended June 30,

(US$ 000's)

2004

2003 (1)

2004

2003 (1)

Production expenses

$

6,269

$

5,561

$

12,047

$

9,404

Program amortization

9,681

7,099

17,516

14,161

Cost of programming

$

15,950

$

12,660

$

29,563

$

23,565

(1) Restated to reflect the adoption of FIN 46 (R).

The amortization of acquired programming for each of our consolidated operations and for the Slovak Republic (MARKIZA TV) for the three and six months ended June 30, 2004 and 2003 is set out in the table below. For comparison the table also shows the cash paid for programming by each of our operations in the respective periods. The cash paid for programming by our operations in Romania, Slovenia and Ukraine is reflected within net cash provided by/(used in) continuing operating activities in our consolidated statement of cash flows.

For the Three Months Ended June 30,

For the Six Months Ended June 30,

(US$ 000's)

2004

2003 (1)

2004

2003 (1)

Program amortization:

Romania (PRO TV, ACASA and PRO TV INTERNATIONAL)

$

5,239

$

2,421

$

8,395

$

4,997

Slovenia (POP TV and KANAL A)

1,197

1,491

2,655

3,038

Ukraine (STUDIO 1+1)

3,245

3,187

6,466

6,126

9,681

7,099

17,516

14,161

Slovak Republic (MARKIZA TV)

2,117

2,294

4,511

4,363

$

11,798

$

9,393

$

22,027

$

18,524

Cash paid for programming:

Romania (PRO TV, ACASA and PRO TV INTERNATIONAL)

$

7,179

$

4,219

$

13,375

$

7,027

Slovenia (POP TV and KANAL A)

1,382

1,551

2,607

3,078

Ukraine (STUDIO 1+1)

3,605

2,730

8,426

6,506

12,166

8,500

24,408

16,611

Slovak Republic (MARKIZA TV)

1,631

2,951

3,699

4,461

$

13,797

$

11,451

$

28,107

$

21,072

(1) Restated to reflect the adoption of FIN 46 (R).

Page 34

III. Critical Accounting Policies

Our accounting policies affecting our financial condition and results of operations are more fully described in Note 3 to our consolidated financial statements that are included in Part II, Item 8 of our Form 10-K filed with the SEC on February 25, 2004 as amended by our Form 10-K/A filed with the SEC on March 12, 2004. The preparation of these financial statements requires us to make judgments in selecting appropriate assumptions for calculating financial estimates, which inherently contain some degree of uncertainty. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities and the reported amounts of revenues and expenses that are not read ily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe our critical accounting policies are as follows: Program Rights Costs, Valuation of Intangible Assets, Bad Debt Provision and Deferred Tax. These critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. There have been no significant change in our critical accounting policies since December 31, 2003.

IV. Analysis of the Results of Consolidated Operations

IV (a) Net Revenues for the three months ended June 30, 2004 compared to three months ended June 30, 2003

	Consolidated Net Revenues
	For the Three Months Ended June 30, (US $000's)
	2004		2003 (1)		*Movement*
Romania	$	17,887	$	13,760	$	4,127
Slovenia		13,751		11,100		2,651
Ukraine		13,248		8,447		4,801
Total Consolidated Net Revenues	$	44,886	$	33,307	$	*11,579*

(1) Restated to reflect the adoption of FIN 46 (R).

Our consolidated net revenues increased by 35% for the three months ended June 30, 2004 compared to the three months ended June 30, 2003 due to a:

· 30% increase in the net revenues of our Romanian operations as described in "II. Analysis of Segment Results";

· 24% increase in the net revenues of our Slovenian operations as described in "II. Analysis of Segment Results"; and

· 57% increase in the net revenues of our Ukrainian operations as described in "II. Analysis of Segment Results".

Page 35

IV (b) Net Revenues for the six months ended June 30, 2004 compared to six months ended June 30, 2003

Consolidated Net Revenues

For the Six Months Ended June 30, (US$ 000's)

2004

2003 (1)

Movement

Romania

$

31,972

$

23,008

$

8,964

Slovenia

23,408

18,909

4,499

Ukraine

25,354

15,988

9,366

Total Consolidated Net Revenues

$

80,734

$

57,905

$

22,829

(1) Restated to reflect the adoption of FIN 46 (R).

Our consolidated net revenues increased by 39% for the six months ended June 30, 2004 compared to the six months ended June 30, 2003 due to a:

· 39% increase in the net revenues of our Romanian operations as described in "II. Analysis of Segment Results";

· 24% increase in the net revenues of our Slovenian operations as described in "II. Analysis of Segment Results"; and

· 59% increase in the net revenues of our Ukrainian operations as described in "II. Analysis of Segment Results".

IV (c) Station Operating Costs and Expenses for the three months ended June 30, 2004 compared to three months ended June 30, 2003

Consolidated Station Operating Costs and Expenses

For the Three Months Ended June 30, (US$ 000's)

2004

2003 (1)

Movement

Romania

$

11,440

$

9,033

$

2,407

Slovenia

6,323

6,193

130

Ukraine

6,861

6,067

794

Total Consolidated Station Operating Costs and Expenses

$

24,624

$

21,293

$

3,331

(1) Restated to reflect the adoption of FIN 46 (R).

Total station operating costs and expenses (including amortization of program rights and depreciation of fixed assets and other intangibles) increased by 16% in the three months ended June 30, 2004 compared to the three months ended June 30, 2003 primarily due to a:

· 27% increase in the station operating costs and expenses of our Romanian operations caused by an increased investment in domestic production and increasing costs of acquired programming rights resulting in higher programming amortization following the launch of PRO CINEMA; and

· 13% increase in the station operating costs and expenses of our Ukrainian operations. The cost of programming increased by US$ 0.5 million due to increased investment in local programming, which accounts for a growing share of the schedule, and higher program syndication charges as a result of the higher cost of acquired Russian programming.

