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Central European Media Enterprises Ltd – ‘10-Q’ for 6/30/08

On:  Wednesday, 7/30/08, at 8:38am ET   ·   For:  6/30/08   ·   Accession #:  1140361-8-17858   ·   File #:  0-24796

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 7/30/08  Central European Media Enter… Ltd 10-Q        6/30/08    4:3.1M                                   Summit Fin’l Printing

Quarterly Report   —   Form 10-Q
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Central European Media 10Q 6-30-2008                HTML   1.66M 
 2: EX-31.01    Certification per Sarbanes-Oxley Act (Section 302)  HTML     12K 
 3: EX-31.02    Certification per Sarbanes-Oxley Act (Section 302)  HTML     12K 
 4: EX-32.01    Certification per Sarbanes-Oxley Act (Section 906)  HTML     10K 


10-Q   —   Central European Media 10Q 6-30-2008
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Table of Contents
"Item 1. Financial Statements
"Condensed consolidated Balance Sheets as at June 30, 2008 and December 31, 2007
"Condensed consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended June 30, 2008 and 2007
"Condensed consolidated Statements of Shareholders' Equity for the Six Months Ended June 30, 2008 and 2007
"Condensed consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007
"Notes to the condensed consolidated Financial Statements
"Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
"Item 3. Quantitative and Qualitative Disclosures About Market Risk
"Item 4. Controls and Procedures
"Item 1. Legal Proceedings
"Item 1A. Risk Factors
"Item 4. Submission of Matters to a Vote of Security Holders
"Item 5. Other information
"Item 6. Exhibits
"Signatures
"Exhibit Index

This is an HTML Document rendered as filed.  [ Alternative Formats ]





UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2008

£           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
 
98-0438382
(State or other jurisdiction of incorporation and organization)
 
(IRS Employer Identification No.)
Clarendon House, Church Street, Hamilton
 
HM 11 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 T No £

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

Large accelerated filer T
Accelerated filer £
Non-accelerated filer £
Smaller reporting company £

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act)  Yes £ No T

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 28, 2008
Class A Common Stock, par value $0.08
 
36,019,073
Class B Common Stock, par value $0.08
 
6,312,839
 


 
 

 

THIS PAGE INTENTIONALLY LEFT BLANK
 

 
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.

FORM 10-Q

For the quarterly period ended June 30, 2008

INDEX

   
Page
Part I. Financial information
   
     
 
2
     
 
2
     
 
4
 
   
 
6
     
 
7
     
 
8
     
 
44
     
 
87
     
 
89
     
Part II. Other Information
   
     
 
90
     
 
91
     
 
99
     
 
100
     
 
100
     
 
101
     
 
102

Page 1


Part I.  Financial Information

Item 1.  Financial Statements

CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(US$ 000’s)
(Unaudited)
 
         
ASSETS
           
Current assets
           
Cash and cash equivalents
  $ 375,752     $ 142,826  
Restricted cash (Note 6)
    1,008       1,286  
Accounts receivable (net of allowance) (Note 7)
    264,567       225,037  
Income taxes receivable
    1,834       1,234  
Program rights
    90,061       77,112  
Other current assets (Note 8)
    85,178       82,329  
Total current assets
    818,400       529,824  
                 
Non-current assets
               
Investments
    16,559       16,559  
Property, plant and equipment (Note 9)
    228,572       180,311  
Program rights
    134,240       108,362  
Goodwill (Note 4)
    1,533,020       1,114,347  
Broadcast licenses (Note 4)
    323,941       237,926  
Other intangible assets (Note 4)
    205,052       135,732  
Other non-current assets (Note 8)
    21,692       15,374  
Total non-current assets
    2,463,076       1,808,611  
Total assets
  $ 3,281,476     $ 2,338,435  


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

Page 2


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(US$ 000’s)
(Unaudited)
 
         
LIABILITIES AND SHAREHOLDERS’ EQUITY
           
Current liabilities
           
Accounts payable and accrued liabilities (Note 10)
  $ 179,120     $ 156,324  
Duties and other taxes payable
    31,802       29,945  
Income taxes payable
    14,715       27,705  
Credit facilities and obligations under capital leases (Note 11)
    17,274       15,090  
Dividends payable to minority shareholders in subsidiaries
    2,662       1,226  
Deferred consideration – Romania
    1,302       2,208  
Deferred tax
    1,167       272  
Total current liabilities
    248,042       232,770  
                 
Non-current liabilities
               
Credit facilities and obligations under capital leases (Note 11)
    6,042       5,862  
Senior Debt (Note 5)
    1,097,678       581,479  
Income taxes payable
    2,129       2,495  
Deferred tax
    104,467       73,340  
Other non-current liabilities
    46,933       19,527  
Total non-current liabilities
    1,257,249       682,703  
                 
Commitments and contingencies (Note 18)
               
Minority interests in consolidated subsidiaries
    99,102       23,155  
                 
SHAREHOLDERS' EQUITY:
               
Nil shares of Preferred Stock of $0.08 each (December 31, 2007 – nil)
    -       -  
36,019,073 shares of Class A Common Stock of $0.08 each (December 31, 2007 – 36,003,198)
    2,882       2,880  
6,312,839 shares of Class B Common Stock of $0.08 each (December 31, 2007 – 6,312,839)
    505       505  
Additional paid-in capital
    993,178       1,051,336  
Retained  earnings
    103,517       53,619  
Accumulated other comprehensive income
    577,001       291,467  
Total shareholders’ equity
    1,677,083       1,399,807  
Total liabilities and shareholders’ equity
  $ 3,281,476     $ 2,338,435  


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

Page 3


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(US$ 000’s, except share and per share data)
(Unaudited)

   
For the Three Months Ended June 30,
   
For the Six Months Ended June 30,
 
       
2007
   
2008
   
2007
 
                         
Net revenues
  $ 305,391     $ 216,284     $ 528,861     $ 364,196  
Operating costs
    37,045       30,944       70,307       56,601  
Cost of programming
    117,609       82,773       212,363       149,126  
Depreciation of station property, plant and equipment
    13,178       7,680       25,518       14,579  
Amortization of broadcast licenses and other intangibles (Note 4)
    8,188       5,165       15,854       10,327  
Cost of revenues
    176,020       126,562       324,042       230,633  
                                 
Station selling, general and administrative expenses
    17,666       15,699       38,421       31,480  
Corporate operating costs
    13,708       7,444       23,725       22,217  
Operating income
    97,997       66,579       142,673       79,866  
                                 
Interest income
    3,781       1,732       5,961       3,146  
Interest expense
    (18,140 )     (19,438 )     (32,390 )     (30,834 )
Foreign currency exchange gain / (loss), net
    6,881       (2,116 )     (10,549 )     (5,252 )
Change in fair value of derivatives (Note 12)
    (13,281 )     7,528       (23,539 )     12,052  
Other income / (expense)
    665       (546 )     1,325       (790 )
Income before provision for income taxes and minority interest
    77,903       53,739       83,481       58,188  
                                 
Income tax credit / (expense)
    (8,919 )     (13,419 )     1,423       (18,478 )
Income before minority interest
    68,984       40,320       84,904       39,710  
                                 
Minority interest in income of consolidated subsidiaries
    (1,380 )     (5,730 )     (2,405 )     (5,370 )
Net income
  $ 67,604     $ 34,590     $ 82,499     $ 34,340  
                                 
Currency translation adjustment, net
    93,579       (13,868 )     285,046       (19,503 )
Obligation to repurchase shares
    -       -       488       --  
Total comprehensive income
  $ 161,183     $ 20,722     $ 368,033     $ 14,837  

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

Page 4


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (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,
 
       
2007
   
2008
   
2007
 
PER SHARE DATA (Note 15):
                       
Net income per share:
                       
Net income – Basic
  $ 1.60     $ 0.84     $ 1.95     $ 0.84  
Net income – Diluted
  $ 1.58     $ 0.83     $ 1.93     $ 0.83  
                                 
Weighted average common shares used in computing per share amounts (000’s):
                               
Basic
    42,322       40,941       42,319       40,867  
Diluted
    42,836       41,407       42,784       41,390  


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

Page 5


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(US$ 000’s)
(Unaudited)

   
Class A Common Stock
   
Class B Common Stock
               
Accumulated Other Comprehensive Income
   
Total Shareholders' Equity
 
   
Number of shares
   
Par value
   
Number of shares
   
Par value
   
Additional Paid-In Capital
   
Retained Earnings
         
    36,003,198     $ 2,880       6,312,839     $ 505     $ 1,051,336     $ 53,619     $ 291,467     $ 1,399,807  
Stock-based compensation
    -       -       -       -       4,072       -       -       4,072  
Stock options exercised
    15,875       2       -       -       1,088       -       -       1,090  
Redeemable Minority Interest (Note 18)
    -       -       -       -       -       (32,601 )     -       (32,601 )
Purchase of capped call options (Note 5)
    -       -       -       -       (63,318 )     -       -       (63,318 )
Net income
    -       -       -       -       -       82,499       -       82,499  
Currency translation adjustment
    -       -       -       -       -       -       285,046       285,046  
Obligation to repurchase shares
    -       -       -       -       -       -       488       488  
BALANCE, June 30, 2008
    36,019,073     $ 2,882       6,312,839     $ 505     $ 993,178     $ 103,517     $ 577,001     $ 1,677,083  

 
   
Class A Common Stock
   
Class B Common Stock
               
Accumulated Other Comprehensive Income / (Loss)
   
Total Shareholders' Equity
 
   
Number of shares
   
Par value
   
Number of shares
   
Par value
   
Additional Paid-In Capital
   
Accumulated Deficit
         
    34,412,138     $ 2,753       6,312,839     $ 505     $ 931,108     $ (31,730 )   $ 133,130     $ 1,035,766  
Impact of adoption of FIN 48
    -       -       -       -       -       (3,219 )     -       (3,219 )
BALANCE, upon the adoption of FIN 48
    34,412,138     $ 2,753       6,312,839     $ 505     $ 931,108     $ (34,949 )   $ 133,130     $ 1,032,547  
Stock-based compensation
    -       -       -       -       2,910       -       -       2,910  
Stock options exercised
    227,783       18       -       -       2,712       -       -       2,730  
Net income
    -       -       -       -       -       34,340       -       34,340  
Currency translation adjustment
    -       -       -       -       -       -       (19,503 )     (19,503 )
BALANCE, June 30, 2007
    34,639,921     $ 2,771       6,312,839     $ 505     $ 936,730     $ (609 )   $ 113,627     $ 1,053,024  
 

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

Page 6


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(US$ 000’s)
(Unaudited)
 
   
For the Six Months Ended June 30,
 
   
2008
   
2007
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 82,499     $ 34,340  
Adjustments to reconcile net income to net cash generated from operating activities:
               
Depreciation and amortization
    159,092       110,945  
Gain on disposal of fixed asset
    (266 )     -  
Stock-based compensation (Note 14)
    3,804       2,605  
Minority interest in income of consolidated subsidiaries
    2,405       5,370  
Change in fair value of derivative instruments
    23,539       (12,052 )
Foreign currency exchange loss, net
    10,549       5,252  
Net change in (net of effects of acquisitions and disposals of businesses):
               
Accounts receivable
    (13,872 )     (25,572 )
Program rights
    (176,348 )     (100,593 )
Other assets
    (5,137 )     (8,018 )
Accounts payable and accrued liabilities
    43,825       5,723  
Income taxes payable
    (15,092 )     (274 )
Deferred taxes
    11,446       (458 )
VAT and other taxes payable
    1,071       4,333  
Net cash generated from continuing operating activities
    127,515       21,601  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase of property, plant and equipment
    (42,034 )     (25,469 )
Proceeds from disposal of property, plant and equipment
    300       123  
Investments in subsidiaries and unconsolidated affiliates
    (247,412 )     (63,017 )
Repayment of loans and advances to related parties
    1,990       250  
Net cash used in continuing investing activities
    (287,156 )     (88,113 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net proceeds from issuance of Convertible Notes
    463,673       -  
Purchase of capped call option
    (63,318 )     -  
Proceeds from credit facilities
    -       135,465  
Payment of credit facilities and capital leases
    (1,240 )     (137,289 )
Net proceeds from issuance of Senior Notes
    -       199,400  
Redemption of Senior Notes
    -       (169,010 )
Proceeds from exercise of stock options
    1,090       2,730  
Excess tax benefits from share based payment arrangements
    268       305  
Dividends paid to minority shareholders
    (1,230 )     (476 )
Net cash received from continuing financing activities
    399,243       31,125  
                 
NET CASH USED IN DISCONTINUED OPERATIONS – OPERATING ACTIVITIES
    (1,973 )     (1,624 )
Impact of exchange rate fluctuations on cash
    (4,703 )     7,769  
                 
Net increase / (decrease) in cash and cash equivalents
    232,926       (29,242 )
CASH AND CASH EQUIVALENTS, beginning of period
    142,826       145,904  
CASH AND CASH EQUIVALENTS, end of period
  $  375,752     $ 116,662  


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

Page 7


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

1.  ORGANIZATION AND BUSINESS

Central European Media Enterprises Ltd., a Bermuda corporation, was formed in June 1994.  Our assets are held through a series of Dutch and Netherlands Antilles holding companies.  We invest in, develop and operate national and regional commercial television stations and channels in Central and Eastern Europe.  At June 30, 2008, we had operations in Croatia, the Czech Republic, Romania, the Slovak Republic, Slovenia and Ukraine.

Our principal subsidiaries, equity-accounted affiliates and cost investments as at June 30, 2008 were:

Company Name
 
Effective
Voting
Interest
 
Jurisdiction of
Organization
 
Type of Affiliate
Nova TV d.d. (“Nova TV (Croatia)”)
 
100.0%
 
Croatia
 
Subsidiary
Operativna Kompanija d.o.o.
 
100.0%
 
Croatia
 
Subsidiary
Media House d.o.o.
 
100.0%
 
Croatia
 
Subsidiary
Internet Dnevnik d.o.o.
 
76.0%
 
Croatia
 
Subsidiary
             
CME Media Investments s. r.o.
 
100.0%
 
Czech Republic
 
Subsidiary
VILJA a.s.
 
100.0%
 
Czech Republic
 
Subsidiary
CET 21 spol. s r.o. (“CET 21”)
 
100.0%
 
Czech Republic
 
Subsidiary
MEDIA CAPITOL, a.s.
 
100.0%
 
Czech Republic
 
Subsidiary
HARTIC a.s.
 
100.0%
 
Czech Republic
 
Subsidiary
Galaxie sport, s. r.o. (“Galaxie Sport”)
 
100.0%
 
Czech Republic
 
Subsidiary
Jyxo, s.r.o. (“Jyxo”)
 
100.0%
 
Czech Republic
 
Subsidiary
BLOG Internet, s.r.o. (“Blog“)
 
100.0%
 
Czech Republic
 
Subsidiary
CME Slovak Holdings B.V.
 
100.0%
 
Netherlands
 
Subsidiary
             
CME Romania B.V.
 
100.0%
 
Netherlands
 
Subsidiary
Media Pro International S.A. (“MPI”)
 
95.0%
 
Romania
 
Subsidiary
Media Vision SRL (“Media Vision”)
 
95.0%
 
Romania
 
Subsidiary
MPI Romania B.V.
 
95.0%
 
Netherlands
 
Subsidiary
Music Television System S.R.L. (“MTS”)
 
95.0%
 
Romania
 
Subsidiary
Pro TV S.A. (“Pro TV”)
 
95.0%
 
Romania
 
Subsidiary
Sport Radio TV Media SRL (“Sport.ro”)
 
95.0%
 
Romania
 
Subsidiary
Media Pro Management S.A.
 
8.7%
 
Romania
 
Cost investment
Media Pro B.V.
 
10.0%
 
Netherlands
 
Cost investment
             
A.R.J., a.s.
 
100.0%
 
Slovak Republic
 
Subsidiary
Markiza-Slovakia spol. s r.o. (“Markiza”)
 
100.0%
 
Slovak Republic
 
Subsidiary
GAMATEX spol. s. r.o.
 
100.0%
 
Slovak Republic
 
Subsidiary (in liquidation)
A.D.A.M. a.s.
 
100.0%
 
Slovak Republic
 
Subsidiary (in liquidation)

Page 8


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

Company Name
 
Effective
Voting
Interest
 
Jurisdiction of
Organization
 
Type of Affiliate
Media Invest, spol s.r.o.
 
