UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(MARK ONE)

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004

COMMISSION FILE NUMBER 1-5706

METROMEDIA INTERNATIONAL GROUP, INC.

8000 Tower Point Drive, Charlotte, North Carolina 28227
(Address and zip code of principal executive offices)

(704) 321-7380
(Registrant’s telephone number, including area code)

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

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b of the Exchange Act). Yes o No x

     The number of shares of common stock outstanding as of July 30, 2004 was 94,034,947.

METROMEDIA INTERNATIONAL GROUP, INC.
Index to
Quarterly Report on Form 10-Q

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METROMEDIA INTERNATIONAL GROUP, INC.

See accompanying notes to unaudited consolidated condensed financial statements.

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METROMEDIA INTERNATIONAL GROUP, INC.

See accompanying notes to unaudited consolidated condensed financial statements.

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METROMEDIA INTERNATIONAL GROUP, INC.

See accompanying notes to unaudited consolidated condensed financial statements.

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METROMEDIA INTERNATIONAL GROUP, INC.

See accompanying notes to unaudited consolidated condensed financial statements.

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Metromedia International Group, Inc.

Notes to Unaudited Consolidated Condensed Financial Statements

1. Basis of Presentation, Description of Business, Going Concern and Recent Developments

Basis of Presentation and Description of Business

     The accompanying consolidated financial statements include the accounts of Metromedia International Group, Inc. (the “Company”) and its consolidated subsidiaries. All significant intercompany transactions and accounts have been eliminated.

     The Company is a holding company with ownership interests in telephony and cable television businesses in Northwest Russia and the Republic of Georgia. For the six months ended June 30, 2004, the telephony businesses generated 96% of consolidated revenues, while the cable television businesses generated 4% of consolidated revenues. Substantially all of the Company’s assets are located and revenues are generated outside of the United States.

     On September 30, 2003, the Board of Directors formally approved management’s plan of disposing its remaining non-core media businesses. As of June 30, 2004, the Company’s non-core media businesses were comprised of eighteen radio businesses operating in Finland, Hungary, Bulgaria, Estonia and the Czech Republic and one cable television network with operations in Lithuania. Further, as disclosed in Note 15, “Subsequent Events – Radio Group Transaction”, the Company entered into a sales purchase agreement for the sale of seventeen of the Company’s remaining eighteen Radio businesses, which is expected to close in early September 2004. These consolidated financial statements also include the results of the Company’s discontinued business components (see Note 3, “Discontinued Business Components”).

     The accompanying interim consolidated condensed financial statements have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the consolidated financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company as of June 30, 2004, and the results of its operations for the three and six month periods ended June 30, 2004 and 2003 and its cash flows for the six month periods ended June 30, 2004 and 2003, have been included. The results of operations for the interim period are not necessarily indicative of the results of operations that may be realized for the full year.

     Certain reclassifications have been made to prior period’s financial information to conform to the current period presentation.

     The Company has reassessed its accounting and presentation of the withholding taxes that were remitted to foreign governments on dividends distributed by its business ventures located outside the United States. Historically, the Company has included such amounts within its selling, general and administrative expenses. The Company has decided to prospectively present such withholding taxes as a component of income taxes. In addition, historical amounts have been reclassified in current period presentation for consistent presentation purposes. The following table summarizes the withholding taxes attributable to dividends from business ventures which have been reclassified, for select historical periods (in thousands):

     Such amounts do not have an impact on earnings per share in prior period financial results or result in an adjustment to the Company's accumulated deficit.

Going Concern and Recent Developments

     In the first quarter of 2003, the Company embarked on an overall restructuring of its business (the “Restructuring”). The Restructuring was prompted by and was intended to resolve the severe liquidity issues that had confronted the Company since the beginning of 2002. In this Restructuring, the Company undertook to sell its non-core businesses, which at the beginning of the Restructuring included nine cable television networks, twenty radio broadcasting stations and various non-core telephony businesses located in Western, Central and Eastern Europe. Proceeds of these sales mitigated short-term liquidity concerns and provided capital for further core business development. Upon completion of all planned sales, which is expected in the third quarter of 2004, the

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Company will emerge as a business with its principal attention focused on the continued development of its core telephony businesses in Northwest Russia and the Republic of Georgia.