Page 36

IV (d) Station Operating Costs and Expenses for the six months ended June 30, 2004 compared to six months ended June 30, 2003

Consolidated Station Operating Costs and Expenses

For the Six Months Ended June 30, (US$ 000's)

2004

2003 (1)

Movement

Romania

$

20,540

$

16,321

$

4,219

Slovenia

11,593

11,523

70

Ukraine

13,637

11,585

2,052

Total Consolidated Station Operating Costs and Expenses

$

45,770

$

39,429

$

6,341

(1) Restated to reflect the adoption of FIN 46 (R).

Total station operating costs and expenses (including amortization of program rights and depreciation of fixed assets and other intangibles) increased by 16% in the six months ended June 30, 2004 compared to the six months ended June 30, 2003 primarily due to a:

· 26% increase in the station operating costs and expenses of our Romanian operations due to an increased investment in domestic production and increasing costs of acquired programming rights resulting in higher programming amortization following the launch of PRO CINEMA; and

· 18% increase in the station operating costs and expenses of our Ukrainian operations. The cost of programming increased by US$ 1.4 million due to increased investment in local programming, which accounts for a growing share of the schedule, and higher program syndication charges as a result of the higher cost of acquired Russian programming.

IV (e) Station Selling, General and Administrative Expenses for the three months ended June 30, 2004 compared to three months ended June 30, 2003

Consolidated Station Selling, General and Administrative Expenses

For the Three Months Ended June 30, (US$ 000's)

2004

2003 (1)

Movement

Romania

$

1,583

$

1,940

$

(357

)

Slovenia

963

876

87

Ukraine

1,776

1,451

325

Total Consolidated Station Selling, General and Administrative Expenses

$

4,322

$

4,267

$

55

(1) Restated to reflect the adoption of FIN 46 (R).

Station selling, general and administrative expenses increased by 1% in the three months ended June 30, 2004 compared to the three months ended June 30, 2003 primarily due to a :

· 18% decrease in the station selling, general and administrative expenses of our Romanian operations. Last year's renegotiation of satellite transmission fees saved US$ 0.2 million compared to 2003, and further reversals of the provision against older debts meant the charge for bad debts was US$ 0.3 million lower than in 2003;

· 10% increase in the station selling, general and administrative expenses of our Slovenian operations partly due to the weaker US dollar. In local currency these costs increased by 6% due primarily to incremental marketing expenditure; and

Page 37

· 22% increase in the station selling, general and administrative expenses of our Ukrainian operations primarily due to increased withholding tax on higher programming payments.

IV (f) Station Selling, General and Administrative Expenses for the six months ended June 30, 2004 compared to six months ended June 30, 2003

Consolidated Station Selling, General and Administrative Expenses

For the Six Months Ended June 30, (US$ 000's)

2004

2003 (1)

Movement

Romania

$

3,003

$

3,192

$

(189

)

Slovenia

1,848

1,654

194

Ukraine

3,033

2,550

483

Total Consolidated Station Selling, General and Administrative Expenses

$

7,884

$

7,396

$

488

(1) Restated to reflect the adoption of FIN 46 (R).

Station selling, general and administrative expenses increased by 7% in the six months ended June 30, 2004 compared to the six months ended June 30, 2003 primarily due to a :

· 6% decrease in the station selling, general and administrative expenses of our Romanian operations. Last year's renegotiation of satellite transmission fees saved US$ 0.6 million compared to 2003, and further reversals of the provision against older debts meant the charge for bad debts was US$ 0.3 million lower than in 2003. These more than offset small incremental increases of expenditure on other general and administrative expenses;

· 12% increase in the station selling, general and administrative expenses of our Slovenian operations due to the weaker US dollar. In local currency terms, station selling, general and administrative expenses increased by 4% due primarily to incremental marketing expenditure; and

· 19% increase in the station selling, general and administrative expenses of our Ukrainian operations due to increased withholding tax on higher programming payments.

IV (g) Consolidated results below operating income/(loss) before corporate expenses for the three months ended June 30, 2004 compared to the three months ended June 30, 2003

For the Three Months Ended June 30, (US$ 000's)

2004

2003 (1)

Movement

Corporate operating costs (excluding stock-based compensation)

4,738

4,140

598

Stock-based compensation

2,369

5,977

(3,608

)

Amortization of intangibles

62

-

62

Equity in income of unconsolidated affiliates

4,304

2,628

1,676

Interest income

786

2,909

(2,123

)

Interest expense

(667

)

(6,931

)

6,264

Foreign currency exchange loss, net

(1,289

)

(8,252

)

6,963

Other expense

(10

)

(2,754

)

2,744

Provision for income taxes

(5,769

)

(2,797

)

(2,972

)

Minority interest in income of consolidated subsidiaries

(379

)

-

(379

)

Post-tax income from discontinued operations

285

348,393

(348,108

)

(1) Restated to reflect the adoption of FIN 46 (R).


	Page 38

Corporate operating costs for the three months ended June 30, 2004 increased by US$ 0.6 million compared to the three months ended June 30, 2003 primarily due to increased salary and related costs as a result of a higher number of corporate staff, performance related bonus provisions and the adverse effect of the US dollar weakening by 10% against the British Pound, the currency in which approximately 55% of corporate expenses are denominated.

