Edgar Filing: PRIVATE MEDIA GROUP INC

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended........................December 31, 2002
OR

[ ] 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 000-25067

PRIVATE MEDIA GROUP, INC.
(Name of Registrant as specified in its Charter)

NEVADA 87-0365673
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)

3230 Flamingo Road, Suite 156, Las Vegas, Nevada 89121
(Registered office)

Carretera de Rubi 22-26, 08190 Sant Cugat del Valles, Barcelona, Spain
(European headquarters and address of principal executive offices)

34-93-590-7070
--------------
(Issuer's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value.

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 past 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 __

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

Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 1b-2 of the Act).
Yes __ No [X]

At June 28, 2002, the aggregate market value of the voting stock and
non-voting common equity held by non-affiliates of the registrant was
$45,040,327. The aggregate market value has been computed by reference to the
last sales price of the common stock on June 28, 2002.

On March 24, 2003 the registrant had 44,904,934 shares of Common Stock
outstanding.

PART I

ITEM 1. DESCRIPTION OF BUSINESS

This Report includes forward-looking statements. Statements other than
statements of historical fact included in this Report, including the statements
under the headings "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business" and elsewhere in this Report regarding
future events or prospects, are forward-looking statements. The words "may,"
"will," "expect," "anticipate," "believe," "estimate," "plan," "intend,"
"should" or variations of these words, as well as other statements regarding
matters that are not historical fact, constitute forward-looking statements. We
have based these forward-looking statements on our current view with respect to
future events and financial performance. These views involve a number of risks
and uncertainties which could cause actual results to differ materially from
those we predict in our forward-looking statements and from our past
performance. Although we believe that the estimates and projections reflected in
our forward-looking statements are reasonable, they may prove incorrect, and our
actual results may differ, as a result of the following uncertainties and
assumptions:

. our business development, operating development and financial
condition;
. our expectations of growth in demand for our products and
services;
. our expansion and acquisition plans;
. the impact of expansion on our revenue potential, cost basis and
margins;
. the effects of regulatory developments and legal proceedings on
our business;
. the impact of exchange rate fluctuations; and
. our ability to obtain additional financing.

We do not intend to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise except to the
extent required by law. You should interpret all subsequent written or oral
forward-looking statements attributable to us or persons acting on our behalf as
being expressly qualified by the cautionary statements in this Report. As a
result, you should not place undue reliance on these forward-looking statements.

THE COMPANY

OVERVIEW

Private Media Group, Inc., a US incorporated company, and its
subsidiaries (together referred to hereinafter as "Private Media Group", "we" or
"us") is a leading international provider of high quality adult media content
for a wide range of media platforms.

Private Media Group, Inc. is incorporated in the State of Nevada. In
accordance with Nevada law we maintain a registered office at 3230 Flamingo
Road, Suite 156, Las Vegas, Nevada.

Our European headquarters are located at the offices of one of our principal
operating subsidiaries, Milcap Media Group, S.L. ,whose addresss is Carretera de
Rubi 22-26, 08190 Sant Cugat del Valles, Barcelona, Spain, telephone +
34-93-590-7070.

Any references in this report to Milcap Media Group refers to Milcap
Media Group S.L. (Spain), and Milcap Media Limited refers to Milcap Media
Limited (Cyprus).

We acquire worldwide rights to still photography and motion pictures
tailored to our specifications from independent directors and process these
images into products suitable for popular media formats such as print
publications, videotapes , DVDs and electronic media content for Internet
distribution. We distribute our adult media content directly, and through a
network of local affiliates and independent distributors, through multiple
channels, including (1) newsstands, video rental stores, travel retail and adult
bookstores, (2) mail order catalogues, (3) cable, satellite and hotel television
programming, (4) over the Internet via proprietary websites and broadband
delivery services and (5) wireless telephony. In addition to media content, we
also market and distribute branded leisure and novelty products oriented to the

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adult entertainment lifestyle and generate additional sales through the
licensing of our Private trademark to third parties. In the fiscal year ended
December 31, 2002, we had net sales of Euro 39.4 million and net income of Euro
0.3 million.

Our business was founded in 1965 and achieved initial success through
our flagship publication, Private, the first full color, hard-core sex
publication in the world. Today, we produce four X-rated periodical magazines:
Private, Pirate, Triple X and Private Sex, as well as several special feature
publications each year. As of December 31, 2002, we had compiled a digital
archive of more than two million photographs and all of our 367 print
publications. We expect to add two additional issues and hundreds of photographs
each month to this archive. Approximately 300,000 copies of our print
publications are distributed each month at an average retail price of
approximately Euro 11.50. We distribute our publications through a network of
approximately 250,000 points of sale in more than 35 countries, with strong
market positions in Europe, Latin America, Australia and Canada. We believe that
our distribution network has the potential to reach nearly 500,000 points of
sale in our existing markets.

Since 1992, we have also acquired, processed and distributed adult
motion picture entertainment. We acquire worldwide rights to motion pictures
that meet our exacting standards for entertainment content and production value
from independent directors, either under exclusive contracts or on a freelance
basis. We then edit and process these motion pictures to ensure consistent image
quality and prepare and customize them for distribution in several formats,
including DVDs, videocassettes, broadcasting, which includes cable, satellite
and hotel television programming, and the Internet. Our proprietary motion
pictures and those produced by joint ventures in which we participate have
received107 industry awards since 1994, evidencing our success in setting high
quality standards for our industry. As of December 31, 2002, our movie library
contained 597 titles. We expect to add approximately 131 additional titles in
2003.

We launched our first Internet website, www.private.com, in 1997. We
now own a number of sites directed at specific customer bases, including
www.private.com/shop. We also generate incremental sales by licensing our
trademarks and proprietary adult media content for use on the websites of other
companies.

Since 1997, we have expanded our presence in emerging electronic
markets for adult media content, such as the Internet, broadcasting and are
currently in the process of launching products developed for use on hand-held
devices including both mobile phones and Personal Digital Assistants. We believe
that these technologies represent a substantial growth opportunity for us in the
future.

We license our content to cable and satellite television operators as
well as to hotels. We have also launched three television channels, Private
Gold, Private Blue and Private Girls, that broadcast our content. Consumers pay
for these products either on a pay-per-view basis or by subscription.

We operate in a highly regulated industry. This requires us to be
socially aware and sensitive to government strictures, including laws and
regulations designed to protect minors and to prohibit the distribution of
obscene material. We take great care to comply with all applicable governmental
laws and regulations in each jurisdiction where we conduct business. Moreover,
we do not knowingly engage the services of any business or individual that does
not adhere to the same standards. Since 1965, we have never been held to have
violated any laws or regulations regarding obscenity or the protection of
minors.

Private, Private Media, our Private logo, Pirate, Triple-X, Triple-X
Files, Private Black Label, Private XXX, Gaia, Private Sex, Private Life,
Private Style, www.privatespeed.com, Private Gold, Private Blue,
www.private.com, www.prvt.com, www.privatelive.com, www.privatechannels.com,
www.sex.se, www.privatepda.com, www.privatenightclub.com, www.privateathome.com,
www.privatestars.com, www.private.com/shop, and www.privategold.com are some of
our trademarks and trade names. Other marks used in this Report are the property
of their owners, which includes us in some instances. Information on these
websites is not a part of this Report.

MARKET OPPORTUNITY

Demand for adult entertainment products has grown substantially in
recent years. We believe that the total worldwide adult entertainment market
exceeds $56 billion annually. Of this market, we believe that our target market,
including print publications, videocassettes, DVDs, broadcasting and the
Internet, comprises more than $40 billion. We believe that two principal factors
are driving growth in our industry: the relaxation of social and legal
restrictions on

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distribution of adult entertainment products and new technologies that
facilitate the distribution of high quality adult media content to consumers in
the privacy of their own homes. As a result of liberalized regulation of adult
entertainment products, we now distribute our products in physical form in more
than 35 countries worldwide with an aggregate current population of 1.1 billion,
as compared to six European countries with a population of 144 million when the
current management took over in 1991. We expect this liberalizing trend to
continue, which should expand our potential markets further in the future.

The proliferation of easy to use electronic equipment, such as VCRs
and DVD players, which allow consumers to view high quality video products in
the privacy of their home, has boosted demand for adult media content compatible
with these formats. For example, the installed base of DVD players in Western
Europe and the United States doubled in 2001 and is expected to reach 48 million
households by the end of 2003 in the US alone. Also, the evolution of the
Internet as a channel of commerce and content distribution has stimulated
additional demand for adult media content. In addition, advances in cable,
satellite and hotel communications systems furnish another relatively new
channel for the delivery of media content, including adult entertainment, into
private homes, hotels and businesses.

More recently, the telecommunications industry has shown considerable
interest in the use of adult content on hand-held devices such as mobile
telephones, PDAs and other wireless activated devices. This provides an
additional and exciting new source of potential revenues for us as one of the
principal providers of adult content.

We expect these regulatory and technological developments to fuel
increasing demand worldwide for adult media content, including demand for our
products. In addition, we believe that market demand for content to fill new
media outlets will lead mainstream media content providers to seek still more
adult media content in the future. We expect that the high quality standards of
the mainstream media, technological demands of multiple delivery formats and
global marketing and distribution costs will increase capital requirements for
providers of adult media content. While the adult entertainment industry is
currently characterized by a large number of relatively small producers and
distributors, we believe that the factors discussed above will cause smaller,
thinly capitalized producers to seek partners or exit the adult entertainment
business, leading to a consolidation of the adult entertainment industry.

OUR COMPETITIVE STRENGTHS

We believe the following strengths, among others, will enable us to
exploit the growing global market for adult entertainment:

Extensive library of high quality adult media content

We have an extensive library of high quality adult media content. As
of December 31, 2002, our library included still photographs developed for more
than 350 back-issues of magazines and more than 580 motion pictures. We hold
exclusive worldwide rights to this entire content archive. This has enabled us
to enter into global distribution arrangements with a wide range of media
content providers, including leading international companies. To facilitate
electronic distribution of our products, we have converted our entire archive of
print images into a digital format. We are currently digitizing our motion
picture archive as well, and have now stored most of our existing motion
pictures in digital form. We believe that this electronic archive constitutes
one of the largest libraries of high quality adult media content in the world.

Recognized brand name

We believe that our target customers associate the Private brand name
with high quality adult entertainment products and services. This name
recognition attracts leading producers of adult media content, as well as
distributors and prospective joint venture partners interested in working with
Private Media Group. We believe that the strength of our brand name leads to
more favorable economic terms than we could otherwise obtain in our processing
and distribution contracts, and enables us to negotiate favorable revenue
sharing arrangements and joint ventures from which we derive significant
licensing fees and royalty income. We have entered into joint venture and
co-branding agreements with leading participants in our industry and other
related industries, including Playboy and Penthouse. We seek to strengthen
awareness of our brand name by consistently featuring the Private label
prominently in our product packaging, cross-promoting our own products,
selectively sponsoring athletes and distributing under the Private label
complementary or ancillary non-media products that are consistent with an adult
entertainment lifestyle. We believe that these activities

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engender a loyal customer base which, in turn, enables us to grow even with
relatively modest external advertising and marketing expenditures.

Established market position and distribution network

We have a well-established worldwide distribution network which has
been built up over the past 35 years, including some 250,000 points of sale in
over 35 countries as of December 31, 2002. In many markets, we believe that our
established presence hinders our competitors' ability to break into the market.
In some cases, exclusive distribution agreements improve our market position
further. This broad distribution network provides an effective channel to
introduce new products and services and new formats for existing products and
services. For example, we were able to utilize our existing video distribution
channels to reach customers with our DVD-based products. In electronic media
categories, we have entered into strategic alliances with a number of leading
international service providers. In addition, we have assembled an internal team
of Internet specialists to maintain and improve our Internet infrastructure and
electronic products and services. We believe that our broad, multi-format
distribution network affords our customers convenient access to high quality
adult media content in the format of their choice.

Flexible operating structure and access to substantial capital

We acquire adult media content from third-party directors on a project
basis. This approach gives us substantial flexibility in terms of production
volume and delivery time, significantly reduces our fixed production overhead
and largely eliminates the risk to us of cost overruns in production. Because of
our multiple product and service formats and broad distribution network, we can
afford to hire top directors in the industry, which we believe results in a
higher quality product for our customers. Similarly, we reduce our fixed
processing costs by outsourcing editing and duplication functions for most of
our products, although we retain oversight of the overall production process for
cost and quality control purposes. As a public company with access to the
capital markets we believe that we will have sufficient financial resources to
increase our production and grow through acquisitions without sacrificing our
high quality standards.

Experienced professional management

Our management team has extensive experience in the production and
distribution of adult media content and in general business administration.
Berth H. Milton, our Chairman of the Board, has extensive knowledge of our
industry and has successfully founded and developed other profitable businesses.
Charles Prast, our President and Chief Executive Officer, has extensive
experience in investment banking and the development of interactive
entertainment companies. Other members of our management team have broad
expertise in content production, sales and marketing, technology and finance,
and have contributed to our record of growth in our core business and in
acquiring and integrating companies in related businesses.

OUR STRATEGY

Our vision is to be the world's preferred content provider of adult
entertainment to consumers anywhere, at any time and across all distribution
platforms and devices. We have developed the strategies described below to
increase sales and operating margins while maintaining the quality of our
products and services and the integrity of our brand name.

Develop strategic alliances and joint ventures with businesses outside
of the adult entertainment industry to broaden our distribution channels. We are
entering into strategic alliances and joint ventures with leading media
companies outside of the adult entertainment industry to distribute our adult
media content for use on popular and newly developing media formats, including
revenue sharing relationships with cable and satellite television operators and
Internet service providers with significant market positions. We expect these
initiatives to widen the scope of our distribution network, enabling us to reach
new customers while supplying our partners and licensees with content.

To be at the forefront of the adult entertainment industry in adapting
new technology and distribution channels such as broadband distribution of our
motion pictures. By actively seeking out and utilizing advanced technologies to
distribute our content such as, broadband, Internet ,cable and satellite
television and wireless devices we expect to increase revenues with minimal
incremental cost.

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Increase market share through strategic acquisitions. The adult
entertainment industry is currently fragmented and consolidating. We expect this
trend to continue as small, privately owned companies seek to exit from the
business. We plan to expand our market presence and increase our market share by
acquiring local distributors in the markets in which we compete. In addition, we
may seek to acquire existing business enterprises in other related businesses
opportunistically. To finance future acquisitions, we expect to use a
combination of debt and equity. As one of the few companies in our industry with
publicly listed common stock, we believe that we will have a significant
advantage over most of our competitors in financing such consolidating
acquisitions.

To complete the digitalization of our entire movie and photograph
library in order to prepare our library for distribution in new electronic
media. We have developed an extensive library of motion pictures and other
pictorial content. Until recently, this library was archived on a master print,
which would allow duplication in traditional media. New forms of electronic
distribution provide us with an opportunity to use this content by distributing
it through new forms of media, such as, Internet ,broadband and wireless
devices. To facilitate electronic distribution of our products, we have
converted our entire archive of print images into a digital format. We are
currently digitizing our motion picture archive as well, and have now stored
most of our existing motion pictures in digital form.

Continue to increase and strengthen brand awareness. We have developed
strong brand awareness within each of our magazines and videos' targeted
markets. We own the worldwide rights to all of our content. We seek to
strengthen awareness of our brand name by consistently featuring the Private
label prominently in our product packaging, cross-promoting our own products,
selectively sponsoring sports and distributing under the Private label
complementary or ancillary non-media products that are consistent with an adult
entertainment lifestyle.

OUR PRINCIPAL PRODUCTS AND MARKETS

Magazine Publications

We are the publisher of Private, an international X-rated magazine.
Private was founded in 1965, and was the first full color, hardcore sex
publication in the world. Today, we produce four X-rated magazines which are
released bi-monthly: Private, Pirate, Triple X and Private Sex. In addition,
special editions are released monthly and a book, The Best of Private, is
released annually. We distribute these magazines through newsstands and other
retail outlets.

Movie Productions

Since 1992, we have acquired and distributed adult motion picture
entertainment. These productions generally feature men and women in a variety of
erotic and sexual situations, generally in both hardcore and softcore versions.
We distribute these movies primarily on videocassettes, DVDs, through cable,
satellite and hotel television programming and over the Internet. We maintain
the ownership and copyrights of every movie we finance and produce.

We expect to produce approximately 95X-rated and 36 R-rated movies in
2003, with distribution through a worldwide network that covers approximately
60,000 points of sale, including primarily video shops and adult book stores. We
believe we have the potential to reach more than 155,000 points of sale. We have
also worked together on creating labels with other recognized brands, including,
in 2000 the introduction of a the Private Penthouse Video label in conjunction
with Penthouse.

As of December 31, 2002, our movie library contained 597 movie titles.
By the end of 2003 we expect the total to increase to approximately 700 titles.
Nearly all titles are available on videocassette and DVD. These products are
sold by distributors, primarily to retail stores and wholesalers worldwide. Many
of our original motion picture programs have also been re-edited and licensed to
cable, satellite and hotel television operators.

Internet

Our Internet team has combined the quality of our extensive media
library with the newest technology to create what we believe to be one of the
best adult websites, www.private.com. We believe that the rapid growth of the
e-commerce market and increased access to the Internet by consumers has created
an excellent opportunity for us to utilize our proprietary assets through
marketing and distribution on the Internet. During 2002 Private.com created over
60,000

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memberships and gave 150,000 dialler customers access to high quality adult
content, including a full library of magazine pictures, photosets, stories, an
interactive search categories gallery and access to over 500 video clips from
Private Media Group movies. Private.com members also get access to live, webcam,
and contact/personals content. In 2002 we completely revamped the site making
use of cutting edge technology to provide our customers with improved video
streaming and a wider selection of movie content. Our new Live sex webcam
solution has become very popular and is generating increased revenue since
partnering with Interclimax, one of the most professional live sex providers
offering international solutions with verification processes in line with our
professional standards. Private.com acquires customers primarily through
advertising in DVDs, videos, magazines and broadcast programming with minimal
incremental cost. It also acquires new customers by establishing partnerships
with leading international portals.

Due to Private.com's recognized brand name among adult site purveyors,
we have many customers who have the confidence to make credit card payments to
us. Current subscriptions prices are $29.95 for a month's subscription and
$149.95 for an annual subscription. Consumers wishing to avoid credit card
payments or not having a credit card can access Private.com content through
so-called dialler access by dialing into a premium rate number and paying a per
minute fee that varies depending on the country. Revenues generated from dialler
have increased significantly over the past year, from nearly 50,000 calls in
2001 to 150,000 calls in 2002. In the US consumers can also pay using our
on-line check facility. The Private.com website is currently generating traffic
of approximately 1.5 million visits per month and more than 25 million pages are
viewed per month.

Private Media Group recently launched its totally re-designed online
Private Shop. The shop offers a complete catalog of Private products - including
all of Private's DVD and video titles, magazines, and adult toys. New features
include an all-new technical platform and back end, real-time processing, and a
customizable user experience that allows Private to develop a more personal
relationship with customers through the use of wish lists, shop alert mailings,
product reviews, and advanced account management features. Customers can search
the entire shop catalog using a new content categorization feature. In addition,
the new Private Shop will be easily customized for partnerships and co-branding.
It allows participants to easily feature the Shop on their own sites and resell
Private's products and in return earn referral fees on the sales they generate.

In addition, we are licensing the right to use our trademarks and
media library on the Internet to third parties with independent websites. This
licensing activity generates significant royalty income. We also market our
products on the Internet through distributor sites and shopping sites.

We currently maintain a staff of 30 full-time Internet employees.

OTHER MARKETS

In April 1996, we launched our Private Collection International, Inc.
line of adult pleasure products. We also license the Private name in connection
with various lines of clothes, nutritional supplements, and energy soft drinks.
Channels of distribution for licensed products include conventional distribution
channels, e-commerce and television home shopping.

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HISTORY

The parent company, Private Media Group, Inc., was originally
incorporated in 1980 as a Utah corporation under the name Glacier Investment
Company, Inc. for the purpose of acquiring or merging with an established
company. In 1991, we changed our domicile to the State of Nevada. The parent
company had no material business activity prior to its acquisition of Milcap
Media Limited and Cine Craft Limited in June 1998.

On December 19, 1997 Private Media Group, Inc. entered into
acquisition agreements with Milcap Media Limited and Cine Craft Limited to
acquire all of their outstanding capital stock in exchange for 22,500,000 shares
of Common Stock, 7,000,000 shares of the $4.00 Series A Preferred Stock, and
2,625,000 common stock purchase warrants. Private Media Group, Inc. completed
these acquisitions on June 12, 1998. In connection with these acquisitions, in
December 1997 the parent company changed its corporate name to Private Media
Group, Inc. and declared a one for five reverse split of its Common Stock.

On January 28, 2000, we acquired all of the outstanding shares of
Extasy Video B.V. for total consideration of Euro 3.2 million. The consideration
consisted of 208,464 shares of common stock and warrants to purchase 208,464
shares of common stock. The warrants are exercisable during the period January
28, 2001 to January 28, 2004 at an exercise price of $9.63.

In May 2000, we authorized a three-for-one stock dividend on our
common stock, which was distributed to holders of record of common stock on May
30, 2000.

As of January 1, 2001, we acquired Coldfair Holdings Ltd., a company
incorporated and organized under the laws of the Republic of Cyprus, for a total
consideration of Euro 1.5 million payable in 248,889 shares of common stock.
Coldfair Holdings is a company engaged in the marketing and sale of adult
entertainment products and services.

Effective April 1, 2001, we acquired the inventory and certain
contracts of our U.S. distributor, Private USA, in exchange for Euro 1.0 million
and the assumption of Private USA's obligations under some contracts.

On April 8, 2001, Peach Entertainment Distribution AB (Sweden), a
subsidiary of Private Media Group, Inc., sold its interest in Private Circle,
Inc., a company engaged in the design, production and marketing of trendy casual
apparel, for an adjusted consideration of Euro 2.9 million as of May 2001.

On December 31, 2002, we acquired all of the outstanding shares of
Barbuda B.V., a company owning a building where we plan to move our European
headquarters to for total consideration of Euro 10.0 million. The consideration
consisted of cash and a note payable in the amount of Euro 6.6 million.

INDUSTRY OVERVIEW

The adult entertainment industry has evolved rapidly in recent years.
In spite of often intense political campaigning, there has been a general trend
towards wider acceptance of adult entertainment content among the general public
and mainstream media channels. New technologies have lowered costs and changed
the way in which adult content is produced, distributed and viewed. Lower costs,
in particular, have lowered barriers to entry and increased competition in the
adult entertainment industry. The trend toward wider acceptance of
sexually-explicit material and ongoing technological developments has created a
large and growing global market for adult content.

Historically, the adult entertainment industry has attracted a
considerable level of government and regulatory attention primarily due to
obscenity, which has led to limitations on either the explicitness of content or
the availability. Traditionally, to view adult material, consumers were required
to purchase movies in a public environment or to go to an adult movie theatre or
peepshow.

Through a process of evolution rather than revolution the adult
entertainment industry has become more acceptable over time, with a relaxation
of the regulations and guidelines governing the industry. For example, in the
United Kingdom, one of Europe's more restrictive countries with respect to adult
entertainment, there has been a gradual relaxation of what is suitable for
public viewing. The British Board of Film Classification, BBFC, has introduced
the `R18'

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category, allowing distribution of hardcore adult videos through licensed sex
shops for the first time. The approval from the BBFC, and subsequent theatrical
release of movies such as The Idiots and Intimacy have also broadened what is
regarded as acceptable adult content.

New technologies have helped to legitimize the industry and increase
the size of the market. During the 1980s, the introduction of adult movies on
videocassette and through broadcasting on cable and satellite television
increased acceptance of adult media content by confining it to the privacy of
the consumer's home. More recently, the Internet has become a primary
distribution platform for both suppliers and consumers of adult media content
providing low-cost delivery and increased privacy. Although currently
under-exploited, third generation mobile and handheld devices are likely to
increase the market even further in the future, making adult media content
viewing mobile.