     In connection with the Restructuring, the Company also substantially downsized its corporate headquarters staff and undertook actions with the intended objective of significantly decreasing its corporate overhead cash-burn rate. The Company relocated its corporate headquarters from New York City, New York to Charlotte, North Carolina and has achieved a significant reduction in its corporate personnel and office related expenditures. Further reductions in corporate overhead expenditures are expected to follow the final disposition of all remaining non-core media businesses.

     The Company’s core telephony businesses are now:

     Both of these business ventures are currently self-financed and hold leading positions in their respective markets. Furthermore, the Company also intends to retain its ownership in Ayety TV (“Ayety”) (pending the resolution of a dispute with the owner of a 15% interest in Ayety, see Note 4, “Change in Basis of Presentation”), a cable television provider in Tbilisi, Georgia, in which the Company has an 85% ownership interest and Telecom Georgia, a long-distance transit operator in Tbilisi, Georgia, in which the Company has a 30% ownership interest.

     The Company is a holding company; accordingly, it does not generate cash flows from operations. As of June 30, 2004 and July 31, 2004, the Company had $31.4 million and $29.8 million, respectively, of unrestricted cash on hand. In addition, as of June 30, 2004, the Company’s consolidated business ventures held $0.9 million of cash. Furthermore, as of June 30, 2004, the Company’s unconsolidated business ventures had $13.6 million of cash on hand, which is held in banks in the Republic of Georgia.

     The Company projects that its current corporate cash reserves, anticipated cash proceeds of non-core media business sales and the anticipated continuing dividends from core business operations will be sufficient for the Company to meet on a timely basis its future corporate overhead requirements and interest payment obligations, associated with its $152.0 million aggregate principal amount (fully accreted) 10½% Senior Discount Notes, due 2007 (the “Senior Notes”). However, the Company cannot assure that dividends from core businesses will be declared and paid nor can it assure that it will be successful in completing the sale of its remaining non-core media businesses or that the realized cash proceeds, if any, will be sufficient to meet short-term liquidity requirements. The Company also is subject to legal and contractual restrictions, including those under the indenture for the Senior Notes, on its use of any cash proceeds from the sale of its assets or those of its business ventures.

     Separately, the Company projects that it has sufficient corporate cash on hand to support the Company’s planned operating, investing and financing cash flows through the end of 2004, including the Company’s $8.0 million semi-annual interest payment due on September 30, 2004 on its Senior Notes. This projection does not include cash inflows that might reasonably arise from cash proceeds realized from the sale of the Company’s non-core media businesses or operating business venture dividend distributions, each of which would further strengthen the Company’s current liquidity position.

     However, the Company does not believe that it has sufficient corporate cash on hand today to support the Company’s planned operating, investing and financing cash flows through March 31, 2005, including the Company’s $8.0 million semi-annual interest payment that is due on March 31, 2005 associated with its Senior Notes.

     If the Company is not able to satisfactorily address the liquidity issues described above, the Company may have to resort to certain other measures, including ultimately seeking the protection afforded under the U.S. Bankruptcy Code. The Company cannot provide assurances at this time that it will be successful in avoiding such measures. Additionally, the Company has a stockholders’ deficit and has suffered recurring operating losses and operating cash deficiencies.

     The factors discussed above raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

     In June 2004, the Company reached an agreement (the “Board of Director Nominee Agreement”) with certain holders of the Company’s 7¼% Cumulative Convertible Preferred Stock (the “Preferred Stock”) who represented to the Company that they held discretionary authority (including the power to vote) with regard to 2.4 million shares or approximately 58% of the outstanding 4.1 million shares of Preferred Stock (the “Participating Preferred Stock Holders”). Under the terms of the Board of Director Nominee Agreement, the Participating Preferred Stock Holders irrevocably waived the right to request a special meeting of holders of Preferred Stock to elect directors or take any action to request such a meeting until immediately after the next annual meeting of the Company’s stockholders is held. In consideration of this waiver, Messrs. Gale and Henderson, who were identified by the Participating Preferred Stock Holders as director candidates, were elected as Class III Directors by the Company’s Board of Directors. Their terms will expire at the Company’s next annual meeting of stockholders. At the next annual meeting, the holders of Preferred Stock will have the right

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to vote separately as a class for the election of two directors. It is expected that Messrs. Gale and Henderson will be nominated for election by the holders of Preferred Stock to fill these two directorships.