Stock-based compensation for the three months ended June 30, 2004 decreased by US$ 3.6 million compared to the three months ended June 30, 2003 due primarily to a reduction in the charge in respect of options awarded in prior periods which are accounted for under FIN44. This charge is driven by the movement in the price of our stock during the period. In the three months ended June 30, 2004 and 2003 our stock price per share increased by 21% and 73%, respectively. (For further discussion, see Part I, Note 9, "Stock-based Compensation").

Amortization of intangibles for the three months ended June 30, 2004 was US$ 0.1 million. This represents the charge for the period following the purchase price allocation of our increased investment in our Romanian operations. (For further discussion, see Part I, Note 14, "Subsequent Events").

Equity in income of unconsolidated affiliates: As explained in Part I, Item 1, "Business" of our December 31, 2003 Form 10-K filed with the SEC on February 25, 2004 as amended by our Form 10-K/A filed with the SEC on March 12, 2004, some of our broadcasting licenses are held by unconsolidated affiliates over which we have minority blocking rights but not majority control. These affiliates are accounted for using the equity method.

Equity in income of unconsolidated affiliates for the three months ended June 30, 2004 increased by US$ 1.7 million compared to the three months ended June 30, 2003 as detailed below:

For the Three Months Ended June 30, (US$ 000's)

2004

2003

Movement

Slovak Republic operations

$

4,082

$

2,624

$

1,458

Romanian operations

222

4

218

Equity in income of unconsolidated affiliates

$

4,304

$

2,628

$

1,676

Interest income decreased by US$ 2.1 million for the three months ended June 30, 2004 compared to the three months ended June 30, 2003 primarily as a result of a higher average cash balance for the three months ended June 30, 2003 compared to the three months ended June 30, 2004.

Interest expense decreased by US$ 6.3 million for the three months ended June 30, 2004 compared to the three months ended June 30, 2003 primarily as a result of the repayment of all outstanding corporate debt between May and August 2003.

Foreign currency loss decreased by $7.0 million for the three months ended June 30, 2004 compared to the three months ended June 30, 2003 primarily as a result of the impact of the Euro strengthening by 6% against the US dollar in the three months ended June 30, 2003. This affected the Euro denominated portion of our Senior Notes which were retired in August 2003.

Other expense for the three months ended June 30, 2004 decreased by US$ 2.7 million compared to the three months ended June 30, 2003.

Provision for income taxes: Provision for income taxes was US$ 5.8 million for the three months ended June 30, 2004 compared to US$ 2.8 million for the three months ended June 30, 2003 primarily due to our trading operations having higher taxable profits.


	Page 39

Minority interest in income of consolidated subsidiaries: Minority interest in the income of consolidated subsidiaries was US$ 0.4 million for the three months ended June 30, 2004 compared to US$ nil for the three months ended June 30, 2003.

Post-tax income from discontinued operations: The amounts charged to the consolidated income statement in respect of discontinued operations are as follows:

For the Three Months Ended June 30, (US$ 000's)

2004

2003

Movement

Czech Republic:

Discontinued operations

$

285

$

348,393

$

(348,108

)

Tax on discontinued operations

-

-

-

Discontinued operations

$

285

$

348,393

$

(348,108

)

On April 4, 2003 the Czech Republic deposited in escrow US$ 354.9 million following the findings of the Tribunal in the Company's Uncitral Arbitration. On May 19, 2003, the escrowed amount was released to the Company as a result of the favorable ruling of the Svea Court of Sweden.

On June 19, 2003, our Board of Directors decided to withdraw from Czech operations. On October 23, 2003 we sold our 93.2% participation interest in CNTS, our Czech operating company, for US$ 53.2 million.

The revenues and expenses of the Czech operations and the arbitration award income and related legal expenses have therefore all been treated as discontinued operations for the three months ended June 30, 2004. Comparatives for the three months ended June 30, 2003 have been reclassified.

For additional information, see Part I, Note 12, "Discontinued Operations".

IV (h) Consolidated results below operating income/(loss) before corporate expenses for the six months ended June 30, 2004 compared to the six months ended June 30, 2003

For the Six Months Ended June 30, (US$ 000's)

2004

2003 (1)

Movement

Corporate operating costs (excluding stock-based compensation)

7,971

6,855

1,116

Stock-based compensation

4,254

6,624

(2,370

)

Amortization of intangibles

62

-

62

Equity in income of unconsolidated affiliates

5,199

2,059

3,140

Interest income

2,240

3,284

(1,044

)

Interest expense

(885

)

(11,922

)

11,037

Foreign currency exchange loss, net

(1,922

)

(10,333

)

8,411

Other expense

(781

)

(3,265

)

2,484

Provision for income taxes

(6,939

)

(3,082

)

(3,857

)

Minority interest in income of consolidated subsidiaries

(457

)

(84

)

(373

)

Post-tax income/(loss) from discontinued operations

(45

)

345,281

(345,326

)

(1) Restated to reflect the adoption of FIN 46 (R).

Corporate operating costs for the six months ended June 30, 2004 increased by US$ 1.1 million compared to the six months ended June 30, 2003 primarily due to increased salary and related


	Page 40

costs as a result of a higher number of corporate staff, performance related bonus provisions and the adverse effect of the US dollar weakening by 11% against the British Pound, the currency in which approximately 55% of corporate expenses are denominated.

Stock-based compensation for the six months ended June 30, 2004 decreased by US$ 2.4 million compared to the six months ended June 30, 2003 due primarily to a reduction in the charge in respect of options awarded in prior periods which are accounted for under FIN44. This charge is driven by the movement in the price of our stock during the period. In the six months ended June 30, 2004 and 2003 our stock price per share increased by 31% and 96%, respectively. (For further discussion, see Part I, Note 9, "Stock-based Compensation").