The production and distribution of adult media content is very
competitive. Hundreds of companies are now producing and distributing movies to
wholesalers and retailers, as well as directly to consumers. The low cost of
high quality video cameras and equipment has significantly lowered the barrier
to entry for production of adult media content. According to Adult Video News,
approximately 10,000 new adult video titles were released in the United States
in 1999, up from 8,950 in 1998 and 1,275 in 1990. The bulk of this production is
represented by low quality, amateur productions, made for only a few thousand
dollars, as opposed to the larger, professionally produced movies with high
production values. Around 20 major producers, such as Private Media Group,
Vivid, Video Company of America and Metro, release most high budget adult videos
and DVDs. See "Business-Competition." In addition, because it costs as little as
$ 5,000 to establish an Internet presence, there is significant competition
among distributors of adult media content over the Internet. The proliferation
of websites distributing adult media content has itself fueled a greater and
ongoing demand for the creation and licensing of new adult media content.

We believe that the global adult entertainment market exceeds $ 56
billion annually. This covers memberships and subscriptions, escort services,
magazines, sex clubs, telephone sex lines, cable and satellite pay-per-view
programming, adult videos and toys and other related products and services. In
1998, Forrester Research estimated the U.S. adult entertainment market at $ 10
billion annually. This compares to total U.S. cinema domestic box office
receipts for mainstream motion pictures of over $ 8 billion in 2002, indicating
the size and importance of the adult market within the entertainment industry.

VIDEO AND DVD SALES & RENTAL

Bringing adult movies into the privacy of the home through the
introduction of videocassettes along with cable and satellite services all but
eliminated the adult theatre business. The introduction of the DVD and its rapid
acceptance by the public is gradually shifting the balance of home viewing from
videos to DVDs. DVDs offer better picture and sound quality than videos,
worldwide compatibility and other add-ons. The DVD format also benefits
suppliers and retailers. Several languages can be combined onto one DVD, so only
the DVD cover needs to be changed for different territories. Also, back
catalogue sales should initially increase as consumers look to replace their
videocassette library with the new format.

Although DVDs will not replace videocassettes completely in the near
term because of the ability of users to record on videocassettes as well as
their current high level of market penetration, currently comprising
approximately 93 million households in the United States, rentals and sales of
DVDs have increased significantly over the past two years as more DVD players
are sold.

In the U.S. market, total rental and retail spending on video and DVD
titles in 2000 was over $ 19 billion, a 10% increase over 1999, according to the
Video Software Dealers Association. In 2000, total sales and rentals of adult
videos in the United States were approximately $ 4.0 billion according to Adult
Video News estimates, including sales through general interest retailers and
dedicated adult stores. In 2001, PR Week reported that the Free Speech Coalition
estimated that 20% of all U.S. households with either cable or satellite
television or a VCR watch adult movies.

The provision of in-room entertainment services by major hotel chains
throughout the world also serves as a distribution channel for adult media
content. In addition to a selection of mainstream movies, hotel guests often
will have a choice of softcore, and frequently hardcore, adult videos available
on a pay-per-view basis. In the United States, these services are provided by
companies such as On Command and Lodgenet, which supply approximately 750,000
and 810,000 hotel rooms, respectively. Estimates by analysts cited to by the Los
Angeles Times in 2001 suggest that adult

- 9 -

movies generate approximately half of total hotel pay-per-view revenue in the
United States, approximately $ 250 million annually. Outside of the United
States, excluding more restrictive countries such as the United Kingdom, hotel
guests also have access to hardcore material on a pay-per-view basis.

BROADCASTING

Cable and satellite television have also brought adult media content
into the privacy of the home. Technological developments, in particular the
evolution of digital broadcasting, should not only increase the number of
channels that can be delivered directly to the home, but should also lead to
video on demand. The development of these services should benefit the adult
entertainment industry by providing a greater number of special interest
channels providing pay-per-view services. This should also increase the need for
new adult media content.

In the United States, in addition to softcore channels such as Playboy
TV, AdulTVision, Spice Channel and The Adam & Eve Channel, there are several
hardcore video channels available, including Eurotica, Exotica, Exxxtasy, True
Blue, X!, Xxxcite and XXXplore, that offer uncensored hardcore material. In
2001, the Asian Wall Street Journal stated that, according to Kagan World Media,
of a total pay-per-view revenue for satellite and cable television operators in
the United States of $ 1.73 billion, around 27%, or $ 465.0 million, can be
attributed to adult movies.

In 1999, Playboy and Spice Entertainment Companies, Inc. entered into
an agreement resulting in the combination of the two companies. Playboy also
acquired three television networks - the Hot Network, the Hot Zone and Vivid TV
- in July 2001 which has altered Playboy's focus from softcore to hardcore
programming.

At the end of 2000, according to Screen Digest, there were over 64
million subscribers to cable and satellite television in Western Europe.
According to Forrester Research, in the United States there were approximately
83 million subscribers to satellite and cable television services at the end of
2000. The number of cable and satellite television subscribers is expected to
continue to increase, as well as gradually shift from analog to digital
services.

INTERNET

The adult entertainment industry was among the first to commercially
exploit the Internet as a distribution channel, and among the few industries
believed to generate a profit on the Internet. The Internet offers relative
privacy for users, a seemingly endless selection of adult media content and can
provide immediate delivery. Datamonitor research estimated that adult content
accounted for 69% of paid content on the Internet in 1998.

Pay sites contain most of the adult media content on the Internet, but
free sites are also common and are primarily supported by advertising from pay
sites. Free sites get a few cents for each viewer who clicks on an advertising
banner. The banner then transports these viewers to a site that tries to entice
the user into paying for content using their credit cards. In 1999, Datamonitor
estimated that there were well over 100,000 sexually-oriented sites, of which
only about 14,000 generate revenues. Of the revenue-generating sites, only a
handful of these account for the majority of overall revenues on the Internet
for adult media content.

According to searchterms.com, `sex' is the third largest category
searched for on the Internet after `autos' and `travel', but above `shopping',
`games' and `MP3'. Of the 1.6 billion web pages indicated as available by the
Google search engine, searching for `sex' results in 15.9 million pages and
`porn' results in 3.3 million. In June 2001, Internet monitoring company
NetValue estimated the following numbers of Internet users were visiting adult
sites at least once per month: 5.3 million in Germany; 3.8 million in the United
Kingdom; 2.7 million in France; 2.4 million in Italy and 1.5 million in Spain.
In the United States, PR Week reported that Nielsen/Net and Media Metrix
estimated that approximately 21 million Americans visit an adult content site at
least once per month.

A number of well-established Internet businesses have recognized the
revenue potential of adult media content and now provide those
services.Freenet.com, Germany's second largest internet service provider has
launched Fundorado.de offering hardcore movies, photographs and sex chat groups
on a monthly subscription basis. In the United Kingdom, online retailer
Lastminute.com has recently introduced a range of adult games and toys to its
site. However, this development has also been subject to criticism, leading to
withdrawals such as Yahoo!'s reversal of its decision to sell adult videos on
its sites after receiving numerous complaints from consumers.

- 10 -

The use of the Internet for viewing adult media content is expected to
increase significantly as home Internet access increases and broadband services
become more widely available. IDC estimates that in 2005 the number of home
Internet users will reach 194.1 million in the United States as compared to
100.8 million in 2000 and 196.4 million in Western Europe as compared to 80.3
million in 2000. Forrester Research estimates broadband services will reach 46.7
million households in the United States by 2005 as compared to 5.0 million in
2000 and 28.7 million in Western Europe as compared to 400,000 in 2000.

The increased availability of adult media content on the Internet has
attracted considerable attention. Concerns have arisen with respect to child
protection and the distribution of illegal material. In response to the issue of
child protection, a number of software packages have become available that
control the content that can be accessed from a personal computer. Products such
as Surfcontrol, NetNanny, Websense and others can be employed to filter sites
for inappropriate material, blocking access for unauthorized users.

MAGAZINE PUBLICATIONS

Our publishing operations include the publication of the adult
magazines identified in the table below, special editions consisting of
previously published material and occasional newsstand specials, calendars and
paperback books. All of these magazines, together with local editions, are
printed under various trade names and are distributed in over 35 countries. We
publish several customized editions of our four principal magazines. Each
edition contains the same editorial material but provides locally targeted
content reflecting local governmental regulation regarding explicit adult
publications. Most of our magazines feature pictures of men and women engaged in
erotic and sexually explicit situations. We distribute approximately 300,000
copies of our print publications per month at an average retail price of
approximately (Euro) 11.50. In 2002 we introduced a new magazine, directed at
the gay market, Private Man. Our most popular publications are Private, Pirate,
Private Sex and Triple X.

AS OF DECEMBER 31,
-------------------------------------
MAGAZINE LIBRARY 2002 2001
-------------------------------------------------------------------------- ----------------- ----------------
TITLE NO OF ISSUES NO OF ISSUES
----------------- ----------------

Private................................................................... 174 168
Pirate.................................................................... 76 70
Triple-X.................................................................. 50 44
Private Sex............................................................... 41 35
Private Man............................................................... 2 -
Special Editions.......................................................... 9 7
Best of Private (Book).................................................... 14 13
Special Editions (Book)................................................... 1 -
----------------- ----------------
TOTAL..................................................................... 367 337
================= ================

QUANTITIES OF MAGAZINES PRODUCED
(PRINTED, NOT SOLD)
-------------------------------------
TITLE 2002 2001
-------------------------------------------------------------------------- ----------------- ----------------

Private................................................................... 590 300 642 200
Pirate.................................................................... 435 250 471 500
Triple-X.................................................................. 419 560 457 200
Private Sex............................................................... 351 275 346 500
Private Man............................................................... 80 250 -
Special Editions.......................................................... 153 825 75 150
Best of Private (Book).................................................... 42 925 58 200
Special Editions (Book)................................................... 60 985 -
----------------- ----------------
TOTAL 2 134 370 2 050 750
================= ================

Our publications offer a variety of features and have gained a loyal
customer base. We believe we have earned a reputation for excellence by
providing a high standard of quality to the adult entertainment industry, while
we maintain

- 11 -

circulation leadership as the leading hardcore magazine publisher. All of our
publications have long been known for their graphic excellence and features, and
publish the work of top artists and photographers in the field. They are also
renowned for their pictorials of beautiful people. Our magazines command some of
the highest prices in the industry.

All of our publications are printed by independent third parties. We
have a longstanding relationship with several printers in Spain We believe that
generally there is an adequate supply of printing services available to us at
competitive prices, should the need for an alternative printer arise. All of our
production and printing activities are coordinated through our operating
facility maintained by our wholly owned subsidiary, Milcap Media Group.

CIRCULATION

Our magazines have historically generated most of their revenues from
firm sales distribution. However, now distributors with rights to return
represent approximately 50% of our production. Single copy retail sales normally
occur in adult book stores and similar establishments. Newsstand retail sales
are permitted in most European countries, including France, Italy, Spain,
Germany, Denmark, Sweden, Finland the Benelux countries and Portugal.

Our magazines are distributed to newsstands and other public retail
outlets through a network of national distributors, who maintain a local network
of several wholesale distributors and licensors. We have entered into national
distribution agreements covering over 35 countries and generally deal with a
magazine distributor for local distribution of our publications. We ship copies
of each issue in bulk to our wholesalers, who distribute on to local retailers.

Independent distributors who distribute our magazines do so under
individual distribution agreements. These agreements are normally subject to
automatic yearly extensions unless either party terminates the arrangement.

For the past few years, we have sought to expand the use of our
magazines' content and other assets across different media formats. Our primary
focus in recent years has been the re-editing and digitizing of every Private
magazine for use on our websites. This content was initially available on our
websites in May 1998, and we completed the digitization of our still photo
archive in 2000.

PRODUCTION, DISTRIBUTION AND FULFILLMENT

Four independent printers in Spain currently print most of our
magazines, books, brochures and video and DVD covers. Printing costs vary based
upon the price of component raw materials. The principal raw materials necessary
for publication of our magazines are coated and uncoated paper. Paper prices are
affected by a variety of factors, including demand, capacity, pulp supply and by
general economic conditions. Our printers have a number of paper supply
arrangements and we believe that those arrangements provide an adequate supply
of paper for our needs. In any event, we believe that alternative sources are
available at competitive prices. With respect to color separation, pre-press and
related services, we currently use our own scanning facilities and have the
support of two independent suppliers for color separations. We are also using
the latest technologies in this field, such as digital imposition and
computer-to-plate process technology, or CTP. CTP eliminates the need for the
production of film/color separations during the pre-printing process, saving
time and money while improving quality. In simple terms, CTP allows printers to
receive computer disks containing electronic files (both text and graphics) and
output those files directly to a plate. The result is a top quality image which
takes minutes instead of hours to produce.

We print and ship all of our proprietary magazines from Barcelona,
Spain. We determine the amount of printed publications bi-monthly with input
from each of our national distributors.

Most of our products are packaged and delivered directly by the
printer or supplier, while Milcap Media Group provides warehousing, customer
service and payment processing. Milcap Media Group employs a staff of 20
professionals to manage the production and to oversee the printing and
distribution of our magazines.

MOVIE PRODUCTIONS

In 1992, we began releasing movies under the Private label.

- 12 -

Our adult movies are in genres similar to our magazines and books
under the titles listed in the table below. Normally, we spend on average
between $ 50,000 and $ 125,000 per movie. This amount excludes the computation
of the post-production, master production, duplication and distribution costs.
Generally, Milcap Media Group creates and designs all artwork for promotional
items and packaging and contracts for printing services. Since 1997, independent
laboratories have duplicated all of our videocassettes for us. Similarly, since
1999 all DVDs have been duplicated by independent laboratories as well. A number
of our titles, including Private Film, Private Video Magazine, Triple X, Private
Stories, Private Gold and The Matador Series are released on a monthly basis
while others are released on a bimonthly or less frequent basis. As of December
31, 2002, our movie library contained 597 movie titles. By the end of 2003, we
expect the total to increase to approximately 728 titles. Almost all titles are
available on both videocassette and DVD. We sell approximately 75,000 videos and
175,000 DVDs per month. We continue to expand our video operations in
international markets and presently market our video products in over 35
countries.

We finance all of our adult movies, and we contract with video and
movie producers on a flat fee basis. All producers generally assume production
costs and obligations, including among other things, the delivery of rights and
model releases.

- 13 -

2002 2001
-------------- --------------
MOVIE LIBRARY NO OF TITLES NO OF TITLES
------------------------------------------------------ -------------- --------------

Amanda's Private Diary ............................... 5 5
Best - End of Year ................................... 8 7
Private Castings ..................................... 42 31
The Best by Private - Compilations ................... 40 28
Pirate Fetish Machine ................................ 8 2
Gaia ................................................. 6 6
Horny Housewives ..................................... 9 9
Private Man .......................................... 3 -
Private-Ninn ......................................... 3 -
Private Black Label .................................. 28 22
Private Films ........................................ 28 28
Pirate Video ......................................... 12 12
The Private Life of .................................. 11 5
Private Movies ....................................... 5 1
Private Gold ......................................... 57 51
Private-Penthouse Movies ............................. 12 11
Private Reality Video ................................ 12 3
Private Superf**kers ................................. 12 12
Peepshow Special ..................................... 12 12
Private Tropical ..................................... 3 -
Pirate Video de Luxe ................................. 16 16
Private Video Magazine ............................... 26 26
Private Stories ...................................... 27 27
Private XXX .......................................... 15 15
The Matador Series ................................... 15 14
Triple X Files ....................................... 12 12
Triple X Video ....................................... 32 32
Virtualia ............................................ 6 5
Private X-Treme ...................................... 5 -
Private Fantasies (DVD only) ......................... 5 -
DVD Packs (DVD only) ................................. 5 -
Private Interactive (DVD only) ....................... 1 -
Private Lust Treasures (DVD only) .................... 8 2
DVD Sampler (DVD only) ............................... 6 4
Erotica (soft titles) ................................ 102 70
-------------- --------------
TOTAL 597 468
============== ==============

We have licensed many of our original programs to cable television
networks and adult pay-per-view television channels. These licenses generally
grant the television channel owner a specific right of transmission and we
retain the intellectual property rights of every production. We edit many of our
new feature video and movie releases into several versions depending on the
media through which they are to be distributed. In general, versions edited for
cable, satellite and hotel television programming are less sexually explicit
than the versions edited for home video distribution.

DISTRIBUTION

We distribute our productions worldwide via masters, videocassettes
and DVD's that are sold or rented in video stores, sex shops, newsstands and
other retail outlets, and where permitted, through direct mail. Our website has
contributed to increasing video and DVD sales, and we expect this new medium to
become a significant distribution channel in the future.

We have entered into distribution agreements in over 35 countries.
Under these distribution agreements, and according to the territory, one of our
subsidiaries, Peach Entertainment Distribution or Milcap Media Group, agrees to

- 14 -

provide a specific minimum number of new titles each month during the term of
the agreement, and a licensee normally serves as the exclusive distributor
throughout its own country or language territory. Under the various distribution
agreements, licensees are normally required to purchase a minimum number of
units for each monthly period during the term of the agreement.

In countries such as Germany, we have expanded our relationships with
our national distributor by entering into exclusive multi-year, multi-product
output agreements. In countries such as the United States, the Benelux
countries, France and Spain, we have established local subsidiaries for the
purpose of owning or controlling local distribution. In general, however, we
believe that national distribution agreements enable us to have an ongoing
branded presence in international markets and to generate higher and more
consistent revenues, than we could achieve selling directly to retailers.

In October 2001 we entered into an agreement with Quadriga Worldwide,
a leading European hotel entertaiment and service provider, to make a wide
selection of our movies available to guests in hotels serviced by Quadriga.
Quadriga presently provides 6,350 hotels in 30 countries with interactive
entertainment and information services, covering 321,000 hotel rooms worldwide,
with an estimated potential annual audience of 100 million hotel guests. Key
customers of Quadriga include leading hotel chains such as Best Western
International, Scandic Hotels, Choice Hotels, Starwood Hotels and Resorts, Six
Continents Hotels, Accor Hotels, Carlson Hospitality Worldwide, Marriott Hotels,
Thistle Hotels and Societe du Louvre.

VIDEO DUPLICATION/PRODUCTION TECHNIQUES

Masters are customized and duplicated by our subsidiary Peach
Entertainment Distribution and from there they are sent to different
distributors and VHS duplication centers. Some distributors receive a master
directly and do their own duplication.

All artwork to print the video covers is created at Milcap Media
Group. Most countries receive their own pre-printed covers from Spain and some
countries print their own covers from CD-Roms when delivered.

THE DVD MARKET

Distribution of DVDs represents one of our fastest growing markets. We
believe we set a high standard for DVDs in the adult entertainment industry,
with each DVD released by us possessing five language options as well as four
other subtitled languages. We believe that our multi-language DVD format
provides a significant competitive advantage for us because it attracts
consumers worldwide and expands our international marketing and sales potential.
This global format allows us to reduce our overall unit production costs and
increase profit margins. Currently, the majority of DVDs released by our
competitors in the United States and worldwide are produced in only one
language. As a result, they have to either license titles country-by-country or
manufacture each title in separate languages, thus loosing out on economies of
scale. As the manufacture of each DVD master disc, prior to duplication, costs
approximately $ 10,000, this further drives down our competitors' profit
margins.

Currently, mainstream movie titles are released on DVD in six Regional
Codes or Zones. This is required primarily because producers often do not
control the worldwide rights to their titles. Our DVDs are playable in any
region, in every country in the world, because we own and control the global
rights to everything we have produced.

Our DVDs are also "Internet Activated," which means that when a
consumer plays the DVD in a personal computer, that person also gets a direct
link to our websites, where they can view our content by purchasing a
subscription or visit our extensive on-line shopping area. We also sometimes add
`extras' to our DVDs, including alternative endings to movies, interviews with
the stars, biographical data on the actors, their roles in other in-house
productions and publications, and multiple-angle views.

BROADCASTING

In 2000, we signed an exclusive joint venture agreement with
International Film Productions and Distributions, Ltd., IFPD, to create two new
adult television channels to be broadcast worldwide. IFPD is a European-based
television

- 15 -

broadcasting company associated with major content providers that specializes in
the distribution of cable and satellite television channels.

Under the terms of our joint venture agreement, IFPD has agreed to
ensure the promotion and broadcasting of our new adult channels, Private Gold
and Private Blue, to a worldwide audience and we have agreed to provide all
adult media content and trademarks. The Private Gold channel will present
hardcore material, while the Private Blue channel will broadcast softcore
material. Under this agreement, we will receive 65% of the gross profits
generated from the broadcast of, and advertising on, these channels. We also
have an option to acquire up to 65% of the equity in IFPD at face value. In
2000, we also started broadcasting our Private Blue channel in the United
Kingdom under an exclusive joint venture agreement with Zone Vision Enterprises,
a UK-based television company, and IFPD. These channels operate on digital and
analog platforms throughout continental Europe. We receive 35% of the net profit
generated from those broadcasting and advertising revenues. Private Blue is
available through the analog and digital satellite platforms of BSkyB and the
Telewest cable network in the United Kingdom. In November 2001 we entered into a
distribution agreement with NTL Network to make Private Blue available to over
one million NTL digital cable subscribers in the United Kingdom on a
pay-per-night basis. We also launched in Turkey on the DigiTurk platform, and in
Hungary and Slovakia on the UPC networks, and in the Netherlands with
MediaKabel. Currently available to over 6.6 million addressable subscribers in
the UK alone, Private Blue has also secured an international satellite feed on
the SIRIUS 2 satellite. This means that our Private Blue signal is available for
further expansion to subscribers in all territories of Europe from 23.00 to
05.00 Central European time every day of the year.

Our Private Gold television channel, broadcasting under Dutch license,
successfully launched in Hungary on the HCA Cable Association platform and in
Hungary, Slovakia and the Czech Republic on cable systems and the UPC Direct
satellite network in 2000. Private Gold also secured an international satellite
feed on the AMOS 1 satellite. This will allow us to expand to subscribers in all
territories in Europe from 24.00 to 04.00 Central European time, every day of
the year. A second satellite feed, on the ASTRA satellite with Cryptoworks
encryption, also became available in 2000. ASTRA is one of the leading satellite
systems for direct-to-home transmission of television, radio and multimedia
services in Europe. ASTRA currently has a fleet of nine satellites and transmits
to 22 European countries.

In 2001, we entered into an agreement with Canal Digital AS which
provides for the distribution of the Private Gold television channel through
Canal Digital in Sweden, Denmark and Finland as part of an exclusive joint
venture agreement with IFPD. Canal Digital is jointly owned by the French
company Canal+ and the Norwegian company Telenor. Canal Digital operates in the
Nordic countries and is one of the leading suppliers of digital programs and
services in the Nordic region. Canal Digital has more than 1.1 million card
customers and over 700,000 subscribers to its services in the Nordic region.

In 2001, the Private Gold and Private Blue television channels were
contracted for distribution throughout Latin America by Pramer S.C.A. Pramer is
the largest company in Latin America dedicated to producing, distributing and
commercializing content for cable and satellite television. Pramer will be
responsible for the satellite distribution, advertising and commercialization of
the Private Blue and Private Gold channels throughout Latin America. Both
channel signals are transmitted on the NSS 806 satellite that covers the entire
South American continent making the channels available to all of Latin America's
15 million satellite and cable subscribers.

In June 2001, we signed an agreement with Wizja TV to broadcast
Private Gold in Poland. Wizja TV is one of the largest Direct to Home platforms
in Poland with approximately 400,000 subscribers.

We believe that currently our Private Gold and Private Blue channels
are available to approximately 22 million potential viewers worldwide.

INTERNET SERVICES

Our Internet team has combined our extensive media library with the
newest technology to create what we believe to be one of the best adult
websites, www.private.com. We believe that the rapid growth of the e-commerce
market and increased access to the Internet by consumers has created an
opportunity for us to use our proprietary content assets through distribution
over the Internet. During 2002 Private.com created over 60,000 memberships and
gave 150,000 dialler customers access to high quality adult content, including a
full library of magazine pictures, photosets, stories, an

- 16 -

interactive search categories gallery and access to over 500 video clips from
Private Media Group movies. Private.com members also get access to live, webcam,
and contact/personals content. In 2002 we completely revamped the site making
use of cutting edge technology to provide our customers with improved video
streaming and a wider selection of movie content. Our new Live sex webcam
solution has become very popular and is generating increased revenue since
partnering with Interclimax, one of the most professional live sex providers
offering international solutions with verification processes in line with our
professional standards. Private.com acquires customers primarily through
advertising in DVDs, videos, magazines and broadcast programming with minimal
incremental costIt also acquires new customers by establishing partnerships with
leading international portals.