     The execution of the Board of Director Nominee Agreement was the culmination of several discussions, which began in late 2003, that the Company had with several holders of the Company’s Preferred Stock. According to the terms of the Preferred Stock, in the event the Company did not make six (6) consecutive dividend payments on the Preferred Stock, holders of 25% of the voting power of the outstanding Preferred Stock became entitled to compel the Company to call a special meeting of the holders of the Preferred Stock for the purpose of electing two new directors. The Company believes that the Board of Director Nominee Agreement was advantageous to the Company because it eliminated the need to hold a special meeting which would have been both time consuming and expensive.

     Opportunities to restructure the Company’s balance sheet as well as other strategic alternatives are being pursued and evaluated, but present Company plans presume the continued service of the Senior Notes on current terms and the continued deferral of the payment of dividends on the Preferred Stock. The Company cannot provide assurances at this time that a capital restructuring or other strategic alternatives will be consummated or, if consummated, that such effort would produce a material improvement in short-run cash flows or equity valuations.

2. Summary of Significant Accounting Policies

Stock Option Plans

     The Company has elected to account for its stock-based compensation in accordance with the provisions of Accounting Principles Board (“APB”) No. 25, “Accounting for Stock Issued to Employees” and present pro forma disclosures of results of operations as if the fair value method had been adopted.

Accounting Change

     Effective January 1, 2003, the Company changed its policy regarding the accounting for certain business ventures previously reported on a lag basis. All of the Company’s current operating business ventures with the exception of PeterStar, have historically reported their financial results on a three-month lag. In an effort to provide more timely and meaningful financial information on the Company’s business operations, the Company determined that all ventures should be reported on a real-time basis. As a result of this change, a $2.5 million decrease to the accumulated deficit as of January 1, 2003 was recorded, of which $2.0 million is reflected as income related to the cumulative effect of a change in accounting principle and the remaining $0.5 million is included as a cumulative effect of a change in accounting principle in income from discontinued components for the six months ended June 30, 2003.

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     The effect of this change on the consolidated statement of operations for the six months ended June 30, 2003 is as follows (in thousands, except per share data):

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3. Discontinued Business Components

     On September 30, 2003, the Board of Directors formally approved management’s plan to dispose of the remaining non-core media businesses of the Company. Management anticipates that the remaining non-core media radio businesses will be disposed of by September 30, 2004.

     Furthermore, since the first quarter of 2002, the Company has sought out opportunities to sell other business ventures for the purpose of improving the Company’s liquidity position. In light of these events, the Company concluded that certain business ventures meet the criteria for classification as discontinued business components as outlined in SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” and these entities have been presented as such within the condensed consolidated financial statements.

     Accordingly, the income statement of the Company for current and prior periods has presented the results of operations of the discontinued components, including any gain or loss recognized on such disposition, in income from discontinued components and the balance sheets presents the assets and liabilities of such operations as assets and liabilities of discontinued components.

     A summary of significant dispositions of such businesses from January 1, 2003 to June 30, 2004 are summarized below.

Radio Skonto

     On April 28, 2004, the Company sold its 55% interest in Radio Skonto (“Skonto”) to A/S Multibanka, a stock company registered in Latvia already owning 10% of Skonto. In addition, the Company assigned its right to collect from Skonto unpaid management fees to A/S Multibanka or A/S Multibanka’s designee. Total consideration for the ownership rights and assigned receivable was $0.5 million. The Company recognized a gain on the disposition of $0.3 million in discontinued components in the three months ended June 30, 2004.

ATK

     On March 26, 2004, the Company announced that it completed the sale of its interest in Arkhangelsk Television Company (“ATK”) to Yuri Firsov, the General Director of ATK, for net cash proceeds of $1.5 million. The Company recognized a gain on the disposition of $0.7 million in discontinued components in the six months ended June 30, 2004.

Romsat

     On March 4, 2004, the Company announced that it had completed the sale of its interests in FX Communications S.R.L. (aka Romsat Cable TV) and FX Internet S.R.L., to a consortium of buyers that includes Romania Cable Systems S.A. and Astral Telecom S.A. in a transaction that resulted in net cash proceeds of $16.0 million. The Company recognized a gain on the disposition of $5.8 million in discontinued components in the six months ended June 30, 2004.