100.0%
 
Slovak Republic
 
Subsidiary
PMT, s.r.o.
 
31.5%
 
Slovak Republic
 
Cost investment
             
MMTV 1 d.o.o.
 
100.0%
 
Slovenia
 
Subsidiary
Produkcija Plus d.o.o. (“Pro Plus”)
 
100.0%
 
Slovenia
 
Subsidiary
POP TV d.o.o. (“Pop TV”)
 
100.0%
 
Slovenia
 
Subsidiary
Kanal A d.o.o. (“Kanal A”)
 
100.0%
 
Slovenia
 
Subsidiary
Euro 3 TV d.o.o.
 
42.0%
 
Slovenia
 
Equity-Accounted Affiliate
Fit & Fun d.o.o.
 
100.0%
 
Slovenia
 
Subsidiary
Televideo d.o.o. (trading as TV Pika)
 
20.0%
 
Slovenia
 
Equity-Accounted Affiliate
             
International Media Services Ltd. (“IMS”)
 
90.0%
 
Bermuda
 
Subsidiary
CME Ukraine Holding GmbH
 
100.0%
 
Austria
 
Subsidiary
Innova Film GmbH (“Innova”)
 
83.4%
 
Germany
 
Subsidiary
CME Cyprus Holding Ltd.
 
100.0%
 
Cyprus
 
Subsidiary
TV Media Planet Ltd. (“TV Media Planet”)
 
90.0%
 
Cyprus
 
Subsidiary
1+1 Media
 
83.4%
 
Ukraine
 
Subsidiary
Studio 1+1 LLC (“Studio 1+1”)
 
90.0%
 
Ukraine
 
Subsidiary
Ukraine Media Services LLC (“UMS”)
 
99.9%
 
Ukraine
 
Subsidiary
Grizard Investments Ltd. (Grizard”)
 
100.0%
 
Cyprus
 
Subsidiary
CME Ukraine Holding B.V.
 
100.0%
 
Netherlands
 
Subsidiary
Ukrpromtorg-2003 LLC (“Ukpromrtorg”)
 
65.5%
 
Ukraine
 
Subsidiary
Gravis LLC (“Gravis”)
 
60.4%
 
Ukraine
 
Subsidiary
Delta JSC
 
60.4%
 
Ukraine
 
Subsidiary
Nart LLC
 
65.5%
 
Ukraine
 
Subsidiary
TV Stimul LLC
 
49.1%
 
Ukraine
 
Equity-Accounted Affiliate
Tor LLC (“Tor”)
 
60.4%
 
Ukraine
 
Subsidiary
Zhysa LLC (“Zhysa”)
 
60.4%
 
Ukraine
 
Subsidiary
             
Central European Media Enterprises N.V.
 
100.0%
 
Netherlands Antilles
 
Subsidiary
Central European Media Enterprises II B.V.
 
100.0%
 
Netherlands Antilles
 
Subsidiary
CME Media Enterprises B.V.
 
100.0%
 
Netherlands
 
Subsidiary
CME Development Corporation
 
100.0%
 
Delaware (USA)
 
Subsidiary
             
CME SR d.o.o.
 
100.0%
 
Serbia
 
Subsidiary

Page 9


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)


Page 10


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

Croatia

We operate one national channel in Croatia, NOVA TV (Croatia). We own 100.0% of Nova TV (Croatia), which holds a national terrestrial broadcast license for Croatia that expires in April 2010.

Czech Republic

We operate one national television channel in the Czech Republic, TV NOVA (Czech Republic) and two cable/satellite channels, GALAXIE SPORT and NOVA CINEMA. We own 100.0% of CET 21, which holds the national terrestrial broadcast license for TV NOVA (Czech Republic) that expires in January 2017 and a satellite license for NOVA CINEMA that expires in November 2019. CET 21 owns 100.0% of Galaxie Sport, which holds the broadcast license for GALAXIE SPORT that expires in March 2014.
 
Romania

We operate five television channels in Romania: PRO TV, ACASA, PRO CINEMA, SPORT.RO and MTV ROMANIA, as well as PRO TV INTERNATIONAL, a channel distributed by satellite outside the country featuring programs re-broadcast from other Romanian channels. Since the acquisition of the assets of Compania de Radio Pro (“Radio Pro”) on April 14, 2008, we operate two leading radio channels in Romania, PRO FM, a pop music channel, and INFO PRO, a national infotainment channel.

We own a 95.0% interest in each of Pro TV, MPI and Media Vision, a production, dubbing and subtitling company.  The remaining shares of each of these companies are owned by companies, or individuals associated with, Adrian Sarbu, our Chief Operating Officer.  Pro TV holds the licenses for the PRO TV, ACASA, PRO TV INTERNATIONAL, PRO CINEMA, SPORT.RO and MTV ROMANIA channels. These licenses expire on various dates between October 2008 and May 2017.

We own 10.0% of Media Pro BV and 8.7% of Media Pro Management S.A., the parent companies of the Media Pro group of companies (“Media Pro”). Substantially all of the remaining shares of Media Pro are owned directly or indirectly by Mr. Sarbu. Media Pro comprises a number of companies with operations in the fields of publishing, information, printing, cinema, entertainment and radio in Romania.

Slovak Republic

In the Slovak Republic we operate one national television channel, TV MARKIZA. We own 100.0% of Markiza, which holds a national terrestrial broadcast license for the Slovak Republic that expires in September 2019.

Slovenia

We operate two national television channels in Slovenia, POP TV and KANAL A.  We own 100.0% of Pro Plus, the operating company for our Slovenia operations.  Pro Plus has a 100.0% interest in each of Pop TV, which holds the licenses for the POP TV channel, and Kanal A, which holds the licenses for the KANAL A channel.  All such licenses expire in August 2012.

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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

Ukraine (Studio 1+1)

We operate one national television channel in Ukraine, STUDIO 1+1. We own a 90% interest in the Studio 1+1 group, which is comprised of several entities in which we hold direct or indirect interests. On June 30, 2008, we acquired a 30.0% interest in the Studio 1+1 group for cash consideration of approximately US$ 219.6 million (see Note 3 “Acquisitions and Disposals”).  Boris Fuchsmann and Alexander Rodnyansky own the remaining 10.0% interest and have the right to put to us, and we will have the right to call from them, the remaining 10.0% interest (see Note 18 “Commitments and Contingencies: Ukraine Buyout Agreements: other commitments”).
 
Following the acquisition we now hold a 90.0% voting and economic interest in each of IMS and TV Media Planet and an 83.4% voting and economic interest in Innova.  Innova owns 100.0% of 1+1 Media, a Ukrainian company, which in turn holds a 30.0% voting and economic interest in Studio 1+1, the license holder for the STUDIO 1+1 channel. In addition, we hold a 99.9% interest in UMS, which owns a 42.0% direct voting and economic interest in Studio 1+1, and 100.0% of Grizard, which owns a 23.0% direct voting and economic interest in Studio 1+1.  The fifteen hour prime time and off prime time license of STUDIO 1+1 expires in December 2016. The license to broadcast for the remaining nine hours in off prime time expires in August 2014.

Ukraine (KINO, CITI)

In Ukraine we operate a network of regional channels, KINO and a local channel that broadcasts in the Kiev area, CITI.

We hold a 65.5% interest in Ukrpromtorg. Ukrpromtorg owns (i) 92.2% of Gravis, which operates the local channels KINO and CITI; (ii) 100.0% of Nart LLC, which holds a satellite broadcasting license; and (iii) 75.0% of TV Stimul LLC.  We also own a 60.4% interest in each of Zhysa and Tor, two regional broadcasters. Licenses for KINO and CITI expire on dates ranging from April 2009 to July 2016.


2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The interim financial statements for the three months ended June 30, 2008 should be read in conjunction with the Notes to the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the period ended December 31, 2007.  Our significant accounting policies have not changed since December 31, 2007, except as noted below.

In the opinion of management, the accompanying interim unaudited financial statements reflect all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with generally accepted accounting principles in the United States of America (“U.S. 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 U.S.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 and assumptions.

The condensed consolidated financial statements include the accounts of Central European Media Enterprises Ltd. and our subsidiaries, after the elimination of intercompany accounts and transactions.  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.

We, like other television operators, experience seasonality, with advertising sales tending to be lower during the first and third quarters of each calendar year, particularly during the summer holiday period (typically July and August) and higher during the second and fourth quarters of each calendar year, particularly toward the end of the year.

Page 12


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

The terms “Company”, “we”, “us”, and “our” are used in this Form 10-Q to refer collectively to Central European Media Enterprises Ltd. and our subsidiaries, through which our various businesses are actually conducted.  Unless otherwise noted, all statistical and financial information presented in this report has been converted into US dollars using appropriate exchange rates.  All references to “US$” or “dollars” are to U.S. dollars, all references to “HRK” are to Croatian kuna, all references to “CZK” are to Czech korunas, all references to “RON” are to the New Romanian lei, all references to “SKK” are to Slovak korunas, all references to “UAH” are to Ukrainian hryvna, all references to “Euro” or “EUR” are to the European Union Euro and all references to “GBP” are to British pounds.

Fair Value of Financial Instruments

In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements” (“FAS 157”).  FAS 157 addresses the need for increased consistency in fair value measurements and defines fair value, establishes a framework for measuring fair value and expands disclosure requirements. FAS 157 was to be effective in its entirety for fiscal years beginning after November 15, 2007, however in February 2008, the FASB issued FASB Staff Position No. FSP FAS 157-2 “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”). Under FSP FAS 157-2, application of FAS 157 may be deferred until fiscal years beginning after November 15, 2008 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis.

We adopted those parts of FAS 157 not deferred by FSP FAS 157-2 on January 1, 2008. There was no impact on the carrying value of any asset or liability recognized at adoption and additional disclosure is provided in Note 12,“Financial instruments and Fair Value Measurements” to comply with the enhanced disclosure requirements of the standard. We do not expect that the adoption of those parts of FAS 157 deferred by FSP FAS 157-2 will result in a material impact on our financial position and results of operations.

On January 1, 2008 we adopted FASB Statement No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("FAS 159") which gives entities the option to prospectively measure many financial instruments and certain other items at fair value in the balance sheet with changes in the fair value recognized in the income statement. We did not elect to apply the fair value option to any assets and liability upon, or since, adoption, therefore there was no impact on our financial position and results of operations.

Recent Accounting Pronouncements

In December 2007, the FASB issued FASB Statement No. 141(R), “Business Combinations” (“FAS 141(R)”), which establishes principles and requirements for how the acquirer:  (a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  FAS 141(R) requires contingent consideration to be recognized at its fair value on the acquisition date and, for certain arrangements, changes in fair value to be recognized in earnings until settled.  FAS 141(R) also requires acquisition-related transaction and restructuring costs to be expensed rather than treated as part of the cost of the acquisition.  FAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  We are currently evaluating the impact this statement will have on our financial position and results of operations. 
 
In December 2007, the FASB issued FASB Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements an Amendment of ARB No. 51” (“FAS 160”), which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  FAS 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements.  FAS 160 also requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest.  It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest.  FAS 160 also provides guidance when a subsidiary is deconsolidated and requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent’s owners and the interests of the noncontrolling owners of a subsidiary.  FAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  We are currently evaluating the impact this statement will have on our financial position and results of operations. 

Page 13


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

In March 2008, the FASB issued FASB Statement No. 161 “Disclosures About Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133” (“FAS 161”) which enhances the disclosure requirements about derivatives and hedging activities. FAS 161 requires additional narrative disclosure about how and why an entity uses derivative instruments, how they are accounted for under FASB Statement No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”), and what impact they have on financial position, results of operations and cash flows. FAS 161 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after November 15, 2008. Although certain additional narrative disclosures may be required in our future financial statements, our limited use of derivative instruments means we do not expect the adoption of FAS 161 will result in a material impact on our financial position and results of operations.

In April 2008 the FASB issued FASB Staff Position No. FAS 142-3 “Determination of the Useful Life of Intangible Assets,” which aims to improve consistency between the useful life of a recognized intangible asset under FASB Statement No. 142 “Goodwill and Other Intangible Assets” and the period of expected cash flows used to measure the fair value of the asset under FAS 141 (R), especially where the underlying arrangement includes renewal or extension terms. The FSP is effective prospectively for fiscal years beginning after December 15, 2008 and early adoption is prohibited. We are currently evaluating the impact this statement will have on our financial position and results of operations.

In May 2008, the FASB issued FASB Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“FAS 162”). This statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of non-governmental entities that are presented in accordance with GAAP. With the issuance of this statement, the FASB concluded that the GAAP hierarchy should be directed toward the entity and not its auditor, and reside in the accounting literature established by the FASB as opposed to the American Institute of Certified Public Accountants (AICPA) Statement on Auditing Standards No. 69, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” This statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The implementation of this standard will not have a material impact on our consolidated financial position and results of operations.

In May 2008, the FASB issued Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”), which clarifies the accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. FSP APB 14-1 requires issuers to account separately for the liability and equity components of certain convertible debt instruments in a manner that reflects the issuer's non-convertible debt (unsecured debt) borrowing rate when interest cost is recognized. FSP APB 14-1 requires bifurcation of a component of the debt including allocated issuance costs, classification of that component in equity and the accretion of the resulting discount on the debt and the allocated acquisition costs to be recognized as part of interest expense in the consolidated statement of operations. FSP APB 14-1 requires retrospective application to the terms of instruments as they existed for all periods presented. FSP APB 14-1 is effective for us as of January 1, 2009 and early adoption is prohibited. The adoption of FSP APB 14-1 will affect the accounting for our Convertible Notes and, we expect, will result in approximately the following changes to the 2008 comparative balances in our 2009 financial statements to reflect the revised equity and liability balances on issuance (net of allocated acquisition costs) of US$ 108.1 million and US$ 364.2 million respectively:

Page 14


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

Impact for the quarterly period ended June 30, 2008:
   
For the Three Months Ended
   
For the Six Months Ended
 
US$  million
 
As reported
   
Impact of Adoption
   
As Adjusted
   
As reported
   
Impact of Adoption
   
As Adjusted
 
Consolidated Statement of Operations:
 
Interest expense
    (18.1 )     (4.3 )     (22.4 )     (32.4 )     (5.2 )     (37.6 )
       
                             
US$ million                          
As reported
   
Impact of Adoption
   
As Adjusted
 
Consolidated balance sheet:
 
Other current assets
                            85.2       (0.7 )     84.5  
Other non-current assets
                            21.7       (1.8 )     19.9  
Senior Debt
                            (1,097.7 )     105.4       (992.3 )
Additional paid-in capital
                            993.2       108.1       1,101.3  
Retained Earnings
                            103.5       (5.2 )     98.3  

In addition, at present, we expect that the adoption of FSP APB 14-1 will cause our reported interest expense in  the 2008 and 2009 financial years to increase by approximately US$ 14.0 million and US$ 18.9 million respectively to reflect the amortization of the issuance discount.


3.  ACQUISITIONS AND DISPOSALS

Czech Republic

Acquisition of Jyxo and Blog

In order to enhance both our internet offering and our software delivery capabilities in the Czech Republic, on May 27, 2008 we purchased 100.0% of Jyxo, an information technology provider and Blog, the operator of the leading blog site in the Czech Republic, blog.cz.

Initial cash consideration was approximately US$ 9.0 million, of which approximately US$ 2.7 million had been paid by June 30, 2008 and the remainder was paid in July 2008. In addition we are committed to paying a further CZK 33.4 million (approximately US$ 2.1 million at the date of acquisition) within one month of the second anniversary of completion, which has been recorded as consideration payable. An additional amount of up to CZK 37.0 million (approximately US$ 2.4 million) may also be payable if certain operational targets are met. We concluded that if the additional consideration becomes payable, we will record the fair value of the consideration issuable as an additional cost of acquiring Jyxo.

We performed a fair value exercise to allocate the purchase price to the acquired assets and liabilities and separately identifiable intangible assets as at May 27, 2008.  The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition:

Page 15


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

   
Fair Value on Acquisition
 
       
Cash and cash equivalents
  $ 727  
Other net assets
    618  
Property, plant and equipment
    3,744  
Intangible assets not subject to amortization (1)
    9,124  
Contingent consideration liability (2)
    (607 )
Deferred tax liability
    (2,462 )
Total purchase price (3)
  $ 11,144  
 
(1) Intangible assets not subject to amortization comprise trademarks.
 