Due to Private.com's recognized brand name among adult site purveyors,
it has many customers who have the confidence to make credit card payments. We
utilize a secure Web Pay application developed by Verisign which allows secure
on-line processing of credit card payment transactions. Current subscriptions
prices are $29.95 for a month's subscription and $149.95 for an annual
subscription. Consumers wishing to avoid credit card payments or not having a
credit card can access Private.com content through so-called dialler access by
dialing into a premium rate number and paying a per minute fee that varies
depending on the country. Revenues generated from dialler have increased
significantly over the past year, from nearly 50,000 calls in 2001 to 150,000
calls in 2002. In the US consumers can also pay using our on-line check
facility. The Private.com website is currently generating traffic of
approximately 1.5 million visits per month and more than 25 million pages are
viewed per month.

We currently maintain a staff of 30 full-time Internet employees of
whom 8 focus on technology and the remainder concentrate on website production,
sales and marketing and customer support.

Through our separate but linked site, privatespeed.com, we offer our
customers high speed broadband access to Private Media Group's complete
collection of movies and video content through video-on-demand. Privatespeed has
a two pronged strategy for acquiring customers for its prepaid service: by
partnering with broadband Internet Service Providers, (ISPs) who host our
content and distribute products to their installed customer bases and by
targeting broadband customers directly, who view the content over the Internet.
With privatespeed.com we are well positioned among adult entertainment companies
to take advantage of the growing transition to broadband content distribution.

In 2002 we established our own monthly newsletter, The Private
Insider, which is now distributed via email free to over 140,000 subscribers.
The newsletter is a key tool for maintaining communication channels with members
of the private.com site. It offers free content to arouse member's interest in
the Private brand. The Insider promotes a mix of new and old products and a
number of Private's key models. New services are also promoted in the
newsletter, such as Private's on-line DVD rental service privateathome.com. We
also have direct links from our DVDs to our Internet sites.

LICENSEES

We license the right to use our trademarks and our library of
photographs and movies to third parties.

During 2002 we reviewed our existing licence arrangements and took the
decision to terminate our agreement with Cyber Entertainment Network, replacing
it with an agreement with Internet Cyber Entertainment (ICE). Under this
agreement, we granted ICE use of the website www.privategold.com a site with
which we provide adult content in exchange for a royalty payment based on gross
revenues.

Our reseller program implemented through www.privatecash.com provides
other websites with promotional material designed to sell our products. The
reseller program aims to attract adult industry and non-adult industry website

- 17 -

owners and potential website owners to sell our products by means of a
substantial commission program. We then fulfill orders through our network of
distributors.

TRADEMARK LICENSING

THE PRIVATE COLLECTION

Together with several licensees, we have developed a program to market
and distribute high quality branded merchandise over our websites and the
websites of those licensees. Our licensed product lines include clothing,
novelties, accessories, fragrances, leather goods, eyewear, nutritional
supplements, aphrodisiacs and condoms. These products have been marketed
principally through mail-order and retail outlets, including department and
specialty stores.

On November 30, 1995, Milcap Media Limited entered into a license
agreement with Private Collection and granted Private Collection worldwide
rights to own, operate, distribute, subcontract, market, advertise and promote
merchandise including, rubber goods, vibrating products, pumps, electric items,
lotions, lubricants, potions, aphrodisiacs, realistic rubber and latex products,
condoms, dolls, jelly products, massagers, playing cards and other items that
fall into these product groups, except the rights to greeting and trading cards,
leather and other apparels and lingerie which were licensed on a non-exclusive
basis.

In 1999, the ownership of Private Collection was transferred to Doc
Johnson Enterprises, a worldwide leader in the adult manufacturing and
distribution business with more than 20 years of experience and a reputation for
creative, innovative novelty products, and we renegotiated our 1995 agreement.
Under the new five-year agreement, Doc Johnson Enterprises has the exclusive
worldwide right to manufacture, distribute, sub-contract, market, advertise and
promote a range of adult novelty products under the brand name The Private
Collection. We, in turn, are entitled to receive royalty income on a quarterly
basis, with a guaranteed minimum payment. We also have a right to purchase at a
special rate an unlimited amount of products manufactured under the agreement
for our own distribution through the Internet, television home shopping and
other similar media.

Under the terms of the agreement, Doc Johnson Enterprises has agreed
to maintain Private's high standards, to market The Private Collection with a
pricing policy similar to that of comparable merchandise under the Doc Johnson
brand name and to market the Private Collection in a manner similar to that used
by Doc Johnson for its own brands. We have agreed to promote The Private
Collection through our own products and services.

PRIVATE ENERGY

In 2001 we signed a five-year worldwide distribution agreement with
Travel Retail Sales Limited to sell an energy drink called Private Energy. Under
this agreement the licensee is responsible for all production, marketing, sales
and distribution of the product and guarantees incremental minimum sales each
year on which royalties are payable to us.

PROPRIETARY RIGHTS

GENERAL

We believe that our branded magazine titles and logos are valuable
assets and are vital to the success and future growth of our businesses. We have
filed trademark registration applications with respect to most of our trade
names and logos. We believe that the name recognition and image that we have
developed in each of our markets significantly enhance customer response to our
sales promotions. We intend to aggressively defend our trademarks throughout the
world, and we constantly monitor the marketplace for counterfeit products. We
initiate legal proceedings from time to time to prevent unauthorized use of our
trademarks.

PIRACY PROBLEMS

According to figures from the Motion Picture Association of America,
annual losses from video piracy are an estimated $ 250 million a year in the
United States alone, and close to $ 3.0 billion a year worldwide. Adult Video
News estimated that approximately 20% of the U.S. video market (both rental and
sales in 2000) was attributable to adult videos.

- 18 -

Piracy involving adult entertainment products and services is most
prevalent in markets where pornography is illegal and in developing countries,
including Eastern European countries, such as Russia, Poland and Romania. We
believe that piracy is so prevalent in many of these countries that we cannot
distribute our products there, as piracy undercuts our price structure and
eliminates profit margins. It is very difficult to enforce our proprietary
rights in these markets.

Another piracy problem concerns the Internet. We are currently unable
to confirm that all mail order sites selling Private products actually sell our
original products and not pirated copies. The problem stems from distribution
procedures, which in the case of Internet, is straight from the Internet
provider's order page to the consumer. Also, video streaming over the Internet
renders it difficult for us to control the origin of what is shown.

Our legal counsel handles most piracy problems and attempts to resolve
these matters or litigate them on a case-by-case basis.

COMPETITION

GENERAL CONSIDERATIONS

Our products compete with other products and services that utilize
leisure time or disposable income of adult consumers. The businesses in which we
compete are highly competitive and service-oriented. We have few long-term or
exclusive service agreements with our customers. Business generation is based
primarily on customer satisfaction with key factors in a purchase decision,
including reliability, timeliness, quality and price. We believe that our
extensive and longstanding international operations, our brand name, image and
reputation, as well as the quality of our content and our distributors, provide
a significant competitive advantage over many of our competitors.

Although we believe our magazines and videos are well-established in
the adult entertainment industry, we compete with entities selling adult
oriented products in retail stores, as well as through direct marketing. Many of
these products are similar to ours.

Over the past few years, the adult entertainment industry has
undergone significant change. Traditional producers of softcore content as well
as mainstream providers of media content have shifted to producing hardcore
content. As a result, we face greater competition to distribute hardcore
content. This shift has also led to industry consolidation, creating fewer, more
financially formidable competitors.

MAGAZINES

We meet with minimal direct competition from other publishers of
hardcore adult magazines and paperback books. We believe that our print
publications are dissimilar to other adult publications in style and format. The
only similar business of which we are aware was represented by Rodox N.V., a
Dutch/ Danish corporation, which has discontinued its publishing operation. We
do not believe there is presently any significant competition in this segment of
our business. Magazines such as Playboy and Penthouse and similar print
publications do not compete directly with our publications, since we consider
them to be softcore publications. There are several hardcore publications in
each country where our magazines are sold. In general, these are printed in
limited editions and are of lower quality than our publications.

VIDEO AND DVD

The distribution of adult entertainment videocassettes and DVDs is a
highly competitive business. Each format competes with the other as well as with
other forms of entertainment. Revenue generation for motion picture
entertainment products depends, in part, upon general economic conditions, but
the competitive position of a producer or distributor is still greatly affected
by the quality of, and public response to, the entertainment product it makes
available to the marketplace. Competition arises from established adult video
producers and from independent companies distributing low-quality material.

Our primary competitors in the movie industry are adult motion picture
studios, with in-house production and

- 19 -

post-production capabilities. These include U.S. producers such as Video Company
of America and Vivid Film, owned by Playboy, as well as Wicked Pictures, Evil
Angel Productions and Metro Global Media Inc. Other competitors are smaller, but
locally or regionally they are capable of quickly identifying niche markets that
could compete for our customers. In addition, we also compete with other forms
of media, including broadcast, cable and satellite television, direct marketing,
electronic media and adult entertainment websites.

BROADCASTING

The distribution of adult movies on cable and satellite television
systems and hotel pay-per-view systems is highly competitive. Competition in
this area is increasing in line with increasing consumer demand for hardcore
adult entertainment generally. Our strongest geographical market position for
cable and television and distribution is in Europe, with our adult channels,
Private Gold and Private Blue, and licensing arrangements with established
European television networks, such as Canal+.

The strength of consumer demand for adult oriented cable programming
is evidenced by the acquisition by Playboy of two hardcore U.S. cable channels
from Vivid Film in July 2001. Until recently, Playboy's business has been
largely confined to softcore adult entertainment and it has resisted entry into
hardcore markets. Competition in this market has also been impacted by an
increase in the number and availability of satellite direct-to-home transmission
channels. Our cable and satellite television activities in the United States to
date have been limited to licensing our content to channel operators, such as
Playboy.

In licensing, we experience competition from our video and DVD
competitors. Our position in U.S. markets is not well established, and
competition in this market is strong.

We have only recently entered the hotel pay-per-view market, which is
an extremely competitive market. This is due primarily to our unwillingness to
enter into a typical hotel pay-per-view agreement, which requires a licensor
such as Private Media Group to license the movies to a hotel provider on a fixed
fee basis for each movie or video. We have recently entered into license
agreements with a major hotel chain which provides for license fees based upon
the number of rooms they service, and we are now intensifying our efforts to
penetrate this segment of the market.

INTERNET

The Internet market for adult oriented content is expanding quickly.
There are numerous adult media content websites competing with ours, operated by
companies that possess global distribution, broadcasting and branding.

- 20 -

EMPLOYEES

As of December 31, 2000, 2001 and 2002 we employed 118, 142 and 177
people, respectively, on a full-time basis.

Our full-time editorial and post-production staff consists of an
editor-in-chief, six executive editors and approximately seven editors,
associate editors and assistant editors who oversee the quality and consistency
of the artwork and editorial copy and manage the production schedule of each
issue. The production of each issue requires the editors to coordinate the
activities of a writer, a pencil artist, an inker, a colorist and a printer over
a two-month period. The majority of this work is performed on our premises in
Barcelona, Spain.

The photographers and directors consist of freelancers who generally
receive a flat fee. We have entered into agreements with some photographers,
movie directors and writers under which such people have agreed to provide their
services to us on an exclusive basis, generally for a period of one to three
years.

We believe that we have a good relationship with our employees.
Currently, none of our employees is represented by a labor union.

GOVERNMENT REGULATION

We operate in a highly regulated industry. This requires us to be
socially aware and sensitive to government strictures, including laws and
regulations designed to protect minors or which prohibit the distribution of
obscene material. We take great care to comply with all applicable governmental
laws and regulations in each jurisdiction where we conduct business. Moreover,
we do not knowingly engage the services of any business or individual that does
not adhere to the same standards. Since 1965, we have never been held to have
violated any laws or regulations regarding obscenity or the protection of
minors.

REGULATION OF THE ADULT ENTERTAINMENT INDUSTRY IN THE U.S.

The following is a description of some of the laws and regulations in
the United States which impact the adult entertainment industry. It is not an
exhaustive description of all such laws. Moreover, we conduct business in over
35countries around the world, each of which has its own regulatory framework.
This regulatory environment is constantly changing in the geographical areas in
which we conduct business, and in some instances laws which are enacted are
subsequently determined by the courts to be unconstitutional.

The Classification and Rating Administration of the Motion Picture
Association of America, MPAA, a motion picture industry trade association,
assigns ratings for age group suitability for theatrical and home video
distribution of motion pictures. Submission of a motion picture to the MPAA for
rating is voluntary, and we do not submit our motion pictures to the MPAA for
review. However, with the exception of several titles which have been re-edited
for cable television, most of the movies distributed by us, if so rated, would
most likely fall into the NC-17 - No Children Under 17 Admitted rating category
because of their depiction of nudity and sexually explicit content.

The right to distribute adult videocassettes, magazines and DVD
products in the United States is protected by the First and Fourteenth
Amendments to the United States Constitution, which prohibits Congress or the
several States from passing any law abridging the freedom of speech.

The First and Fourteenth Amendments, however, do not protect the
dissemination of obscene material, and several states and communities in which
our products are distributed have enacted laws regulating the distribution of
obscene material, with some offenses designated as misdemeanors and others as
felonies, depending on numerous factors. The consequences for violating these
state statutes are as varied as the number of states enacting them. Similarly,
specific U.S. federal regulations prohibit the dissemination of obscene
material. The potential penalties for individuals (including directors, officers
and employees) violating the Federal obscenity laws include fines, community
service, probation, forfeiture of assets and incarceration. The range of
possible sentences requires calculations under the Federal Sentencing
Guidelines, and the amount of the fine and the length of the period of the
incarceration under those guidelines are

- 21 -

calculated based upon the retail value of the unprotected materials. Also taken
into account in determining the amount of the fine, length of incarceration or
other possible penalty are whether the person accepts responsibility for his or
her actions, whether the person was a minimal or minor participant in the
criminal activity, whether the person was an organizer, leader, manager or
supervisor, whether multiple counts were involved, whether the person provided
substantial assistance to the government, and whether the person has a prior
criminal history. In addition Federal law provides for the forfeiture of: (1)
any obscene material produced, transported, mailed, shipped or received in
violation of the obscenity laws; (2) any property, real or personal,
constituting or traceable to gross profits or other proceeds obtained from such
offense; and (3) any property, real or personal, used or intended to be used to
commit or to promote the commission of such offense, if the court in its
discretion so determines, taking into consideration the nature, scope and
proportionality of the use of the property in the offense.

With respect to the realm of potential penalties facing an
organization such as ours, the forfeiture provisions detailed above apply to
corporate assets falling under the statute. In addition, a fine may be imposed,
the amount of which is tied to the pecuniary gain to the organization from the
offense or determined by a fine table tied to the severity of the offense. Also
factored into determining the amount of the fine are the number of individuals
in the organization and whether an individual with substantial authority
participated in, condoned, or was willfully ignorant of the offense; whether the
organization had an effective program to prevent and detect violations of the
law; and whether the organization cooperated in the investigation and accepted
responsibility for its criminal conduct. In addition, the organization may be
subject to a term of probation of up to five years.

Federal and state obscenity laws define the legality or illegality of
materials by reference to the U.S. Supreme Court's three-prong test set forth in
Miller v. California, 413 U.S. 1593 (1973). This test is used to evaluate
whether materials are obscene and therefore subject to regulation. Miller
provides that the following must be considered: (a) whether the average person,
applying contemporary community standards would find that the work, taken as a
whole, appeals to the prurient interest; (b) whether the work depicts or
describes, in a patently offensive way, sexual conduct specifically defined by
the applicable state law; and (c) whether the work, taken as a whole, lacks
serious literary, artistic, political or scientific value. The Supreme Court has
clarified the Miller test in recent years, advising that the prurient interest
prong and patent offensiveness prong must be measured against the standards of
an average person, applying contemporary community standards, while the value
prong of the test is to be judged according to a reasonable person standard.

We are engaged in the wholesale distribution of our products to U.S.
wholesalers and/or retailers. We have taken steps to ensure compliance with all
Federal, State and local regulations regulating the content of motion pictures
and print products, by staying abreast of all legal developments in the areas in
which motion pictures and print products are distributed and by specifically
avoiding distribution of motion pictures and print products in areas where the
local standards clearly or potentially prohibit these products. In light of our
efforts to review, regulate and restrict the distribution of our materials, we
believe that the distribution of our products does not violate any statutes or
regulations.

Many of the communities in the areas in which we offer or intend to
offer products or franchises, have enacted zoning ordinances restricting the
retail sale of adult entertainment products. We supply products only in
locations where the retail sale of adult entertainment products is permitted.

In February 1996, the U.S. Congress passed the Telecommunications Act.
Some provisions of the Telecommunications Act are directed exclusively at cable
programming in general and adult cable programming in particular. In some cable
systems, audio or momentary bits of video of premium or pay-per-view channels
may accidentally become available to non-subscribing cable customers. This is
called bleeding. The practical effect of Section 505 of the Telecommunications
Act is to require many existing cable systems to employ additional blocking
technology in every household in every cable system that offers adult
programming, whether or not customers request it or need it, to prevent any
possibility of bleeding, or to restrict the period during which the programming
is transmitted from 10:00 p.m. to 6:00 a.m. Penalties for violation of the
Telecommunications Act are significant and include fines and imprisonment.
Surveying of cable operators and initial results indicate that most will choose
to comply with Section 505 by restricting the hours of transmission. We believe
that our revenues will be marginally adversely affected as a result of
enforcement of Section 505. However, as digital technology (which is unaffected
by Section 505) becomes more available, we believe that ultimately the impact
will be insignificant.

- 22 -

As discussed above, federal and state government officials have
targeted sin industries, such as tobacco, alcohol, and adult entertainment for
special tax treatment and legislation. In 1996, U.S. Congress passed the
Communications Decency Act of 1996, or the CDA. Recently, the U.S. Supreme
Court, in ACLU v. Reno, held certain substantive provisions of the CDA
unconstitutional. Businesses in the adult entertainment and programming
industries expended millions of dollars in legal and other fees in overturning
the CDA. Investors should understand that the adult entertainment industry may
continue to be a target for legislation. In the event we must defend ourselves
and/or join with other companies in the adult programming business to protect
our rights, we may incur significant expenses that could have a material adverse
effect on our business and operating results.

Child Pornography and Non-Mainstream Content

We believe that roughly 90% of the adult material produced and
distributed over the past 15 years contains mainstream sexual acts between
consenting adults. The rest could be classified as specialty material which does
not contain explicit sex, but which still involves consenting adults (i.e.
fetish, bondage, etc.). Mainstream sex acts means intercourse, oral sex, anal
sex, group sex, etc. Our adult movies do not contain any depictions, let alone
actual performances of rape, sex with coercion, animals, urination, defecation,
violence, incest or child pornography.

Since 1990, the Free Speech Coalition has worked with the U.S.
government to create a workable regulatory system designated to prevent minors
from working in the adult industry. Child Protection Restoration and Penalties
Enhancement Act of 1990 (18 U.S.C. section 2257) requires, in essence, that no
one can work without having copies of their passport or driver's license, and a
declaration under perjury of their age and true name, on file with a designated
Custodian of Records, and available for inspection by law enforcement.

As indicated above, all of our products are all in compliance with 18
U.S.C. Section 2257 and all models performing in our productions are 18 years of
age or older.

INTERNET REGULATION

Government regulation of the Internet is a rapidly developing area
and, therefore, adds additional uncertainty to our business. New laws or
regulations relating to the Internet, or more aggressive application of existing
laws, could decrease the growth of our websites, prevent us from making our
content available in various jurisdictions or otherwise have a material adverse
effect on our business, financial condition and operating results. These new
laws or regulations could relate to liability for information retrieved from or
transmitted over the Internet, taxation, user privacy and other matters relating
to our products and services. For example, the U.S. government has recently
enacted laws regarding website privacy, copyrights and taxation. Moreover, the
application to the Internet of other existing laws governing issues such as
intellectual property ownership and infringement, pornography, obscenity, libel,
employment and personal privacy is uncertain and developing.

REGULATION OF THE INTERNET OUTSIDE THE UNITED STATES

We may also be subject to claims based upon the content that is
available on our websites through links to other sites and in jurisdictions that
we have not previously distributed content in. For example, a recent French
ruling banning the sale of Nazi memorabilia in France suggests that website
operators may be forced to undertake expensive security measures to block
certain users or face significant fines. Implementing such security measures to
reduce our exposure to this liability may require us to take steps that would
substantially limit the attractiveness of our websites and/or their availability
in various geographic areas, which could negatively impact their ability to
generate revenue.

SEASONALITY

Our businesses are generally not seasonal in nature. However, June,
July and August are typically impacted by smaller orders from some European and
U.S. distributors, due to the holiday season, while November and December sales
are generally higher due to the printing of special issues such as The Best of
Private.

- 23 -

ITEM 2. DESCRIPTION OF PROPERTIES

PROPERTIES

In 1997, we relocated our principal administrative and operating
offices in Europe from Stockholm to Barcelona. The Barcelona facility houses our
administrative, editorial and operational offices, the data center, customer
service, and some of the warehouse and fulfillment facilities. With the
acquisition of our French distributor at the end of 1997, we also inherited some
office space in Paris, France. Currently, we lease office space in Barcelona,
Spain, Knegsel, the Netherlands, and Paris, France.

In January 2002 Milcap Media Group renewed for a further term of five
years a lease for the building it currently occupies, located at Carretera de
Rubi 22-26, 08190 Sant Cugat del Valles, Barcelona, Spain. Average monthly base
rental expense is approximately $ 19,400. We recognize the rent expense on a
straight-line basis over the extended term of the lease. Additionally, the lease
requires us to pay our proportionate share of the building's real estate taxes
and operating expenses. The building is currently used by all of our operating
groups, primarily for marketing, administration and post production. In
addition, the building serves as the European headquarters of Private Media
Group, Inc.

Effective December 31, 2002, Fraserside Holdings Limited ("Purchaser")
a wholly-owned subsidiary of Private Media Group, Inc. completed the purchase of
all of the outstanding stock of Barbuda B.V., from Luthares Investments N.V. and
Stichting de Oude Waag, companies indirectly beneficially owned by the Company's
principal shareholder. The principal asset of Barbuda B.V. is an approximately
9,700 square meter office facility, including parking, located in Barcelona,
Spain, currently under construction. Construction is expected to be completed in
June 2004. The purpose of this transaction was to acquire this property. The
Company intends to occupy this property as its European headquarters upon
completion of construction and general adaptation of the property to its
requirements

The consideration paid by Purchaser to the seller for the stock was
EUR 9,956,950. The consideration consisted of EUR 3,387,581 cash paid in
December 2002 and a note payable in the amount of EUR 6,569,369. The note bears
interest at a rate of EURIBOR+1% payable annually and is due and payable on
December 31, 2004. The fair market value of the principal asset, the real
estate, is based upon independent appraisals.

Private Benelux is the lessee under a lease which terminates on July
31, 2006 and July 31, 2008 located in Knegsel. Average monthly base rental
expense is approximately $ 2,716. We recognize the rent expense on a
straight-line basis over the extended term of the lease. Additionally, the lease
requires us to pay our proportionate share of the building's real estate taxes
and operating expenses. We use the majority of this space for operating our
distribution in the Benelux countries.

Private France is the lessee under an expired term lease, which is now
currently month-to-month, for approximately 50 square meters of corporate
headquarters space located at 17, rue Charles de Gaulle -78680 Epone, France.
Subsequent to the term of the lease, the average monthly base rental expense is
approximately $ 1,001. The rent expense is being charged to operations, on a
monthly basis.

Private North America is the lessee under a lease effective April 1,
2001, with a term of five years, for a 21,500 square foot office and warehouse
facility located in Sun Valley, California. Average monthly base rental expense
is $ 11,200, which amount increases by $ 400 on an annual basis. The rent
expense is being charged to operations on a monthly basis. Additionally, the
lease requires us to pay our proportionate share of the building's real estate
taxes and operating expenses.