Sun TV

     On November 12, 2003, the Company sold its interest in the Moldovan cable television company Sun TV and Sun Constructie S.R.L., a Moldovan trading company to Lekert Management, Ltd., a company organized under the laws of British Virgin Islands for cash consideration of $2.1 million. Lekert Management, Ltd. is an affiliate of Neocom S.R.L., which owned 35% of Sun TV prior to the transaction. The Company recorded a charge to earnings in the third quarter of 2003 in the amount of $0.4 million to reflect its investment in Sun TV and Sun Constructie at the lower of cost or fair value less cost to sell. The impairment charge was included in the results of discontinued components.

Technocom

     On June 25, 2003, the Company sold its wholly-owned subsidiary, Technocom Limited (“Technocom”) for $4.5 million. Technocom holds interests in several Russian telecommunications enterprises including satellite-based transport operator Teleport-TP. Simultaneous with the sale of Technocom, the Company entered into agreements to settle all historical claims concerning Technocom-related businesses, including claims arising from litigation in Guernsey that Technocom initiated in 2002 concerning its majority-owned subsidiary Roscomm and from arbitration proceedings initiated in 2003 in connection with that Guernsey litigation.

     The Company received cash proceeds of $4.5 million and incurred closing costs of $0.6 million, principally legal fees and severance costs, resulting in a gain of $2.9 million on the disposition, which was recorded in discontinued components in the three months ended June 30, 2003.

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Adamant Transaction

     On April 24, 2003, the Company completed an exchange with Adamant Advisory Services (“Adamant”) of its ownership in certain of its business units in Russia for approximately $58.6 million, face value, of the Company’s Senior Notes held by Adamant. The Company conveyed to Adamant its ownership interests in Comstar, a Moscow-based fixed-line telephony operator (“Comstar”); Kosmos TV, a Moscow-based cable television operator (“Kosmos TV”); and the Company’s Russian radio businesses (the “Radio Businesses”). In addition to conveying the Senior Notes to the Company, Adamant paid $5.0 million in cash and released the Company of its $3.5 million obligation to pay interest accrued on the Senior Notes being exchanged. The consideration was determined by arms length negotiations between the Company and Adamant.

     The Company recorded a gain related to this transaction of approximately $31.6 million in the year ended December 31, 2003, which is comprised of a $24.1 million gain related to the early extinguishment of the exchanged Senior Notes and a $7.0 million gain on the transfer of the Company’s interests in the Radio Businesses. Such gain on early debt extinguishment was adjusted to $24.6 million in the third quarter of 2003, due to a favorable adjustment of $0.5 million to professional fees previously accrued. The gain on early extinguishment was reflected in the Company’s income from continuing operations in the three months ended June 30, 2003, while the gain on sale of the Company’s interests in the Radio Businesses was reflected in the income from operations of discontinued components in the three months ended June 30, 2003.

Other

     The Company recognized a gain of $0.5 million related to the settlement of remaining severance obligations and other liabilities of discontinued components in the six months ended June 30, 2004.

     The Company recognized income of $0.5 million in discontinued components in the six months ended June 30, 2003 related to the cumulative effect of a change in accounting principle (see Note 2, “Summary of Significant Accounting Policies – Accounting Change”).

     The Company recognized a gain of $0.7 million in discontinued components in the three and six months ended June 30, 2003 related to the final accounting of the sale of Snapper in November 2002.

Operating Results

     The combined operating results of the discontinued radio businesses are as follows (in thousands):

     The combined operating results of the discontinued cable television businesses are as follows (in thousands):

     Included in the discontinued cable businesses’ operating results for the six months ended June 30, 2004 are the operating results of Vilsat. However, subsequent to March 31, 2004, the Company has accounted for its interest in Vilsat following the cost basis method of accounting. Vilsat operates a cable television business in Vilnius, Lithuania and is 85% owned by the Company. The decision to follow the cost basis method of accounting was principally due to the Company’s inability to readily obtain reliable and timely financial information associated with the financial performance of Vilsat for purposes of inclusion within the Company’s consolidated financial statements. Further, since the Company’s carrying value in Vilsat is negligible and it has no obligation or intention to fund future amounts to Vilsat, the Company’s carrying value should not change in future periods.