(2) Since the aggregate value of the assets and liabilities acquired exceeds the purchase price without considering any additional amounts we may have to pay that are contingent upon meeting operational targets, we have recognized this excess, which is lower than the maximum amount of contingent consideration that may become payable, as if it were a liability.
 
(3) The total purchase price includes US$ 0.5 million of capitalized acquisition costs, initial cash payments of approximately US$ 8.5 million and consideration payable of CZK 33.4 million (approximately US$ 2.1 million at the date of acquisition).
 
Romania

Acquisition of Radio Pro

In order to further strengthen our position in the youth market in Romania and complement our acquisition of the license for MTV Romania, on April 17, 2008 we purchased certain assets of Radio Pro from Media Pro, a company which is controlled by Mr. Sarbu and in which we hold 95% interest, for total consideration of RON 47.2 million (approximately US$ 20.6 million at the date of acquisition).

We determined that the assets we acquired met the definition of a business and therefore performed a fair value exercise to allocate the purchase price to the acquired assets and liabilities and separately identifiable intangible assets.  The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition:


   
Fair Value on Acquisition
 
       
Property, plant and equipment
  $ 2,561  
Intangible assets not subject to amortization (1)
    15,892  
Goodwill (2)
    2,394  
Total purchase price (3)
  $ 20,847  
 
(1) Intangible assets not subject to amortization comprise trademarks of US$ 1.7 million and broadcasting licenses of US$ 14.2 million.
 
(2) No goodwill is expected to be deductible for tax purposes.
 
(3) The total purchase price includes US$ 0.2 million of capitalized acquisition costs.
 
Page 16


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

Ukraine (Studio 1+1)

Acquisition of additional interest – Studio 1+1

On June 30, 2008 we acquired a 30.0% interest in the Studio 1+1 group from our partners, Alexander Rodnyansky and Boris Fuchsmann.  The interests acquired consisted of (i) an 8.335% direct and indirect ownership interest in the Studio 1+1 group held by Messrs. Rodnyansky and Fuchsmann and (ii) a 21.665% direct and indirect interest in Studio 1+1, Innova and IMS over which Igor Kolomoisky, one of our shareholders and a member of our board of directors, held options (the “Optioned Interests”). Following the completion of these transactions, we now hold a 90.0% interest in the Studio 1+1 group and Messrs. Rodnyansky and Fuchsmann each hold a 5.0% interest.

Messrs. Rodnyansky and Fuchsmann received a combined total cash consideration of US$ 79.6 million, including a de minimus amount upon exercise of the Optioned Interests, in exchange for the 30.0% beneficial ownership interest in the Studio 1+1 group.  Mr Kolomoisky received total cash consideration of US$ 140.0 million upon the assignment of his options to us.

In addition, we have granted Messrs. Rodnyansky and Fuchsmann the right to jointly put both of their remaining 5.0% interests in the Studio 1+1 group to us, which became effective upon completion of our purchase of the 30% interest in the Studio 1+1 Group. We calculated that the fair value of these options was US $58.0 million at the purchase date using a binomial option pricing model and included it in the purchase price in accordance with EITF Topic D-87 “Determination of the Measurement Date for Consideration Given by the Acquirer in a Business Combination When That Consideration is Securities Other Than Those Issued by the Acquirer.” (“EITF D-87”).

We performed a fair value exercise to allocate the purchase price to the acquired assets and liabilities and separately identifiable intangible assets as at June 30, 2008.  The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition:

   
Fair Value on Acquisition
 
       
Intangible assets subject to amortization (1)
  $ 41,480  
Intangible assets not subject to amortization (2)
    35,652  
Goodwill
    208,964  
Deferred tax liability
    (19,284 )
Minority interests (3)
    14,398  
Total purchase price (4)
  $ 281,210  
 
(1) The intangible assets subject to amortization comprise broadcasting licenses of US$ 40.9 million, which are being amortized on a straight line basis over 18 years, and customer relationships of US$ 0.6 million, which are being amortized on a straight line basis over nine  years.
 
(2) Intangible assets not subject to amortization comprise trademarks.
 
(3) As a result of granting Messrs. Rodyansky and Fuchsmann options to put their remaining 10% interests to us we have accounted for this as a redeemable minority interest. (See Note 18, “Commitments and Contingencies, Ukraine Buyout: redeemable minority interest”).
 
(4) The total purchase price includes US$ 3.6 million of capitalized acquisition costs, cash payments to Messrs. Rodyansky and Fuchsmann of US$ 79.6 million, cash payments of US$ 140.0 million to Mr Kolomoisky and the fair value of options granted to Messrs. Rodyansky and Fuchsmann of US$ 58.0 million.
 
Page 17


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

4.  GOODWILL AND INTANGIBLE ASSETS

Our goodwill and intangible asset additions are the result of acquisitions in Croatia, the Czech Republic, Romania, the Slovak Republic, Slovenia and Ukraine.  No goodwill is expected to be deductible for tax purposes.

Goodwill:

Goodwill by operating segment as at June 30, 2008 and December 31, 2007 is summarized as follows:
 
   
Balance
   
Additions / Allocations
   
Foreign currency movement
   
Balance
 
                         
Croatia
  $ 773       -     $ 67     $ 840  
Czech Republic
    951,286       -       183,328       1,134,614  
Romania
    74,667       1,869       12,346       88,882  
Slovak Republic
    57,635       -       10,854       68,489  
Slovenia
    18,393       -       1,304       19,697  
Ukraine (STUDIO 1+1)
    4,096       208,964       -       213,060  
Ukraine (KINO, CITI)
    7,497       (59 )     -       7,438  
Total
  $ 1,114,347     $ 210,774     $ 207,899     $ 1,533,020  


Broadcast licenses:

The net book value of our broadcast licenses as at June 30, 2008 and December 31, 2007 is summarized as follows:

   
Indefinite-Lived Broadcast Licenses
   
Amortized Broadcast Licenses
   
Total
 
                   
  $ 50,748     $ 187,178     $ 237,926  
Additions
    14,177       40,890       55,067  
Amortization
    -       (11,184 )     (11,184 )
Foreign currency movements
    7,365       34,767       42,132  
Balance, June 30, 2008
  $ 72,290     $ 251,651     $ 323,941  

Our broadcast licenses in Croatia, Romania and Slovenia have indefinite lives because we expect the cash flows generated by those assets to continue indefinitely.  These licenses are subject to annual impairment reviews.  The licenses in Ukraine have economic useful lives of, and are amortized on a straight-line basis over, between two and ten years.  The license in the Czech Republic has an economic useful life of, and is amortized on a straight-line basis over, twelve years.  The license in the Slovak Republic has an economic useful life of, and is amortized on a straight-line basis over, thirteen years.

Page 18


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

The gross value and accumulated amortization of our broadcast licenses was as follows at June 30, 2008 and December 31, 2007:

         
             
Gross value
  $ 399,940     $ 241,100  
Accumulated amortization
    (75,999 )     (53,922 )
Total net book value
  $ 323,941     $ 187,178  

Other intangible assets:

The net book value of our other intangible assets as at June 30, 2008 and December 31, 2007 is summarized as follows:

   
Trademarks
   
Customer Relationships
   
Other
   
Total
 
                         
  $ 60,084     $ 73,267     $ 2,381     $ 135,732  
Reallocation (1)
    -       -       624       624  
Additions
    46,491       590       -       47,081  
Amortization
    (170 )     (4,176 )     (324 )     (4,670 )
Foreign currency movements
    12,587       13,481       217       26,285  
Balance, June 30, 2008
  $ 118,992     $ 83,162     $ 2,898     $ 205,052  

(1) At December 31, 2007 we had not completed our purchase price allocation of MTS in Romania. The carrying value of other intangible assets was adjusted during the first quarter of 2008 to reflect the final value of our Trademark and Programming Agreement with MTV NE which allows MTS access to MTV programming and to use the MTV name.

Customer relationships are deemed to have an economic useful life of, and are amortized on a straight-line basis over, five to fourteen years.  Trademarks have an indefinite life, with the exception of the TV Sport” trademark acquired with Sport.ro, which has an economic life of, and is being amortized on a straight line basis over, two years because it is no longer used.


The gross value and accumulated amortization of other intangible assets was as follows at June 30, 2008 and December 31, 2007:

         
             
Gross value
  $ 224,387     $ 147,514  
Accumulated amortization
    (19,335 )     (11,782 )
Total net book value
  $ 205,052     $ 135,732  

Page 19


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

5.  SENIOR DEBT

Our senior debt comprised the following as at June 30, 2008 and December 31, 2007:

   
Carrying Value
   
Fair Value
 
   
June 30 , 2008
       
June 30 , 2008
     
                         
EUR 245.0 million 8.25% Senior Notes
  $ 386,218     $ 360,664     $ 388,149     $ 366,976  
EUR 150.0 million Floating Rate Senior Notes
    236,460       220,815       217,543       204,806  
USD 475.0 million 3.50% Senior Convertible Notes
    475,000       -       495,188       -  
    $ 1,097,678     $ 581,479     $ 1,100,880     $ 571,782  

On May 5, 2005, we issued EUR 245.0 million of 8.25% senior notes (the “Fixed Rate Notes”). The Fixed Rate Notes mature on May 15, 2012.

On May 16, 2007, we issued EUR 150.0 million of floating rate senior notes (the “Floating Rate Notes”, and collectively with the Fixed Rate Notes, the “Senior Notes”) which bear interest at six-month Euro Inter Bank Offered Rate (“EURIBOR”) plus 1.625% (6.504% was applicable at June 30, 2008). The Floating Rate Notes mature on May 15, 2014.

On March 10, 2008, we issued US$ 475.0 million of 3.50% Senior Convertible Notes (the “Convertible Notes”). The Convertible Notes mature on March 15, 2013.

Fixed Rate Notes

Interest is payable semi-annually in arrears on each May 15 and November 15.  The fair value of the Fixed Rate Notes as at June 30, 2008 and December 31, 2007 was calculated by multiplying the outstanding debt by the traded market price.

The Fixed Rate Notes are secured senior obligations and rank pari passu with all existing and future senior indebtedness and are effectively subordinated to all existing and future indebtedness of our subsidiaries.  The amounts outstanding are guaranteed by two subsidiary holding companies and are secured by a pledge of shares of those subsidiaries as well as an assignment of certain contractual rights.  The terms of our Fixed Rate Notes restrict the manner in which our business is conducted, including the incurrence of additional indebtedness, the making of investments, the payment of dividends or the making of other distributions, entering into certain affiliate transactions and the sale of assets.

In the event that (A) there is a change in control by which (i) any party other than our present shareholders becomes the beneficial owner of more than 35.0% of our total voting power; (ii) we agree to sell substantially all of our operating assets; or (iii) there is a change in the composition of a majority of our Board of Directors; and (B) on the 60th day following any such change of control the rating of the Fixed Rate Notes is either withdrawn or downgraded from the rating in effect prior to the announcement of such change of control, we can be required to repurchase the Fixed Rate Notes at a purchase price in cash equal to 101.0% of the principal amount of the Fixed Rate Notes plus accrued and unpaid interest to the date of purchase.

Page 20


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

The Fixed Rate Notes are redeemable at our option, in whole or in part, at the redemption prices set forth below:

From:
 
Fixed Rate Notes
Redemption Price
 
       
    104.125 %
    102.063 %
May 15, 2011 and thereafter
    100.000 %

Prior to May 15, 2009, we may redeem all or a part of the Fixed Rate Notes at a redemption price equal to 100.0% of the principal amount of such notes, plus a “make-whole” premium and accrued and unpaid interest to the redemption date.

Certain derivative instruments, including redemption call options and change of control and asset disposition put options, have been identified as being embedded in the Fixed Rate Notes but as they are considered clearly and closely related to those notes, they are not accounted for separately.

Floating Rate Notes

Interest is payable semi-annually in arrears on each May 15 and November 15.  The fair value of the Floating Rate Notes as at June 30, 2008 and December 31, 2007 was calculated by multiplying the outstanding debt by the traded market price.

The Floating Rate Notes are secured senior obligations and rank pari passu with all existing and future senior indebtedness and are effectively subordinated to all existing and future indebtedness of our subsidiaries.  The amounts outstanding are guaranteed by two subsidiary holding companies and are secured by a pledge of shares of those subsidiaries as well as an assignment of certain contractual rights.  The terms of our Floating Rate Notes restrict the manner in which our business is conducted, including the incurrence of additional indebtedness, the making of investments, the payment of dividends or the making of other distributions, entering into certain affiliate transactions and the sale of assets.

In the event that (A) there is a change in control by which (i) any party other than our present shareholders becomes the beneficial owner of more than 35.0% of our total voting power; (ii) we agree to sell substantially all of our operating assets; or (iii) there is a change in the composition of a majority of our Board of Directors; and (B) on the 60th day following any such change of control the rating of the Floating Rate Notes is either withdrawn or downgraded from the rating in effect prior to the announcement of such change of control, we can be required to repurchase the Floating Rate Notes at a purchase price in cash equal to 101.0% of the principal amount of the Floating Rate Notes plus accrued and unpaid interest to the date of purchase.

The Floating Rate Notes are redeemable at our option, in whole or in part, at the redemption prices set forth below:

From:
 
Floating Rate Notes
Redemption Price
 
       
    101.000 %
May 15, 2009 and thereafter
    100.000 %

Page 21


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

Certain derivative instruments, including redemption call options and change of control and asset disposition put options, have been identified as being embedded in the Floating Rate Notes but as they are considered clearly and closely related to those notes, they are not accounted for separately.


Convertible Notes

Interest is payable semi-annually in arrears on each March 15 and September 15.  The fair value of the Convertible Notes as at June 30, 2008 was calculated by multiplying the outstanding debt by the traded market price.

The Convertible Notes are secured senior obligations and rank pari passu with all existing and future senior indebtedness and are effectively subordinated to all existing and future indebtedness of our subsidiaries.  The amounts outstanding are guaranteed by two subsidiary holding companies and are secured by a pledge of shares of those subsidiaries as well as an assignment of certain contractual rights.

Prior to December 15, 2012, the Convertible Notes are convertible following certain events and from that date, at any time, based on an initial conversion rate of 9.5238 shares of our Class A common stock per US$ 1,000 principal amount of Convertible Notes (which is equivalent to an initial conversion price of approximately US$ 105.00, or a 25% conversion premium based on the closing sale price of US$ 84.00 per share of our Class A common stock on March 4, 2008). The conversion rate is subject to adjustment if we make certain distributions to the holders of our Class A common stock, undergo certain corporate transactions or a fundamental change, and in other circumstances specified in the Convertible Notes.   From time to time up to and including December 15, 2012, we will have the right to elect  to deliver (i) shares of our Class A common stock or (ii) cash and, if applicable, shares of our Class A common stock upon conversion of the Convertible Notes. At present, we have elected to deliver cash and, if applicable, shares of our Class A common stock. As at June 30, 2008 the Convertible Notes may not be converted.  In addition, the holders of the Convertible Notes have the right to put the Convertible Notes to us for cash equal to the aggregate principal amount of the Convertible Notes plus accrued but unpaid interest thereon following the occurrence of certain specified fundamental changes (including a change of control, certain mergers, insolvency and a delisting).

In order to increase the effective conversion price of our Convertible Notes, on March 4, 2008 we purchased, for aggregate consideration of US$ 63.3 million, capped call options over 4,523,809 shares of our Class A common stock (This amount corresponds to the number of shares of our Class A common stock that would be issuable on a conversion of the Convertible Notes at the initial conversion price if we elected to settle the Convertible Notes solely in shares of Class A common stock). The options entitle us to receive, at our election, cash or shares of Class A common stock with a value equal to the difference between the trading price of our shares at the time the option is exercised and US$ 105.00, up to a maximum trading price of US$ 151.20. At present, we have elected to receive shares of our Class A common stock on exercise of the options. The table below shows how many shares of our Class A common stock would be issued under the Convertible Notes and received on the exercise of the capped call options for a variety of share price scenarios assuming the currently selected settlement methods continue to apply and no event that would result in an adjustment to the conversion rate or the value of the option has occurred:

Page 22


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

Stock Price
 
Shares issued on conversion of Convertible Notes
   
Shares received on exercise of capped call options
   
Net shares issued
   
Value of shares issued (US$ ‘000)
 
$105.00 and below
    -       -       -     $ -  
$ 110.00
    (205,628 )     205,628       -       -  
$ 120.00
    (565,476 )     565,476       -       -  
$ 130.00
    (869,963 )     869,963       -       -  
$ 140.00
    (1,130,951 )     1,130,951       -       -  
$ 151.20
    (1,382,274 )     1,382,274       -       -  
$ 200.00
    (2,148,807 )     1,044,997       (1,103,810 )   $ 220,762  

Under these assumptions, current shareholders do not suffer dilution to their shareholding until the price of our Class A common shares reaches US$ 151.20 per share. We determined that these capped call options meet the definition of an equity instrument in EITF Issue No. 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” and consequently recognize them on issuance at fair value within Shareholders’ Equity. Subsequent changes in fair value are not recognized as long as the instruments continue to be classified in Shareholders’ Equity. At June 30, 2008, the options could not be exercised because no conversion of any Convertible Notes had occurred. In the event any Convertible Notes had been converted at June 30, 2008, no shares of our Class A common stock would have been issuable because the closing price of our shares was below US$ 105.00 per share. The fair value of the capped call options at June 30, 2008 was US$ 66.8 million.