Private Media Group maintains an office in the United States at 3230
Flamingo Road, Suite 156, Las Vegas, Nevada 89121.

- 24 -

ITEM 3. LEGAL PROCEEDINGS

In December 1999 the Company received final notification from the
Swedish Tax Authority assessing its subsidiary in Cyprus for the tax years
1995-1998 for a total amount of SEK 42,000,000 (approx. EUR 4.5 million) plus
fines amounting to SEK 16,800,000 (approx. EUR 1.8 million) plus interest. The
Swedish Tax Authority has taken the position that the subsidiary carried on
business in Sweden from a permanent establishment during the period in question
and should therefore be taxed on the income attributable to the permanent
establishment. The case is under litigation and the Company believes the
circumstances supporting the Tax Authority's claim are without merit. However,
the County Court has decided that a permanent establishment is at hand. The
Court has only made a principle statement and the question how to calculate any
eventual profit that can be allocated to the permanent establishment is not
decided by the Court at this stage. The Company has appealed against the
decision. The final outcome of this litigation will not be known for several
years. Due to the early stages of this matter and the uncertainty regarding the
ultimate decision, no amounts have been provided in the Company's financial
statements for this dispute.

We are from time to time a defendant in suits for defamation and
violation of rights of privacy, many of which allege substantial or unspecified
damages, which we vigorously defend.

We are presently engaged in litigation, most of which is generally
incidental to the normal conduct of our business and is immaterial in amount. We
believe that our reserves are adequate and that no such action will have a
material adverse impact on our financial condition. However, there can be no
assurance that our ultimate liability will not exceed our reserves.

Except as disclosed above, neither Private Media Group, Inc. nor its
subsidiaries is or has been, during the last two fiscal years, involved in any
other litigation or arbitration proceedings which have had or might have a
material influence on our financial condition or results of operations, nor are
we aware of any such proceedings pending or being threatened.

- 25 -

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET FOR PRIVATE MEDIA GROUP, INC. COMMON STOCK

The common stock of Private Media Group, Inc. has traded on the Nasdaq
National Market since February 1, 1999 under the symbol "PRVT". Previously, our
common stock traded on the NASD, Inc. OTC Bulletin Board since March 29, 1996.
The following table sets forth the range of representative high and low bid
prices for the common stock for the periods indicated, as reported by the Nasdaq
National Market. Quotations represent inter-dealer prices, do not include retail
markups, markdowns or commissions and may not represent actual transactions.

HIGH LOW
----------- --------
Fiscal 2002:
First Quarter ............. $ 9.80 $ 5.44
Second Quarter ............ $ 7.00 $ 2.02
Third Quarter ............. $ 3.90 $ 2.12
Fourth Quarter ............ $ 3.70 $ 1.92

Fiscal 2001:
First Quarter ............. $ 8.88 $ 4.94
Second Quarter ............ $ 9.40 $ 4.54
Third Quarter ............. $ 9.84 $ 6.46
Fourth Quarter ............ $ 9.80 $ 7.05

On March 21, 2003, the last sales price reported on the Nasdaq
National Market was $ 1.30. On December 19, 2002, there were approximately 2,000
beneficial owners of our common stock.

CONVERSION OF PREFERRED STOCK

We are authorized to issue up to 10,000,000 shares of preferred stock
under our Articles of Incorporation, of which 7,000,000 million have been issued
as Series A Preferred Stock.. On March 18, 2003 Slingsby Enterprises Limited,
the record owner of the outstanding Series A Preferred Stock, converted
5,350,000 of the 7,000,000 shares of $4.00 Series A Preferred Stock into
16,050,000 shares of common stock in accordance with the terms of the Series A
Preferred Stock. Accordingly, as of March 18, 2003, 1,650,000 shares of Series A
Preferred Stock remained outstanding.

STOCK-BASED COMPENSATION

On March 1, 1999 the Company adopted the 1999 Employee Stock Option
Plan. In February 2003 the Plan was amended to provide for the issuance of up to
7,200,000 shares of the Company's common stock to employees, consultants and
advisors of the company, and was approved by the shareholders.

Full details of the Plan are included in note 18 to the financial
statements and are summarized in the table below as of December 31, 2002:

(a) Number of securities to be issued upon exercise 3,671,395
of outstanding options, warrants and rights

(b) Weighted-average exercise price of outstanding 5.73
options, warrants and rights

- 26 -

(c) Number of securities remaining available for 3,242,819
future issuance under equity compensation plans
(excluding securities reflected in row (a)
above)

- 27 -

DIVIDEND POLICY

We did not pay any cash dividends during our last fiscal year and we
do not contemplate doing so in the near future. We currently intend to retain
all earnings to finance the development and expansion of our operations, and do
not anticipate paying cash dividends on our shares of common stock in the
foreseeable future. Our future dividend policy will be determined by our Board
of Directors on the basis of various factors, including results of operations,
financial condition, business opportunities and capital requirements. The
payment of dividends will also be subject to the requirements of Nevada Law, as
well as restrictive financial covenants which may be required in credit
agreements.

STOCK DIVIDEND

We implemented a 3:1 stock dividend whereby each holder of record of
our common stock on May 30, 2000, received two additional shares of common stock
for each share owned on the record date. Corresponding adjustments have been
made to the warrants and options outstanding on the record date as well as the
Series A Preferred Stock to reflect adjusted conversion and dividend terms.
Accordingly, all share and per share values reflected have been adjusted to give
effect to the stock dividend.

TRANSFER AGENT

The transfer agent and registrar for our common stock is InterWest
Transfer Co., Inc., 1981 East 4800 South, Suite 100, Salt Lake City, Utah 84117.

MISCELLANEOUS

In July, 2000, our common stock was added to the Russell 2000 and 3000
Index.

- 28 -

ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected consolidated financial
information for the five years ended December 31, 2002. The selected financial
information has been derived from our consolidated financial statements which,
for the four years ended December 31, 2001 have been audited by Ernst & Young
AB, independent auditors, and for the year ended December 31, 2002 have been
audited by BDO Audiberia, independent auditors.

This selected consolidated financial information should be read along
with our historical consolidated financial statements and related notes, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in or appearing elsewhere in this Report.

YEARS ENDED DECEMBER 31,
2002 2002 2001 2000 1999 1998
USD EUR EUR EUR EUR EUR
(in thousands, except per share data)

STATEMENT OF INCOME DATA:
Net sales ................................ 41,052 39,410 38,979 30,553 19,917 18,757
Cost of sales ............................ 17,741 17,031 13,827 11,693 9,608 8,216
------------ ------------ ------------ ------------ ------------ ------------
Gross Profit ............................. 23,311 22,379 25,152 18,860 10,309 10,541
Selling, general and administrative
expenses................................. 21,418 20,562 16,751 11,469 7,455 6,060
Offering expenses ........................ 1,634 1,569 843 - - -
------------ ------------ ------------ ------------ ------------ ------------
Operating income ......................... 259 249 7,557 7,391 2,854 4,480
Sale of controlled entity ................ - - 1,862 - - -
Interest expense ......................... 381 366 194 213 304 84
Interest income .......................... 341 327 152 364 111 54
------------ ------------ ------------ ------------ ------------ ------------
Income before income taxes ............... 219 210 9,378 7,543 2,661 4,451
Income taxes ............................. (135) (130) 1,361 1,267 440 497
------------ ------------ ------------ ------------ ------------ ------------
Net income ............................... 354 340 8,017 6,275 2,222 3,954
------------ ------------ ------------ ------------ ------------ ------------
Other Comprehensive Income:
Unrealized loss on short-term investment.. (70) (67) (134) - - -
Foreign currency translation adjustments.. 694 666 (1,978) (1,305) 2,023 (1,730)
------------ ------------ ------------ ------------ ------------ ------------
Comprehensive income ..................... 978 939 5,905 4,970 4,245 2,224

Income applicable to common shareholders.. (1,153) (1,107) 6,428 4,769 816 3,381
============ ============ ============ ============ ============ ============
Weighted average of shares outstanding:
Basic .................................... 28,626,327 28,626,327 28,137,817 27,002,220 25,269,792 23,372,505
Diluted .................................. N/A N/A 49,679,835 48,745,896 47,909,223 46,121,286
Basic income per share ................... (0.04) (0.04) 0.23 0.18 0.03 0.14
============ ============ ============ ============ ============ ============
Fully diluted income per share ........... (0.04) (0.04) 0.16 0.13 0.03 0.09
============ ============ ============ ============ ============ ============
Dividends declared per common Share ...... - - - - - -

AS PER DECEMBER 31,
2002 2002 2001 2000 1999 1998
USD EUR EUR EUR EUR EUR
(IN THOUSANDS)

BALANCE SHEET DATA:
Cash and cash equivalents ................ 1,764 1,694 6,408 1,624 861 441
Working capital .......................... 15,924 15,287 22,360 15,864 11,536 6,946
Total assets ............................. 71,864 68,989 57,086 43,864 29,969 22,855
Total debt ............................... 17,173 16,486 4,750 605 765 1,006
Total shareholders' Equity ............... 45,261 43,451 42,280 34,195 24,640 17,826

- 29 -

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

You should read this section together with the consolidated financial
statements and the notes and the other financial data in this Report. The
matters that we discuss in this section, with the exception of historical
information, are forward-looking statements within the meaning of the Private
Securities Reform Act of 1995. Such forward-looking statements are subject to
risks, uncertainties and other factors which could cause our actual results to
differ materially from those expressed or implied by such forward-looking
statements. Potential risks and uncertainties relate to factors such as: (1) the
timing of the introduction of new products and services and the extent of their
acceptance in the market; (2) our expectations of growth in demand for our
products and services; (3) our ability to successfully implement expansion and
acquisition plans; (4) the impact of expansion on our revenue, cost basis and
margins; (5) our ability to respond to changing technology and market
conditions; (6) the effects of regulatory developments and legal proceedings
with respect to our business; (7) the impact of exchange rate fluctuations; and
(8) our ability to obtain additional financing.

OVERVIEW

We are an international provider of adult media content. We acquire
still photography and motion pictures from independent directors and process
these images into products suitable for popular media formats such as print
publications, DVDs, video cassettes and digital media content for Broadcasting,
Broadband and Internet distribution. In addition to media content, we also
market and distribute branded leisure and novelty products oriented to the adult
entertainment lifestyle and generate additional sales through the licensing of
our Private trademark to third parties.

In June 1998, we acquired Milcap Media Limited, its subsidiaries and
Cine Craft. Prior to these acquisitions, we were a holding company. Milcap Media
Limited, its subsidiaries and Cine Craft were the acquirees, but for accounting
purposes they were deemed to be the acquirors. We became a U.S. reporting
company following the 1998 acquisitions.

We operate in a highly competitive, service-oriented market and are
subject to changes in business, economic and competitive conditions. Nearly all
of our products compete with other products and services that utilize adult
leisure time and disposable income.

Due to the highly fragmented structure of the adult entertainment
industry, we expect increasing consolidation. We believe that, as a public
company with sufficient working capital and future financing capabilities, we
are in a position to acquire several privately-held competitors.

We generate revenues primarily through:

. sales of movies on DVD and videocassette formats;
. sales of adult feature magazines;
. Internet subscriptions and licensing;
. broadcasting movies through cable, satellite and hotel television
programming; and
. brand name and trademark licensing.

The following table illustrates our net sales by product group for the
periods indicated.

NET SALES BY PRODUCT GROUP

YEARS ENDED DECEMBER 31,
---------------------------------
2000 2001 2002
--------- --------- ---------
EUR EUR EUR
NET SALES BY PRODUCT GROUP (IN THOUSANDS)
Magazine and video . 16,082 16,224 13,763
DVD's .............. 5,942 11,871 15,482

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Internet ........... 6,005 7,741 6,059
Broadcasting ....... 2,055 2,836 4,106
Other/(1)/.......... 469 307 -
--------- --------- ---------
Total .............. 30,553 38,979 39,410
========= ========= =========

/(1)/ Includes primarily net sales of CD-ROMs and licensing fees.

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Over time, we expect net sales from magazines and videocassettes to
continue to decline as a percentage of net sales in relation to total net sales
from DVDs, the Internet and broadcasting.

We recognize net sales on delivery (for further information, see
Critical Accounting Estimates).

Even though we recognize net sales upon delivery, we generally provide
extended payment terms to our distributors of between 90 and 180 days. Although
our extended payment terms increase our exposure to accounts receivable
write-offs, we believe our risk is minimized by our generally long-term
relationships with our distributors. In addition, we view our extended payment
terms as an investment in our distribution channels which are important to the
growth of our business.

Our primary expenses include:

. acquisition of content for our library of photographs and videos;
. printing, processing and duplication costs; and
. selling, general and administrative expenses.

Our magazines and DVD and videocassette covers are printed by
independent third-party printers in Spain. We introduced DVDs as a motion
picture medium in 1999. The production of each DVD master disc, prior to
duplication, costs approximately $10,000. DVDs have a relatively low cost of
duplication, inclusive of box and packaging, of approximately $2.00 per unit. We
released 120 titles on DVD during 2002, 119 titles during 2001 and 83 titles
during 2000, including both new and archival material. We plan to introduce
approximately 120 titles on DVDs in 2003.

Over the years, our cost of sales has decreased relative to net sales
due to our use of new mediums for our products, such as the Internet, DVD and
broadcasting. These new media provide us with additional sales of our existing
content. However, our selling, general and administrative expenses have
increased in relation to these media due to, among other things, our Internet
development costs and ongoing administrative costs. We maintain a staff of 30
full-time Internet employees and invest extensively in advanced computer and
communications infrastructure.

In addition, our selling, general and administrative costs have
increased due to the expansion of our European administrative headquarters in
Barcelona.

We also incur significant intangible expenses in connection with the
amortization of our library of photographs and movies and capitalized
development costs, which include the Internet and broadcasting. We amortize
these tangible and intangible assets on a straight-line basis for periods of
between three and ten years. In the future, we expect fewer capitalized
development costs in relation to the Internet and cable, satellite and hotel
television programming. We will increasingly expense future investments in these
media as incurred.

CRITICAL ACCOUNTING ESTIMATES

GENERAL

Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amount of assets and
liabilities revenues and expenses. On an ongoing basis, we evaluate our
estimates, including those related to impairment of the library of photographs
and videos and other long lived assets, allowances for bad debt, income taxes
and contingencies and litigation. Accounts receivable and sales related to
certain products are, in accordance with industry practice, subject to
distributors right of return to unsold items. We base our estimates on
historical experience and on various assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily available from other sources. Management periodically reviews such
estimates. Actual results may differ from these estimates.

We believe the following critical accounting policies are
significantly affected by judgments and estimates used in

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the preparation of our consolidated financial statements.

Recognition of Revenue

Revenues from the sale of magazines, videocassettes, DVD's and other
related products where distributors are not granted rights-of-return are
recognized upon transfer of title, which generally occurs upon delivery.
Revenues from the sale of magazines under agreements that grant distributors
rights-of-return are recognized upon transfer of title, which generally occurs
on delivery, net of an allowance for returned magazines. Revenues from the sale
of videocassette and DVD products under consignment agreements with distributors
are recognized based upon reported sales by the Company's distributors. Revenues
from the sale of subscriptions to the Company's internet website are deferred
and recognized ratably over the subscription period. Revenues from licensing of
broadcasting rights to the Company's video and film library are recognized upon
delivery when the following conditions have been met (i) license period of the
arrangement has begun and the customer can begin its exploitation, exhibition,
or sale (ii) the arrangement fee is fixed or determinable and (iii) collection
of the arrangement fee is reasonably assured.

Accounts receivable

We are required to estimate the collectibility of our trade
receivables and notes receivable. A considerable amount of judgment is required
in assessing the ultimate realization of these receivables including the current
credit-worthiness of each customer. Significant changes in required reserves
have been recorded in the past and may occur in the future due to the current
market environment.

Goodwill and Other Intangible Assets

On January 1, 2002 the Company adopted Financial Accounting Standards
Board Statement (SFAS) No. 142, "Goodwill and Other Intangible Assets". Under
SFAS 142, goodwill and indefinite lived intangible assets will no longer be
amortized but will be reviewed annually for impairment (or more frequently if
indicators of impairment arise).

During 2002, the Company performed the required initial impairment
test of goodwill and indefinite lived intangible assets as of January 1, 2002.
There was no effect of on the earnings and financial position of the Company as
a result of the impairment testing.

Other Intangible Assets represents the value attributable to the
customer base which was acquired from one of the Company's distributors in the
U.S. in 2001 (see Note 3 and 9). Amortization expense is calculated on a
straight-line basis over 10 years.

Impairment of Long-Lived Assets

The Company periodically evaluates the carrying value of long-lived
assets including its library of photographs and videos for potential impairment.
Upon indication of impairment, the company will record a loss on its long-lived
assets if the undiscounted cash flows that are estimated to be generated by
those assets are less than the related carrying value of the assets. An
impairment loss is then measured as the amount by which the carrying value of
the asset exceeds the estimated discounted future cash flows. Management's
estimated future revenues are based upon assumptions about future demand and
market conditions and additional write downs may be required if actual
conditions are less favorable than those assumed.

Inventories

Inventories are valued at the lower of cost or market, with cost
principally determined on an average basis. Inventories principally consist of
DVD's, videocassettes and magazines held for sale or resale. The inventory is
written down to the estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions are less favorable
than those projected by management, additional write-downs may be required.

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RESULTS OF OPERATIONS

2002 compared to 2001

Net sales. Our net sales in 2002 were EUR 39.4 million compared to EUR
39.0 million in 2001, an increase of EUR 0.4 million, or 1%. We attribute the
change in sales to increases in DVD and Broadcasting sales offset by a decrease
in Video and Magazine sales, and Internet sales compared to 2001. Video and
Magazine sales decreased 15% compared to 2001 to EUR 13.8 million as a result of
lower sales of back-issues of our magazines and reduced price levels in the
market for videocassettes. Internet sales decreased 22% compared to 2001 to EUR
6.1 million as a result of reduced Internet license sales and a non-recurring
drop in Internet subscription sales related to technical problems, which have
now been resolved. DVD sales increased 30% to EUR 15.5 million and Broadcasting
sales increased 45% to EUR 4.1 million.

We attribute the growth in sales of DVDs to the increasing number of
DVD players being sold in all of our markets. We believe that the growth in DVD
and Broadcasting sales will continue through the remainder of 2003.

Net sales in general were affected by unfavorable changes in exchange
rates. During the period the dollar weakened against the euro and since our
sales in the United States are translated into euro this had a negative effect.
Fluctuations in exchange rates between the euro and the dollar can affect the
comparability of our results from year to year. We translate our consolidated
subsidiaries whose functional currency is not the euro into the euro for
reporting purposes. Income statement amounts are translated into euros using the
average exchange rate for the fiscal year. The balance sheet is translated at
the year-end exchange rate. Due to the significance of the results reported in
dollars the impact of the euro/dollar exchange rate on our major categories of
revenue and expense can be material.

Cost of Sales. Our cost of sales was EUR 17.0 million for 2002
compared to EUR 13.8 million for 2001, an increase of EUR 3.2 million, or 23%.
The increase was the result of a combination of an increase in sales volume and
unfavorable exchange rate changes. Cost of sales as a percentage of sales was
43% for 2002, an increase of 8% compared to 2001. The increase was primarily the
result of unfavorable exchange rate changes.

Gross Profit. Our gross profit for 2002 was EUR 22.4 million, or 57%
of net sales, compared to EUR 25.2 million, or 65% of net sales for 2001. This
represented a decrease of EUR 2.8 million, or 11%, compared to 2001. Gross
profit as a percentage of sales was down 8% for 2002 compared to 2001. The
decrease was primarily the result of unfavorable exchange rate changes.

Selling, general and administrative expenses. Our selling, general and
administrative expenses were EUR 20.6 million for 2002 compared to EUR 16.8
million for 2001, an increase of EUR 3.8 million, or 23%. We attribute this
increase to a re-organization of the legal structure of the group, our expansion
in the United States through our new subsidiary Private North America which was
fully operational during the second half of last year, increased marketing
efforts, an overall expansion of operations and our management team and our
continued investment in new technologies and broadcasting related activities. We
expect our investment in new technologies and broadcasting related activities to
continue in 2003.

Offering expense. We reported offering expenses of EUR 1.6 million for
2002 for the activities related to the listing and secondary offering on the
Frankfurt Stock Exchange, Neuer Markt in Germany. The offering was postponed in
January, 2002 due to poor market conditions. Including offering expenses in
2001, the total cost for offering expenses was EUR 2.4 million.

Operating profit. We reported an operating profit of EUR 0.2 million
for 2002 compared to EUR 7.6 million for 2001, a decrease of EUR 7.4 million, or
97%. We attribute this change primarily to reduced gross profit as a result of
unfavorable exchange rate changes, increased selling, general and administrative
expenses and offering expense.

Sale of controlled entity. We reported a net gain of EUR 1.9 million
for 2001 for the sale of our subsidiary, Private Circle, Inc.

Interest expense. Our interest expense was EUR 0.4 million for 2002,
compared to EUR 0.2 million for 2001.

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Income tax expense/benefit. Our income tax benefit was EUR 0.1 million
for 2002, compared to a tax expense of 1.4 million for 2001. We attribute this
change to decreased operating profit and in particular to a tax credit related
to our offering expense.

Net income. Our net income was EUR 0.3 million for 2002, compared to
EUR 8.0 million for 2001. We attribute this change in net income in 2002 of EUR
7.7 million, or 96%, to decreased operating profit, including offering expenses
of EUR 1.6 million, and the absence of a non-recurring gain of EUR 1.9 thousand
from the sale of subsidiary in 2001.

2001 compared to 2000

Net sales. Our net sales in 2001 were EUR 39.0 million compared to EUR
30.6 million in 2000, an increase of EUR 8.4 million, or 28%. We attribute this
change mainly to an increase in DVD, Internet (subscriptions and licensing) and
broadcasting (cable, satellite and hotel-television programming) sales. Sales
from broadcasting increased 38% to EUR 2.8 million compared to 2000. DVD sales
increased 100% to EUR 5.9 million compared to 2000. Internet sales increased 29%
to 7.7 million.

In 2001, our total DVD, Internet and broadcasting sales increased EUR
8.4 million, or 60%, to EUR 22.4 million, compared to 2000.We attribute the
growth in sales of DVDs to the increasing number of DVD players being sold in
all of our markets. We attribute the growth in broadcasting sales to the growing
digital satellite and cable television market. We attribute the growth in
Internet sales to the increasing number of people who are able to connect to the
Internet. Sales from broadcasting, DVD and Internet provided additional net
sales from content previously sold on videocassette. We believe that the growth
in broadcasting, DVD and Internet sales will continue in 2002.

Net sales of videos and magazines increased slightly during 2001
compared to the 2000 fiscal year.

In May, 2001 we sold our interest in our subsidiary, Private Circle,
which engaged in the design, production and marketing of trendy apparel.
Accordingly, revenues and expenses associated with Private Circle did not have a
significant impact in the last three quarters of 2001. Also, during the second
quarter of 2001 we acquired the assets of Private USA, our North American
distributor. As a result of the change in ownership, revenues associated with
Private USA during this quarter declined and operations were briefly suspended,
causing a temporary decline in revenues from North American distribution
activities. Our distribution activities in North America are now operating
normally.

Cost of Sales. Our cost of sales was EUR 13.8 million for 2001
compared to EUR 11.7 million for 2000, an increase of EUR 2.1 million, or 18%.
The increase was primarily the result of an increase in sales volume. Cost of
sales as a percentage of sales was 35.5% for 2001, a reduction of 2.8% compared
to 2000. This improvement was the direct result of lower costs associated with
DVD, Internet and broadcasting sales.

Gross Profit. Our gross profit for 2001 was EUR 25.2 million, or 64.5%
of net sales, compared to EUR 18.9 million, or 61.7% of net sales for 2000. This
represented an increase of 46.1%, or 2.8% in gross profit in relation to net
sales. We attribute this increase to increased sales in DVD, Internet and
broadcasting which are areas with higher margins. These products generally have
higher profit margins.