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     The principal balance sheet items included in Discontinued Business Components are as follows (in thousands):

4. Change in Basis of Presentation

     The Company is in a commercial dispute with Mtatsminda Ltd. (“Mtatsminda”), owner of a 15% interest in Ayety.

     On June 2, 2004, Mtatsminda sent a letter to the Company in which it addressed four issues. First, Mtatsminda requested that the Company cause Ayety to renegotiate the terms pursuant to which Ayety is using 11 broadcast frequencies which belong to Mtatsminda. Second, Mtatsminda alleges that the Company has an obligation to pay property taxes on the buildings owned by an affiliate of the Company in Tbilisi and that the Company has failed to meet this obligation. Third, Mtatsminda disputes the amount of certain loans made by the Company to Ayety. Fourth, Mtatsminda alleges that the Company may have violated laws against bribery of foreign officials and possibly engaged in other improper or illegal conduct. These issues were again raised by Mtatsminda in a letter addressed to the Company, dated June 25, 2004.

     With respect to the broadcast frequencies, Ayety has been using the 11 frequencies under an agreement with Mtatsminda which recently expired. Ayety is intending to enter into negotiations with Mtatsminda to secure continued long-term use of these frequencies. The Company believes that the risk of Mtatsminda withdrawing the right to use its frequencies is remote. With respect to the property tax issue, the Company is currently investigating this allegation and has retained outside legal counsel to assist with this investigation. The Company believes that the amount of tax due, if any, is relatively low and it has been advised by outside legal counsel that the risk of a tax assessment is remote. Further, the Company believes that the allegations related to the amount of the loans made to Ayety are unfounded and intends to vigorously defend itself on this issue.

     The Company believes that the fourth allegation is substantially similar to those raised previously by certain Georgian individuals and described in Note 12, “Commitments and Contingencies — Georgian Matters.” The Company’s Board of Directors authorized the Company’s outside counsel to conduct an independent inquiry into the allegations of possible improper or illegal conduct made by the Georgian individuals. The investigation has been completed and the results have been reported by the Company’s outside counsel to the Board of Directors of the Company. The investigation did not uncover any specific factual support for the allegations regarding violations of laws against bribery of foreign officials, including the Foreign Corrupt Practices Act, or other alleged improper or illegal conduct. The Audit Committee of the Company’s Board of Directors has reviewed the June 2, 2004 letter sent by Mtatsminda and believes that the allegations made with respect to violations of laws and other improper or illegal conduct are substantially similar to those previously investigated by the Company’s outside counsel. For this reason, the Audit Committee has determined not to re-open the investigation.

     At the request of Mtatsminda, the Company agreed to participate in a meeting of Ayety shareholders on June 28, 2004. At that meeting, the Company’s intent was to address matters raised in Mtasminda’s letter to the Company dated June 2, 2004 and to also address matters relative to the poor financial performance of Ayety, including the Company’s decision to remove and appoint a new General Director of the business. However, at such meeting, Mtatsminda notified the Company that in March 2003, a new charter of Ayety was prepared and filed in the Georgian courts (which are responsible for company registration in Georgia) (the “New Charter”). Pursuant to the terms of the New Charter, unanimous shareholder approval is required for certain key decisions, including the removal and appointment of a new General Director; whereas previously only a 75% vote was required. Further, at the meeting, Mtatsminda informed the Company that it would not vote “for” the Company’s proposal regarding the removal of Ayety’s General Director. In addition, Mtatsminda also informed the Company representatives that they believed the Company, through its control of Ayety, had disadvantaged Mtatsminda by ensuring that Ayety’s business performed poorly.

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     The Company believes that the legality of the changes to the charter are questionable and can be disputed by the Company on the basis that the New Charter was adopted in a manner that was not in compliance with applicable law. However, since the New Charter has already been filed and accepted by the Georgian courts, the New Charter is valid until successfully challenged.

     Management is attempting to buy-out Mtatsminda’s interest in Ayety. If this course of action fails, the Company might either attempt to resolve the commercial dispute with Mtatsminda, while simultaneously seeking to nullify the New Charter, or the Company may dispose of its interest in Ayety. However, it is uncertain if any of these efforts will succeed.