Equity in income of unconsolidated affiliates for the six months ended June 30, 2004 increased by US$ 3.1 million compared to the six months ended June 30, 2003 as detailed below:

For the Six Months Ended June 30, (US$ 000's)

2004

2003

Movement

Slovak Republic operations

$

4,813

$

2,712

$

2,101

Romanian operations

386

(25

)

411

Slovenian operations

-

(628

)

628

Equity in income of unconsolidated affiliates

$

5,199

$

2,059

$

3,140

Interest income decreased by US$ 1.0 million for the six months ended June 30, 2004 compared to the six months ended June 30, 2003 primarily as a result of a higher average cash balance for the six months ended June 30, 2003 compared to the six months ended June 30, 2004.

Interest expense decreased by US$ 11.0 million for the six months ended June 30, 2004 compared to the six months ended June 30, 2003 primarily as a result of the repayment of all outstanding corporate debt between May and August 2003.

Foreign currency loss decreased by US$ 8.4 million for the six months ended June 30, 2004 compared to the six months ended June 30, 2003 primarily as a result of the impact of the Euro strengthening by 12% against the US dollar in the six months ended June 30, 2003. This affected the Euro denominated portion of our Senior Notes which were retired in August 2003.

Other expense for the six months ended June 30, 2004 decreased by US$ 2.5 million compared to the six months ended June 30, 2003.

Provision for income taxes: Provision for income taxes was US$ 6.9 million for the six months ended June 30, 2004 compared to US$ 3.1 million for the six months ended June 30, 2003 primarily due to our trading operations having higher taxable profits.

Minority interest in income of consolidated subsidiaries: Minority interest in the income of consolidated subsidiaries was US$ 0.5 million for the six months ended June 30, 2004 compared to US$ 0.1 million for the six months ended June 30, 2003.


	Page 41

Post-tax income/(loss) from discontinued operations: The amounts charged to the consolidated income statement in respect of discontinued operations are as follows:

For the Six Months Ended June 30, (US$ 000's)

2004

2003

Movement

Czech Republic:

Discontinued operations

$

(45

)

$

345,281

$

(345,326

)

Tax on discontinued operations

-

-

-

Discontinued operations

$

(45

)

$

345,281

$

(345,326

)

The revenues and expenses of the Czech operations and the arbitration award income and related legal expenses have therefore all been treated as discontinued operations for the six months ended June 30, 2004. Comparatives for the six months ended June 30, 2003 have been reclassified.

For additional information, see Part I, Note 12, "Discontinued Operations".

V. Liquidity and Capital Resources

Summary

As at June 30, 2004, we had US$ 165.3 million of cash and cash equivalents compared to US$ 192.2 million as at December 31, 2003. The principal reasons for the decrease of US$ 26.9 million are as follows:

· US$ 16.9 million payments in connection with the 14% increase in our holding of our Romanian operations (for further information, see Item 1, Note 14, "Subsequent Events") ; and

· US$ 11.0 million payments to the Dutch Tax Authorities.

Contractual Cash Obligations

Our future contractual obligations as of June 30, 2004 are as follows:

Contractual Obligations

Payments due by period (US$ 000’s)

Total

Less than 1 year

1-3 years

3-5 years

More than 5 years

Long-Term Debt

$

14,533

$

1,767

$

9,230

$

3,536

$

-

Capital Lease Obligations

918

236

244

244

194

Operating Leases

6,135

1,415

2,344

1,911

465

Unconditional Purchase Obligations

16,914

16,527

316

71

-

Other Long-Term Obligations

13,068

2,868

7,123

3,077

-

Total Contractual Obligations

$

51,568

$

22,813

$

19,257

$

8,839

$

659

Page 42

At June 30, 2004, we had two tranches of debt:

(1) Euro 7.3 million (approximately US$ 8.9 million) (December 31, 2003: Euro 8.0 million, approximately US$ 10.0 million) was drawn down on the agreement our Slovenia operations have with Bank Austria Creditanstalt d.d. ("BACA") and Nova Ljubljanska banka d.d. This secured loan bears a variable interest rate of the European Inter-Banking Official Rate ("EURIBOR") 6 month rate plus 3.0% (EURIBOR - 6 month as at December 31, 2003 was 3.0%). As at June 30, 2004 a rate of 6.0% applied to this loan.

(2) A loan of Sk187 million (approximately US$ 5.7 million) (December 31, 2003: Sk187 million, approximately US$ 5.7 million) from our non-consolidated affiliate, STS. This loan bears a variable interest rate of the Bratislava Inter Bank Official Rate ("BRIBOR") 3 month rate plus 2.2% (BRIBOR - 3 month as at June 30, 2004 was 5.4%).

In addition to the above, STS, our non-consolidated affiliate had the following loan:

(1) Sk 90 million (approximately US$ 2.7 million) (December 31, 2003: Sk 90 million, US$ 2.7 million) was outstanding on an agreement with Vseobecna uverova banka a.s. This secured loan bears a variable interest rate of the Bratislava Inter Bank Official Rate ("BRIBOR") 3 month rate plus 1.7% (BRIBOR - 3 month as at June 30, 2004 was 5.4%).

We had programming rights commitments (included within "Unconditional Purchase Obligations" in the chart above) of US$ 15.9 million in respect of future programming which includes contracts signed with license periods starting after June 30, 2004 (December 31, 2003: US$ 8.2 million).

Included in Other Long-Term Obligations are our commitments to the Romanian tax authorities and the Dutch tax authorities.

Sources and Uses of Cash

Our ongoing source of cash in the operating stations is primarily the receipt of payments from advertisers and advertising agencies. This may be augmented from time to time by local borrowing. Surplus cash generated in this manner, after funding the ongoing station operations, may be remitted to corporate, or to other shareholders where appropriate. Surplus cash is remitted to corporate in the form of debt interest payments and capital repayments, dividends, and other distributions and loans from our subsidiaries and equity accounted investments.