Selling, general and administrative expenses. Our selling, general and
administrative expenses were EUR 16.8 million for 2001 compared to EUR 11.5
million for 2000, an increase of EUR 5.3 million, or 46%. We attribute this
increase to increased marketing efforts, the setting up and consolidation of our
North American subsidiary, an overall expansion of operations and our management
team and our continued investment in Internet, DVD and broadcasting related
activities. We expect our investment in Internet, DVD and broadcasting related
activities to continue in 2002.

Offering expense. We reported offering expenses of EUR 0.8 million for
2001 for the activities related to the listing and secondary offering on the
Frankfurt Stock Exchange, Neuer Markt in Germany. The offering was postponed in
January, 2002 due to poor market conditions.

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Operating profit. We reported an operating profit of EUR 7.6 million
for 2001 compared to EUR 7.4 million for 2000, an increase of EUR 0.2 million,
or 2%. We attribute this increase primarily to increased sales and higher
margins offset by offering expense.

Sale of controlled entity. We reported a net gain of EUR 1.9 million
for 2001 for the sale of our subsidiary, Private Circle, Inc.

Interest expense. Our interest expense was EUR 0.2 million for 2001,
compared to EUR 0.2 million for 2000.

Income taxes. Our income tax expense was EUR 1.4 million for 2001,
compared to 1.3 million for 2000. We attribute this increase of 0.1 million to
increased DVD, Internet and broadcasting sales, higher margins and a one-time
tax provision of EUR 0.3 million relating to the sale of certain land and
building offset by a decrease in tax as a result of lesser profits being
recorded in jurisdictions with higher corporate tax rates.

Net income. Our net income was EUR 8.0 million for 2001, compared to
EUR 6.3 million for 2000. We attribute this increase in net income of 1.7
million, or 28%, primarily to increased DVD, Internet and broadcasting sales,
higher margins from these sales and the net gain on the sale of our subsidiary
Private Circle offset by offering expense.

LIQUIDITY AND CAPITAL RESOURCES

We generate cash from our operating activities, borrowings from third
parties, the exercise of warrants and private sales of our equity securities.
Our principal uses of cash typically include acquisitions and joint ventures,
building our library of photographs and movies and Internet infrastructure
development.

We reported a working capital surplus of EUR 15.3 million at December
31, 2002, a decrease of EUR 7.1 million compared to the year ended December 31,
2001. The decrease is principally attributable to decreased accounts receivable
related to better collection performance, a decrease in cash and cash
equivalents and increases in short-term borrowings.

We reported a working capital surplus of EUR 22.4 million at December
31, 2001, an increase of EUR 6.5 million compared to the year ended December 31,
2000. The increase is principally attributable to increased accounts receivable
related to increased sales and increases in short-term investments, related
party receivable and inventories.

OPERATING ACTIVITIES

Net cash provided by our operating activities was EUR 4.3 million for
2002 compared to EUR 7.5 million for 2001, and was primarily the result of net
income and adjustments to reconcile net income to net cash flows from operating
activities. We adjusted our net income of EUR 0.3 million to reconcile it to net
cash flows from operating activities. Adjustments included (1) depreciation of
EUR 1.0 million and (2) amortization of photographs and videos of EUR 5.8
million offset by (3) deferred income taxes of EUR 0.2 million, providing a
total of EUR 6.9 million. We reduced the total of EUR 6.9 million by the
increases in related party receivable, inventories, prepaid expenses and other
current assets and income taxes payable totaling EUR 6.7 million, and we offset
this reduction with EUR 4.2 million from trade accounts receivable accounts
payable trade and accrued other liabilities.

Net cash provided by our operating activities was EUR 7.5 million for
2001 compared to EUR 8.6 million for 2000, and was primarily the result of net
income and adjustments to reconcile net income to net cash flows from operating
activities. We adjusted our net income of EUR 8.0 million to reconcile it to net
cash flows from operating activities. Adjustments included (1) depreciation of
EUR 0.6 million, (2) bad debt provision of EUR 0.5 million (3) tax provision on
asset held for sale of EUR 0.3 million, (4) amortization of goodwill of EUR 0.3
million, and (5) amortization of photographs and videos of EUR 4.5 million
offset by (6) deferred taxes of EUR 0.2 million, (7) gain on sale of asset held
for sale of EUR 0.2 million and (8) gain on sale of controlled entity of EUR 1.9
million, providing a total of EUR 12.1 million. We reduced the total of EUR 12.1
million by the increases in trade accounts receivable, related party receivable,
inventories, income taxes payable and accrued other liabilities totaling EUR 7.3
million, and we offset this reduction with EUR 2.8 million from prepaid expenses
and other current assets, and accounts payable trade.

Net cash provided by our operating activities was EUR 8.6 million for
2000 compared to EUR 2.8 million for

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1999, and primarily resulted from net income and adjustments to reconcile net
income to net cash flows from operating activities. We adjusted our net income
of EUR 6.3 million to reconcile it to net cash flows from operating activities.
Adjustments included (1) amortization of goodwill of EUR 0.2 million, (2)
amortization of our library of photographs and movies of EUR 3.7 million, and
(3) depreciation of EUR 0.9 million and were offset by deferred taxes of EUR 0.1
million, providing for a total of EUR 11.1 million. We reduced the total of EUR
11.1 million by the increases in trade accounts receivable, inventories and
prepaid expenses and other current assets totalling EUR 7.5 million, and we
offset this reduction by EUR 5.1 million from related party receivable, accounts
payable trade, income taxes payable and accrued other liabilities.

INVESTING ACTIVITIES

Net cash used in investing activities for the fiscal year ended
December 31, 2002 was EUR 21.6 million. The investing activities were investment
in library of photographs and videos of EUR 8.5 million, which were carried out
in order to maintain the 2002 and 2003 release schedules for magazines, videos,
DVDs and broadband. In addition to investment in library of photographs and
videos, EUR 13.1 million was invested in capital expenditures. The increase over
the comparable twelve-month 2001 period is principally due to investments in a
building included in capital expenditures primarily financed by related party
note payable.

Net cash used in investing activities for the fiscal year ended
December 31, 2001 was EUR 5.5 million. The investing activities were principally
investment in library of photographs and videos of EUR 7.0 million, which were
carried out in order to maintain the 2001 and 2002 release schedules for
magazines, videos, DVDs and broadband. In addition to investment in library of
photographs and videos, EUR 2.8 million was invested in short-term investments,
EUR 0.7 million in capital expenditures, EUR 0.6 million in investment in
subsidiary offset by EUR 2.9 million from cash from sale of controlled entity,
EUR 2.6 million from cash from sale of asset held for sale and EUR 0.2 million
from sale of other assets. The decrease over the comparable twelve-month 2000
period is principally due to cash from sale of controlled entity, cash from sale
of asset held for sale and sale of other assets offset by capital expenditures,
investments in controlled entity, short-term investments and investments in
library of photographs and videos in order to maintain inventory levels and
expand DVD activities.

Net cash used in our investing activities for 2000 was EUR 7.8 million
compared to EUR 4.5 million in 1999. The investing activities were primarily
investments in our library of photographs and videos of EUR 5.7 million, which
were carried out in order to start up DVD sales, increase content quality and
maintain the 2000-2001 release schedule. In addition to investing in our library
of photographs and movies, we invested EUR 1.4 million in capital expenditures
and EUR 0.6 million in other assets. The increase over the comparable
twelve-month 1999 period was due principally to increased investments in our
library of photographs and movies, capital expenditures and investments in other
assets.

FINANCING ACTIVITIES

Net cash provided by our financing activities for the fiscal year
ended December 31, 2002 was EUR 12.0 million, represented primarily by related
party note payable, short-term borrowings and conversion of warrants during the
year offset by repayments of long-term borrowings. We attribute the increase
over the comparable twelve-month 2001 period to related party note payable and
short-term borrowings which result from loans provided by Beate Uhse in November
and December 2002.

Net cash provided by our financing activities for the fiscal year
ended December 31, 2001 was EUR 4.8 million, represented primarily by short-term
borrowings and conversion of warrants during the year offset by repayments of
long-term borrowings. We attribute the increase over the comparable twelve-month
2000 period to short-term borrowings which result from a loan provided by
Commerzbank AG in December 2001.

In December 2001 we borrowed $ 4.0 million from Commerzbank AG
pursuant to a Note originally due on December 20, 2002. The Note bears interest
at an annual rate of 7%, payable quarterly, with the entire principal amount and
accrued interest originally due on December 20, 2002. In December 2002
Commerzbank AG agreed to extend the maturity date of the Note from December 20,
2002 to March 20, 2003.

We are in discussion with an independent third party to replace the
Note and other short term borrowings with

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appropriate long-term financing. We expect that this arrangement will be in
place by mid-April.

Net cash provided by our financing activities for 2000 was EUR 10.5
million compared to EUR 18.9 million for 1999, attributable to EUR 11.7 million
from conversion of warrants and an increase in short-term borrowings of EUR 0.2
million on our line of credit, offset by our repayments on long-term borrowings
of EUR 1.4 million. We attribute the decrease over the comparable 1999 period
primarily to fewer conversions of warrants.

OUTLOOK

We expect continued growth in 2003, particularly in the DVD and
broadcasting segments. We also plan to introduce video content accessible by
mobile devices in 2003. During 2003, we expect to continue to release movie
productions at the same rate as in 2002.

We expect that our available cash resources and cash generated from
operations will be sufficient to meet our presently anticipated working capital
and capital expenditure requirements for at least the next 12 months. However,
we may need to raise additional funds to support more rapid expansion or respond
to unanticipated requirements. In addition, we will be required to refinance the
Note to Commerzbank AG. We are in discussion with an independent third party to
replace the Note and other short term borrowings with appropriate long-term
financing. We expect that this arrangement will be in place by mid-April.

If additional funds are raised through the issuance of equity
securities, our shareholders' percentage ownership will be reduced, they may
experience additional dilution, or these newly issued equity securities may have
rights, preferences, or privileges senior to those of our current shareholders.
Additional financing may not be available when needed on terms favorable to us,
or at all. If adequate funds are not available or are not available on
acceptable terms, we may be unable to develop or enhance our products and
services, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements, which could harm our business.

- 38 -

EURO CONVERSION

Historically, a significant portion of our revenues and operating
expenditures have been in Swedish Kronor. Over time, due to internal growth, new
business developments and acquisitions, our business activities are being
increasingly conducted in countries of the European Union who have adopted the
euro as their currency. As a result, for all fiscal periods beginning after
December 31, 2001, we are submitting our accounting reports using the euro as
our primary reporting currency. The transitional period for the introduction of
the euro ended on January 1, 2002 when the euro replaced all local currencies in
eleven of the member states. Although the euro conversion may affect
cross-competition by creating cross-border price transparency, we believe that
this development is unlikely to affect our business due to the low per item cost
of our magazines, movies and other products.

NEW ACCOUNTING STANDARDS

In October 2001 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supercedes
Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets to be Disposed Of ("SFAS 121")" and those
sections of Accounting Principle Board Standard No. 30 "Reporting the Results of
Operations" ("APB 30"), related to discontinued operations. The scope of SFAS
144 includes long-lived assets, or groups of assets, to be held and used as well
as those which are to be disposed of by sale or by other method, but excludes a
number of long-lived assets such as goodwill and intangible assets not being
amortized under the application of SFAS 142. Under SFAS 144 the impairment test
methodologies of SFAS 121 are essentially unchanged as the standard requires
testing for impairment when indicators of impairment are in evidence, and that
impairment losses are recognized only if the assets carrying value is not
recoverable (based on undiscounted cash flows) and the carrying value of the
long lived asset (group) is higher than the fair value.

SFAS 144 was effective January 1, 2002, for the Company. The adoption
of SFAS 144 did not have a material impact on the of the Company's results of
operations or financial position.

In June 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146), which addresses
financial accounting and reporting for costs associatd with exit or disposal
activities, and nullifies EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)" which previously governed
the accounting treatment for restructuring charges. SFAS 146 applies to costs
associated with an exit activity that does not involve an entity newly acquired
in a business combination or with a disposal covered by SFAS 144. SFAS 146 will
be applied prospectively and is effective for exit or disposal activities
initialted after December 31, 2002. The Company does not expect the adoption of
SFAS 146 to materially impact its financial position, results of operation, or
cash flows.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others" ("Interpretation"). This Interpretation
elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees such as standby letters of credit. It also clarifies
that at the time a company issues a guarantee, the company must recognize an
initial liability for the fair market value of the obligations it assumes under
that guarantee and must disclose that information in its interim and annual
financial statements. The initial recognition and measurement provisions of the
Interpretation apply on a prospective basis to guarantees issued or modified
after December 31, 2002.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not use derivative financial instruments for trading purposes
and were never a party to any derivative, swap or option contracts. We do not
hedge our interest rate or foreign currency exchange rate exposures.

As our cash and cash equivalent and short-term investments consist
principally of money market securities and investments in short-term debt or
equity securities and our borrowings are primarily at fixed rates of interest
our market risk related to fluctuations in interest rates is limited.
Accordingly, a one percentage change in market interest rates would not have a
material impact on our results of operations.

- 39 -

We transact our business in various currencies, principally the Euro
and the U.S dollar and certain other European Union currencies. We generally
attempt to limit exposure to currency rate fluctuations by matching transaction
currencies (revenues/expenses) to the functional currency of its operating
subsidiaries. Our exposure to market risk for fluctuations in foreign currency
exchange rates relates primarily to fluctuations in the Euro versus the U.S
dollar. We translate our consolidated subsidiaries whose functional currency is
not the euro into the euro for reporting purposes. Income statement amounts are
translated into euros using the average exchange rate for the fiscal year. The
balance sheet is translated at the year-end exchange rate. Due to the
significance of the results reported in dollars the impact of the euro/dollar
exchange rate on our major categories of revenue and expense can be material.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our audited consolidated financial statements and related notes appear
at the end of this Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

CHANGE IN INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

On September 12, 2002, the Company dismissed Ernst & Young AB as the
principal auditor of the Company, effective as of such date. On September 12,
2002 the Company appointed BDO Audiberia as the principal auditor of the Company
for the fiscal year ended December 31, 2002. The dismissal of Ernst & Young AB
and the appointment of BDO Audiberia was approved by the Company's Audit
Committee.

The Company has retained Ernst & Young AB to render certain other
audit and non-audit services to the Company in designated matters, including
acting as the Company's statutory auditors in Cyprus, France and Sweden, and
providing certain tax-related services.

The reports of Ernst & Young AB on the Company's financial statements
for the past two fiscal years did not contain an adverse opinion or a disclaimer
of opinion and were not qualified or modified as to uncertainty, audit scope, or
accounting principles.

Except for the matter discussed in the following paragraph, there were
no disagreements with Ernst & Young AB for the past two fiscal years and the
subsequent interim periods through the date of dismissal, on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope and procedures which if not resolved to the satisfaction of Ernst & Young
AB, would have caused Ernst & Young AB to make reference to the matter in their
report.

In connection with the audit of the Company's financial statements for
the year ended December 31, 2001 there was a difference of opinion between the
Company and Ernst & Young AB related to the appropriateness of accounting
principles applied related to the recognition of revenues on a transaction with
a related party. Such difference of opinion was discussed by Ernst & Young AB
with the Audit Committee of the Board of the Company. This difference of opinion
was ultimately resolved to the satisfaction of Ernst & Young AB.

Other than the difference of opinion discussed above there were no
other differences of opinion with Ernst & Young AB for the past two fiscal years
and the subsequent interim periods through the date of dismissal, on any matters
of accounting principles or practices, financial statement disclosure, or
auditing scope and procedures which, if not resolved to the satisfaction of
Ernst & Young AB would have caused Ernst & Young AB to make reference to the
matter in their report.

- 40 -

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

IDENTIFICATION OF DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

The following table sets forth all of the current directors, executive
officers and key employees of Private Media Group, Inc., their age and the
office they hold with Private Media Group. Executive officers and employees
serve at the discretion of the Board of Directors. All directors hold office
until the next annual meeting of shareholders and until their successors have
been duly elected and qualified.

NAME AGE POSITION WITH THE COMPANY OR SUBSIDIARY
------------------------------------------ --- -------------------------------------------------

DIRECTORS
Berth H. Milton 47 Chairman and Director
Bo Rodebrant 50 Director
Ferran Mirapeix 45 Director

OTHER EXECUTIVE OFFICERS AND KEY EMPLOYEES
Charles Prast 36 President and Chief Executive Officer
Claes Henrik Marten Kull 37 Chief Marketing Officer, Private Media Group,
Inc.; Marketing Manager, Milcap Media Group
Javier Sanchez 41 Chief Operating Officer, Private Media Group,
Inc.;
Johan Gillborg 40 Secretary and Chief Financial Officer, Private
Media Group, Inc.; Chairman, Private France
S.A.; Chairman, Private Benelux; Administrator,
Milcap Media Group
Philip Christmas 41 Vice President, Private Media Group, Inc.; Chief
Financial Officer, Milcap Media Group
Ad Heesbeen 47 Managing Director of Private Benelux B.V.

The following sets forth certain information with respect to the
persons who are members of the Board of Directors, executive officers or key
employees of Private Media Group, Inc.:

Berth H. Milton was appointed to the Board of Directors of the Company in
February 1998 and was the Corporate Secretary from June 1998 until February
1999. In February 1999 Mr. Milton was appointed Chairman of the Board and Chief
Executive Officer of Private, and served as Chief Executive Officer until May
2002. Mr. Milton was Administrator of Milcap Media Group from its inception
until June 2000 and has been acting as an advisor to the Milcap Group since
1991. Mr. Milton is also active in several international industry and real
estate projects and developments.

Bo Rodebrant was appointed as a Director of Private Media Group, Inc. in August
1998. Mr. Rodebrant has operated his own accountancy and management consulting
services, R&S Ekonomiservice, since 1986. Prior to that time he co-founded an
ice cream business, Hemglass, which was the largest of its kind in Stockholm,
Sweden. The business was sold by Mr. Rodebrant in 1986. Mr. Rodebrant holds a
degree in construction engineering which he received in 1974.

Ferran Mirapeix was appointed to the Board of Directors in December 2001. Mr.
Mirapeix joined the Meriden Group, a private holding company, in 1990 and has
been its President since 1996. Between 1985 and 1990, he lived in Spain and
worked as Director of Marketing and Director of New Business Development for a
large consumer goods company. Prior to 1985, he worked for a management
consulting firm in the United States for two years. Mr. Mirapeix holds a Law
Degree from the University of Barcelona, a Diploma in Economics from the London
School of Economics and a Master in Business Administration from Northwestern
University.

Charles Prast, age 36, was appointed President and CEO of Private Media Group in
May 2002. Prior to joining Private

- 41 -

Media, Mr. Prast was a senior corporate financier with Commerzbank Securities in
London. Mr. Prast has held a variety of positions with leading investment banks
and has worked closely with interactive entertainment companies to enhance
shareholder value. Mr. Prast received a B.A. degree from Bates College in 1987.

Claes Henrik Marten Kull joined the Milcap Media Group in 1992 as a sales
manager, and has been Milcap Media Group's Marketing Manager since 1993, and was
appointed Chief Marketing Officer of Private Media Group in August 1998, with
his main responsibilities being to identify and open up new markets and
negotiate with distributors. Since he began working for the Private Media Group,
Inc. in 1992, it has commenced distribution in approximately 25 new countries.
From 1991 to 1992 he operated his own business (his business partner was Johan
Gillborg) which acted as a sub-contracted sales force for Securitas Direct of
Sweden. From 1988 to 1991 he managed a private import and trading corporation,
which became the start of his career as an entrepreneur and sales professional.

Javier Sanchez was appointed as the Chief Operating Officer of Private Media
Group, Inc. in August 1998, and has been the General Manager of Milcap Media
Group, member of the Board of Milcap Media Group and Private France, and
minority shareholder of Milcap Media Group since its incorporation in 1991. He
has been a member of the Board of Milcap Publishing Group AB since its
incorporation in 1994 until 1997. From 1988 to 1991 he was the Operations
Director of a mid-size printing company near Barcelona. From 1984 to 1987 he was
the Production Manager of a major printing company in Barcelona.

Johan Gillborg was appointed as Chief Financial Officer of Private Media Group,
Inc. in August 1998 and has been the Chairman and Managing Director of Milcap
Publishing Group AB from 1994 until January 2000. Mr. Gillborg joined the group
in 1992 as Marketing Consultant. From 1991 to 1992 he operated his own business
which acted as sub-contracting sales force for Securitas Direct of Sweden
(together with Mr. Kull). From 1988 to 1990, Mr. Gillborg served as a general
manager in the hotel business in the United Kingdom and Portugal.Mr. Gillborg
holds a Bachelor's Degree in Business Administration from Schiller International
University in London.

Philip Christmas was appointed Vice President, in August 2001. Prior to this
time Mr. Christmas was employed by PricewaterhouseCoopers and its predecessor
firm, Coopers & Lybrand, since 1988. While employed by PricewaterhouseCoopers he
was responsible for carrying out audits of multinational and local companies
and, more recently, he has provided transaction services to clients acquiring
businesses in Spain. Mr. Christmas is a member of the Institute of Chartered
Accountants of England and Wales and of ROAC (Official Register of Auditors) in
Spain.

Ad Heesbeen has been the Managing Director of Private Benelux B.V. (formerly
known as Extasy Video B.V.) since 1989, when he founded the distribution
business which was purchased by Private Media Group in 2000. Prior to founding
Extasy Video, Mr. Heesbeen was partner in Exclusief Film & Video B.V., a
mainstream video distribution company which was founded in 1986.

No director or executive officer serves pursuant to any arrangement or
understanding between him or her and any other person.

COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors currently has three committees: (1) an Audit
Committee, a Compensation Committee, and (3) an Executive Committee.

The Audit Committee is currently comprised of three directors, Berth
Milton, Bo Rodebrant and Ferran Mirapeix. The Audit Committee reviews and
recommends to the Board, as it deems necessary, our internal accounting and
financial controls and the accounting principles and auditing practices and
procedures to be employed in preparation and review of our financial statements.
The Audit Committee makes recommendations to our board of directors concerning
the engagement of independent public accountants and the scope of the audit to
be undertaken by the accountants.

The Compensation Committee is currently comprised of Messrs. Prast and
Sanchez. The Compensation Committee reviews and, as it deems appropriate,
recommends to the Board of Directors policies, practices and procedures relating
to the compensation of the officers and other managerial employees and the
establishment and administration of employee benefit plans. It exercises all
authority under any employee stock option plans as the Committee therein

- 42 -

specified, unless the Board of Directors resolution appoints any other committee
to exercise such authority, and advises and consults with our officers as may be
requested regarding managerial personnel policies. The Compensation Committee
also has such additional powers as may be conferred upon it from time to time by
the Board of Directors.

The Executive Committee is comprised of Messrs. Prast, Kull and
Sanchez. The Executive Committee is authorized, subject to certain limitations,
to exercise all of the powers of the Board of Directors during periods between
board meetings.

COMPENSATION OF DIRECTORS

Our Board of Directors may, at its discretion, compensate directors
for attending Board and Committee meetings and reimburse the directors for
out-of-pocket expenses incurred in connection with attending such meetings.

Effective May 2002, we have agreed to pay to Berth Milton a director
fee of $215,000 per year plus out-of-pocket expenses for serving as Chairman of
the Board. In 1999 we adopted the 1999 Employee Stock Option Plan which
authorizes stock options to be issued to directors. None of our other directors
received any compensation during the 2002 fiscal year for serving in their
position as a director.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Based solely upon a review of Forms 3, 4 and 5 furnished to Private
Media Group covering its 2002 fiscal year filed under Section 16(a) of the
Securities Exchange Act of 1934, each of our directors other than Bo Rodebrant
and Ferran Mirapeix, and officers and beneficial owners of more than 10% of the
our common stock who are identified in the table appearing in Item 12 of this
Report did not file Form 5 on a timely basis.

- 43 -

ITEM 11. EXECUTIVE COMPENSATION

The following table summarizes all compensation paid to our Chief
Executive Officers serving during 2002 and to our other most highly compensated
executive officers other than the Chief Executive Officers whose total annual
salary and bonus exceeded $100,000 (the "Named Executive Officers"), for
services rendered in all capacities to Private Media Group during the fiscal
years ended December 31, 2002, 2001, and 2000. No other executive officer earned
compensation in excess of $100,000 in each of these periods.