Certain derivative instruments, including put options and conversion options, have been identified as being embedded in the Convertible Notes, but as they are either considered to be clearly and closely related to those Convertible Notes, or would be treated as equity instruments if free-standing, they are not accounted for separately, however this treatment will change when we adopt FSP APB 14-1 on January 1, 2009 (see Note 2, “Summary of Significant Accounting Policies: Recent accounting pronouncements”).


6.  RESTRICTED CASH

Restricted cash comprised the following at June 30, 2008 and December 31, 2007:

         
             
Croatia
  $ -     $ 424  
Romania
    85       -  
Slovenia
    867       810  
Ukraine
    56       52  
Total restricted cash
  $ 1,008     $ 1,286  

Page 23


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

The balances in Slovenia represent minimum balances required to be kept in our accounts with ING Bank N.V (“ING”) pursuant to the terms of our revolving facility (see Note 11,“Credit Facilities and Obligations under Capital Leases”).
 
7.  ACCOUNTS RECEIVABLE

Accounts receivable comprised the following at June 30, 2008 and December 31, 2007:

         
Trading:
           
Third-party customers
  $ 271,475     $ 231,467  
Less: allowance for bad debts and credit notes
    (15,319 )     (13,908 )
Related parties
    8,316       7,978  
Less: allowance for bad debts and credit notes
    (242 )     (656 )
Total trading
  $ 264,230     $ 224,881  
                 
Other:
               
Third-party customers
  $ 318     $ 57  
Less: allowance for bad debts and credit notes
    (32 )     (27 )
Related parties
    51       187  
Less: allowance for bad debts and credit notes
    -       (61 )
Total other
  $ 337     $ 156  
                 
Total accounts receivable
  $ 264,567     $ 225,037  

At June 30, 2008, CZK 775.6 million (approximately US$ 51.2 million) (December 31, 2007: CZK 695.6 million, US$ 45.9 million) of receivables in the Czech Republic were pledged as collateral subject to a factoring agreement (see Note 11, “Credit Facilities and Obligations under Capital Leases”).

Page 24


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

8.  OTHER ASSETS

Other current and non-current assets comprised the following at June 30, 2008 and December 31, 2007:
         
Current:
           
Prepaid programming
  $ 46,265     $ 50,914  
Other prepaid expenses
    13,813       11,785  
Production in progress
    12,865       5,724  
Deferred tax
    3,186       3,652  
VAT recoverable
    3,130       4,520  
Loan to related party
    -       1,924  
Capitalized debt costs
    5,239       3,104  
Other
    680       706  
Total other current assets
  $ 85,178     $ 82,329  
                 
         
Non-current:
               
Capitalized debt costs
  $ 17,372     $ 10,310  
Deferred  tax
    1,735       2,147  
Other
    2,585       2,917  
Total other non-current assets
  $ 21,692     $ 15,374  

Capitalized debt costs primarily comprise the costs incurred in connection with the issuance of our Senior Notes and Convertible Notes (see Note 5 “Senior Debt”), and are being amortized over the term of the Senior Notes and Convertible Notes using the effective interest method. The carrying value of the costs related to the Convertible Notes will change when we adopt FSP APB 14-1 on January 1, 2009 (see Note 2, “Summary of Significant Accounting Policies: Recent accounting pronouncements”).

Page 25


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

9.  PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment comprised the following at June 30, 2008 and December 31, 2007:

         
             
Land and buildings
  $ 101,918     $ 84,515  
Station machinery, fixtures and equipment
    216,990       173,123  
Other equipment
    37,790       31,512  
Software licenses
    30,195       21,517  
Construction in progress
    17,134       11,406  
Total cost
    404,027       322,073  
Less:  Accumulated depreciation
    (175,455 )     (141,762 )
Total net book value
  $ 228,572     $ 180,311  
                 
Assets held under capital leases (included above)
               
Land and buildings
  $ 6,632     $ 6,193  
Station machinery, fixtures and equipment
    1,507       800  
Total cost
    8,139       6,993  
Less: Accumulated depreciation
    (1,942 )     (1,368 )
Net book value
  $ 6,197     $ 5,625  

Page 26


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

10.  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities comprised the following at June 30, 2008 and December 31, 2007:

         
Accounts payable
  $ 33,516     $ 37,977  
Programming liabilities
    35,723       49,457  
Deferred revenue
    34,510       7,126  
Accrued staff costs
    23,333       29,202  
Accrued production costs
    9,174       4,982  
Accrued interest payable
    11,574       5,930  
Consideration payable - Czech Republic
    6,598       -  
Accrued legal costs
    1,790       2,475  
Accrued rent costs
    1,076       999  
Authors’ rights
    5,843       5,522  
Onerous contracts
    1,743       2,832  
Obligation to repurchase shares
    -       488  
Other accrued liabilities
    14,240       9,334  
Total accounts payable and accrued liabilities
  $ 179,120     $ 156,324  
 
The accrued interest payable balance relates primarily to interest on our Senior Notes and our Convertible Notes (see Note 5, “Senior Debt”).

Page 27


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

11.  CREDIT FACILITIES AND OBLIGATIONS UNDER CAPITAL LEASES

Group loan obligations and overdraft facilities comprised the following at June 30, 2008 and December 31, 2007:

           
Credit facilities:
             
Corporate
(a)
  $ -     $ -  
Czech Republic
(b) – (d)
    16,494       13,829  
Romania
(e)
    -       683  
Slovenia
(f)
    -       -  
Ukraine (KINO, CITI)
(g)
    1,700       1,700  
Total credit facilities
    $ 18,194     $ 16,212  
                   
Capital leases:
                 
Croatia operations, net of interest
    $ -     $ -  
Romania operations, net of interest
      501       242  
Slovak Republic operations, net of interest
      67       86  
Slovenia operations, net of interest
      4,554       4,412  
Total capital leases
      5,122     $ 4,740  
                   
Total credit facilities and capital leases
    $ 23,316     $ 20,952  
Less current maturities
      (17,274 )     ( 15,090 )
Total non-current maturities
    $ 6,042     $ 5,862  

Corporate

(a) On July 21, 2006, we entered into a five-year revolving loan agreement for EUR 100.0 million (approximately US$ 157.6 million) arranged by the European Bank for Reconstruction and Development (“EBRD”) and on August 22, 2007, we entered into a second revolving loan agreement for EUR 50.0 million (approximately US$ 78.8 million) also arranged by EBRD (together with the EUR 100.0 million facility, the “EBRD Loan”).  ING and Ceska Sporitelna, a.s. (“CS”) are each participating in the EBRD Loan for EUR 37.5 million (approximately US$ 59.1 million). At June 30, 2008, the full EUR 150.0 million facility was available to be drawn.

We also entered into a supplemental agreement with EBRD on August 22, 2007 to amend the interest rate payable on the initial EUR 100.0 million loan, as a result of which the EBRD Loan bears interest at a rate of three-month EURIBOR plus 1.625% on the drawn amount. A commitment charge of 0.8125% is payable on any undrawn portion of the EBRD Loan.  The available amount of the EBRD Loan amortizes by 15.0% every six months from May 2009 to November 2010 and by 40.0% in May 2011.

Covenants contained in the EBRD Loan are similar to those contained in our Senior Notes (see below and Note 5, “Senior Debt”).  In addition, the EBRD Loan’s covenants restrict us from making principal repayments on other new debt of greater than US$ 20.0 million per year for the life of the EBRD Loan.  This restriction is not applicable to our existing facilities with ING or CS or to any refinancing of our Senior Notes.

Page 28


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

The EBRD Loan is a secured senior obligation and ranks pari passu with all existing and future senior indebtedness, including the Senior Notes and the Convertible Notes, and is effectively subordinated to all existing and future indebtedness of our subsidiaries.  The amount drawn is guaranteed by two subsidiary holding companies and is secured by a pledge of shares of those subsidiaries as well as an assignment of certain contractual rights.  The terms of the EBRD Loan restrict the manner in which our business is conducted, including the incurrence of additional indebtedness, the making of investments, the payment of dividends or the making of other distributions, entering into certain affiliate transactions and the sale of assets.

Czech Republic

(b) As at June 30, 2008, there were no drawings by CET 21 under a credit facility of CZK 1.2 billion (approximately US$ 79.2 million) available until December 31, 2010 with CS.  This facility may, at the option of CET 21, be drawn in CZK, US$ or EUR and bears interest at the three-month, six-month or twelve-month London Inter-Bank Offered Rate (“LIBOR”), EURIBOR or Prague Inter-Bank Offered Rate (“PRIBOR”) rate plus 1.65%. A utilization interest of 0.25% is payable on the undrawn portion of this facility.  This percentage decreases to 0.125% of the undrawn portion if more than 50% of the loan is drawn.  This facility is secured by a pledge of receivables, which are also subject to a factoring arrangement with Factoring Ceska Sporitelna, a.s. (“FCS”), a subsidiary of CS.

(c) As at June 30, 2008, CZK 250 million (approximately US$ 16.5 million), the full amount of the facility, had been drawn by CET 21 under a working capital facility agreement with CS with a maturity date of December 31, 2010. The facility bears interest at three-month PRIBOR plus 1.65% (three-month PRIBOR relevant to drawings under this facility at June 30, 2008 was 3.74%). This facility is secured by a pledge of receivables, which are also subject to a factoring arrangement with FCS.

(d) As at June 30, 2008, there were no drawings under a CZK 300.0 million (approximately US$ 19.8 million) factoring facility with FCS available until June 30, 2011.  The facility bears interest at one-month PRIBOR plus 1.40% for the period that actively assigned accounts receivable are outstanding.

Romania

(e) Two loans from San Paolo IMI Bank, assumed on our acquisition of MTS, were repaid in January 2008.

Slovenia

(f) On July 29, 2005, Pro Plus entered into a revolving facility agreement for up to EUR 37.5 million (approximately US$ 59.1 million) in aggregate principal amount with ING, Nova Ljubljanska Banka d.d., Ljubljana and Bank Austria Creditanstalt d.d., Ljubljana.  The facility amortizes by 10.0% each year for four years commencing one year after signing, with 60.0% repayable after five years.  This facility is secured by a pledge of the bank accounts of Pro Plus, the assignment of certain receivables, a pledge of our interest in Pro Plus and a guarantee of our wholly-owned subsidiary CME Media Enterprises B.V.  Loans drawn under this facility will bear interest at a rate of EURIBOR for the period of drawing plus a margin of between 2.1% and 3.6% that varies according to the ratio of consolidated net debt to consolidated broadcasting cash flow for Pro Plus.  As at June 30, 2008, EUR 30.0 million (approximately US$ 47.3 million) was available for drawing under this revolving facility and there were no drawings outstanding.

Ukraine (KINO, CITI)

(g) Our Ukraine (KINO, CITI) operations have entered into a number of three-year unsecured loans with Glavred-Media, LLC, the minority shareholder in Ukrpromtorg.  As at December 31, 2007 and June 30, 2008, the total value of loans drawn was US$ 1.7 million.  The loans are repayable between August 2009 and December 2009 and bear interest at 9.0%.

Page 29


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

Total Group

At June 30, 2008, the maturity of our debt (including our Senior Notes and Convertible Notes) was as follows:

2008
  $ 16,494  
2009
    1,700  
2010
    -  
2011
    -  
2012
    386,218  
2013 and thereafter
    711,460  
Total
  $ 1,115,872  


Capital Lease Commitments

We lease certain of our office and broadcast facilities as well as machinery and equipment under various leasing arrangements.  The future minimum lease payments from continuing operations, by year and in the aggregate, under capital leases with initial or remaining non-cancelable lease terms in excess of one year, consisted of the following at June 30, 2008:

2008
  $ 585  
2009
    1,153  
2010
    585  
2011
    532  
2012
    529  
2013 and thereafter
    3,837  
    $ 7,221  
Less: amount representing interest
    (2,099 )
Present value of net minimum lease payments
  $ 5,122  


12.  FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

FAS 157 establishes a hierarchy that prioritizes the inputs to those valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under FAS 157 are:

Basis of Fair value Measurement

Level 1
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted instruments.

Level 2
Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly.

Level 3
Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

Page 30


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

We evaluate the position of each financial instrument measured at fair value in the hierarchy individually based on the valuation methodology we apply. At June 30, 2008, we have no material financial assets or liabilities carried at fair value using significant level 1 or level 3 inputs and the only instruments we value using level 2 inputs are currency swap agreements as follows:

Currency Swap

On April 27, 2006, we entered into currency swap agreements with two counterparties whereby we swapped a fixed annual coupon interest rate (of 9.0%) on notional principal of CZK 10.7 billion (approximately US$ 705.9 million), payable on July 15, October 15, January 15, and April 15, to the termination date of April 15, 2012, for a fixed annual coupon interest rate (of 9.0%) on notional principal of EUR 375.9 million (approximately US$ 592.6 million) receivable on July 15, October 15, January 15, and April 15, to the termination date of April 15, 2012.

These currency swap agreements reduce our exposure to movements in foreign exchange rates on a part of the CZK-denominated cash flows generated by our Czech Republic operations that is approximately equivalent in value to the Euro-denominated interest payments on our Senior Notes (see Note 5, “Senior Debt”). They are financial instruments that are used to minimize currency risk and are considered an economic hedge of foreign exchange rates.  These instruments have not been designated as hedging instruments as defined under FAS 133 and so changes in their fair value are recorded in the consolidated statement of operations and in the consolidated balance sheet in other non-current liabilities.

We value our currency swap agreements using an industry-standard currency swap pricing model which calculates the fair value on the basis of the net present value of the estimated future cash flows receivable or payable. These instruments are allocated to level 2 of the FAS 157 fair value hierarchy because the critical inputs to this model, including the relevant yield curves and the known contractual terms of the instrument, are readily observable.

The fair value of these instruments as at June 30, 2008, was a US$ 39.8 million liability, which represented a US$ 23.5 million increase from the US$ 16.2 million liability as at December 31, 2007 and was recognized as a derivative loss in the consolidated statement of operations.


13.  SHAREHOLDERS’ EQUITY

Preferred Stock

5,000,000 shares of Preferred Stock, with a $0.08 par value, were authorized as at June 30, 2008 and December 31, 2007.  None were issued and outstanding as at June 30, 2008 and December 31, 2007.

Class A and B Common Stock

100,000,000 shares of Class A common stock and 15,000,000 shares of Class B common stock were authorized as at June 30, 2008 and December 31, 2007.  The rights of the holders of Class A common stock and Class B common stock are identical except for voting rights.  The shares of Class A common stock are entitled to one vote per share and the shares of Class B common stock are entitled to ten votes per share.  Class B common stock is convertible into Class A common stock for no additional consideration on a one-for-one basis.  Holders of each class of shares are entitled to receive dividends and upon liquidation or dissolution are entitled to receive all assets available for distribution to shareholders.  The holders of each class have no preemptive or other subscription rights and there are no redemption or sinking fund provisions with respect to such shares.

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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

14.  STOCK-BASED COMPENSATION

The charge for stock-based compensation in our condensed consolidated statements of operations was as follows:

   
For the Three Months Ended June 30,
   
For the Six Months Ended June 30,
 
       
2007
   
2008
   
2007
 
                         
Stock-based compensation charged under SFAS 123(R)
  $ 1,991     $ 1,343     $ 3,804     $ 2,605  

Under the provisions of SFAS 123(R), the fair value of stock options is estimated on the grant date using the Black-Scholes option-pricing model and recognized ratably over the requisite service period.