As at June 30, 2004 and December 31, 2003 the operations had the following unsecured balances owing to their respective holding companies which are ultimately owned by us:

	As at June 30, 2004		As at December 31, 2003
Country	(US$ 000’s)
Romania	$	37,585	$	37,756
Slovak Republic		94		350
Slovenia		42		77
Ukraine		13,619		16,243
Total	$	51,340	$	54,426

During the first six months of 2004 our continuing consolidated operating stations generated cash of US$ 12.9 million (2003: US$ 12.1 million) prior to making investments in associated companies, borrowing or repayment of third party overdraft or debt, or payments to corporate in excess of current year recharges. STS, our equity accounted affiliate, generated cash of US$ 5.5 million in the first six months of 2004 (2003: US$ 3.5 million).


	Page 43

Cash Outlook

Our future cash needs, over and above working capital requirements, will depend on our overall financial performance and our future acquisition and development decisions.

On July 16, 2004, we acquired 100% of Nova TV and OK in Croatia. The purchase price is currently estimated to be Euro 20.8 million (approximately US$ 25.3 million), payable in three installments. 75% of the estimated amount was paid at closing. An additional 10% will be paid following a post-completion audit, which is expected to occur by the end of August. The remaining 15% will be held back for a one-year period to cover undisclosed liabilities. The estimated purchase price reflects an adjustment for the negative working capital position of the business at the time of its acquisition. We plan to cover this deficit through inter-company financing in the near term. This acquisition and any additional funding can be met from our existing cash resources.

On October 23, 2003 we sold our 93.2% participation interest in CNTS, our Czech operating company, for US$ 53.2 million. The first installment of US$ 7.5 million was received on October 8, 2003, the second US$ 7.5 million installment was received on October 23, 2003, the third installment of US$ 20.3 million, classified as other receivable in our balance sheet as at June 30, 2004, was received on July 14, 2004. The remainder of the purchase price of US$ 18.2 million plus all accrued interest is due to be settled on or before July 15, 2005.

During 2003 our Board, after extensive discussions with both management and outside advisors, agreed a strategic plan focusing on expansion through acquisition of additional shares in our existing stations and of appropriate additional businesses in new markets.

This strategy may result in the acquisition of a significant business in a major Central or Eastern European market. Such an acquisition would likely require funding beyond our current available resources. This could be achieved through funds raised in one or more public or private offerings of debt or equity related securities.

Tax Inspections

Pro Plus has been the subject of an income tax inspection by the Republic of Slovenia tax authorities for the years 1995 to 1998. As a result of these inspections the Slovenian tax authorities had levied an assessment seeking unpaid income taxes, customs duties and interest charges of SIT 1,073.0 million (approximately US$ 5.7 million). The Slovenian authorities have asserted that capital contributions and loans made by us in the years 1995 and 1996 to Pro Plus should be extraordinary revenue to Pro Plus. On this basis, the Slovenian authorities claim that Pro Plus made a profit in 1995 and 1996 for which it owes income taxes and interest. Additionally, the Slovenian tax authorities claim that the fixed assets imported as capital contributions were subject to customs duties which were not paid. On February 9, 2001, the Slovenian tax authorities approved the cash capital contributions for 1995 and 1996. This has reduced the assessment to SIT 636.8 million (approximately US$ 3.4 million). The Administrative Court of Ljubljana has issued an injunction to prevent the tax authorities from demanding payment until a hearing on the matter has been concluded. There is currently no date set for this hearing. We do not hold a provision in our financial statements in relation to this legal action.

VI. Forward-looking Statements

This report contains forward-looking statements, including statements regarding the future economic climate in our markets, future investments in existing television broadcast operations, the growth potential of the advertising market, business strategies and commitments, anticipated corporate cash expenditures and the timing of the need for additional cash resources. For these statements and all other forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and actual results, affecting


	Page 44

the financial position, results of our operations and cash flows, could differ materially from those described in or contemplated by the forward-looking statements. Important factors that contribute to such risks include, but are not limited to, the renewals of broadcasting licenses, the regulatory environment and compliance, the ability to acquire programming, the ability to attract audiences, the rate of development of advertising markets in countries where we currently operate and general market and economic conditions in these countries, the US and Western Europe.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We engage in activities that expose us to various market risks, including the effects of changes in foreign currency exchange rates and interest rates. We do not regularly engage in speculative transactions, nor do we regularly hold or issue financial instruments for trading purposes.

Foreign Currency Exchange Risk Management

The Company conducts business in a number of foreign currencies. As a result, it is subject to foreign currency exchange rate risk due to the effects that foreign exchange rate movements of these currencies have on the Company's costs and on the cash flows it receives from certain subsidiaries. In limited instances the Company enters into forward foreign exchange contracts to hedge foreign currency exchange rate risk. On March 23, 2004, we entered into eight forward exchange contracts to buy US$ 100 million worth of Euros at various exchange rates ranging from Euro 0.8102-0.8106 to the US dollar. All of these forward exchange contracts matured on or before May 5, 2004.

Interest Rate Risk Management

None of our debt was maintained with a fixed interest rate as at June 30, 2004 or December 31, 2003. We have two tranches of debt that provide for interest at a spread above a base rate (Euro Inter Bank Official Rate and the Bratislava Inter Bank Official Rate). A significant rise in the base rate of either would not have an adverse effect on our business and results of operations.