SUMMARY COMPENSATION TABLE

NAME AND PRINCIPAL POSITION DURING FISCAL 2002 FISCAL YEAR ANNUAL COMPENSATION SALARY ($)
------------------------------------------------------- ------------ ------------------------------

Berth H. Milton, President and CEO (1) ................ 2002 215,000
2001 170,000
2000 151,000

Charles Prast, President and CEO (2) .................. 2002 70,000
2001 -
2000 -

Javier Sanchez......................................... 2002 155,000
Chief Operating Officer, Private Media Group, Inc. 2001 150,262
General Manager, Milcap Media Group 2000 150,262

(1) Mr. Milton was appointed as the President and CEO of PrivateMedia Group,
Inc. in February 1999 and served in such capacity until May 2002. For 2002
compensation reflects base salary as CEO through May 2002 and director fee
for 2002

(2) Mr. Prast was appointed as the President and CEO of Private Media Group,
Inc. in May 2002.

EMPLOYMENT CONTRACTS

Effective May 2002 we entered into an employment agreement with
Charles Prast providing for Mr. Prast to serve as our President and Chief
Executive Officer. The employment agreement has an initial term of five years,
subject to earlier termination or renewal under certain circumstances, and
provides for a base salary of $120,000 per year. In addition, the employment
agreement provides for the Company to grant 1,500,000 options to Mr. Prast at an
exercise price of $6.00, with vesting over a period of seven years, which
vesting is subject to acceleration in the event of a change in control of the
Company.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Our Compensation Committee is currently comprised of Messrs. Prast and
Sanchez, who are our Chief Executive Officer and Chief Operating Officer,
respectively, and served in these capacities during the 2002 fiscal year. During
the last fiscal year, none of our executive officers served on our Board of
Directors or Compensation Committee of any other entity whose officers served
either on our Board of Directors or Compensation Committee.

EMPLOYEE STOCK OPTION PLAN

The 1999 Employee Stock Option Plan was adopted by the Board of
Directors and shareholders of Private Media Group, Inc. in 1999 and was amended
effective December 31, 2002. The Plan allows us to grant options to purchase

- 44 -

common stock to designated employees, executive officers, directors,
consultants, advisors and other corporate and divisional officers of Private
Media Group.

The Plan authorizes us to grant stock options exercisable for up to an
aggregate of 7,200,000 shares of common stock. No stock options may be granted
under the Plan, after the Plan expires, on March 1, 2009. If a stock option
expires, terminates or is cancelled for any reason without having been exercised
in full, the shares of common stock not purchased under the Plan are available
for future grants.

The purchase price (exercise price) of option shares must be at least
equal to the fair market value of such shares on the date the stock option is
granted or such later date we may specify. The stock option is exercisable for a
period of ten years from the date of grant or such shorter period as is
determined by us. Each stock option may provide that it is exercisable in full
or in cumulative or non-cumulative installments, and each stock option is
exercisable from the date of grant or any later date specified in the option.
The Board of Directors has the authority under the Plan to take certain actions,
including the authority to accelerate vesting schedules and to otherwise waive
or adjust restrictions applicable to the exercise of stock options.

Unless otherwise provided by us, an optionee may not exercise a stock
option unless from the date of grant to the date of exercise the optionee
remains continuously in our employ. If the employment of the optionee terminates
for any reason other than death, disability or retirement at or after the age of
65, (1) the stock options then currently exercisable will remain exercisable for
a period of 90 days after that termination of employment (except that the 90 day
period is extended to 12 months if the optionee dies during such 90 day period),
unless those stock options expire prior to the expiration of 90 days, and (2)
the stock options then not exercisable will terminate as of the date of
termination of employment.

The Board of Directors may at any time suspend, amend or terminate the
Plan. Shareholder approval is required, however, to (1) materially increase the
benefits accruing to optionees, (2) materially increase the number of securities
which may be issued (except for adjustments under anti-dilution clauses), or (3)
materially modify the requirements as to eligibility for participation. The Plan
authorizes us to include in stock options provisions which permit the
acceleration of vesting in the event of a change in control of Private Media
Group, Inc. as defined under the Plan.

As of December 31, 2002, 3,671,395 options were outstanding under the
Plan with an average exercise price of 5.73. Options for 3,242,819 shares of
common stock remained available for grant as of such date. Future grants under
the Plan will be made at our discretion.

- 45 -

OPTION GRANTS IN THE LAST FISCAL YEAR

The following table sets forth certain information at December 31,
2002, and for the year then ended, with respect to stock options granted to the
individuals named in the Summary Compensation Table above. No options have been
granted at an option price below the fair market value of the Common Stock on
the date of grant.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

% OF TOTAL
NUMBER OF OPTIONS/ POTENTIAL REALIZED VALUE AT
SECURITIES SARs ASSUMED ANNUAL RATES OF
UNDERLYING GRANTED TO STOCK PRICE APPRECIATION
OPTIONS/SARS EMPLOYEES EXERCISE OR BASE FOR OPTION TERM AT 5%
NAME GRANTED(#) IN FISCAL YEAR PRICE($/Sh) EXPIRATION DATE AND 10% RESPECTIVELY
----------------------- -------------------- -------------- ---------------- --------------- --------------------------

Charles Prast 1,500,000(1) - 6.00 (1) $3,368,269 $10,826,538
Berth H. Milton - - - - - -
Javier Sanchez - - - - - -

----------
(1) Options vest over a period of seven years and expire between 2010 and 2015

The following table summarizes certain information regarding the
number and value of all options to purchase Common Stock of Private Media Group,
Inc. held by the individuals named in the Summary Compensation Table.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

VALUE OF
UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS/SARS
OPTIONS/SARs AT FISCAL AT FISCAL YEAR
SHARES YEAR END END($)*
ACQUIRED ON VALUE REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE ($) UNEXERCISABLE UNEXERCISABLE**
------------------ ----------- -------------- ----------------------- ---------------

Charles Prast - - 0 1,500,000 -
Berth H. Milton - - 165,000 15,000 127,875 6,300
Javier Sanchez - - 165,000 15,000 127,875 6,300

(*) Based on the closing price of our common stock on the last trading day of
the fiscal year ended December 31, 2002.

(**) Weighted average exercise price for vested options only has been used.

- 46 -

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table presents certain information as of March 24, 2003,
regarding the beneficial ownership of our common stock by (i) each of our
directors and executive officers individually, (ii) all persons known by us to
be beneficial owners of five percent or more of our common stock, and (iii) all
of our directors and executive officers as a group. Unless otherwise noted, the
persons listed below have sole voting and investment power and beneficial
ownership with respect to such shares.

PERCENT
NUMBER OF SHARES BENEFICIALLY
NAME AND ADDRESS (1) BENEFICIALLY OWNED (1) OWNED
-------------------------------------- ---------------------- --------------

Berth H. Milton (2) .................. 25,171,612 50.3%
Senate Limited (3) ................... 5,025,000 11.2%
3 Bell Lane, Gibraltar
Chiss Limited (4) ................... 4,200,000 9.4%
3 Bell Lane, Gibraltar
Pressmore Licensing Limited ......... 1,875,000 4.2%
P.O. Box N-341, Nassau, Bahamas
Solidmark (Gibraltar) Ltd. .......... 1,875,000 4.2%
3 Bell Lane, Gibraltar
Javier Sanchez (5) .................. 198,750 *
Bo Rodebrant (6) ..................... 66,000 *
Ferran Mirapeix (7) .................. 50,000 *
Charles Prast ........................ - -
All Executive Officers and Directors
as a group (10 people) (8)........... 26,138,862 51.6%

----------
* Denotes less than 1%

(1) Beneficial ownership is determined in accordance with rules of the U.S.
Securities and Exchange Commission, and includes generally voting power
and/or investment power with respect to securities. Shares of Common
Stock which may be acquired by a beneficial owner upon exercise or
conversion of warrants, options or Preferred Stock which are currently
exercisable or exercisable within 60 days of March 24, 2003, are
included in the Table as shares beneficially owned and are deemed
outstanding for purposes of computing the beneficial ownership
percentage of the person holding such securities but are not deemed
outstanding for computing the beneficial ownership percentage of any
other person. Except as indicated by footnote, to the knowledge of the
Company, the persons named in the table above have the sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.

(2) Includes 4,950,000 shares of Common Stock issuable upon conversion of
1,650,000 shares of the Company's $4.00 Series A Convertible Preferred
Stock. Mr. Milton is indirectly the beneficial owner of the 1,650,000
$4.00 Series A Convertible Preferred Stock and 1,196,786 shares of
Common Stock owned of record by Slingsby Enterprises Limited. All of
these Preferred Shares are pledged to a third party to secure payment of
a loan from the third party to the Company. See "Management - Related
Transactions." Also includes (i) 2,785,076 shares of Common Stock owned
by Bajari Properties Limited, of which Mr. Milton is the sole
shareholder, and (ii) 168,750 shares issuable upon exercise of Options
issued under the Employee Stock Option Plan. His address is c/o the
Company, Carrettera de Rubi 22-26, 08190 Sant Cugat del Valles,
Barcelona, Spain.

(3) Kate Bentley is the sole shareholder of Senate Limited and, therefore,
may be deemed to be the beneficial owner of these shares.

(4) Marina Magid is the sole shareholder of Chiss Limited and, therefore,
may be deemed to be the beneficial owner of these shares.

- 47 -

(5) Includes 168,750 shares issuable upon exercise of Options issued under
the Employee Stock Option Plan owned by Mr. Sanchez. His address is c/o
the Company, Carrettera de Rubi 22-26, 08190 Sant Cugat del Valles,
Barcelona, Spain.

(6) Includes 66,000 shares issuable upon exercise of Options issued under
the Employee Stock Option Plan owned by Mr. Rodebrant. His address is
c/o the Company, Carrettera de Rubi 22-26, 08190 Sant Cugat del Valles,
Barcelona, Spain.

(7) Includes 50,000 shares issuable upon exercise of Options issued under
the Employee Stock Option Plan owned by Mr. Mirapeix. His address is c/o
the Company, Carrettera de Rubi 22-26, 08190 Sant Cugat del Valles,
Barcelona, Spain.

(8) Includes 4,950,000 shares of Common Stock issuable upon conversion of
the outstanding Series A Preferred Stock and 776,000 shares issuable
upon exercise of outstanding Options under the Employee Stock Option
Plan.

- 48 -

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

CERTAIN RELATIONSHIPS

No Director or executive officer of Private Media Group is related to
any other Director or executive officer. None of our officers or Directors hold
any directorships in any other public entity. There are currently three outside
directors on our Board of Directors.

RELATED TRANSACTIONS

We have short-term loans to an entity controlled by Mr. Milton in the
amount of EUR 1.6 million and 4.2 million at December 31, 2001 and 2002,
respectively. The loans bear interest at the rate of EURIBOR+1% per annum and
have no maturity date. During 2002 the highest amount outstanding was EUR 5.7
million. Advances and repayments since June 30, 2002 are related to the property
that we have acquired from an entity controlled by Mr. Milton, which transaction
is discussed below. As of March 28, 2003, EUR 4.3 million remained outstanding
on these loans including interest.

In December 2001 we borrowed $4.0 million from Commerzbank AG pursuant
to a Note originally due December 20, 2002 in order to expand our product
portfolio. Subsequently the maturity of the Note was extended to March 2003. The
Note bears interest at an annual rate of 7%, payable quarterly, with the entire
principal amount and accrued interest due on maturity. The Note is prepayable in
full upon the sale of equity by us. Upon the Note becoming prepayable, we are
required to repay the entire principal amount of the Note together with the
greater of (1) accrued interest payable on the Note or (2) a prepayment premium
equal to $200,000. The Note is secured by a guaranty from Slingsby Enterprises
and a pledge by Slingsby Enterprises of 5,600,000 shares of our Series A
Preferred Stock. The lender and Slingsby Enterprises have also agreed that if
the Note remains unpaid at maturity, Commerzbank may elect to exchange the Note
for Series A Preferred Stock or common stock owned by Slingsby Enterprises to
the value of $5.0 million. The Company is in discussion with an independent
third party to replace the Note with appropriate long-term financing. The
Company expects that this arrangement will be in place by mid-April. Slingsby
Enterprises is beneficially owned by Berth H. Milton, Chairman of the Board of
Directors.

Effective December 31, 2002, we completed the purchase of all of the
outstanding stock of Barbuda B.V., from companies indirectly beneficially owned
by Berth Milton. The principal asset of Barbuda B.V. is an approximately 9,700
square meter office facility, including parking, located in Barcelona, Spain,
currently under construction. Construction is expected to be completed in June
2004. The purpose of this transaction was to acquire this property. We intend to
occupy this property as our European headquarters upon completion of
construction.

The consideration paid by our subsidiary to the seller for the stock
was EUR 9,956,950. The consideration consisted of EUR 3,387,581 cash paid in
December 2002 and a note payable in the amount of EUR 6,569,369. The note bears
interest at a rate of EURIBOR+1% payable annually and is due and payable on
December 31, 2004. The fair market value of the principal asset, the real
estate, is based upon independent appraisals.

The foregoing transactions were approved by a majority of our
disinterested directors and are believed to be on terms no less favorable to us
than could be obtained from unaffiliated third parties on an arms-length basis.

- 49 -

ITEM 14. CONTROLS AND PROCEDURES

Based upon an evaluation by our Chief Executive Officer and Chief
Financial Officer within 90 days prior to the filing date of this Annual Report
on Form 10-K they have concluded that our disclosure controls and procedures as
defined in Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended,
are effective for gathering, analyzing and disclosing the information we are
required to disclose in our reports filed under such Act.

There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation referred to above.

- 50 -

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Documents filed as part of this Form 10-K:

1. FINANCIAL STATEMENTS.

See Consolidated Financial Statements.

2. FINANCIAL STATEMENT SCHEDULES.

See Consolidated Financial Statements.

3. EXHIBITS.

See Exhibit Index.

(B) REPORTS ON FORM 8-K:

There were no reports on Form 8-K filed by the Registrant in the last
quarter of fiscal 2002.

- 51 -

INDEX TO EXHIBITS

EXHIBIT
NO. DESCRIPTION OF DOCUMENT
-------- -----------------------

***3.1 Restated Articles of Incorporation
***3.2 Articles of Amendment to the Articles of Incorporation
***3.3 Bylaws
*4.1 Specimen Common Stock Certificate
*4.3 Certificate of Designation re Preferred Stock
*10.1 Milcap Acquisition Agreement dated December 19, 1997
*10.2 Cinecraft Acquisition Agreement dated December 19, 1997
*10.3 Distribution Agreement between Sundance Associates and the Registrant
*10.4 License Agreement between PCI, Inc. and Milcap Media Ltd.
*10.5 Letter of Intent dated May 5, 1998, by and between Max's Film AB and
Milcap Media Limited as amended on August 20, 1998, and October 12, 1998
*10.7 Agreement dated March 31, 1998, by and between Milcap Media Ltd. and certain
shareholders of Viladalt, S.L.
*10.8 Agreement dated March 31, 1998, by and between Zebra Forvaltnings,
AB and certain shareholders of Viladalt, S.L.
*10.9 Agreement dated March 31, 1998, by and between Milcap Media Ltd. and certain
shareholders of Viladalt, S.L.
*10.10 Agreement dated March 31, 1998, by and between Milcap Media Ltd. and certain
shareholders of Viladalt, S.L.
10.11 Amended and Restated 1999 Employee Stock Option Plan.
**10.12 Production Agreement dated as of March 29, 1999, by and between Milcap Media Ltd. And
Pierre Woodman.
**10.13 Final Agreement dated as of March 22, 1999, by and among Private Media Group, Inc.,
Danny Cook and Qamilla Carlsson.
***10.14 7% Note Due 2002 from the Registrant to Commerzbank AK.
10.15 Amendment No.1 to the 7% Note Due 2002
+10.16 Share Purchase Agreement dated as of December 9, 2002, by and among Fraserside Holdings
Limited, Luthares Investments N.V. and Stichting de Oude Waag.
21 Subsidiaries
23.1 Consent of BDO Audiberia
23.2 Consent of Ernst & Young AB
23.3 Consent of Bruce E. Waldman, C.P.A.
99.1 Certification of CEO and CFO.

*Incorporated by reference from the registrant's Registration Statement on Form
SB-2 (SEC File No. 333-62075).

**Incorporated by reference from the registrant's Annual Report on Form 10-KSB
for the year ended December 31, 1998.

+Incorporated by reference from the registrant's Form 8-K dated January 14,
2003.

***Incorporated by reference from the registrant's Registration Statement on
Form S-1 (SEC File No. 333-69654).

- 52 -

SIGNATURES

In accordance with the requirements of Section 13 or 15(d) of the
Exchange Act, the registrant has caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.

Dated: March 28, 2003 PRIVATE MEDIA GROUP, INC.

By: /s/Charles Prast
-----------------------
Charles Prast, Chief Executive
Officer

In accordance with the requirements of the Exchange Act, the Report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the dates indicated.

NAME TITLE DATE
---- ----- ----
/s/ Berth H. Milton Chairman of the Board, Director March 28, 2003
-------------------
Berth H. Milton

/s/ Johan Gillborg Chief Financial Officer, Chief March 28, 2003
------------------ Accounting Officer
Johan Gillborg

/s/ Ferran Mirapeix Director March 28, 2003
--------------------
Ferran Mirapeix

/s/ Bo Rodebrant Director March 28, 2003
----------------
Bo Rodebrant

- 53 -

CERTIFICATIONS

I, Charles Prast, President and Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Private Media Group,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

March 28, 2003

/s/ Charles Prast
------------------------------------------
Charles Prast, Principal Executive Officer

- 54 -

I, Johan Gillborg, Vice President and Chief Financial Officer, certify that:

1. I have reviewed this annual report on Form 10-K of Private Media Group,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(d) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
(e) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
(f) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(c) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(d) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.

March 28, 2003

/s/ Johan Gillborg
-------------------------------------------
Johan Gillborg, Principal Financial Officer

- 55 -

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and
Shareholders of Private Media Group, Inc.

1. We have audited the accompanying consolidated balance sheet of Private
Media Group, Inc. as of December 31, 2002 and the related consolidated
statements of income and comprehensive income, shareholders' equity, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We
did not audit the financial statements of Private North America Inc. a
wholly-owned subsidiary incorporated in 2001, which statements reflect
total assets constituting 6% and total revenues constituting 17% of the
related consolidated totals. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar
as it relates to data included for Private North America Inc, is based
solely on the report of those auditors.

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

3. In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Private Media
Group, Inc. at December 31, 2002, and the consolidated results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.

4. As discussed in the Summary of Significant Accounting Policies in the
consolidated financial statements, on January 1, 2002, the Company adopted
the provisions of Statement of Financial Accounting Standards No. 142,
"Goodwill and other Intangible Assets".

BDO AUDIBERIA AUDITORES

Barcelona, Spain
March 26, 2003

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and
Shareholders of Private Media Group, Inc.

We have audited the accompanying consolidated balance sheet of Private
Media Group, Inc, as of December 31, 2001 and the related consolidated
statements of income and comprehensive income, shareholders' equity and cash
flows for each of the two years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Private North America
Inc., a wholly-owned subsidiary incorporated in 2001, which statements reflect
total assets constituting 6 % and total revenues constituting 12 % in 2001 of
the related consolidated totals. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
data included for Private North America Inc., is based solely on the report of
other auditors.

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

In our opinion, based on our audits and the report of other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Private Media Group,
Inc, at December 31, 2001 and the consolidated results of its operations and its
cash flows for each of the two years in the period ended December 31, 2001, in
conformity with generally accepted accounting principles in the United States of
America.

Stockholm, Sweden

April 11, 2002

Ernst & Young AB

/s/ Tom Bjorklund
-----------------
Tom Bjorklund

PRIVATE MEDIA GROUP, INC.
CONSOLIDATED BALANCE SHEETS

DECEMBER 31,
---------------------------------------
2001 2002 2002
---------- ---------- ----------
EUR EUR USD
(in thousands)

ASSETS
Cash and cash equivalents ....................................... 6,408 1,694 1,764
Short-term investments .......................................... 2,850 2,850 2,969
Trade accounts receivable - net (Note 4) ........................ 15,930 12,472 12,992
Related party receivable (Note 13) .............................. 1,563 4,228 4,404
Inventories - net (Note 5) ...................................... 8,252 8,808 9,175
Deferred income tax asset (Note 12) ............................. 159 396 413
Prepaid expenses and other current assets (Note 6) .............. 1,785 3,630 3,782
---------- ---------- ----------
TOTAL CURRENT ASSETS ............................................ 36,947 34,078 35,498

Library of photographs and videos - net (Note 7) ................ 14,241 16,929 17,634
Property, plant and equipment - net (Note 8) .................... 2,786 14,890 15,510
Goodwill and other intangible assets (Note 3 and 9) ............. 2,892 2,851 2,970
Other assets .................................................... 220 240 250
---------- ---------- ----------
TOTAL ASSETS .................................................... 57,086 68,989 71,864
========== ========== ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings (Note 10) ................................. 4,530 9,739 10,145
Accounts payable trade .......................................... 6,875 6,929 7,218
Income taxes payable (Note 12) .................................. 2,431 753 784
Deferred income taxes (Note 12) ................................. 22 31 32
Accrued other liabilities (Note 11) ............................. 728 1,339 1,395
---------- ---------- ----------
TOTAL CURRENT LIABILITIES ....................................... 14,586 18,791 19,574

Long-term borrowing (Note 10) ................................... 220 178 185
Related party payable (Note 13) ................................. - 6,569 6,843
---------- ---------- ----------
TOTAL LIABILITIES ............................................... 14,806 25,538 26,602

SHAREHOLDERS' EQUITY (Note 14)

$4.00 Series A Convertible Preferred Stock
10,000,000 shares authorized, 7,000,000
shares issued and outstanding................................... - - -
Common Stock, $.001 par value, 100,000,000 shares authorized
28,370,857 and 28,608,609 issued and outstanding
at December 31, 2001 and 2002, respectively..................... 863 863 899
Additional paid-in capital ...................................... 14,285 15,668 16,321
Stock dividends to be distributed ............................... 396 692 721
Retained earnings ............................................... 29,802 28,695 29,891
Accumulated other comprehensive income .......................... (3,066) (2,467) (2,570)
---------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY ...................................... 42,280 43,451 45,261
---------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...................... 57,086 68,989 71,864
========== ========== ==========

See accompanying notes to consolidated financial statements.

F-1

PRIVATE MEDIA GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME

YEARS ENDED DECEMBER 31,
----------------------------------------------------
2000 2001 2002 2002
---------- ---------- ---------- ----------
EUR EUR EUR USD
(in thousands)

Net sales 30,553 38,979 39,410 41,052
Cost of sales 11,693 13,827 17,031 17,741
---------- ---------- ---------- ----------
Gross profit 18,860 25,152 22,379 23,311
Selling, general and administrative expenses 11,469 16,751 20,562 21,418
Offering expenses - 843 1,569 1,634
---------- ---------- ---------- ----------
Operating income 7,391 7,557 249 259
Sale of controlled entity - 1,862 - 0
Interest expense 213 194 366 381
Interest income 364 152 327 341
---------- ---------- ---------- ----------
Income before income taxes 7,543 9,378 210 219
Income tax (benefit) 1,267 1,361 (130) (135)
---------- ---------- ---------- ----------
Net income 6,276 8,017 340 354
---------- ---------- ---------- ----------
Other comprehensive income:
Unrealized loss on short-term investment - (134) (67) (70)
Foreign currency translation adjustments (1,305) (1,978) 666 693
---------- ---------- ---------- ----------
Comprehensive income 4,971 5,905 939 978
========== ========== ========== ==========

Income applicable to common shares 4,769 6,428 (1,107) (1,153)
========== ========== ========== ==========

Net income per share:
Basic 0.18 0.23 (0.04) (0.04)
========== ========== ========== ==========
Diluted 0.13 0.16 (0.04) (0.04)
========== ========== ========== ==========

See accompanying notes to consolidated financial statements.