2008 Option Grants

Pursuant to the Amended and Restated 1995 Stock Incentive Plan, the Compensation Committee of our Board of Directors awarded options to an executive to purchase 12,500 shares of our Class A common stock, with a vesting period of four years and a contractual life of eight years, on April 1, 2008.

Pursuant to the Amended and Restated 1995 Stock Incentive Plan, the Compensation Committee of our Board of Directors awarded options to non-executive directors to purchase 40,000 shares of our Class A common stock and 5,000 shares of our Class B common stock with a vesting period of one year and a contractual life of five years on June 3, 2008.

The exercise price of the options granted ranges from US$ 88.51 to US$ 109.58 per share.  The fair value of these option grants was estimated on the date of the grant using the Black-Scholes option-pricing model, with the following assumptions used:

 
 
 
Date of Option Grant
 
Number of Options Granted
   
Risk-free interest rate (%)
   
 
Expected term (years)
   
Expected volatility (%)
   
Dividend yield (%)
   
Weighted-average fair value ($/share)
 
                                     
April 1, 2008  (Class A)
    12,500       2.65       5.25       34.98       0.00     $ 31.85  
June 3, 2008 (Class A)
    40,000       2.75       3.0       31.70       0.00       26.03  
June 3, 2008 (Class B)
    5,000       2.75       3.0       31.70       0.00     $ 27.33  

The expected stock price volatility was calculated based on an analysis of the historical stock price volatility of our shares and those of our peers for the preceding 5.25 or 3-year period.  We consider this basis to represent the best indicator of expected volatility over the life of the option. The weighted average fair value of all the grants made in the three months and six months ended June 30, 2008 was US$ 27.41 per option.  In accordance with SFAS 123(R), the fair value of the option grants made in the six months ended June 30, 2008 (less expected forfeitures) of US$ 47 thousand is being recognized as an expense in the consolidated statement of operations over the requisite service period of the award.

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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

A summary of option activity for the six months ended June 30, 2008 is presented below:

   
 
 
 
Shares
   
 
Weighted Average Exercise Price per Share
   
Weighted Average Remaining Contractual Term (years)
   
 
 
Aggregate Intrinsic Value
 
                         
Outstanding at January 1, 2008
    1,176,117     $ 56.72       7.04     $ 69,693  
Granted
    57,500       101.37       -       -  
Exercised
    (15,875 )     68.63       -       -  
Forfeited
    (14,375 )     79.75       -       -  
Outstanding at June 30, 2008
    1,203,367     $ 58.42       6.43     $ 43,679  
Vested or expected to vest at June 30, 2008
    1,148,823       57.23       6.38       42,811  
Exercisable at June 30, 2008
    618,617     $ 35.72       6.03     $ 34,016  

The exercise of stock options in 2008 is expected to generate a net operating loss carry forward in our Delaware subsidiary of US$ 11.6 million.  In the three months ended June 30, 2008 and March 31, 2008 tax benefits of US$ 0.2 million and US$ 0.1 million respectively were recognized in respect of the utilization of part of this loss, and were recorded as additional paid in capital.

The aggregate intrinsic value (the difference between the stock price on the last day of trading of the second quarter of 2008 and the exercise prices multiplied by the number of in-the-money options) represents the total intrinsic value that would have been received by the option holders had all option holders exercised their options on June 30, 2008.  This amount changes based on the fair value of our common stock.  The total intrinsic value of options exercised during the six months ended June 30, 2008 and 2007, respectively, was US$ 0.5 million and US$ 15.6 million, respectively.  As of June 30, 2008, there was US$ 15.4 million of total unrecognized compensation expense related to options.  The expense is expected to be recognized over a weighted average period of 1.2 years.  Proceeds received from the exercise of stock options were US$ 1.1 million and US$ 2.7 million for the six months ended June 30, 2008 and 2007, respectively.

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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

15.  EARNINGS PER SHARE

The components of basic and diluted earnings per share are as follows:

   
For the Three Months Ended June 30,
   
For the Six Months Ended June 30,
 
       
2007
   
2008
   
2007
 
                         
Net income available for common shareholders
  $ 67,604     $ 34,590     $ 82,499     $ 34,340  
                                 
Weighted average outstanding shares of common stock (000’s)
    42,322       40,941       42,319       40,867  
Dilutive effect of employee stock options (000’s)
    514       466       465       523  
Common stock and common stock equivalents (000’s)
    42,836       41,407       42,784       41,390  
                                 
Net income per share:
                               
Basic
  $ 1.60     $ 0.84     $ 1.95     $ 0.84  
Diluted
  $ 1.58     $ 0.83     $ 1.93     $ 0.83  

At June 30, 2008, 260,000 (December 31, 2007: 228,500) stock options were antidilutive to income from continuing operations and excluded from the calculation of earnings per share. These may become dilutive in the future. Class A common shares potentially issuable under our Convertible Notes may also become dilutive in the future although they were antidilutive to income at June 30, 2008.


16.  SEGMENT DATA

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

We evaluate the performance of our business segments based on Segment Net Revenues and Segment EBITDA.

Our key performance measure of the efficiency of our business segments is EBITDA margin.  We define Segment EBITDA margin as the ratio of Segment EBITDA to Segment Net Revenues.

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

·
expenses presented as corporate operating costs in our condensed consolidated statements of operations and comprehensive income;

·
stock-based compensation charges;

·
foreign currency exchange gains and losses;

·
changes in fair value of derivatives; and

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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

·
certain unusual or infrequent items (e.g., extraordinary gains and losses, impairments of assets or investments).

Below are tables showing our Segment Net Revenues, Segment EBITDA, segment depreciation and segment asset information by operation, including a reconciliation of these amounts to our consolidated results for the three and six months ended June 30, 2008 and 2007 for condensed consolidated statement of operations data and as at June 30, 2008 and December 31, 2007 for condensed consolidated balance sheet data:


   
For the Three Months Ended June 30,
 
   
Segment Net Revenues (1)
   
Segment EBITDA
 
   
2008
   
2007
   
2008
   
2007
 
Country:
                       
Croatia (NOVA TV)
  $ 18,094     $ 10,414     $ 1,683     $ (2,167 )
Czech Republic (TV NOVA, NOVA CINEMA and GALAXIE SPORT)
    112,570       80,544       71,204       47,595  
Romania (2)
    79,842       52,224       38,293       22,530  
Slovak Republic (TV MARKIZA)
    37,097       29,652       13,974       11,712  
Slovenia (POP TV and KANAL A)
    26,210       20,095       10,866       8,388  
Ukraine (STUDIO 1+1)
    30,254       22,701       (1,894 )     565  
Ukraine (KINO, CITI)
    1,324       654       (1,055 )     (1,755 )
Total segment data
  $ 305,391     $ 216,284     $ 133,071     $ 86,868  
                                 
Reconciliation to condensed consolidated statement of operations:
 
                                 
Consolidated net revenues / income before provision for income taxes and minority interest
  $ 305,391     $ 216,284     $ 77,903     $ 53,739  
Corporate operating costs
    -       -       13,708       7,444  
Depreciation of station property, plant and equipment
    -       -       13,178       7,680  
Amortization of broadcast licenses and other intangibles
    -       -       8,188       5,165  
Interest income
    -       -       (3,781 )     (1,732 )
Interest expense
    -       -       18,140       19,438  
Foreign currency exchange (gain)/ loss, net
    -       -       (6,881 )     2,116  
Change in fair value of derivatives
    -       -       13,281       (7,528 )
Other (income)/ expense
    -       -       (665 )     546  
Total segment data
  $ 305,391     $ 216,284     $ 133,071     $ 86,868  
 
(1) All net revenues are derived from external customers.  There are no inter-segmental revenues.
 
(2) Romania channels are PRO TV, PRO CINEMA, ACASA, PRO TV INTERNATIONAL, SPORT.RO and MTV ROMANIA for the three months ended June 30, 2008. For the three months ended June 30, 2007 the Romanian channels were PRO TV, PRO CINEMA, ACASA, PRO TV INTERNATIONAL and SPORT.RO.

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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

   
For the Six Months Ended June 30,
 
   
Segment Net Revenues (1)
   
Segment EBITDA
 
   
2008
   
2007
   
2008
   
2007
 
Country:
                       
Croatia (NOVA TV)
  $ 29,628     $ 17,646     $ (1,047 )   $ (6,819 )
Czech Republic (TV NOVA, NOVA CINEMA and GALAXIE SPORT)
    198,128       132,063       115,049       73,262  
Romania (2)
    137,838       91,566       61,669       37,666  
Slovak Republic (TV MARKIZA)
    63,331       48,329       23,111       17,468  
Slovenia (POP TV and KANAL A)
    44,161       32,764       15,206       11,389  
Ukraine (STUDIO 1+1)
    53,473       40,776       (3,957 )     (1,805 )
Ukraine (KINO, CITI)
    2,302       1,052       (2,261 )     (4,172 )
Total segment data
  $ 528,861     $ 364,196     $ 207,770     $ 126,989  
                                 
Reconciliation to condensed consolidated statement of operations:
 
                                 
Consolidated net revenues / income before provision for income taxes and minority interest
  $ 528,861     $ 364,196     $ 83,481     $ 58,188  
Corporate operating costs
    -       -       23,725       22,217  
Depreciation of station property, plant and equipment
    -       -       25,518       14,579  
Amortization of broadcast licenses and other intangibles
    -       -       15,854       10,327  
Interest income
    -       -       (5,961 )     (3,146 )
Interest expense
    -       -       32,390       30,834  
Foreign currency exchange loss, net
    -       -       10,549       5,252  
Change in fair value of derivatives
    -       -       23,539       (12,052 )
Other (income)/ expense
    -       -       (1,325 )     790  
Total segment data
  $ 528,861     $ 364,196     $ 207,770     $ 126,989  
 
(1) All net revenues are derived from external customers.  There are no inter-segmental revenues.
 
(2) Romania channels are PRO TV, PRO CINEMA, ACASA, PRO TV INTERNATIONAL, SPORT.RO and MTV ROMANIA for the six months ended June 30, 2008. For the six months ended June 30, 2007 the Romanian channels were PRO TV, PRO CINEMA, ACASA, PRO TV INTERNATIONAL and SPORT.RO. We acquired SPORT.RO on February 20, 2007.
 
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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

   
For the Three Months Ended June 30,
   
For the Six Months Ended June 30,
 
       
2007
   
2008
   
2007
 
Depreciation of station property, plant and equipment and amortization of broadcast licenses and other intangibles:
                       
Croatia
  $ 1,696     $ 947     $ 3,106     $ 1,732  
Czech Republic
    10,417       6,689       20,562       13,150  
Romania
    3,826       2,180       7,367       3,927  
Slovak Republic
    2,879       947       5,455       2,134  
Slovenia
    1,512       1,110       2,795       2,096  
Ukraine (STUDIO 1+1)
    767       799       1,558       1,544  
Ukraine (KINO, CITI)
    269       173       529       323  
Total
  $ 21,366     $ 12,845     $ 41,372     $ 24,906  
Represented as follows:
                               
Depreciation of station property, plant & equipment
    13,178       7,680       25,518       14,579  
Amortization of broadcast licenses and other intangibles
    8,188       5,165       15,854       10,327  


Total assets (1):
       
             
Croatia
  $ 58,609     $ 44,787  
Czech Republic
    1,713,562       1,429,256  
Romania
    448,393       360,144  
Slovak Republic
    258,832       203,302  
Slovenia
    103,039       89,984  
Ukraine (STUDIO 1+1)
    372,522       90,064  
Ukraine (KINO, CITI)
    17,040       17,854  
Total segment assets
  $ 2,971,997     $ 2,235,391  
                 
Reconciliation to condensed consolidated balance sheets:
               
Corporate
    309,479       103,044  
Total assets
  $ 3,281,476     $ 2,338,435  
 
(1) Segment assets exclude any inter-company investments, loans, payables and receivables.

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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

Long-lived assets (1):
       
             
Croatia
  $ 17,366     $ 12,144  
Czech Republic
    78,754       58,809  
Romania
    56,871       44,808  
Slovak Republic
    39,123       29,345  
Slovenia
    23,275       21,524  
Ukraine (STUDIO 1+1)
    6,973       7,380  
Ukraine (KINO, CITI)
    4,972       5,003  
Total long-lived assets
  $ 227,334     $ 179,013  
                 
Reconciliation to condensed consolidated balance sheets:
               
Corporate
    1,238       1,298  
Total long-lived assets
  $ 228,572     $ 180,311  
 
(1) Reflects property, plant and equipment
 
We do not rely on any single major customer or group of major customers.  No customer accounts for more than 10% of revenue.


17.  DISCONTINUED OPERATIONS

On May 19, 2003, we received US$ 358.6 million from the Czech Republic in final settlement of our UNCITRAL arbitration in respect of our former operations in the Czech Republic.

On June 19, 2003, our Board of Directors decided to withdraw from operations in the Czech Republic. The revenues and expenses of our former Czech Republic operations and the award income and related legal expenses have therefore all been accounted for as discontinued operations for all periods presented.

On February 9, 2004, we entered into an agreement with the Dutch tax authorities to settle all tax liabilities outstanding for the years up to and including 2003, including receipts in respect of our 2003 award in the arbitration against the Czech Republic, for a payment of US$ 9.0 million.  We expected to continue to pay tax in the Netherlands of between US$ 1.0 and US$ 2.5 million for the foreseeable future and therefore agreed to a minimum payment of US$ 2.0 million per year for the years 2004 - 2008 and US$ 1.0 million for 2009.

We have since re-evaluated our forecasts of the amount of taxable income we expect to earn in the Netherlands in the period to 2009.  As the expected tax payable on this income is lower than the minimum amounts agreed with the Dutch tax authorities, we have provided for the shortfall.

The settlement with the Dutch tax authorities also provides that if any decision is issued at any time prior to December 31, 2008 exempting awards under Bilateral Investment Treaties from taxation in the Netherlands, we will be allowed to recover losses previously used against the 2003 arbitration award, which could be up to US$ 195.0 million, to offset other income within the applicable carry forward rules. This would not reduce the minimum amount of tax agreed payable under the settlement agreement.  At this time there is no indication that the Dutch tax authorities will issue such a decision.

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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

The settlement with the Dutch tax authorities has also resulted in a deductible temporary difference in the form of a ruling deficit against which a full valuation allowance has been recorded.


18.  COMMITMENTS AND CONTINGENCIES

Commitments

a) Ukraine Buyout Agreements: redeemable minority interest

We have granted Messrs. Rodnyansky and Fuchsmann the right to jointly put both of their remaining 5.0% interests in the Studio 1+1 group to us. This put option became effective upon the completion of our acquisition of a 30% interest in the Studio 1+1 group on June 30, 2008 (see Note 3 “Acquisitions and Disposals: Ukraine (Studio 1+1)”). The consideration payable by Messrs. Rodnyansky and Fuchsmann upon exercise of these non-transferrable put options (“the exercise price”) is: (i) US$ 95.4 million if exercised at any time from June 30, 2008 to June 29, 2009; (ii) US$ 102.3 million if exercised between June 30, 2009 and June 29, 2010; and (iii) the greater of US$ 109.1 million and an agreed valuation if exercised at any time after June 30, 2010. As at June 30, 2008 we consider, using a binomial option pricing model, that the fair value of the put option was US$ 58.0 million because the exercise price is substantially higher than the fair value of the underlying equity interests, and included this amount in the purchase price of the Studio 1+1 group for the purposes of calculating goodwill as required by FASB Statement No. 141 “Business Combinations” (“FAS 141”) as interpreted by EITF D-87.

We concluded that upon the issuance of these put options, the remaining minority interests in the Studio 1+1 group meet the definition of a Redeemable Security as it is used in EITF Topic No. D-98 “Classification and Measurement of Redeemable Securities” because Messrs. Rodnyansky and Fuchsmann can now cause us to repurchase their minority shareholdings at their option. Consequently, we adjusted the minority interest in the Studio 1+1 group at June 30, 2008 to reflect the US$ 95.4 million that would have been paid had Messrs. Rodnyansky and Fuchsmann chosen to exercise their options at that date. The excess of this amount over the minority interest that would have been recognized under Accounting Research Bulletin No. 51 “Consolidated Financial Statements” (“ARB 51”) was allocated between goodwill (US$ 58.0 million) and retained earnings (US$ 32.6 million). The amount recognized within goodwill represents the fair value of the put options on acquisition.