Interest Rate Table as at June 30, 2004

Expected Maturity Dates

2004

2005

2006

2007

Thereafter

We have no fixed rate debt

Total Debt in Euros 000's

Variable Rate

-

-

-

-

7,273

Average Interest Rate

-

-

-

-

6.00

%

Total Debt in Sk 000's

Variable Rate

-

187,000

-

-

-

Average Interest Rate

-

7.61

%

-

-

-

Variable Interest Rate Sensitivity as at June 30, 2004

					Yearly interest charge if interest rates increase by: (US$ 000's)
Value of Debt as at June 30, 2004 (US$ 000's)	Interest Rate as at June 30, 2004		Yearly Interest Charge (US$ 000’s)		1%		2%		3%		4%		5%
8,848 (Euro 7.3 million)		6.00%		531		619		708		796		885		973
5,694 (Sk 187 million)		7.61%		433		490		547		604		661		718
Total			$	964	$	1,109	$	1,255	$	1,400	$	1,546	$	1,691


	Page 45

Item 4. Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time period specified by the Securities and Exchange Commission's rules and forms.

There were no changes in our internal controls over financial reporting that occurred in the three months ended June 30, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Page 46

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

We present below a summary of our significant proceedings by country.

UKRAINE

SLOVENIA

GENERAL


	Page 47

Item 4. Submission of Matters to a Vote of Security Holders

The following are the results of voting by shareholders present or represented at the Annual General Meeting of Shareholders on June 2, 2004.

a. Each of the nominees considered at the Annual General Meeting of Shareholders was elected to serve as a Director of the Company until the next Annual General Meeting of Shareholders or until their respective successors have been elected and qualified. The persons named below were elected to serve as Directors and received the number of votes set forth opposite their respective names:

For

Withheld

Ronald S. Lauder

88,006,468

2,280

Frederic T. Klinkhammer

88,006,468

2,280

Michael Garin

88,006,468

2,280

Ann Mather

88,006,468

2,280

Eric Zinterhofer

88,006,468

2,280

Jacob Z. Schuster

88,006,468

2,280

Alfred W. Langer

88,006,468

2,280

Charles R. Frank, Jr

88,006,468

2,280

Herbert A. Granath

88,006,468

2,280

Bruce Maggin

88,006,468

2,280

b. The financial statements of the Company for the fiscal year ended December 31, 2003 together with the auditor’s report thereon, were approved, with 87,981,968 cast for approval, 836 votes cast against approval and 25,944 votes abstaining.

c. The proposal to appoint Deloitte & Touche LLP as auditors of the Company and to authorize the directors, acting by the Audit Committee, to approve their fees was approved, with 87,999,618 votes cast for approval, 3,586 votes cast against approval and 5,544 abstaining.

Item 6. Exhibits and Reports on Form 8-K.

a) The following exhibits are attached:

10.51	Share sale and purchase agreement of Nova TV d.d., dated July 7, 2004.

31.01	s.302 Sarbanes-Oxley Certification - CEO, dated August 5, 2004
31.02	s.302 Sarbanes-Oxley Certification - CFO, dated August 5, 2004
32.01	s.906 Sarbanes-Oxley Certification - CEO and CFO, dated August 5, 2004 (furnished only)

b) Reports on Form 8-K

A Form 8-K was filed on May 5, 2004 announcing the results for the three months ended March 31, 2004.


	Page 48

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Date: August 5, 2004		/s/ Michael Garin

		Michael Garin Chief Executive Officer (Duly Authorized Officer)


Date: August 5, 2004		/s/ Wallace Macmillan

		Wallace Macmillan Vice President - Finance (Principal Financial Officer and Duly Authorized Officer)

EXHIBIT INDEX

10.51	Share sale and purchase agreement of Nova TV d.d., dated July 7, 2004.

31.01	s.302 Sarbanes-Oxley Certification - CEO, dated August 5, 2004
31.02	s.302 Sarbanes-Oxley Certification - CFO, dated August 5, 2004
32.01	s.906 Sarbanes-Oxley Certification - CEO and CFO, dated August 5, 2004 (furnished only)

Page 49

	Page
Part I. Financial information
Item 1. Financial Statements
Consolidated Balance Sheets as at June 30, 2004 and December 31, 2003	3
Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2004 and 2003	5
Consolidated Statement of Shareholders' Equity for the Six Months from December 31, 2003 to June 30, 2004	7
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003	8
Notes to the Consolidated Financial Statements	9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3. Quantitative and Qualitative Disclosures About Market Risk	45
Item 4. Controls and Procedures	46
Part II. Other Information
Item 1. Legal Proceedings	47
Item 4. Submission of Matters to a Vote of Security Holders	48
Item 6. Exhibits and Reports on Form 8-K	48
Signatures	49
Exhibit Index	49

	June 30, 2004		December 31, 2003 (1)
ASSETS
Current Assets
Cash and cash equivalents	$	165,307	$	192,246
Restricted cash		5,453		5,429
Accounts receivable (net of allowances of $5,664, $5,625, respectively)		32,238		29,812
Other receivable (Note 13)		20,326		20,103
Program rights		14,047		10,160
Loans to related parties		1,600		3,849
Other short-term assets		8,838		5,292
Total Current Assets		247,809		266,891
Loans to related parties		1,154		1,883
Investments in associated companies		29,616		24,413
Property, plant and equipment (net of depreciation $60,184, $55,850, respectively)		18,863		18,003
Other receivable (Note 13)		18,200		18,200
Program rights		12,560		9,682
Goodwill (Note 5)		29,236		17,821
Other intangibles (Note 5)		22,962		9,554
Other assets		788		2,305
Total Assets	$	381,188	$	368,752