F-2

PRIVATE MEDIA GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

ADDI-
COMMON STOCK PREFERRED STOCK TIONAL
--------------------------- --------------------------- PAID-IN
SHARES AMOUNTS SHARES AMOUNTS CAPITAL
------------ ------------ ------------ ------------ ------------
EUR EUR EUR

Balance at January 1, 2000 26,601,866 861 7,000,000 - 3,748
Shares issued in acquisition 208,464 - - - 3,164
Translation Adjustment - - - - -
Conversion of warrants and options 677,722 1 - - 1,393
Stock-based compensation - - - - 24
Stock dividends 262,868 - - - 1,811
Stock dividends to be distributed - - - - -
Net income - - - - -
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2000 27,750,920 862 7,000,000 - 10,140
Shares issued in acquisition 248,889 1 - - 1,507
Translation Adjustment - - - - -
Unrealized loss on
short-term investment - - - - -
Conversion of warrants and options 122,769 - - - 673
Stock dividends 248,279 - - - 1,966
Stock dividends to be distributed - - - - -
Net income - - - - -
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2001 28,370,857 863 7,000,000 - 14,285
Translation Adjustment - - - - -
Unrealized loss on short-term investment - - - - -
Conversion of warrants and options 55,295 - - - 232
Stock dividends 182,457 - - - 1,150
Stock dividends to be distributed - - - - -
Net income - - - - -
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2002 28,608,609 863 7,000,000 - 15,668
============ ============ ============ ============ ============

ACCU-
MULATED
STOCK OTHER TOTAL
DIVIDENDS COMPRE- SHARE-
TO BE RETAINED HENSIVE HOLDER'S
DISTRIBUTED EARNINGS INCOME EQUITY
------------ ------------ ------------ ------------
EUR EUR EUR EUR

Balance at January 1, 2000 1,079 18,602 351 24,641
Shares issued in acquisition - - - 3,164
Translation Adjustment - - (1,305) (1,305)
Conversion of warrants and options - - - 1,394
Stock-based compensation - - - 24
Stock dividends (1,079) - - 732
Stock dividends to be distributed 774 (1,506) - (732)
Net income - 6,276 - 6,276
------------ ------------ ------------ ------------
Balance at December 31, 2000 774 23,372 (954) 34,194
Shares issued in acquisition - - - 1,508
Translation Adjustment - - (1,978) (1,978)
Unrealized loss on
short-term investment - - (134) (134)
Conversion of warrants and options - - - 673
Stock dividends (774) - - 1,192
Stock dividends to be distributed 396 (1,588) - (1,192)
Net income - 8,017 - 8,017
------------ ------------ ------------ ------------
Balance at December 31, 2001 396 29,802 (3,066) 42,280
Translation Adjustment - - 666 666
Unrealized loss on short-term investment - - (67) (67)
Conversion of warrants and options - - - 232
Stock dividends (1,150) - - -
Stock dividends to be distributed 1,446 (1,446) - -
Net income - 340 - 340
------------ ------------ ------------ ------------
Balance at December 31, 2002 692 28,695 (2,467) 43,450
============ ============ ============ ============

See accompanying notes to consolidated financial statements.

F-3

PRIVATE MEDIA GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31,
----------------------------------------------------
2000 2001 2002 2002
---------- ---------- ---------- ----------
EUR EUR EUR USD
(in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 6,276 8,017 340 354
ADJUSTMENT TO RECONCILE NET INCOME TO NET CASH FLOWS
PROVIDED BY OPERATING ACTIVITIES:
Deferred income taxes (74) (152) (237) (246)
Depreciation 932 602 1,021 1,063
Stock-based compensation 24 - - -
Translation difference - (40) - -
Bad debt provision - 538 (39) (41)
Tax provision on asset held for sale - 323 - -
Amortization of goodwill and other intangible assets 189 342 41 43
Gain on sale of asset held for sale - (241) - -
Gain on sale of controlled entity - (1,862) - -
Amortization of photographs and videos 3,744 4,541 5,784 6,025
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Trade accounts receivable (4,933) (4,222) 3,497 3,642
Related party receivable 287 (1,053) (2,665) (2,776)
Inventories (1,277) (1,371) (557) (580)
Prepaid expenses and other current assets (1,325) 1,529 (1,846) (1,923)
Accounts payable trade 3,124 1,272 61 64
Income taxes payable 1,262 (309) (1,678) (1,748)
Accrued other liabilities 416 (370) 611 637
---------- ---------- ---------- ----------
Net cash provided by operating activities 8,645 7,544 4,334 4,515

CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of short-term investments - 2,850 - -
Investment in library of photographs and videos 5,712 7,020 8,471 8,824
Capital expenditures 1,422 688 13,125 13,672
Investment in controlled entity - 616 - -
Cash from sale of controlled entity - (2,933) - -
Investments in (cash from sale of) asset held for sale 25 (2,609) - -
Investment in (cash from sale of) other assets 565 (165) 20 21
Cash acquired in acquisition 76 - - -
---------- ---------- ---------- ----------
Net cash used in investing activities 7,799 5,466 21,617 22,517

CASH FLOW PROVIDED BY FINANCING ACTIVITIES:
Conversion of stock options and warrants 1,383 673 232 242
Related party note payable - - 6,569 6,843
Long-term borrowings (repayments on loans), net (181) (309) (42) (44)
Short-term borrowings(repayments), net 21 4,454 5,209 5,426
---------- ---------- ---------- ----------
Net cash (used in) provided by financing activities 1,222 4,818 11,969 12,468
Foreign currency translation adjustment (1,305) (2,112) 599 624
---------- ---------- ---------- ----------
Net increase in cash and cash equivalent 763 4,784 (4,715) (4,911)
Cash and cash equivalents at beginning of the year 861 1,624 6,408 6,675
---------- ---------- ---------- ----------

See accompanying notes to consolidated financial statements.

F-4

Cash and cash equivalents at end of the year 1,624 6,408 1,694 1,764
========== ========== ========== ==========
Cash paid for interest 49 136 329 343
========== ========== ========== ==========
Cash paid for taxes 194 1,346 1,548 1,613
========== ========== ========== ==========

See accompanying notes to consolidated financial statements.

F-5

PRIVATE MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. THE COMPANY AND BASIS OF PRESENTATION

Private Media Group, Inc. ("the Company") was originally incorporated
on September 23, 1980 as Glacier Investment Company, Inc. under the laws of the
State of Utah and, effective November 24, 1997, after a series of interim name
changes, changed its name to Private Media Group Inc. Effective June 12, 1998
the Company acquired Cine Craft Limited ("Cine Craft"), a Gibraltar corporation
and Milcap Media Limited ("Milcap"), a Republic of Cyprus corporation. Prior to
the acquisitions the Company was a holding company with no operations. Milcap
and its subsidiaries and Cine Craft operate under common control and are engaged
in the acquisition, refinement and distribution of video and photo rights for
adult feature magazines and movies (videocassettes and DVD's) through
distributors and via the Internet. The acquisition was accounted for as a
reverse acquisition whereby the Company was considered to be the acquiree even
though legally it is the acquiror. Accordingly, the accompanying financial
statements present the historical combined financial statements of Cine Craft
and Milcap from January 1, 1998 through the acquisition date of June 12, 1998
and the consolidated financial statements of the Company, Cine Craft and Milcap
since that date. Since the fair value of the net assets of the Company were
equal to their net book values on June 12, 1998, the assets and liabilities of
the Company remained at their historical cost following the acquisition. During
the year ended December 31, 2000, the Company established two new wholly owned
subsidiaries, one in Sweden (Peach Entertainment Distribution AB, "Peach") and
one in the Republic of Cyprus (Fraserside Holdings Ltd., "Fraserside"). These
subsidiaries were formed to carry on the business of Milcap Publishing Group AB
(Sweden) and Milcap (Cyprus), respectively.

Effective January 1, 2002, the Company changed its reporting currency
from the Swedish Krona (SEK) to the euro ("EUR"). On that date, the euro became
the principal currency in which Private Media Group generates its cash flows.
The assets and operations of the Company's US based operations are currently not
significant. The accompanying financial statements have been recast for all
periods presented using methodology consistent with Statement of Financial
Accounting Standards No. 52, Foreign Currency Translation (SFAS 52).

Solely for the convenience of the reader, the accompanying consolidated
financial statements as of December 31, 2002 and for the twelve months then
ended have been translated into United States dollars ("USD") at the rate of EUR
0.96 per USD 1.00 the Exchange Rate of the European Central Bank on December 31,
2002. The translations should not be construed as a representation that the
amounts shown could have been, or could be, converted into US dollars at that or
any other rate.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of the
Company and all wholly owned subsidiaries and of companies which the Company is
deemed to control. All significant intercompany transactions and balances have
been eliminated in consolidation.

Foreign Currency

The financial statements of the Company's operations based outside of
the euro area have been translated into euro in accordance with SFAS 52.
Management has determined that the functional currency for each of the Company's
foreign operations is its applicable local currency. When translating functional
currency financial statements into euro, year-end exchange rates are applied to
the balance sheet accounts, while average annual rates are applied to income
statement accounts. Translation gains and losses are recorded in other
comprehensive

F-6

PRIVATE MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

income as a component of shareholders' equity.

Transactions involving foreign currencies are translated into euro or
functional currencies using exchange rates in effect at the time of the
transactions. Monetary assets and liabilities denominated in foreign currencies
are translated at period end exchange rates and the resulting gain or loss is
charged to income in the period.

The aggregate exchange gain/(loss) included in determining net income
amounted to EUR 620 thousand, EUR 1,203 thousand and EUR (1,297) thousand for
the years ended December 31, 2000, 2001 and 2002, respectively

Recognition of Revenue

The Company's revenue recognition policies are in accordance with Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." Revenues from the sale of magazines, videocassettes, DVD's and
other related products where distributors are not granted rights-of-return are
recognized upon transfer of title, which generally occurs upon delivery.
Revenues from the sale of magazines under agreements that grant distributors
rights-of-return are recognized upon transfer of title, which generally occurs
on delivery, net of an allowance for returned magazines. Revenues from the sale
of videocassette and DVD products under consignment agreements with distributors
are recognized based upon reported sales by the Company's distributors. Revenues
from the sale of subscriptions to the Company's internet website are deferred
and recognized ratably over the subscription period. Revenues from licensing of
broadcasting rights to the Company's video and film library are recognized upon
delivery when the following conditions have been met (i) license period of the
arrangement has begun and the customer can begin its exploitation, exhibition,
or sale (ii) the arrangement fee is fixed or determinable and (iii) collection
of the arrangement fee is reasonably assured.

Use of Estimates

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

Inventories

Library of Photographs & Videos

The library of photographs and videos, including rights for photographs
and videos as well as translation and dubbing of video material, is reflected at
the lower of amortized cost or net realizable value. The cost is amortized on a
straight-line basis over 3-5 years representing the estimated useful life of the
asset, except for photos which are amortized on a sliding-scale basis over three
years. Estimated future revenues are periodically reviewed and, revisions may be
made to amortization rates or write-downs made to the asset's net realizable
value as a result of significant changes in future revenue estimates. Net
realizable value is the estimated selling price in the ordinary course of
business, less estimated costs to complete and exploit in a manner consistent
with realization of that income.

F-7

PRIVATE MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Property, Plant and Equipment

Property, plant and equipment are carried at cost and are generally
depreciated using the straight-line method over the estimated useful lives of
the assets. The useful lives range from 3-5 years.

In March 2000 the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board reached a consensus on Issue 00-2, "Accounting for
Web Site Development Costs" ("EITF 00-2"). In accordance with the transition
provisions of EITF 00-2, the Company has elected to apply this standard to
website development costs incurred from January 1, 2000 forward. Capitalized
website development costs including graphics and related software are being
amortized on a straight-line basis over 5 years and are included in property,
plant and equipment in the accompanying balance sheet (see Note 8).

Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price paid over the fair
value of the net assets of the businesses acquired (see Note 3 and 9).

In July 2001 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets"
("SFAS 142"). SFAS 142 was required to be adopted by the company as of January
1, 2002. Under SFAS 142, goodwill and indefinite lived intangible assets are no
longer amortized but are reviewed annually for impairment (or more frequently if
indicators of impairment arise). Further separable intangible assets that are
not deemed to have an indefinite life will continue to amortized over their
expected useful lives with no maximum life specified; whereas under prior rules
a maximum life of 40 years was required.

During 2002, the Company performed the required initial impairment test
of goodwill and indefinite lived intangible assets as of January 1, 2002. There
was no effect of on the earnings and financial position of the Company as a
result of the impairment testing.

Impairment of Long-Lived Assets

The Company evaluates the carrying value of its long-lived assets when
events or circumstances indicate the carrying value may not be recoverable
through the estimated undiscounted cash flows from the use of the asset. An
impairment loss is then measured as the amount by which the carrying value of
the asset exceeds its estimated fair value.

Advertising Costs

Advertising costs are charged to income as incurred. The total
advertising costs were EUR 481 thousand, EUR 1,299 thousand and EUR 2,609
thousand for the years ended December 31, 2000, 2001 and 2002, respectively.

Shipping and Handling Costs

Shipping and handling costs related to the Company's products are
recognized in cost of sales.

F-8

PRIVATE MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Income Taxes

The Company accounts for certain income and expense items differently
for financial reporting purposes than for tax purposes. Provision for deferred
taxes are made in recognition of such temporary differences, following the
requirements of Financial Accounting Standards Board Statement No. 109
"Accounting for Income Taxes."

Cash Equivalents

All highly liquid investments purchased with an original maturity of
three months or less at the time of acquisition are considered to be cash
equivalents.

Short-Term Investments

Short-term investments are classified by the Company as
available-for-sale securities are stated at fair value, with the unrealized
gains and losses, net of tax, reported in other comprehensive income. Realized
gains and losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included in investment income. The cost of
securities sold is based on the specific identification method. Interest and
dividends on securities classified as available-for-sale are included in
interest income.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents and
trade accounts receivable. The Company does not require collateral on these
financial instruments.

Cash and cash equivalents are maintained principally with major
financial institutions in Spain and Sweden that have high credit standings and
the Company's policy is to limit exposure to any one institution. Management
attempts to limit credit risk on trade receivables mainly through establishment
and monitoring of credit controls.

Basic and Diluted Earnings Per Share

Basic and diluted earnings per share is calculated in accordance with
Financial Accounting Standards Board Statement No. 128, "Earnings per Share"
(Note 15).

Derivative Financial Instruments

As of January 1, 2001, the Company adopted Financial Accounting
Standards Board Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities (SFAS 133). Under SFAS 133 all derivative financial
instruments, such as interest rate swap contracts and foreign exchange
contracts, are required to be recognized in the consolidated financial
statements at fair value regardless of the purpose or intent for holding the
instrument.

The Company does not use derivative financial instruments for purposes
of hedging foreign currency exposures, net investments in foreign subsidiaries
or any other purposes and accordingly the adoption of this standard had no
effect on the Company's financial position or results of operations.

F-9

PRIVATE MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair Value of Financial Instruments.

The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments. The estimates
presented herein are not necessarily indicative of the amounts that the Company
could realize in a current market exchange.

Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.

Short-term investments: The fair values for available-for-sale debt and
equity securities are based on quoted market prices.

Accounts receivable and accounts payable: The carrying amounts reported
in the balance sheet for accounts receivable and accounts payable approximate
their fair values.

Long-and short-term debt: The carrying amounts of the Company's
borrowings under its short-term credit arrangements approximate their fair
value. The fair value of the Company's long-term debt and leasing contracts are
estimated to be equivalent to their carrying values as the rates of interest in
these contract represents rates available to the Company for similar types of
arrangements.

Stock-Based Compensation

As permitted by Statement of Financial Accounting Standards No. 123
("SFAS No. 123"), "Accounting for Stock-Based Compensation," the Company has
elected to continue following Accounting Principles Board Opinion No. 25 ("APB
25"), Accounting for Stock Issued to Employees, and related Interpretations for
measurement and recognition of stock-based transactions with employees and
adopted the disclosure-only provisions of SFAS No. 123. Under APB 25, generally
no compensation expense is recognized because the exercise price of the options
equals the fair value of the stock at the vesting date.

Had compensation cost for the Company's stock based compensation issued
to employees been determined based upon the fair value at the grant date
consistent with the methodology prescribed under SFAS 123, the Company's pro
forma net income (loss) for 2000, 2001 and 2002 would have been as per the
following table:

F-10

PRIVATE MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31,
---------------------------------------
2000 2001 2002
---------- ---------- -----------
EUR EUR EUR
(in thousands)

Net income, as reported 6,276 8,017 340
========== ========== ===========
Deduct: Total stock based employee compensation
expense determined under fair value based method for
all awards net of related tax effects (2,655) (1,665) (2,406)
---------- ---------- -----------
Pro forma net income 3,621 6,352 (2,066)
========== ========== ===========

Net income applicable to common shares, as reported 4,769 6,428 (1,107)
========== ========== ===========
Deduct: Total stock based employee compensation
expense determined under fair value based method for
all awards net of related tax effects (2,655) (1,665) (2,406)
---------- ---------- -----------
Pro forma net income applicable to common shares 2,114 4,763 (3,513)
========== ========== ===========

Earnings per share:
Basic - as reported 0.18 0.23 (0.04)
========== ========== ===========
Basic - pro forma 0.08 0.17 (0.12)
========== ========== ===========

Diluted - as reported 0.13 0.16 (0.04)
========== ========== ===========
Diluted - pro forma 0.07 0.13 (0.12)
========== ========== ===========

The weighted average fair value of options granted during 2002 was
estimated at $3.69 share, based upon the Black-Scholes option-price model with
the following weighted average assumptions: 0% dividend yield, expected
volatility of 71% to 90%, risk-free interest rate of 2.60% to 5.29% and expected
life of 3-12 years. The weighted average fair value of options granted during
2001 was estimated at $3.68 per share, based upon the Black-Scholes option-price
model with the following weighted average assumptions: 0% dividend yield,
expected volatility of 70%, risk-free interest rate of 4.87% to 4.96% and
expected life of 9.5-10 years. The weighted average fair value of options
granted during 2000 was estimated at $7.10 per share, based upon the
Black-Scholes option-price model with the following weighted average
assumptions: 0% dividend yield, expected volatility of 67-111%, risk-free
interest rate of 5.1-6.0% and expected life of 9.5-10 years.

3. TRANSACTIONS

Barbuda BV.

On December 9, 2002 the Company entered into a Share Purchase Agreement
with an entity controlled by the company's principal shareholder to acquire all
of the outstanding shares of Barbuda BV. ("Barbuda") for total consideration of
EUR 9,956,950. The consideration consisted of cash EUR 3,387,581 paid in
December 2002 and a note payable in the amount of EUR 6,569,369. The note bears
interest at a rate of EURIBOR+1%

F-11

PRIVATE MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

payable annually. The note is payable at December 31, 2004. The transaction was
effectively closed on December 31, 2002.

The allocation of the purchase price is as follows:

EUR
----------------
Current assets........................... 1,206,962
Building................................. 13,194,142
Current liabilities...................... (2,189,507)
Long-term liabilities.................... (2,254,646)
----------------
9,956,950
================

Prior to its acquisition by the Company, the activity of Barbuda BV
entailed the construction of an office building. The Company intends to use this
building as its corporate headquarters upon completion. Barbuda BV did not have
any other material operations and therefore the pro forma impact on the results
of operations is immaterial.

Coldfair Holdings Ltd.

On September 20, 2000 the Company entered into a Share Purchase
Agreement to acquire all of the outstanding shares of Coldfair Holdings Ltd.
("Coldfair") for total consideration of US$1,400,000 (EUR 1,507,960). The
consideration consisted of 248,889 shares of the Company's common stock. The
transaction was effectively closed on January 1, 2001. The excess of the
purchase price over the fair market value of the net assets acquired has
resulted in goodwill of EUR 876,171.

The allocation of the purchase price is as follows:

EUR
----------------
Current assets........................... 69,529
Fixed assets and other intangibles....... 630,112
Current liabilities...................... (67,852)
Goodwill................................. 876,171
----------------
1,507,960
================

The acquisition has been accounted for using the purchase method of
accounting and, accordingly, the operating results of Coldfair has been included
in the Company's consolidated financial statements since the date of closing.

Anton Enterprises, Inc. d.b.a. Private USA

On February 27, 2001 the Company entered into an Asset Purchase
Agreement to acquire certain inventory and distribution contracts of its U.S.
distributor, Anton Enterprises, Inc. (d.b.a. Private USA) ("Anton") a company
partially owned by a member of the Company's Board of Directors. The transaction
was effectively closed on April 1, 2001. Consideration for the transaction
US$875,000 (EUR 992,820) was taken as a reduction of certain indebtedness owed
by Anton to the Company. The excess of the purchase price over the fair value of
the net tangible assets acquired resulted in the recognition of an intangible
asset of EUR 505,762 which is being amortized on a straight line basis over 10
years.

F-12

PRIVATE MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The allocation of the purchase price is as follows:

EUR
----------------
Current assets........................... 487,058
Intangible asset......................... 505,762
----------------
992,820
==============-=

The Company's pro forma revenues and net income, assuming these
acquisitions occurred on January 1, 2000, 2001 and 2002, respectively would not
have been materially different from reported results.

Sale of controlled entity

On April 8, 2001, the Company's Swedish subsidiary Peach Entertainment
Distribution AB entered into an agreement to sell its interest in Private
Circle, Inc. a company, the activities of which, the Company was deemed to
control for cash of EUR 2,367 plus reimbursement of an additional EUR 566
thousand for advances made by the Company to Private Circle, Inc. during 2001.
This agreement was consummated on May 3, 2001 and the final consideration
received in cash was EUR 2,933 thousand. The Company realized a net gain of EUR
1,862 thousand from the sale.

Sale of land and building

In July 2001, the Company's Spanish subsidiary Viladalt S.L. entered
into an agreement to sell certain land and building for a consideration of EUR
3.1 million. The sale closed in July, 2001 and the Company received the cash
consideration and repaid related outstanding long-term borrowings of EUR 1.0
million.

4. TRADE ACCOUNTS RECEIVABLE

Trade accounts receivable consist of the following:

DECEMBER 31,
------------------------
2001 2002
---------- ----------
EUR EUR
(in thousands)
Trade accounts receivable 17,233 13,736
Allowance for doubtful accounts (1,303) (1,264)
---------- ----------
Total trade accounts receivable, net.. 15,930 12,472
========== ==========

DECEMBER 31,
------------------------
2001 2002
---------- ----------
EUR EUR
(in thousands)
Allowance at beginning of year (278) (1,303)
Provision for bad debt (1,025) (489)
Recoveries - 528
---------- ----------
Allowance at end of year (1,303) (1,264)
========== ==========

Management reviews the allowance for doubtful accounts on at least a
quarterly basis and adjusts the

F-13

PRIVATE MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

balance based on their estimate of the collectibility of specific accounts as
well as a reserve for a portion of other accounts which have been outstanding
for more than 180 days. This estimate is based on historical losses and
information about specific customers. After collection attempts have failed, the
Company writes off the specific account.

5. INVENTORIES

Inventories consist of the following:

DECEMBER 31,
-----------------------
2001 2002
---------- ----------
EUR EUR
(in thousands)
Magazines for sale and resale 2,551 2,634
Video cassettes 2,929 2,874
DVDs 2,464 3,231
Other 308 69
---------- ----------
8,252 8,808
========== ==========

6. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Included in prepaid expenses and other current assets at December 31,
2001 and 2002, is an amount of EUR 426 thousand and EUR 1,790 thousand
respectively representing VAT receivable from the Spanish Tax Authority.