In addition, Messrs. Rodnyansky and Fuchsmann granted us the right to call their combined 10.0% interest in the Studio 1+1 group for a consideration of US$ 109.1 million. From June 30, 2009, Messrs. Rodnyansky and Fuchsmann have the option of electing to have an agreed valuation conducted, in which case the call price will be the greater of US$ 109.1 million and the agreed valuation.  In the event we exercise the call option, Messrs. Rodnyansky and Fuchsmann have the right to request their consideration in the form of either cash or unregistered shares of our Class A common stock. If they request settlement in shares we must undertake commercially reasonable best efforts to comply with this request. Both the put and call options may only be exercised for the entire 10.0% interest held by Messrs. Rodnyansky and Fuchsmann. As at June 30, 2008 we consider, using a binomial pricing model, that the  fair value of our call option is approximately US$ nil because the exercise price is substantially higher than the fair value of the underlying equity interests.

In future periods, if neither the put nor the call options have been exercised, we will continue to record any minority interest income or expense that would have been recognized under ARB 51 through a reallocation between retained earnings and minority interest income or expense. At each balance sheet date we will also increase the value of the redeemable minority interest to equal the exercise price of the put options if necessary with the offsetting amount reducing retained earnings where necessary.

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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

If either the put or call options are exercised, we will reverse any amounts recognized in retained earnings before completing a purchase price allocation under FAS 141.
 
b) Ukraine Buyout Agreements: other commitments
    
Messrs. Rodnyansky and Fuchsmann have entered into consultancy agreements with us providing for total annual aggregate compensation under both agreements not to exceed EUR 1.0 million. These agreements terminate at the earlier of the time either sells his remaining 5.0% interest in the Studio 1+1 group or January 30, 2010. We concluded that these amounts did not form part of the purchase price of the 30% interest in the Studio 1+1 group and will account for them as compensation costs in future periods.

Messrs. Rodnyansky and Fuchsmann intend to acquire 10.0% of our interest in the entities operating the channels KINO and CITI in Ukraine for consideration of US$ 1.92 million. In the event Messrs. Rodnyansky and Fuchsmann exercise their put or we exercise our call described above, this 10.0% interest will be transferred to us together with the 10.0% interest held by Messrs. Rodnyansky and Fuchsmann in the Studio 1+1 group, and Messrs. Rodnyansky and Fuchsmann shall not be entitled to any additional consideration other than as described above in respect of the put and call options.

c) Station Programming Rights Agreements

At June 30, 2008 we had the following commitments in respect of future programming, including contracts signed with license periods starting after the balance sheet date:

     
       
Croatia
  $ 3,841  
Czech Republic
    48,616  
Romania
    36,048  
Slovak Republic
    11,518  
Slovenia
    4,475  
Ukraine (STUDIO 1+1)
    9,397  
Ukraine (KINO, CITI)
    121  
Total
  $ 114,016  

Of the amount shown in the table above, US$ 102.6 million is payable within one year.

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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

d) Operating Lease Commitments

For the six months ended June 30, 2008 and 2007 we incurred aggregate rent on all facilities of US$ 7.0 million and US$ 6.0 million, respectively.  Future minimum operating lease payments at June 30, 2008 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:

     
       
2008
  $ 3,054  
2009
    5,147  
2010
    2,707  
2011
    914  
2012
    320  
2013 and thereafter
    -  
Total
  $ 12,142  

e) Acquisition of Minority Shareholdings in Romania

Mr. Sarbu has the right to sell to us his remaining shareholding in Pro TV and MPI under a put option agreement entered into in July 2004 at a price to be determined by an independent valuation, subject to a floor price of US$ 1.45 million for each 1.0% interest sold. Mr. Sarbu’s right to put his remaining shareholding’ is exercisable from November 12, 2009, provided that we have not enforced a pledge over this shareholding which Mr. Sarbu granted as security for our right to put him our shareholding in Media Pro. As at June 30, 2008, we considered the fair value of the put option of Mr. Sarbu to be approximately US$ nil.


f) Other

Dutch tax

On February 9, 2004 we entered into an agreement with the Dutch tax authorities to settle all tax liabilities outstanding for the years up to and including 2003, including receipts in respect of our 2003 award in the arbitration against the Czech Republic, for a payment of US$ 9.0 million.  We expected to continue to pay tax in the Netherlands of between US$ 1.0 and US$ 2.5 million for the foreseeable future and therefore 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.

We have since re-evaluated our forecasts of the amount of taxable income we expect to earn in the Netherlands in the period to 2009.  As the expected tax payable on this income is lower than the minimum amounts agreed with the Dutch tax authorities, we have provided for the shortfall.

The settlement with the Dutch tax authorities also provides that if any decision is issued at any time prior to December 31, 2008 exempting awards under Bilateral Investment Treaties from taxation in the Netherlands, we will be allowed to recover losses previously used against the 2003 arbitration award, which could be up to US$ 195.0 million, to offset other income within the applicable carry forward rules. This would not reduce the minimum amount of tax agreed payable under the settlement agreement.  At this time there is no indication that the Dutch tax authorities will issue such a decision.

As at June 30, 2008 we provided US$ 1.3 million (US$ 0.5 million in non-current liabilities and US$ 0.8 million in current liabilities) and as at December 31, 2007 we provided US$ 3.3 million (US$ 1.0 million in non-current liabilities and US$ 2.3 million in current liabilities) of tax in the Netherlands as the difference between our obligation under this agreement and our estimate of tax in the Netherlands that may fall due over this period from business operations, based on current business structures and economic conditions.

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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

Czech Republic - Factoring of Trade Receivables

CET 21 has a working capital credit facility of CZK 250 million (approximately US$ 16.5 million) with CS. This facility is secured by a pledge of receivables under the factoring agreement with FCS.

The transfer of the receivables is accounted for as a secured borrowing under FASB Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, with the proceeds received recorded in the Condensed Consolidated Balance Sheet as a liability and included in current credit facilities and obligations under capital leases.  The corresponding receivables remain a part of accounts receivable because we retain the risks of ownership.

Contingencies

a) Litigation

We are, from time to time, a party to litigation that arises in the normal course of our business operations. However, 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.

Ukraine Settlement:

On December 23, 2005, we initiated international arbitration proceedings against our partners Alexander Rodnyansky and Boris Fuchsmann to enforce our contractual rights and compel a restructuring of the ownership of Studio 1+1 in order to permit us to hold a 60.0% interest in Studio 1+1. Following the adoption of an amendment to the Ukraine Media Law in March 2006, our partners acknowledged their obligation to restructure to permit us to hold a 60.0% interest had ripened; and in September 2006, they entered into agreements to effect a restructuring. On November 9, 2006, the arbitration proceedings were suspended by mutual consent to permit the parties to implement the restructuring. On August 30, 2007, we succeeded in registering our Ukrainian subsidiary UMS as the owner of 42.0% of Studio 1+1. Together with our 18.0% indirect interest in Studio 1+1 held through Inter-Media, we then had a 60.0% interest in Studio 1+1.
 
On September 4, 2007, Messrs. Fuchsmann and Rodnyansky sought to file a cross action in these international arbitration proceedings to compel the transfer by us of an interest in Ukrpromtorg to Messrs. Fuchsmann and Rodnyansky. They alleged that they were entitled to participate on a pro rata basis in our investment in Ukrpromtorg. This claim was based on the terms of our shareholders’ agreement pursuant to which we and our partners have a limited right to participate on a pro rata basis in investment opportunities in the Ukrainian media sector undertaken by the other. In our response to this cross action, we denied any breach of our shareholders’ agreement and requested that the tribunal hold the cross action inadmissible in the current arbitration proceedings, whose subject matter is the restructuring, and terminate these proceedings.
 
On June 30, 2008 we acquired a 30.0% interest in the Studio 1+1 group from Messrs. Fuchsmann and Rodnyansky (see Note 3, “Acquisitions and Disposals: Ukraine”).  Pursuant to the terms of the acquisition, we and Messrs. Fuchsmann and Rodnyansky agreed to terminate the arbitration proceedings described above. On July 3, 2008, we jointly informed the arbitral tribunal that the parties had reached a comprehensive settlement, with each party to pay its own legal costs. Following such notification, the arbitral tribunal terminated the arbitration proceedings.   

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CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in US$ 000’s, except share and per share data)
(Unaudited)

b) Licenses

Regulatory bodies in each country in which we operate control access to available frequencies through licensing regimes. We believe that the licenses for our license companies will be renewed prior to expiry. In Romania, the Slovak Republic, Slovenia and Ukraine local regulations contain a qualified presumption for extensions of broadcast licenses, according to which a broadcast license may be renewed if the licensee has operated substantially in compliance with the relevant licensing regime. To date, all expiring licenses have been renewed; however, there can be no assurance that any of the licenses will be renewed upon expiration of their current terms. The failure of any such license to be renewed could adversely affect the results of our operations.

The following summarizes the expiry dates of our television broadcasting licenses:

Croatia
 
The license of NOVA TV (Croatia) expires in April 2010.
     
Czech Republic
 
The license of TV NOVA (Czech Republic) expires in January 2017. The GALAXIE SPORT license expires in March 2014.
     
Romania
 
Licenses expire on dates ranging from October 2008 to May 2017.
     
Slovak Republic
 
The license of MARKIZA TV in the Slovak Republic expires in September 2019.
     
Slovenia
 
The licenses of POP TV and KANAL A expire in August 2012.
     
Ukraine
 
The 15-hour prime time and off prime time license of STUDIO 1+1 expires in December 2016. The license to broadcast for the remaining nine hours in off prime expires in August 2014.  Licenses used for the KINO and CITI channels expire on dates ranging April 2009  to July 2016.


c) Restrictions on dividends from Consolidated Subsidiaries and Unconsolidated Affiliates

Corporate law in the Central and Eastern European countries in which we have operations stipulates generally that dividends may be declared by shareholders, out of yearly profits, subject to the maintenance of registered capital and required reserves after the recovery of accumulated losses. The reserve requirement restriction generally provides that before dividends may be distributed, a portion of annual net profits (typically 5%) be allocated to a reserve, which reserve is capped at a proportion of the registered capital of a company (ranging from 5% to 25%).  The restricted net assets of our consolidated subsidiaries and equity in earnings of investments accounted for under the equity method together are less than 25% of consolidated net assets.


19.  SUBSEQUENT EVENTS

On July 28, 2008, we entered into a Master Share Purchase Agreement with Top Tone Holdings Limited to acquire an 80% indirect interest in TV2, which operates a national terrestrial network in Bulgaria, and Ring TV, which operates a sports cable channel, for cash consideration of approximately $172 million. See Part II, Item 5, “Other Information” for further information.

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

Contents

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


I. Forward-looking Statements

This report contains forward-looking statements, including statements regarding our capital needs, business strategy, expectations and intentions. Statements that use the terms “believe”, “anticipate”, “expect”, “plan”, “estimate”, “intend” and similar expressions of a future or forward-looking nature identify forward-looking statements for purposes of the U.S. federal securities laws or otherwise. 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 or are otherwise beyond our control and some of which might not even be anticipated.  Forward-looking statements reflect our current views with respect to future events and because our business is subject to such risks and uncertainties, actual results, our strategic plan, our financial position, results of operations and cash flows could differ materially from those described in or contemplated by the forward-looking statements contained in this report.
 
Important factors that contribute to such risks include, but are not limited to, those factors set forth under “Risk Factors” as well as the following: general market and economic conditions in our markets as well as in the United States and Western Europe;  the results of additional investment in Croatia and Ukraine; the impact of the buyout of our partners in the Studio 1+1 group in Ukraine; the growth of television advertising spending and the rate of development of advertising in our markets; our ability to make future investments in television broadcast operations; our ability to develop and  implement strategies regarding sales and multi-channel distribution; the performance of obligations by third parties with whom we have entered into agreements; the general political, economic and regulatory environments where we operate and application of relevant laws and regulations; the renewals of broadcasting licenses and our ability to obtain additional frequencies and licenses; and our ability to acquire necessary programming and attract audiences. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included in this report. We undertake no obligation to publically update or review any forward-looking statements, whether as a result of new information, future developments or otherwise.

The following discussion should be read in conjunction with our interim financial statements and notes included elsewhere in this report.

Page 44


II. Executive Summary

Continuing Operations

The following table provides a summary of our consolidated results for the three and six months ended June 30, 2008 and 2007:

   
For the Three Months Ended June 30, (US$ 000's)
 
   
2008
   
2007
   
Movement
 
                   
Net revenues
  $ 305,391     $ 216,284       41.2 %
Operating income
    97,997       66,579       47.2 %
Net income
  $ 67,604     $ 34,590       95.4 %
   
For the Six Months Ended June 30, (US$ 000's)
 
   
2008
   
2007
   
Movement
 
                         
Net revenues
  $ 528,861     $ 364,196       45.2 %
Operating income
    142,673       79,866       78.6 %
Net income
  $ 82,499     $ 34,340       140.2 %

The principal events for the three months ended June 30, 2008 are as follows:

Performance:

·
In the three months ended June 30, 2008, we reported growth in Segment Net Revenues and Segment EBITDA of 41% and 53%, respectively compared to the three months ended June 30, 2007, delivering a Segment EBITDA margin of 44% compared to the 40% margin reported in the three months ended June 30, 2007 (Segment EBITDA is defined and reconciled to our consolidated results in Item 1, Note 16, “Segment Data”).
 
·
Each of our stations reported revenue growth in excess of 25% compared to the three months ended June 30, 2007, with particularly strong growth reported in Croatia and Romania.
 

Acquisitions:
 
·
On April 17, 2008 we acquired the assets of Radio Pro, which owns two leading radio channels in Romania.  Total consideration was RON 47.2 million, (approximately US$ 20.6 million at the date of payment).  These assets were owned by Media Pro Management S.A., in which we hold an 8.7% interest and the remainder is owned by Adrian Sarbu, our Chief Operating Officer.  See Item 1, Note 3 “Acquisitions and Disposals” for further information.
 
·
On May 27, 2008 we acquired Jyxo, the information technology provider and operator of the leading blog site in the Czech Republic, blog.cz, and Jyxo's affiliate Blog.  See Item 1, Note 3 “Acquisitions and Disposals” for further information.

·
On June 30, 2008 we completed the acquisition of an additional 30.0% interest in the Studio 1+1 group in Ukraine.  Total cash consideration was approximately US$ 219.6 million.  See Item 1, Note 3 “Acquisitions and Disposals” for further information.

Page 45


Subsequent to the quarter-end:

On July 28, 2008, we entered into a Master Share Purchase Agreement with Top Tone Holdings Limited to acquire an 80% indirect interest in TV2, which operates a national terrestrial network in Bulgaria, and Ring TV, which operates a sports cable channel, for cash consideration of approximately $172 million. See Part II, Item 5, “Other Information” for further information.

Future Trends
 
CME Strategy: We believe over the medium term that we will see higher levels of GDP growth as well as general advertising and television advertising spending growth in our markets than in Western European or U.S. markets. The largest portion of advertising spending in our markets is on television advertising and it makes up a larger proportion than in Western European or U.S. markets. We expect this trend to continue for the foreseeable future. We have not seen any negative impact of the current challenging economic conditions widely reported in western markets on the demand for television advertising in our markets, although there can be no assurance that a continuation of the current difficulties will not adversely affect our markets in the future. We believe the fastest growth in television advertising in our markets may continue to be in Ukraine and Romania, our markets with the largest populations and, currently, the lowest levels of television advertising spending per capita.
 
The large audience share that we enjoy in most of our markets is due both to the commercial strength of our channels and to the constraints on bandwidth that limit the number of free-to-air broadcasters in our markets. The only markets where we currently face significant competition from other distribution platforms are Romania and Slovenia, where cable penetration exceeds 50% of television households.
 
As our markets mature, we anticipate more intense competition for audience share and advertising spending from other incumbent terrestrial broadcasters and from cable, satellite and digital terrestrial broadcasters as the coverage of these technologies grows. The impact on our advertising share will be less significant due to the small audience rating each individual channel can attract. The advent of digital terrestrial broadcasting as well as the introduction of alternative distribution platforms for content (including additional direct-to-home (“DTH”) services, the internet, internet protocol TV (“IPTV”), mobile television and video-on-demand services) will cause audience fragmentation and change the competitive dynamics in our operating countries in the medium term.
 
We believe that our leading position in our operating countries and the strength of our existing brands place us in a solid position to manage increased competition and to launch new niche channels as these new technologies develop. In the near term we intend to continue to pursue further improvements in the performance of our existing operations in order to maximize the potential for organic growth in our existing businesses.
 