	June 30, 2004			December 31, 2003 (1)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and accrued liabilities	$	36,361		$	37,748
Duties and other taxes payable		19,383			20,192
Income taxes payable		4,807			12,991
Credit facilities and obligations under capital leases		1,946			185
Total Current Liabilities		62,497			71,116
Non-Current Liabilities:
Credit facilities and obligations under capital leases		14,082			16,891
Income taxes payable		6,760			6,000
Provision for losses in investments in associated companies		-			227
Deferred tax		5,078			-
Total Non-Current Liabilities		25,920			23,118
Minority interests in consolidated subsidiaries		1,452			994

SHAREHOLDERS' EQUITY:
Class A Common Stock, $0.08 par value: authorized: (2) 100,000,000 shares at June 30, 2004 and December 31, 2003; issued and outstanding : 20,699,100 at June 30, 2004 and 19,269,766 at December 31, 2003		1,656			1,542
Class B Common Stock, $0.08 par value: authorized: (2) 15,000,000 shares at June 30, 2004 and December 31, 2003; issued and outstanding: 7,334,736 at June 30, 2004 and December 31, 2003		587			587
Additional paid-in capital		380,387			372,662
Accumulated deficit		(94,796	)		(105,999	)
Accumulated other comprehensive income		3,485			4,732
Total shareholders' equity		291,319			273,524
Total liabilities and shareholders' equity	$	381,188		$	368,752

	Comprehensive Income/(Loss)			Class A Common Stock		Class B Common Stock		Additional Paid-In Capital		Accumulated Deficit			Accumulated Other Comprehensive Income/(Loss)			Total Shareholders' Equity
BALANCE, December 31, 2003 (1)				$	1,542	$	587	$	372,662	$	(105,999	)	$	4,732		$	273,524
Stock-based compensation									4,254								4,254
Stock options exercised					114				3,471								3,585
Comprehensive income:
Net income		11,203									11,203						11,203
Other comprehensive income:
Unrealized translation adjustments		(1,247	)											(1,247	)		(1,247	)
Comprehensive income	$	9,956
BALANCE, June 30, 2004				$	1,656	$	587	$	380,387	$	(94,796	)	$	3,485		$	291,319

		For the Three Months Ended June 30,						For the Six Months Ended June 30,
		(US$ 000’s, except per share data)
		2004			2003			2004			2003

Net Income	As Reported	$	6,032		$	330,826		$	11,203		$	319,539
Add: Stock-based compensation expense included in reported net income, net of related tax effects	As Reported		2,369			5,977			4,254			6,624
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects	Pro Forma Expense		(2,422	)		(6,134	)		(4,361	)		(6,908	)
Net Income	Pro Forma	$	5,979		$	330,669		$	11,096		$	319,255

Net Income Per Common Share - Basic:	As Reported	$	0.22		$	12.50		$	0.40		$	12.08
Pro Forma		$	0.21		$	12.50		$	0.40		$	12.07

Net Income Per Common Share -Diluted:	As Reported	$	0.20		$	11.06		$	0.37		$	10.68
Pro Forma		$	0.20		$	11.06		$	0.37		$	10.67

Key Subsidiaries and Affiliates as at June 30, 2004	Voting Interest	Share of Profits	Accounting Treatment	TV Network

Continuing Operations

*Romania*

Operating Companies:
Media Pro International S.A. (MPI)	80%	80%	Consolidated Subsidiary
Media Vision S.R.L. (Media Vision)	70%	70%	Consolidated Subsidiary

License Companies:
Pro TV S.A. - formerly Pro TV S.R.L. (Pro TV)	80%	80%	Consolidated Subsidiary	PRO TV, ACASA, PRO CINEMA and PRO TV INTERNATIONAL
Media Pro S.R.L. (Media Pro)	20%	20%	Equity Accounted Affiliate	PRO FM (radio)

*Slovenia*

Operating Company:
Produkcija Plus, d.o.o. (Pro Plus)	96.85%	96.85%	Consolidated Subsidiary

License Companies:
Pop TV d.o.o. (Pop TV)	96.85%	96.85%	Consolidated Subsidiary	POP TV
Kanal A d.o.o. (Kanal A)	96.85%	96.85%	Consolidated Subsidiary	KANAL A

*Slovak Republic*

Operating Company:
Slovenska Televizna Spolocnost, spol. s.r.o. (STS)	49%	70%	Equity Accounted Affiliate

License Company:
Markiza-Slovakia s.r.o. (Markiza)	34%	0.1%	Equity Accounted Affiliate	MARKIZA TV

*Ukraine*

Operating Companies:
Innova Film GmbH (Innova)	60%	60%	Consolidated Subsidiary
International Media Services Ltd. (IMS)	60%	60%	Consolidated Subsidiary
Enterprise "Inter-Media" (Inter-Media)	60%	60%	Consolidated Subsidiary

License Company:
Broadcasting Company "Studio 1+1" (Studio 1+1)	18%	18%	Consolidated Variable Interest Entity	STUDIO 1+1

*Consolidated Balance Sheet Financial Statement Caption*	Balance as at December 31, 2003 prior to adjustment		Impact of FIN 46 (R)			Adjusted Balance
			(US$ 000's)
Total current assets		264,743		2,148			266,891
Total assets		365,801		2,951			368,752
Total current liabilities		66,286		4,830			71,116
Total non-current liabilities		24,997		(1,879	)		23,118
Total shareholders' equity		273,524		-			273,524

*Consolidated Statement of Operations Financial Statement Caption*	For the Three Months ended June 30, 2003
	Balance prior to adjustment			Impact of FIN 46 (R)		Adjusted Balance
				(US$ 000's)
Net revenues		31,926			1,381		33,307
Total station operating costs and expenses		20,854			439		21,293
Operating income/(loss)		(2,534	)		164		(2,370	)
Net loss from continuing operations		(17,567	)		-		(17,567	)
Net income		330,826			-		330,826