     Management has concluded that based on the New Charter, Mtatsminda has substantive participating rights, including the ability to block appointment and removal of the General Director and that the Company no longer controls the day-to-day business affairs of Ayety. Accordingly, effective June 30, 2004, the Company will no longer account for its ownership interest in Ayety following the consolidation method of accounting but will follow the equity method of accounting.

     Summarized results of operations of the Company’s consolidated financial statements and proforma results of operations of the Company with Ayety unconsolidated as of all periods presented are as follows (in thousands):

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     Summarized balance sheet information of the Company’s consolidated financial statements and proforma balance sheet information of the Company as if Ayety had been unconsolidated as of December 31, 2003 are as follows (in thousands):

5. Investments in and Advances to Business Ventures

Credit Agreements with Business Ventures

     Advances have historically been made to business ventures in the form of cash, for working capital purposes, payment of expenses or capital expenditures, or in the form of equipment purchased on behalf of the business ventures. Interest rates charged to the business ventures range from prime rate to prime rate plus 6%. The credit agreements generally provide for the payment of principal and interest from 90% of the business ventures’ available cash flow, as defined, prior to any substantial distributions of dividends to the business venture partners. The Company has entered into credit agreements with its business ventures, including those classified as discontinued components, to provide up to $17.2 million in funding of which $5.7 million in funding obligations remain at June 30, 2004. The Company’s funding commitments are contingent on its approval of the respective business ventures’ business plans.

     Such funding commitments and outstanding credit agreement balances have been significantly reduced since January 1, 2003, principally due to dispositions of business ventures during the eighteen months ended June 30, 2004. In addition, outstanding credit agreement balances have been reduced by business venture repayments, including Magticom’s repayment of its obligation to the Company in the first quarter of 2003, partially offset by interest accruals and limited funding by the Company to existing business ventures.

     The following table summarizes the credit agreement activity for the six months ended June 30, 2004 and 2003 (in thousands):

Investments in and Advances to Business Ventures

     As of June 30, 2004 and December 31, 2003, the Company’s investment in and advances to business ventures line item included within the Company’s consolidated balance sheet reflects the Company’s 49% equity investment in Magticom through Telcell

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Wireless, LLC, a 70.41% owned subsidiary holding company for which the Company follows the consolidation method of accounting. The Company’s effective ownership of Magticom is 34.5%.

     As further described in Note 4, “Change in Basis of Presentation,” as of June 30, 2004, the Company’s investment in and advances to business ventures line item also includes the Company’s net investment in Ayety.

     The components of the Company’s investments in and advances to business ventures are as follows (in thousands):

Changes in the Investments in and Advances to Business Ventures

     The changes in the investments in and advances to business ventures are as follows (in thousands):

Combined Information of Unconsolidated Business Ventures

     Certain cable and telephony business ventures in which the Company disposed of its interests in were accounted for using the equity method of accounting. Such ventures principally include:

     Comstar and Kosmos TV were disposed as a part of the Adamant transaction while MTR Svyaz and Teleport TP were disposed as a part of the Technocom transaction. The remaining transactions are as follows:

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Cosmos TV Transaction

     On March 26, 2004, the Company announced that it has completed the sale of its interests in various cable ventures, including Cosmos TV (“Cosmos”), to Star Broadband Limited, a British Virgin Islands company, which is controlled by Dominic Reid, former General Director of the Company’s cable business group, for $0.7 million.

     The results of Cosmos are presented in the Statement of Operations of the Company as continuing operations and have been included in the “Equity in income (losses) of unconsolidated investees.”

Teleplus Transaction

     On November 21, 2003, the Company sold all of its interest in the St. Petersburg, Russia cable television company, Teleplus, to a Russian company “Svyaz-Kapital” and AVT Systems Ltd., a company organized under the laws of Cayman Islands, for cash consideration of $0.9 million. The Company recognized a gain of $0.7 million on the disposition in the three months ended December 31, 2003.

Tyumenruskom Transaction

     On September 24, 2003, the Company sold its interest in the Russian mobile phone company Tyumenruskom to a Russian company for cash consideration of $1.2 million. In addition, the Company was released from its guarantee of Tyumenruskom’s debt by a vendor. The Company had previously recorded a reserve related to this guarantee that totaled $1.4 million on the date of the transaction. The Company recognized a gain on the disposition of $2.6 million, which was recorded in the three months ended September 30, 2003.