Our priorities in this regard include:
 
 
·
developing our Ukraine operations in order to secure consistent performance and a leading position in the Ukrainian market;

 
·
ensuring that our leading position in our operating countries is secured during the transition to digital terrestrial broadcasting and the anticipated growth of DTH offerings;

 
·
launching or acquiring additional channels in our markets in order to expand our offerings, target niche audiences and increase our advertising inventory;

 
·
improving margins by leveraging expertise from our best-performing operations; and

 
·
expanding our capabilities in production and the development of local content.

In addition, we continue to review opportunities to develop our business and expand our footprint through strategic acquisitions such as our recent acquisition of TV2 in Bulgaria, the adoption and implementation of new technologies and expansion into additional markets in Central and Eastern Europe. Internet broadband penetration is low in all of our markets in comparison to Western European and U.S. markets. As the GDP per capita of our markets grows over the medium term, we anticipate broadband penetration will increase significantly and will foster the development of significant new opportunities for generating advertising and other revenues in new media. We believe that the strength of our brands, our news programming and locally produced content, our relationships with advertisers and the opportunities for cross promotion afforded by the large audiences of our broadcast operations put us in a strong position to achieve leading positions in these new forms of media as they develop. We intend to continue our program of investment into our non-broadcast activities in order to develop offerings and launch services on the internet and mobile platforms that complement our broadcast offerings and generate revenues.
 
Page 46


Digital Terrestrial Broadcasting: The transition from analog to digital terrestrial broadcasting is beginning to accelerate in our markets.  While the approach being applied is not uniform, there are certain steps that each jurisdiction appears to be following.  Typically, legislation governing the transition to digital is adopted which addresses the licensing of operators of the digital networks as well as the licensing of digital broadcasters, technical parameters concerning the allocation of frequencies to be used for digital services (including those currently being used for analog services), broadcasting standards to be provided, the timing of the transition and, ideally, principles to be applied in the transition, including transparency and non-discrimination. As a rule, these are embodied in a technical transition plan (“TTP”) that, in most jurisdictions, is agreed among the relevant Media Council, the national telecommunications agency (which is generally responsible for the allocation and use of frequencies) and the broadcasters.

The TTP will typically include the following: the timeline and final switchover date, time allowances for the phases of the transition, allocation of frequencies for digital broadcasting and other digital services, methods for calculating digital terrestrial signal coverage and penetration of set top boxes, parameters for determining whether the conditions for switchover have been satisfied for any phase, the technical specifications for broadcasting standards to be utilized and technical restrictions on parallel broadcasting in analog and terrestrial during the transition phase.

Of our markets, the Czech Republic, the Slovak Republic and Slovenia are the furthest advanced in the transition to digital.  All three have adopted new legislation or amendments to existing legislation.  Generally, this legislation provides that incumbent analog broadcasters are entitled to receive a digital license or that current licenses entitle the holders to digital terrestrial broadcasting, although broadcasters in a specific jurisdiction may be required to formally file an application in order for a digital license to be issued.

In that regard, both of our Slovenian channels, POP TV and KANAL A, were issued digital licenses in November 2007. We anticipate that the switchover to digital in Slovenia will be completed by 2012, when the current licenses of POP TV and KANAL A expire.  Under the TTP for the Czech Republic, the license currently held by CET 21 allows for digital terrestrial broadcasting by TV Nova (Czech Republic).  In the Slovak Republic, TV MARKIZA is entitled to receive a digital license under recently adopted legislation and intends to apply for one following the completion of the tender offer for the multiplex operator under the TTP for the Slovak Republic.

Draft legislation governing the transition to digital is under discussion in Romania and Croatia.  We anticipate that legislation will be adopted during 2008 that will address digital licensing and the TTP for each market in a comprehensive way.  We expect that all of our channels will receive digital licenses in these markets.

The Ukrainian governmental authorities have issued generic legislation in respect of the transition to digital. In addition, the Ukraine Media Council has issued decisions confirming that STUDIO 1+1 would be included in one of the multiplexes to be launched in connection with the transition to digital broadcasting.  The Media Council recently held a tender for licenses for additional digital frequencies that will be made available for niche channels in the switchover to digital, and is currently soliciting proposals for technical development of certain digital multiplexes. However, there has been no indication as to when a TTP will be adopted in Ukraine.
 
Page 47


We intend to apply for and obtain digital licenses that are issued in replacement of analog licenses in our operating countries and to apply for additional digital licenses and for licenses to operate digital networks where such applications are permissible and prudent.

 
III. Analysis of Segment Results
 

OVERVIEW

We manage our business on a geographic basis and review the performance of each business segment using data that reflects 100% of operating and license company results.  We also consider how much of our total revenues and earnings are derived from our broadcast and non-broadcast operations. Our business segments are Croatia, the Czech Republic, Romania, the Slovak Republic, Slovenia and our two businesses in Ukraine.

We evaluate the performance of our business segments based on Segment Net Revenues and Segment EBITDA.

Our key performance measure of the efficiency of our business segments is EBITDA margin.  We define Segment EBITDA margin as the ratio of Segment EBITDA to Segment Net Revenues.

Segment EBITDA is determined as segment net income/loss, which includes program rights amortization costs, 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 operating costs in our condensed consolidated statements of operations and comprehensive income;

·
stock-based compensation charges;

·
foreign currency exchange gains and losses;

·
change in fair value of derivatives; and

·
certain unusual or infrequent items (e.g., extraordinary gains and losses, impairments of assets or investments).

EBITDA may not be comparable to similar measures reported by other companies.  Non-GAAP measures should be evaluated in conjunction with, and are not a substitute for, US GAAP financial measures.

We believe Segment EBITDA is useful to investors because it provides a more meaningful representation of our performance as it excludes certain items that either do not impact our cash flows or the operating results of our stations.  Segment EBITDA is also used as a component in determining management bonuses.

For a full reconciliation of our Segment EBITDA by operation to our consolidated results for the three and six months ended June 30, 2008 and 2007 see Item 1, Note 16 “Segment Data”.

A summary of our total Segment Net Revenues, Segment EBITDA and Segment EBITDA margin showing the relative contribution of each Segment, is as follows:

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SEGMENT FINANCIAL INFORMATION
 
   
For the Three Months Ended June 30, (US$ 000's)
 
   
2008
      (1 )  
2007
      (1 )
Segment Net Revenue
                           
Croatia (NOVA TV)
  $ 18,094       6 %   $ 10,414       5 %
Czech Republic (TV NOVA, NOVA CINEMA and GALAXIE SPORT)
    112,570       37 %     80,544       37 %
Romania (2)
    79,842       26 %     52,224       24 %
Slovak Republic (TV MARKIZA)
    37,097       12 %     29,652       14 %
Slovenia (POP TV and KANAL A)
    26,210       9 %     20,095       9 %
Ukraine (STUDIO 1+1)
    30,254       10 %     22,701       11 %
Ukraine (KINO, CITI)
    1,324       -       654       -  
Total Segment Net Revenues
  $ 305,391       100 %   $ 216,284       100 %
                                 
Represented by:
                               
Broadcast operations
  $ 302,611       99 %   $ 214,987       99 %
Non-broadcast operations
    2,780       1 %     1,297       1 %
Total Segment Revenues
  $ 305,391       100 %   $ 216,284       100 %
                                 
Segment EBITDA
                               
Croatia (NOVA TV)
  $ 1,683       1 %   $ (2,167 )     (2 )%
Czech Republic (TV NOVA, NOVA CINEMA and GALAXIE SPORT)
    71,204       54 %     47,595       55 %
Romania (2)
    38,293       29 %     22,530       26 %
Slovak Republic (TV MARKIZA)
    13,974       11 %     11,712       13 %
Slovenia (POP TV and KANAL A)
    10,866       8 %     8,388       9 %
Ukraine (STUDIO 1+1)
    (1,894 )     (1 )%     565       1 %
Ukraine (KINO, CITI)
    (1,055 )     (1 )%     (1,755 )     (2 )%
Total Segment EBITDA
  $ 133,071       100 %   $ 86,868       100 %
                                 
Represented by:
                               
Broadcast operations
  $ 134,964       101 %   $ 87,175       100 %
Non-broadcast operations
    (1,893 )     (1 )%     (307 )     -  
Total Segment EBITDA
  $ 133,071       100 %   $ 86,868       100 %
                                 
Segment EBITDA Margin (3)
    44 %             40 %        
 
(1) Percentage of Total Segment Net Revenues and Total Segment EBITDA.
 
(2) Romania channels are PRO TV, PRO CINEMA, ACASA, PRO TV INTERNATIONAL, SPORT.RO and MTV ROMANIA for the three months ended June 30, 2008. For the three months ended June 30, 2007 Romanian channels were PRO TV, PRO CINEMA, ACASA, PRO TV INTERNATIONAL and SPORT.RO.
 
(3) We define Segment EBITDA margin as the ratio of Segment EBITDA to Segment Net Revenue.
 
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SEGMENT FINANCIAL INFORMATION
 
   
For the Six Months Ended June 30, (US$ 000's)
 
   
2008
      (1 )  
2007
      (1 )
Segment Net Revenue
                           
Croatia (NOVA TV)
  $ 29,628       6 %   $ 17,646       5 %
Czech Republic (TV NOVA, NOVA CINEMA and GALAXIE SPORT)
    198,128       38 %     132,063       37 %
Romania (2)
    137,838       26 %     91,566       25 %
Slovak Republic (TV MARKIZA)
    63,331       12 %     48,329       13 %
Slovenia (POP TV and KANAL A)
    44,161       8 %     32,764       9 %
Ukraine (STUDIO 1+1)
    53,473       10 %     40,776       11 %
Ukraine (KINO, CITI) (4)
    2,302       -       1,052       -  
Total Segment Net Revenues
  $ 528,861       100 %   $ 364,196       100 %
                                 
Represented by:
                               
Broadcast operations
  $ 524,108       99 %   $ 362,409       100 %
Non-broadcast operations
    4,753       1 %     1,787       -  
Total Segment Revenues
  $ 528,861       100 %   $ 364,196       100 %
                                 
Segment EBITDA
                               
Croatia (NOVA TV)
  $ (1,047 )     (1 )%   $ (6,819 )     (5 )%
Czech Republic (TV NOVA, NOVA CINEMA and GALAXIE SPORT)
    115,049       56 %     73,262       58 %
Romania (2)
    61,669       30 %     37,666       29 %
Slovak Republic (TV MARKIZA)
    23,111       11 %     17,468       13 %
Slovenia (POP TV and KANAL A)
    15,206       7 %     11,389       9 %
Ukraine (STUDIO 1+1)
    (3,957 )     (2 )%     (1,805 )     (1 )%
Ukraine (KINO, CITI)
    (2,261 )     (1 )%     (4,172 )     (3 )%
Total Segment EBITDA
  $ 207,770       100 %   $ 126,989       100 %
                                 
Represented by:
                               
Broadcast operations
  $ 211,141       102 %   $ 127,889       101 %
Non-broadcast operations
    (3,371 )     (2 )%     (900 )     (1 )%
Total Segment EBITDA
  $ 207,770       100 %   $ 126,989       100 %
                                 
Segment EBITDA Margin (3)
    39 %             35 %        
 
(1) Percentage of Total Segment Net Revenues and Total Segment EBITDA.
 
(2)  Romania channels are PRO TV, PRO CINEMA, ACASA, PRO TV INTERNATIONAL, SPORT.RO and MTV ROMANIA for the six months ended June 30, 2008. For the six months ended June 30, 2007 Romanian channels were PRO TV, PRO CINEMA, ACASA, PRO TV INTERNATIONAL and SPORT.RO. We acquired SPORT.RO on February 20, 2007.
 
(3) We define Segment EBITDA margin as the ratio of Segment EBITDA to Segment Net Revenue.
 
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ANALYSIS BY GEOGRAPHIC SEGMENT

Spot and Non-Spot Revenues. For the purposes of our management’s discussion and analysis of financial condition and results of operations, total television and radio advertising revenue net of rebates is referred to as “spot revenues”.  “Non-spot revenues” refers to all other revenues, including those from sponsorship, game shows, program sales, short message service (“SMS”) messaging, cable subscriptions and barter transactions.  The total of spot revenues and non-spot revenues is equal to Segment Net Revenues.
 
Our goal is to increase revenues from advertising in local currency year-on-year in every market through disciplined management of our advertising inventory.  In any given period, revenue increases can be attributable to combinations of price increases, higher inventory sales, seasonal or time-of-day incentives, target-audience delivery of specific campaigns, introductory pricing for new clients or audience movements based on our competitors’ program schedule.
 
Audience Ratings and Share. When describing our performance we refer to “audience share”, which represents the share attracted by a channel as a proportion of the total audience watching television, and “ratings”, which represents the number of people watching a channel (expressed as a proportion of the total population measured). Audience share and ratings information is measured in each market by international measurement agencies, using peoplemeters, which quantify audiences for different demographics and sub geographies of the population measured throughout the day. Our channels schedule programming intended to attract audiences within specific “target” demographics that we believe will be attractive to advertisers. For each of our segments we show all day and prime time audience share and program ratings information for our channels and our major competitors, based on our channels’ target demographics,

Spot Sales. Our main unit of sale is the commercial gross rating point (“GRP”).  This is a measure of the number of people watching when the advertisement is aired. Generally we will contract with a client to provide an agreed number of GRPs for an agreed price (“cost per point”). Much more rarely, and usually only for small niche channels, we may sell on a fixed spot basis where an advertisement is placed at an agreed time for a negotiated price that is independent of the number of viewers.  The price per GRP package varies depending on the season and time of day the advertisement is aired, the volume of GRPs purchased, requirements for special positioning of the advertisement, the demographic group that the advertisement is targeting (in a multi-channel environment), and other factors. Our larger advertising customers generally enter into annual contracts which usually run from April to March and set the pricing for a committed volume of GRPs.
 
Generally, demand for broadcast advertising is highest in the fourth and second quarters of the year and lowest in the third quarter.

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(A) CROATIA

Market Background:  We estimate that the television advertising market in Croatia experienced local currency growth of approximately 4% to 7% in 2007 and expect it to show 6% to 8% growth during 2008. The Croatian kuna appreciated by 16% against the U.S. dollar between June 30, 2007 and June 30, 2008.

NOVA TV (Croatia) Audience  Share and Ratings Performance

For advertising sales purposes, the NOVA TV (Croatia) target audience is the 18-49 demographic and all audience data is shown on this basis.


   
For the Six Months Ended June 30,
 
       
2007
   
Movement
 
All day audience share
    22.9 %     18.3 %     4.6 %
All day ratings
    3.6 %     3.0 %     0.6 %
Prime time audience share
    26.4 %     19.2 %     7.2 %
Prime time ratings
    9.7 %     7.3 %     2.4 %

Our major competitors are the two state-owned channels, HRT1 and HRT2, with national all day audience shares for the six months ended June 30, 2008 of 23.3% and 15.9%, respectively, and privately owned broadcaster RTL with a national all day audience share of 26.9%.

The improved prime time audience share performance for NOVA TV (Croatia) in the six months ended June 30, 2008 compared to the same period in 2007, made NOVA TV (Croatia) the leading channel in the market for the period, reflecting the success of our strategy of investing in local productions, with shows such as ‘The Farm’ and ‘Don’t Forget The Lyrics’ delivering particularly strong ratings. Prime time audience share for HRT1 decreased from 26.1% to 21.6% for comparable periods, HRT2 decreased from 18.4% to 18.1% and RTL decreased from 29.1% to 26.0%.

Prime time ratings for the Croatia market decreased from 37.8% to 36.4% for comparable periods.