*Consolidated Statement of Operations Financial Statement Caption*	For the Six Months ended June 30, 2003
	Balance prior to adjustment			Impact of FIN 46 (R)		Adjusted Balance
				(US$ 000's)
Net revenues		55,448			2,457		57,905
Total station operating costs and expenses		38,350			1,079		39,429
Operating income/(loss)		(2,562	)		163		(2,399	)
Net loss from continuing operations		(25,742	)		-		(25,742	)
Net income		319,539			-		319,539

	Slovenian operations			Ukrainian operations		Romanian operations		Total
	(US$ 000’s)
Carrying amount as at December 31, 2003	$	13,725		$	4,096	$	-	$	17,821
Additions in the period		-			-		11,921		11,921
Foreign exchange movements		(506	)		-		-		(506	)
Carrying amount as at June 30, 2004	$	13,219		$	4,096	$	11,921	$	29,236

	License acquisition cost		Broadcast license			Trademarks			Customer relationships			Total
	(US$ 000’s)
Carrying amount as at December 31, 2003 (1)	$	1,628	$	5,447		$	2,479		$	-		$	9,554
Additions in the period		-		5,537			6,344			1,974			13,855
Amortization in the period		-		-			-			(62	)		(62	)
Foreign exchange movements		-		(306	)		(79	)		-			(385	)
Carrying amount as at June 30, 2004	$	1,628	$	10,678		$	8,744		$	1,912		$	22,962

	Segment Net Revenues (1)				Segment EBITDA
	2004		2003 (2)		2004			2003 (2)
Country
Romania (3)	$	18,702	$	13,760	$	5,920		$	3,588
Slovak Republic (MARKIZA TV)		17,448		14,698		8,393			5,524
Slovenia (POP TV and KANAL A)		13,751		11,100		6,860			4,354
Ukraine (STUDIO 1+1)		13,248		8,447		4,895			1,193
Total Segment Data	$	63,149	$	48,005	$	26,068		$	14,659

Reconciliation to Consolidated Statement of Operations:
Consolidated Net Revenues / Income/(loss) before provision for income taxes, minority interest and discontinued operations	$	44,886	$	33,307	$	11,895		$	(14,770	)
Corporate operating costs		-		-		4,738			4,140
Stock-based compensation		-		-		2,369			5,977
Amortization of intangibles		-		-		62			-
Unconsolidated Equity Affiliates (4)		18,263		14,698		8,792			5,524
Station Depreciation		-		-		1,336			1,388
Equity in (income)/loss of unconsolidated equity affiliates		-		-		(4,304	)		(2,628	)
Interest income		-		-		(786	)		(2,909	)
Interest expense		-		-		667			6,931
Foreign currency exchange (gain)/loss, net		-		-		1,289			8,252
Other (income)/expense		-		-		10			2,754
Total Segment Data	$	63,149	$	48,005	$	26,068		$	14,659

	As at June 30, 2004			As at December 31, 2003
	(US$ 000's)			(US$ 000's)
Current assets	$	27,408		$	21,224
Non-current assets		14,289			14,831
Current liabilities		(23,291	)		(13,249	)
Non-current liabilities		(2,300	)		(2,457	)
Net Assets	$	16,106		$	20,349

	For the Three Months Ended June 30,
	Net Income/(Loss) (US$ 000's)				Common Shares (000's)				Net Income/(Loss) per Common Share
	2004		2003		2004		2003		2004			2003
Basic EPS
Net income/(loss) attributable to common stock	$	6,032	$	330,826		28,034		26,459	$	0.22		$	12.50
Effect of dilutive securities : stock options		-		-		1,943		3,452		(0.02	)		(1.44	)
Diluted EPS
Net income/(loss) attributable to common stock	$	6,032	$	330,826		29,977		29,911	$	0.20		$	11.06

I.	*Executive Summary*
*II.*	*Analysis of Segment Results*
*III.*	*Critical Accounting Policies and Estimates*
*IV.*	*Analysis of the Results of Consolidated Operations*
V.	*Liquidity and Capital Resources*
*VI.*	*Forward-looking Statements*

Contractual Obligations	Payments due by period (US$ 000’s)
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Long-Term Debt	$	14,533	$	1,767	$	9,230	$	3,536	$	-
Capital Lease Obligations		918		236		244		244		194
Operating Leases		6,135		1,415		2,344		1,911		465
Unconditional Purchase Obligations		16,914		16,527		316		71		-
Other Long-Term Obligations		13,068		2,868		7,123		3,077		-
Total Contractual Obligations	$	51,568	$	22,813	$	19,257	$	8,839	$	659

Expected Maturity Dates	2004		2005			2006		2007		Thereafter
We have no fixed rate debt
Total Debt in Euros 000's
Variable Rate		-		-			-		-		7,273
Average Interest Rate		-		-			-		-		6.00	%
Total Debt in Sk 000's
Variable Rate		-		187,000			-		-		-
Average Interest Rate		-		7.61	%		-		-		-

	For	Withheld
Ronald S. Lauder	88,006,468	2,280
Frederic T. Klinkhammer	88,006,468	2,280
Michael Garin	88,006,468	2,280
Ann Mather	88,006,468	2,280
Eric Zinterhofer	88,006,468	2,280
Jacob Z. Schuster	88,006,468	2,280
Alfred W. Langer	88,006,468	2,280
Charles R. Frank, Jr	88,006,468	2,280
Herbert A. Granath	88,006,468	2,280
Bruce Maggin	88,006,468	2,280