Baltcom TV Transaction

     On August 1, 2003, the Company sold all of its interest in the Latvian cable television company Baltcom TV (“Baltcom”) to the Latvian company SIA Alina (“Alina”) for cash consideration of $14.5 million. Alina was the owner of 45% of Baltcom prior to the transaction. The Company recognized a gain of $9.3 million on the disposition, which was recorded in the three months ended September 30, 2003.

Financial Information

     The following tables represent summary financial information for the Company’s operating unconsolidated business ventures, including those disposed, up to the date of disposition, being grouped as indicated as of and for the three and six months ended June 30, 2004 and 2003. The results of operations presented below are before the elimination of intercompany interest (in thousands):

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     The summarized combined balance sheets of Magticom and Ayety as of June 30, 2004 and the summarized balance sheet of Magticom as of December 31, 2003 are as follows (in thousands):

     Balance Sheets

6. Long-term Debt

10½% Senior Notes

     In September 1999, the Company entered into a trust agreement to issue the Senior Notes in the face amount of $210.6 million. The Senior Notes are unsecured but rank senior to all existing and future subordinated indebtedness of the Company. The Senior Notes are not subject to sinking fund requirements and are redeemable at the Company’s option at any time. The principal is due, in its entirety, in September 2007. The Senior Notes bear interest at a rate of 10½% per annum, payable semiannually.

     Under the terms of the indenture governing the Senior Notes, the Company and certain of its subsidiaries are subject to certain covenants pertaining to its financing activities. Such covenants restrict the Company and certain of its subsidiaries from paying dividends, acquiring its capital stock, prepaying subordinated indebtedness, investing in and selling assets and subsidiary stock, and incurring additional indebtedness, among other activities. In addition, upon the occurrence of a change of control (as defined) of the Company, the holders of the Senior Notes have the right to require the Company to repurchase all or any part of the Senior Notes at a cash purchase price of 101% of the face value of the Senior Notes plus accrued interest as of the date of repurchase.

     On April 24, 2003, the Company completed an exchange with Adamant of its ownership interest in certain of its business units in Russia for, among other things, approximately $58.6 million face value of Senior Notes held by Adamant, $5.0 million in cash and a release of its $3.5 million obligation to pay interest accrued on the Senior Notes being exchanged. With the completion of this transaction, the outstanding principal balance on the Senior Notes was reduced to $152.0 million.

7. Stockholders’ Equity

Common Stock

     On September 24, 2003, the Company’s equity securities were removed from quotation on the OTC Bulletin Board trading system (“OTCBB”) because the Company was not then in compliance with NASD Rule 6530. As a result, the Company’s common stock (“Common Stock”) and Preferred Stock were then quoted on the Pink Sheets.

     The Company filed its March 31, 2004 Form 10-Q on June 18, 2004, thus regaining compliance with OTCBB trading eligibility requirements. On August 6, 2004, the Common Stock (OTCBB: MTRM.OB) began trading on the OTC Bulletin Board. The Preferred Stock (OTCPK: MTRMP) remains quoted on the Pink Sheets.

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Preferred Stock

     There are 70.0 million authorized shares of preferred stock of the Company of which 4.1 million shares have been issued and designated as Preferred Stock with a liquidation preference of $50.00 per share, all of which were outstanding as of June 30, 2004 and December 31, 2003.

     Dividends on the Preferred Stock are cumulative from the date of issuance and payable quarterly, in arrears. The Company may make any payments due on the Preferred Stock, including dividend payments and redemptions, (i) in cash; (ii) through issuance of the Company’s common stock or (iii) through a combination thereof.

     Through March 15, 2001, the Company paid its quarterly dividends in cash. The Company has elected not to declare a dividend for any quarterly dividend periods ending after June 15, 2001. As of June 30, 2004, total dividends in arrears are $55.1 million. The dividend requirement for the twelve months ending June 30, 2005 will be $19.5 million, inclusive of the effects of compounding and assuming no payments of the dividends.