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Three months ended June 30, 2008 compared to the three months ended June 30, 2007

   
CROATIA SEGMENT FINANCIAL INFORMATION
 
   
For the Three Months Ended June 30, (US$ 000's)
 
   
2008
   
2007
   
Movement
 
Spot revenues
  $ 15,050     $ 8,482       77.4 %
Non-spot revenues
    3,044       1,932       57.6 %
Segment Net Revenues
  $ 18,094     $ 10,414       73.7 %
                         
Represented by:
                       
Broadcast operations
  $ 17,909     $ 10,389       72.4 %
Non-broadcast operations
    185       25       640.0 %
Segment Net Revenues
  $ 18,094     $ 10,414       73.7 %
                         
Segment EBITDA
  $ 1,683     $ (2,167 )     177.7 %
                         
Represented by:
                       
Broadcast operations
  $ 2,157     $ (2,144 )     200.6 %
Non-broadcast operations
    (474 )     (23 )     (1,960.9 )%
Segment EBITDA
  $ 1,683     $ (2,167 )     177.7 %
                         
Segment EBITDA Margin
    9 %     (21 )%     30 %


·
Segment Net Revenues for the three months ended June 30, 2008 increased by 74% compared to the three months ended June 30, 2007.  In local currency, Segment Net Revenues grew by 48%.  Spot revenues for the three months ended June 30, 2008 increased by 77% compared to the same period in 2007.  This increase resulted from our ratings improvement in 2007 and 2008, which has improved our position in the market and consequently supported the sale of significantly higher volumes of GRPs at increased prices. Non-spot revenues for the three months ended June 30, 2008 increased by 58% compared to the same period in 2007, primarily due to increased sponsorship revenue generated from our locally produced program ‘The Farm’.

·
Segment EBITDA for the three months ended June 30, 2008 was US$ 1.7 million compared to a loss of US$ 2.2 million for the three months ended June 30, 2007. This has been the first quarter in which our Croatia operations have generated positive EBITDA.

Costs charged in arriving at Segment EBITDA for the three months ended June 30, 2008 increased by 31% compared to the same period in 2007.  Cost of programming grew by 36% as a result of continued investment in high-quality programming to improve performance, driven by a 109% increase in production expenses due to the broadcast of popular locally-produced content such as ‘The Farm’ and ‘Don’t Forget The Lyrics’. The programming strategy to increase locally produced content is reflected by program syndication decreasing by 5% during the same period. Other operating costs increased by 49%, primarily due to increased broadcast operating expenses related to increasing locally produced programming and also increased accruals for staff bonuses as a result of the significant improvement in performance. Selling, general and administrative expenses decreased by 13% primarily due to a reduction in our provision for doubtful debts as we collected our receivables more quickly and a reduction in legal accruals following the successful resolution of  a legal proceeding.

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Six months ended June 30, 2008 compared to the six months ended June 30, 2007

   
CROATIA SEGMENT FINANCIAL INFORMATION
 
   
For the Six Months Ended June 30, (US$ 000's)
 
   
2008
   
2007
   
Movement
 
Spot revenues
  $ 24,712     $ 13,503       83.0 %
Non-spot revenues
    4,916       4,143       18.7 %
Segment Net Revenues
  $ 29,628     $ 17,646       67.9 %
                         
Represented by:
                       
Broadcast operations
  $ 29,314     $ 17,616       66.4 %
Non-broadcast operations
    314       30       946.7 %
Segment Net Revenues
  $ 29,628     $ 17,646       67.9 %
                         
Segment EBITDA
  $ (1,047 )   $ (6,819 )     84.6 %
                         
Represented by:
                       
Broadcast operations
  $ (430 )   $ (6,767 )     93.6 %
Non-broadcast operations
    (617 )     (52 )     1086.5 %
Segment EBITDA
  $ (1,047 )   $ (6,819 )     84.6 %
                         
Segment EBITDA Margin
    (4 )%     (39 )%     35 %


·
Segment Net Revenues for the six months ended June 30, 2008 increased by 68% compared to the six months ended June 30, 2007.  In local currency, Segment Net Revenues grew by 43%.  Spot revenues for the six months ended June 30, 2008 increased by 83% compared to the same period in 2007 because our ratings improvement in 2007 and 2008 has improved our position in the market and this supported the sale of significantly higher volumes of GRPs at increased prices. Non-spot revenues for the six months ended June 30, 2008 increased by 19% compared to the same period in 2007, primarily due to increased sponsorship revenue generated from our locally produced program ‘The Farm’.

·
Segment EBITDA losses for the six months ended June 30, 2008 fell by 85% compared to the six months ended June 30, 2007.  In local currency, Segment EBITDA losses fell by 87%.

Costs charged in arriving at Segment EBITDA for the six months ended June 30, 2008 increased by 25% compared to the same period in 2007.  Cost of programming grew by 29% as a result of continued investment in high-quality programming to improve performance, driven by a 83% increase in production expenses due to the broadcast of popular locally-produced content such as ‘The Farm’ and ‘Don’t Forget The Lyrics’. Program syndication remained in line with the same period in 2007. Other operating costs increased by 42%, primarily due to increased broadcast operating expenses and also increased accruals for staff bonuses as a result of the improvement in performance .  Selling, general and administrative expenses decreased by 12% primarily due to a reduction in our provision for doubtful debts as we collected our receivables more quickly and a reduction in legal accruals following the successful resolution of a legal proceeding.

Page 54


(B) CZECH REPUBLIC

Market Background:  We estimate that the television advertising market in the Czech Republic grew by approximately 6% to 8% in local currency during 2007 and expect 8% to 10% growth in 2008.  The Czech koruna appreciated by 29% against the US dollar between June 30, 2007 and June 30, 2008.

TV NOVA (Czech Republic) Audience Share and Ratings Performance

For advertising sales purposes, the TV NOVA (Czech Republic) target audience is the 15-54 demographic and all audience data is shown on this basis.

   
For the Six Months Ended June 30,
 
       
2007
   
Movement
 
All day audience share
    41.9 %     43.6 %     (1.7 )%
All day ratings
    4.8 %     4.9 %     (0.1 )%
Prime time audience share
    45.8 %     48.1 %     (2.3 )%
Prime time ratings
    13.8 %     14.8 %     (1.0 )%

Our major competitors are the two state-owned channels CT1 and CT2, with all day audience shares for the six months ended June 30, 2008 of 17.6%, 7.1% respectively, and privately owned broadcaster TV Prima with a national all day audience share of 16.6%.

Prime time audience share for CT1 decreased from 20.3% to 18.3% for comparable periods, CT2 decreased from 6.4% to 6.3% and TV Prima decreased from 17.9% to 16.9%.

Prime time ratings for the Czech Republic market decreased from 30.7% to 30.2% for comparable periods

Three months ended June 30, 2008 compared to the three months ended June 30, 2007

   
CZECH REPUBLIC SEGMENT FINANCIAL INFORMATION
 
   
For the Three Months Ended June 30, (US$ 000's)
 
   
2008
   
2007
   
Movement
 
Spot revenues
  $ 104,070     $ 74,048       40.5 %
Non-spot revenues
    8,500       6,496       30.8 %
Segment Net Revenues
  $ 112,570     $ 80,544       39.8 %
                         
Represented by:
                       
Broadcast operations
  $ 112,040     $ 80,489       39.2 %
Non-broadcast operations
    530       55       863.6 %
Segment Net Revenues
  $ 112,570     $ 80,544       39.8 %
                         
Segment EBITDA
  $ 71,204     $ 47,595       49.6 %
                         
Represented by:
                       
Broadcast operations
  $ 72,057     $ 47,822       50.7 %
Non-broadcast operations
    (853 )     (227 )     275.8 %
Segment EBITDA
  $ 71,204     $ 47,595       49.6 %
                         
Segment EBITDA Margin
    63 %     59 %     4 %

Page 55


·
Segment Net Revenues for the three months ended June 30, 2008 increased by 40% compared to the three months ended June 30, 2007.  In local currency, Segment Net Revenues increased by 7%.  Spot revenues increased by 41%, with an increase in the average revenue per GRP sold.  There was a decrease in the volume of GRPs sold due to a change in sales policy, which encouraged clients to spend more of their budgets during the low season of the first quarter. Non-spot revenue for the three months ended June 30, 2008 increased by 31% compared to the same period in 2007, primarily due to increased sponsorship.

·
Segment EBITDA for the three months ended June 30, 2008 increased by 50% compared to the three months ended June 30, 2007, resulting in an EBITDA margin of 63% compared to 59% for the same period in 2007. In local currency, Segment EBITDA increased by 14%.

Costs charged in arriving at Segment EBITDA for the three months ended June 30, 2008 increased by 26% compared to the three months ended June 30, 2007.  Cost of programming grew by 49%.  Production costs showed an increase of 20% due to an increase in the number of hours of news programming.  Program syndication increased by 92% over comparable periods due to an increase in the number of hours syndicated programming being broadcast as well as an increase in the cost of such programming.   Other operating costs were in line with the same period in 2007.  Selling, general and administrative expenses decreased by 14% primarily due to lower provisions for doubtful debts and lower equipment and consultancy fees, partly offset by increased office running costs.
    
Six months ended June 30, 2008 compared to the six months ended June 30, 2007

   
CZECH REPUBLIC SEGMENT FINANCIAL INFORMATION
 
   
For the Six Months Ended June 30, (US$ 000's)
 
   
2008
   
2007
   
Movement
 
Spot revenues
  $ 181,673     $ 120,712       50.5 %
Non-spot revenues
    16,455       11,351       45.0 %
Segment Net Revenues
  $ 198,128     $ 132,063       50.0 %
                         
Represented by:
                       
Broadcast operations
  $ 197,423     $ 131,969       49.6 %
Non-broadcast operations
    705       94       650.0 %
Segment Net Revenues
  $ 198,128     $ 132,063       50.0 %
                         
Segment EBITDA
  $ 115,049     $ 73,262       57.0 %
                         
Represented by:
                       
Broadcast operations
  $ 116,293     $ 73,759       57.7 %
Non-broadcast operations
    (1,244 )     (497 )     (150.3 )%
Segment EBITDA
  $ 115,049     $ 73,262       57.0 %
                         
Segment EBITDA Margin
    58 %     55 %     3 %


·
Segment Net Revenues for the six months ended June 30, 2008 increased by 50% compared to the six months ended June 30, 2007.  In local currency, Segment Net Revenues increased by 17%.  Spot revenues increased by 51%, primarily due to an increase in the average revenue per GRP sold, as well as a slight increase in the volume of GRPs sold.  Non-spot revenue for the six months ended June 30, 2008 increased by 45% compared to the same period in 2007, primarily due to increased sponsorship.

Page 56


·
Segment EBITDA for the six months ended June 30, 2008 increased by 57% compared to the six months ended June 30, 2007, resulting in an EBITDA margin of 58% compared to 55% for the same period in 2007. In local currency, Segment EBITDA increased by 10%.

Costs charged in arriving at Segment EBITDA for the six months ended June 30, 2008 increased by 41% compared to the six months ended June 30, 2007.  Cost of programming grew by 60%. Production costs showed an increase of 33%, with an increase in the number of hours of news programming.  Program syndication increased by 96% over comparable periods due to an increase in the number of hours of syndicated programming being broadcast as well as an increase in the cost of such programming.  Other operating costs increased by 19%, due to higher salary costs and broadcast operating expenses.  Selling, general and administrative expenses increased by 20% primarily due to increased office running costs and increased marketing and research costs.


(C) ROMANIA
 
Market Background:  We estimate that the television advertising market grew by approximately 50% to 60% in US dollars during 2007 and expect the continued growth in the range of 25% to 35% in 2008. The New Romanian lei appreciated by 1% against the US dollar between June 30, 2007 and June 30, 2008.

Romania Audience Share and Ratings Performance (All CME stations)

For advertising sales purposes, our Romanian channels have different target audience demographics; PRO TV 18 - 49 urban, ACASA 15 - 49 female urban, PRO CINEMA 18 - 49 urban, SPORT.RO male all urban and MTV ROMANIA 15 - 34 urban. All audience data shown below is based on the target demographic of PRO TV.


   
For the Six Months Ended June 30,
 
       
2007
   
Movement
 
All day audience share
    29.1 %     29.5 %     (0.4 )%
All day ratings
    4.6 %     4.2 %     0.4 %
Prime time audience share
    32.8 %     31.7 %     1.1 %
Prime time ratings
    11.3 %     9.8 %     1.5 %

Our main competitors are privately owned broadcaster Antena 1, which based on PRO TV’s target demographic, had an all day audience share of 9.0% and the two channels operated by the public broadcaster, TVR1 and TVR2, which had an all day audience share for the six months ended June 30, 2008 of 4.5% and 1.6%, respectively.
 
Prime time audience share for TVR1 decreased from 8.0% to 5.8% for comparable periods, TVR2 decreased from 2.7% to 1.4% and Antena 1 decreased from 13.6% to 10.9%.

Prime time ratings for the Romania market increased from 30.8% to 34.4% for comparable periods.
 
Additional information
 
The functional currency of our Romania operations changed from the U.S. dollar to the New Romanian lei with effect from January 1, 2008.

Page 57


Three months ended June 30, 2008 compared to the three months ended June 30, 2007

   
ROMANIA SEGMENT FINANCIAL INFORMATION
 
   
For the Three Months Ended June 30, (US$ 000's)
 
   
2008
   
2007
   
Movement
 
Spot revenues
  $ 73,864     $ 49,069       50.5 %
Non-spot revenues
    5,978       3,155       89.5 %
Segment Net Revenues
  $ 79,842     $ 52,224       52.9 %
                         
Represented by:
                       
Broadcast operations
  $ 79,229     $ 52,168       51.9 %
Non-broadcast operations
    613       56       994.6 %
Segment Net Revenues
  $ 79,842     $ 52,224       52.9 %
                         
Segment EBITDA
  $ 38,293     $ 22,530       70.0 %
                         
Represented by:
                       
Broadcast operations
  $ 38,184     $ 22,625       68.8 %
Non-broadcast operations
    109       (95 )     214.7 %
Segment EBITDA
  $ 38,293     $ 22,530       70.0 %
                         
Segment EBITDA Margin
    48 %     43 %     5 %


·
Segment Net Revenues for the three months ended June 30, 2008 increased by 53% compared to the three months June 30, 2007.  The functional currency of our Romanian operations changed from the US dollar to the New Romanian lei with effect from January 1, 2008; for comparative purposes Segment Net Revenues increased by 47% in New Romanian lei for the three months ended June 30, 2008 compared to the six months June 30, 2007.  Spot revenues increased by 51% and non-spot revenues increased by 90% over comparable periods.  The increase in spot revenues was driven by increases in the average revenue per GRP sold. In addition US$ 1.5 million of spot revenue was generated from RADIO PRO, acquired on April 17, 2008 and US$ 1.1 million was generated from MTV ROMANIA, for which we acquired a license to operate on December 20, 2007.  The increase in non-spot revenue was primarily due to increased cable tariff revenue, as SPORT.RO and MTV ROMANIA benefited from an increased channel offering to generate income from this revenue stream.

MTV ROMANIA and RADIO PRO contributed approximately US$ 4.0 million in total to Segment Net Revenues for the three months ended June 30, 2008.


·
Segment EBITDA for the three months ended June 30, 2008 increased by 70% compared to the three months ended June 30, 2007, resulting in an EBITDA margin of 48%, compared to 43% for the same period in 2007.
 
Costs charged in arriving at Segment EBITDA for the three months ended June 30, 2008 increased by 40% compared to the three months ended June 30, 2007.  Cost of programming grew 40%, reflecting increased investment to enable us to maintain our ratings in the face of increased competition.  Production expenses increased by 38% due to increased investment to expand the news and news-related content on PRO TV and ACASA, the increase in production costs related to the MTV ROMANIA license and an increase in the number of production hours broadcasted on SPORT.RO.  Programming syndication increased by 42%, primarily driven by investment in the programming schedule as well as an increase in syndicated hours broadcast, primarily due to MTV ROMANIA.  Other operating costs increased by 53%, reflecting increased salary costs due to increased headcount, particularly following the acquisition of the license for MTV ROMANIA. In addition there has been an increased bonus accrual reflecting the improved performance, as well as the impact of the weakening of the dollar against the New Romanian lei, the currency in which salaries are paid. Broadcast operating expenses have also increased.  Selling, general and administrative expenses increased by 19%, primarily due to increases in office running costs and marketing and research costs.

Page 58


Six months ended June 30, 2008 compared to the six months ended June 30, 2007

   
ROMANIA SEGMENT FINANCIAL INFORMATION
 
   
For the Six Months Ended June 30, (US$ 000's)
 
   
2008
   
2007
   
Movement
 
Spot revenues
  $ 126,896     $ 85,604       48.2 %
Non-spot revenues
    10,942       5,962       83.5 %
Segment Net Revenues
  $ 137,838     $ 91,566       50.5 %
                         
Represented by:
                       
Broadcast operations
  $ 137,028     $ 91,510       49.7 %
Non-broadcast operations
    810       56       1346.4 %
Segment Net Revenues
  $ 137,838