     The Preferred Stock is redeemable at any time, in whole or in part, at the discretion of the Company, initially at a price of $52.5375 per share in the year 2000 and thereafter at prices declining to $50.00 per share on or after September 15, 2007, plus in each case all accrued and unpaid dividends as of the redemption date. As of June 30, 2004, the Company has not redeemed any of the Preferred Stock. The Preferred Stock is not subject to any sinking fund provisions.

     The Preferred Stock is convertible at any time at the option of the holders into shares of Common Stock of the Company. The rate used to determine the number of shares of Common Stock is a function of the liquidation preference, any accrued and unpaid dividends and the initial conversion price of $15.00. As of June 30, 2004, no shares of Preferred Stock have been converted into shares of Common Stock. In the event of any voluntary or involuntary dissolution, liquidation or winding up of the Company, the holders of the Preferred Stock will be entitled to be paid out of the Company’s assets available for distribution to its stockholders, before any payment or distribution is made to the holders of Common Stock or other class of stock subordinated to the Preferred Stock. The holders of the Preferred Stock are entitled to receive a liquidation preference in the amount of $50.00 per share, plus all accrued and unpaid dividends, or a pro rata share of the full amounts to which the holders of the Preferred Stock are entitled in the event the liquidation preference cannot be paid in full. Except as described below, the holders of the Preferred Stock have no voting rights.

     In June 2004, the Company entered into the Board of Director Nominee Agreement with certain holders of the Preferred Stock who represented to the Company that they held discretionary authority (including the power to vote) with regard to 2.4 million shares or approximately 58% of the outstanding 4.1 million shares of Preferred Stock. Under the terms of the Board of Director Nominee Agreement, the Participating Preferred Stock Holders irrevocably waived the right to request a special meeting of holders of Preferred Stock to elect directors or take any action to request such a meeting until immediately after the next annual meeting of the Company’s stockholders is held. In consideration of this waiver, Messrs. Gale and Henderson, who were identified by the Participating Preferred Stock Holders as director candidates, were elected as Class III Directors by the Company’s Board of Directors. Their terms will expire at the Company’s next annual meeting of stockholders. At the next annual meeting, the holders of Preferred Stock will have the right to vote separately as a class for the election of two directors. It is expected that Messrs. Gale and Henderson will be nominated for election by the holders of Preferred Stock to fill these two directorships.

     The execution of the Board of Director Nominee Agreement was the result of several discussions, which began in late 2003, that the Company had with several holders of the Company’s Preferred Stock. According to the terms of the Preferred Stock, in the event the Company did not make six (6) consecutive dividend payments on the Preferred Stock, holders of 25% of the voting power of the outstanding Preferred Stock became entitled to compel the Company to call a special meeting of the holders of the Preferred Stock for the purpose of electing two new directors. The Company believes that the Board of Director Nominee Agreement was advantageous to the Company because it eliminated the need to hold a special meeting, which would have been both time consuming and expensive.

8. Employee Benefit Plans

     The Company has two principal qualified retirement plans in the United States. These plans covered certain former employees of the Company or one of its subsidiaries. The Plan covering Company personnel was amended effective December 31, 1995 and such benefits were frozen as of that date. The Plan covering the former subsidiaries’ personnel was amended effective December 31, 2002 and such benefits were frozen as of that date. Both plans are noncontributory defined benefit pension plans under which pension benefits are calculated based on years of service and participants’ compensation.

     The Company’s policy has been to make, at a minimum, annual cash contributions to the defined benefit pension plans equal to an actuarially determined amount consistent with federal tax regulations. However, the Company may from time to time make contributions beyond those legally required. In 2004, the Company currently expects to contribute $1.0 million to the defined benefit plans. The Company’s funding objective has been to accumulate funds at a relatively stable rate over the participants’ working lives so benefits are fully funded at retirement.

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     The Company also maintains an unqualified, unfunded supplemental retirement plan for certain former executives based in the U.S. The plan is a noncontributory defined benefit pension plan under which pension benefits are calculated based on a formula incorporating years of service and participants’ compensation. In addition, the Company also maintains an unfunded group medical plan and provides life insurance coverage for certain former employees subsequent to retirement. In 2004, the Company expects to contribute $0.4 million to these aforementioned unfunded benefit plans.

     Components of net periodic benefit costs are as follows (in thousands):