F-14

PRIVATE MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. LIBRARY OF PHOTOGRAPHS & VIDEOS

Library of photographs & videos consist of the following:

DECEMBER 31,
-----------------------
2001 2002
---------- ----------
EUR EUR
(in thousands)
GROSS:
Photographs ................................. 4,372 5,210
Videos ...................................... 21,915 27,185
Translations, Sound Dubbing, & Sub-Titles ... 5,084 6,147
Digital Manipulation for DVD Masters ........ 2,238 3,533
Digital Manipulation for Broadband Masters .. 543 549
---------- ----------
34,152 42,624
========== ==========
LESS ACCUMULATED DEPRECIATION:
Photographs ................................. 3,456 4,120
Videos ...................................... 12,465 15,652
Translations, Sound Dubbing, & Sub-Titles ... 3,275 4,126
Digital Manipulation for DVD Masters ........ 642 1,607
Digital Manipulation for Broadband Masters .. 73 190
---------- ----------
19,911 25,695
========== ==========
NET:
Photographs ................................. 916 1,090
Videos ...................................... 9,450 11,533
Translations, Sound Dubbing, & Sub-Titles ... 1,809 2,020
Digital Manipulation for DVD Masters ........ 1,596 1,927
Digital Manipulation for Broadband Masters .. 470 359
---------- ----------
14,241 16,929
========== ==========

8. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

DECEMBER 31,
-----------------------
2001 2002
--------- ----------
EUR EUR
(in thousands)
Building - 11,090
Equipment & Furniture 3,758 5,730
Website Development 778 972
E-commerce software system 593 607
Translation difference 198 52
Accumulated depreciation (2,541) (3,562)
---------- ----------
Total Property, Plant and
Equipment, net 2,786 14 890
========== ==========

In March 2000 the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board

F-15

PRIVATE MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

reached a consensus on Issue 00-2, "Accounting for Web Site Development Costs"
("EITF 00-2"). EITF 00-2 requires that all costs incurred in the website
planning stage should be expensed as incurred.

The EITF also concluded that costs incurred in the website application
and infrastructure development stage (including the initial graphics) and costs
relating to software used to operate a website are to be accounted for in
accordance with Statement of Position No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1") unless a
plan exists or is being developed to market the website software externally.

The EITF further concluded that costs incurred to operate an existing
website including training, administration, maintenance, and other costs should
be expensed as incurred. However, costs incurred in the operation stage that
involve providing additional functions or features to the website should be
accounted for as, in effect, new software and the costs of upgrades and
enhancements that add functionality being expensed or capitalized based on the
guidance in SOP 98-1.

In accordance with the transition provisions of EITF 00-2, the Company
has elected to apply this standard to website development costs incurred from
January 1, 2000 forward and accordingly in the years ended December 31, 2001 and
2002 the Company has capitalized EUR 171 thousand and EUR 194 thousand
respectively of costs related to the development of its website including
graphics and related software.

9. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets consist of the following:

YEARS ENDED DECEMBER 31,
--------------------------------------
2001 2002 2001 2002
------------------ ------------------
OTHER
INTANGIBLE
GOODWILL ASSETS
------------------ ------------------
EUR EUR EUR EUR
(in thousands)

Beginning of year ................. 2,023 2,900 506
Acquisition value (cost) .......... 876 506
-------- -------- -------- --------
End of year ....................... 2,900 2,900 506 506

Accumulated amortization, beginning (185) (475) (38)
Depreciation and amortization ..... (290) (38) (43)
Accumulated amortization, ending .. (475) (475) (38) (80)
-------- -------- -------- --------
Net book value .................... 2,424 2,425 468 426
======== ======== ======== ========

As discussed in the summary of accounting policies, the Company adopted
SFAS 142 as of January 1, 2002. The results of operations for the years ended
December 31, 2001 and 2000 as if the company had ceased amortization of
intangibles as of January 1, 2000 are as follows:

F-16

PRIVATE MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31,
------------------------
2000 2001
---------- ----------
EUR EUR
(in thousands, except
per share values)

Net income 6,276 8,017
Amortization expense 189 302
---------- ----------
Adjusted net income 6,465 8,319
========== ==========

Adjusted earnings per share:
Basic 0.18 0.24
========== ==========
Diluted 0.13 0.17
========== ==========
10. BORROWINGS

In December 2001 the group's holding company, Private Media Group,
Inc., borrowed $ 4.0 million from Commerzbank AG pursuant to a Note originally
due on December 20, 2002. The Note bears interest at an annual rate of 7%,
payable quarterly, with the entire principal amount and accrued interest
originally due on December 20, 2002. In December 2002 Commerzbank AG agreed to
extend the maturity date of the Note to March 20, 2003. The Company is in
discussion with an independent third party to replace the Note with appropriate
long-term financing. The Company is confident that this arrangement will be in
place by mid-April.

On November 15, 2002 the group's holding company, Private Media Group,
Inc., borrowed $ 2.0 million from Beate Uhse AG under a Loan Agreement. Interest
accrues at the rate of 5% per annum, payable quarterly, with the entire
principal plus accrued interest due at maturity, November 14, 2003. The loan may
be pre-paid at the option of the Company at any time and requires mandatory
prepayment if certain future financings are consummated by the Company with
Beate Uhse.

On December 13, 2002 the group's holding company, Private Media Group,
Inc., borrowed $ 3.0 million from Beate Uhse AG under a Loan Agreement. Interest
accrues at the rate of 5%, payable quarterly, with the entire principal plus
accrued interest due at maturity, December 13, 2003. The loan may be pre-paid at
the option of the Company at any time and requires mandatory prepayment if
certain future financings are consummated by the Company with Beate Uhse.

The Company's Spanish subsidiary has an existing bank line of credit
agreement under which this subsidiary may borrow up to EUR 1,500 thousand.
Borrowings under the line of credit during 2002 were charged interest at
EURIBOR+1%. At December 31, 2001 there were no borrowings and 2002 there was an
amount of EUR 1,100 thousand outstanding under this agreement.

At December 31, 2002 the Company's Swedish subsidiary has an
outstanding bank loan totaling EUR 82 thousand. Interest on the loan at December
31, 2002 was 7.5 % which was equal to the Swedish banks' official interest rate
at that time. This loan requires principal repayments of EUR 5 thousand
quarterly plus accrued

F-17

PRIVATE MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

interest and the loan matures on September 30, 2006. The loan has been
guaranteed by the Company's principal shareholder.

At December 31, 2002, the Company's Spanish subsidiary had a total debt
of EUR 96 thousand under several long term leasing agreements under which the
subsidiary has acquired certain equipment, machinery and fixtures. The leasing
arrangements carry an average EURIBOR+1.5% rate of interest and cover 36-60
month periods. Payments under these lease agreements are made monthly in an
approximate aggregate amount of EUR 8 thousand.

11. ACCRUED OTHER LIABILITIES

Accrued other liabilities are comprised of the following:

DECEMBER 31,
-----------------------
2001 2002
---------- ----------
EUR EUR
(in thousands)
Accrued expenses ............................ 150 538
Deferred income ............................. 284 360
Taxes and social security ................... 282 316
Other ....................................... 12 125
---------- ----------
728 1,339
========== ==========

12. INCOME TAXES

Following is a summary of income before income taxes of U.S. and
international operations:

YEARS ENDED DECEMBER 31,
------------------------------
2000 2001 2002
-------- -------- --------
EUR EUR EUR
(in thousands)
USA ........................ (1,576) (2,027) (3,167)
International .............. 9,119 11,405 3,377
-------- -------- --------
7,543 9,378 210
======== ======== ========

The provision for income taxes consisted of the following in the years
ended December 31, 2000, 2001, and 2002:

YEARS ENDED DECEMBER 31,
------------------------------
2000 2001 2002
-------- -------- --------
EUR EUR EUR
(in thousands)
Current
Federal 387 291 (601)
State - 30 1
Foreign 865 1,193 719
-------- -------- --------
Current tax expense 1,252 1,514 118

F-18

PRIVATE MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Deferred
Federal - (16) (296)
State - (3) (49)
Foreign 15 (134) 97
-------- -------- --------
Deferred tax expense/(benefit) 15 (153) (248)
-------- -------- --------
Income tax expense/(benefit) 1,267 1,361 (130)
======== ======== ========

A reconciliation of income taxes determined using the United States
corporate statutory rate of 35% to actual income taxes provided is as follows:

YEARS ENDED DECEMBER 31,
----------------------------------
2000 2001 2002
-------- -------- --------

US federal statutory income tax rate 35.00% 35.00% 35.00%

Aggregate effect of foreign tax rates (19.44)% (26.67)% (41.16)%

Permanent differences
Items not deductible for tax purposes 0.38% 0.48% 11.61%
Prior period adjustments 0.00% 1.21% (38.65)%
Other 0.80% 4.35% 2.97%

Movement in valuation allowances 0.06% 0.14% 4.83%
-------- -------- --------
Total tax provision 16.80% 14.51% (25.39)%
======== ======== ========

The tax charge for the year includes the effect of a benefit arising
from the reversal of an overprovision of taxes recorded in prior years. This
principally reflects the release to income of amounts accrued during 2000 in
connection with the Company's estimated liability for income taxes on certain
foreign source income accruing since the date of the acquisition of certain
subsidiaries in 1998.

During 2002, the Company completed amended return filings in connection
with these taxes for applicable tax years and released amounts originally
provided and not required as of December 31, 2002.

Deferred tax assets and liabilities reflect the future tax consequences
of events that have already been recognized in the consolidated financial
statements or income tax returns. At December 31, deferred tax assets and
liabilities consisted of the following:

DECEMBER 31,
------------------------
2001 2002
---------- ----------
EUR EUR
(in thousands)
Deferred Tax Assets:
Deferred revenue 26 -
Provisions for sales returns 62 151
Provision for bad debts 16 37
Differences in fixed assets 3 17
Deferred expenses 48 (122)

F-19

PRIVATE MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOL carryforwards 9 343
Other - 50
---------- ----------
164 476
Less: Valuation allowance (5) (79)
---------- ----------
159 396
Deferred Tax Liabilities:

Investment Incentives (2) (2)
Swedish Tax Reserves (20) (29)
---------- ----------
Net deferred tax asset/(liability) 137 (365)
========== ==========

F-20

PRIVATE MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NET OPERATING LOSS CARRYFORWARD

The company's operating loss carry-forwards are described in the table
below:

YEAR ENDED
DECEMBER 31,
--------------
2002
--------------
EUR
(in thousands)

USA ................ 567
Cyprus ............. 762
Spain .............. 57
Italy .............. 174
--------------
1,560
==============

The NOLs in Spain and Italy have been fully valued against. Cyprus
losses may be carried forward for 5 years. Utilization of these NOL's is limited
to future earnings of the Cyprus companies

No provision has been made for United States federal and state, or
foreign taxes that may result from future remittances of undistributed earnings
of foreign subsidiaries, because it is expected that all such earnings will be
permanently reinvested in these foreign operations. It is not practical to
estimate the amount of taxes that might be payable on the eventual remittance of
these earnings.

13. RELATED PARTY TRANSACTIONS

The Company has short-term loans receivable from entities controlled by
the Company's principal shareholder of EUR 1,563 thousand and EUR 4,228 thousand
at December 31, 2001 and 2002 respectively. The loans bear interest at a rate of
EURIBOR+1% payable annually. The balance of these loans at December 31, 2002
totaled EUR 4,228 thousand which includes accrued interest.

The Company has a note payable to an entity controlled by the Company's
principal shareholder of EUR 6,569 thousand at December 31, 2002. The note bears
interest at a rate of EURIBOR+1% payable annually. The note is payable at
December 31, 2004.

In December 2001 we borrowed $4.0 million from Commerzbank AG pursuant
to a originally Note due December 20, 2002 in order to expand our product
portfolio. Subsequently the maturity of the Note was extended to March 2003. The
Note bears interest at an annual rate of 7%, payable quarterly, with the entire
principal amount and accrued interest due on maturity. The Note is prepayable in
full upon the sale of equity by us. Upon the Note becoming prepayable, we are
required to repay the entire principal amount of the Note together with the
greater of (1) accrued interest payable on the Note or (2) a prepayment premium
equal to $200,000. The Note is secured by a guaranty from Slingsby Enterprises
and a pledge by Slingsby Enterprises of 5,600,000 shares of our Series A
Preferred Stock. The lender and Slingsby Enterprises have also agreed that if

F-21

PRIVATE MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

the Note remains unpaid at maturity, Commerzbank may elect to exchange the Note
for Series A Preferred Stock or common stock owned by Slingsby Enterprises to
the value of $5.0 million. The Company is in discussion with an independent
third party to replace the Note with appropriate long-term financing. The
Company is confident that this arrangement will be in place by mid-April.
Slingsby Enterprises is beneficially owned by Berth H. Milton, our Chairman of
the Board.

Peach Entertainment Distribution AB ("PED"), a wholly owned subsidiary
of the Company, is a party to an exclusive Distribution Agreement with Sundance
Associates, Inc. ("Sundance"). A former member of the Company's Board of
Directors was the sole shareholder of Sundance through December 31, 2001. Under
the terms of the Distribution Agreement, PED granted to Sundance the exclusive
rights to distribute specified products of the Company in the United States at
prices consistent with prices charged to other distributors. This agreement was
terminated in April 2001. During the 12 month periods ended December 31, 1999
and 2000 sales to Sundance and related entities from PED totaled EUR 1,993
thousand and EUR 3,076 thousand, respectively. As of December 31, 1999 and 2000
receivables owed to the Company by entities related to Sundance totaled EUR
1,140 thousand and EUR 2,023 thousand, respectively.

In April 2001, the Company acquired certain tangible and intangible
assets from Anton Enterprises, Inc. (d.b.a. Private USA) ("Anton") a company
partially owned by a former member of the Company's Board of Directors who also
held an ownership interest in Sundance (Note 3).

14. SHAREHOLDERS' EQUITY

Retained Earnings

The Company is a holding company with no significant operations of its
own. Accordingly, the retained earnings of the Company represent the accumulated
earnings of its foreign subsidiaries, principally Cine Craft Ltd, Milcap Media
Ltd. and Fraserside Holdings Ltd. The ability of the Company to pay dividends is
dependent on the transfer of accumulated earnings from these subsidiaries. The
Company is not currently aware of any significant restrictions that would
inhibit its ability to pay dividends should it choose to do so, although the
Company's current intention is to re-invest the unremitted earnings of its
foreign subsidiaries. In addition the Company is restricted from payment of
dividends under the terms of its short-term note agreement (Note 10).

Common Stock

The Company is authorized to issue 100,000,000 shares of common stock.
Holders of common stock are entitled to one vote per share. The common stock is
not redeemable and has no conversion or pre-emptive rights.

In June, 2000, the Company's shareholders and board of directors
approved an increase in the Company's authorized capital stock, consisting of an
increase in the number of authorized common shares from 50,000,000 to
100,000,000. This increase was effected in August 2001 upon the filing of a
Certificate of Amendment of the Company's articles of incorporation with the
Nevada Secretary of State.

During 2000 the Company's Board of Directors authorized the repurchase
of up to 10% of the Company's outstanding common shares. Such purchases may be
made from time to time in the open market for an indefinite period of time. As
of December 31, 2002 no shares had been repurchased.

F-22

PRIVATE MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock Dividend

The Company implemented a 3:1 stock dividend whereby each holder of
record of Common Stock on May 30, 2000, received two additional shares of Common
Stock for each share owned. Corresponding adjustments have been made to the
Warrants and Options outstanding on the record date as well as the Series A
Preferred Stock to reflect the dividend. Accordingly, all share and per share
values reflected in the accompanying consolidated financial statements have been
adjusted to give effect to the stock dividend.

F-23

PRIVATE MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Preferred Stock

The Company is authorized to issue 10,000,000 shares of preferred stock
with relative rights, preferences and limitations determined at the time of
issuance. The Company has issued 7,000,000 shares of $4.00 Series A convertible
preferred stock. The Series A convertible preferred stock is non-voting and
provides for a 5% annual stock dividend beginning in 1998 to be paid quarterly
in common stock at the average closing price of the Company's common stock for
the twenty consecutive days prior to the quarterly record date. Each preferred
share is convertible at any time into common shares on a one-for-three basis
(post-split). Additionally, at any time the common stock of the Company has a
closing price of less than $1.33 per share for twenty consecutive days the
preferred stock may be converted at the option of the holder thereof into common
stock at a 20% discount to the five day average closing price prior to the date
of conversion. In accordance with the terms of the Series A Preferred Stock
Agreement, 246,325 shares of common stock will be distributed in 2003 with
respect to dividends on preferred shares. This amount is shown in the
accompanying Statement of Shareholders' Equity under stock dividend to be
distributed. On March 18, 2003 Slingsby Enterprises Limited converted 5,350,000
shares of $4.00 Series A convertible preferred stock into 16,050,000 shares of
common stock.

Common Stock Warrants

The Company has issued 208,464 common stock warrants in connection with
the acquisition of Extasy Video B.V. The warrants are exercisable until January
28, 2004 at an exercise price of USD 9.63 per share. During 2002, 22,500
warrants held by Qamilla Carlson were exercised at an exercise price of USD 3.33
per share.

F-24

15. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted
earnings per share:

YEARS ENDED DECEMBER 31,
-----------------------------------------------
2000 2001 2002
-------------- -------------- ---------------

NUMERATOR: (EUR IN THOUSANDS)

Net income (numerator diluted EPS) 6,276 8,017 340
============== ============== ===============

Less: Dividends on preferred stock 1,507 1,589 1,446
-------------- -------------- ---------------

Income applicable to common shares
(numerator basic EPS) 4,769 6,428 (1,107)
============== ============== ===============

DENOMINATOR:

Denominator for basic earnings per share - Weighted
average shares outstanding 27,002,220 28,137,817 28,626,327

EFFECT OF DILUTIVE SECURITIES:
Preferred stock 21,000,000 21,000,000 n/a
Common stock warrants, options and other dilutive
securities 743,676 542,018 n/a
-------------- -------------- ---------------

Denominator for diluted earnings per share - weighted
average shares and assumed conversions 48,745,896 49,679,835 n/a
============== ============== ===============

EARNINGS PER SHARE (IN EUR)

Basic 0.18 0.23 (0.04)
============== ============== ===============
Diluted 0.13 0.16 (0.04)
============== ============== ===============

For 2002 diluted impact of potentially dilutive securities is
anti-dilutive therefore diluted and basic loss per share are EUR 0.03. The
equivalent of 21,085,904 common shares derived from dilutive securities such as
options, warrants and convertible preferred shares are excluded from the diluted
earnings per share as they are anti-dilutive.

16. COMMITMENTS AND CONTINGENT LIABILITIES

The Company leases certain property and equipment under non-cancelable
operating leases. Certain of these leases contain renewal options. Rental
payments under these leases are charged to operations on a straight-line basis
with any differential recognized as deferred rent in the balance sheet. The
rental payments under these leases are charged to operations as incurred. Rental
expense for the years ended December 31, 2000, 2001 and 2002 amounted to EUR 514
thousand, EUR 699 thousand and EUR 849 thousand, respectively.

F-25

PRIVATE MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Future minimum payments under non-cancelable leases as of December 31,
2001 are as follows:

EUR
YEAR (IN THOUSANDS)
-------------------- -----------------
2003 797
2004 714
2005 578
2006 510
2007 359
2008 -
-----------------
2,958
=================

17. OPERATIONS BY GEOGRAPHICAL AREA

The Company operates in one business segment, which is the acquisition,
refinement and distribution of video and photo rights for adult feature
magazines, movies and the Internet.

Information concerning the Company's geographic locations is summarized
as follows:

YEARS ENDED DECEMBER 31,
--------------------------------------
2000 2001 2002
---------- ---------- ----------
EUR EUR EUR
(in thousands)
Net Sales
USA 1,100 4,712 7,472
Gibraltar 1,411 1,818 1,437
Cyprus 14,114 18,346 14,367
Sweden 19,327 24,188 25,362
Spain 20,944 24,489 28,698
France 1,082 1,472 1,793
Benelux 2,313 3,699 3,629
Eliminations (29,738) (39,745) (43,347)
---------- ---------- ----------
Total 30,553 38,979 39,410
========== ========== ==========

F-26

PRIVATE MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Eliminations principally relates to inter-group revenue arising from
trademark, license and distribution agreements between the Company's
subsidiaries in USA, Gibraltar, Cyprus, France, Sweden, Spain and the
Netherlands.

YEARS ENDED DECEMBER 31,
--------------------------------------
2000 2001 2002
---------- ---------- ----------
EUR EUR EUR
(in thousands)
Operating profit
USA (1,610) (2,671) (2,901)
Gibraltar 1,400 1,818 1,428
Cyprus 6,154 7,175 142
Sweden (183) 77 1,000
Spain 1,536 810 384
France 37 100 42
Benelux 68 271 173
Other (12) (23) (20)
---------- ---------- ----------
Total 7,391 7,557 249
Sale of subsidiary - 1,862 -
Interest income (expense), net 151 (42) (39)
---------- ---------- ----------
Income before income taxes 7,543 9,378 210
========== ========== ==========

DECEMBER 31,
------------------------
2001 2002
---------- ----------
EUR EUR
(in thousands)
Long-lived assets
USA 2,892 697
Cyprus 12,116 17,063
Sweden 3,632 4,166
Spain 1,217 12,678
France 18 34
Benelux 257 272
Other 7 -
---------- ----------
Total 20,140 34 ,910
========== ==========

DECEMBER 31,
------------------------
2001 2002
---------- ----------
EUR EUR
(in thousands)
Additions to long-lived assets
USA 1,316 -
Cyprus 6,486 8,747
Sweden 2,088 2,379
Spain 517 12,916
---------- ----------
Total 10,407 24,042
========== ==========

F-27

PRIVATE MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Additions to long-lived assets include long-lived assets and goodwill
acquired in business acquisitions in each year.

One customer accounted for 11% of consolidated revenues for the year
ended December 31, 2000 and another customer accounted for 8% and 11 % of
consolidated revenues for the years ended December 31, 2001 and 2002,
respectively.

The following table illustrates our net sales by product group for the
periods indicated.

YEARS ENDED DECEMBER 31,
------------------------------
2000 2001 2002
-------- -------- --------
EUR EUR EUR
(in thousands)
Net sales by product group
Magazine and video 16,082 16,224 13,763
DVD's 5,942 11,871 15,482
Internet 6,005 7,741 6,059
Broadcasting 2,055 2,836 4,106
Other /(1)/ 469 307 -
-------- -------- --------
Total 30,553 38,979 39,410
======== ======== ========

/(1)/ Includes primarily net sales of CD-ROMs and licensing fees.

18. STOCK-BASED COMPENSATION

On March 1, 1999 the Company adopted the 1999 Employee Stock Option
Plan ("the Plan"). The Plan was amended in February 2003 and provides for the
issuance of up to 7,200,000 shares of the Company's common stock to employees,
consultants and advisors of the company. At December 31, 2002, stock options to
purchase an aggregate of 3,671,395 shares of the Company's common stock were
outstanding under the Plan and these options have a weighted average contractual
remaining life of approximately 7.4 years as of December 31, 2002. Options for
1,727,895 shares were exercisable with exercise prices ranging from $2.36 to
$11.71 per share and the weighted average exercise price of vested options
equals $5.73 as of December 31, 2002. Vested options for 1,188,770 shares have
exercise prices ranging from $2.36 to $6.00 per share and a weighted average
exercise price of $4.31 per share as of December 31, 2002. Vested options for
539,125 shares have exercise prices ranging from $7.16 to $11.71 per share and a
weighted average exercise price of $8.85 per share as of December 31, 2002.
Granted and outstanding options for 253,500 shares will vest in 4 equal
quarterly installments from March 31, 2003 through December 31, 2003 with the
exercise price for each installment of options vesting equal to the fair market
value of the Company's common stock on the date of vesting. Options for
1,690,000 shares were granted during 2002 at a weighted average exercise price
of $6.02 per share and the weighted average time period from December 31, 2002
until they become exercisable is 4.2 years. At December 31, 2002, options for
3,242,819 shares were available for future grant under the Plan. Share options
become exercisable on their respective vesting dates with vesting terms
determined by management and approved by the Company's compensation committee.
Options granted under the Plan generally expire 10 years following the date of
grant, certain options grants may have shorter lives.

F-28

PRIVATE MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A summary of stock option activity for the years ended December 31,
2000, 2001 and 2002 is a follows:

WEIGHTED
AVERAGE
EXERCISE
NUMBER OF PRICE
SHARES IN USD
---------- ----------
Granted ........................ 156,750 7.30/(1)/
Exercised ...................... 160,222 4.30
Forfeited ...................... 377,043 6.18/(1)/
----------
Outstanding December 31, 2000 .. 2,590,985 5.38/(1)/

Granted ........................ 100,000 8.50
Exercised ...................... 92,769 4.33
Forfeited ...................... 218,848 7.56/(1)/
----------
Outstanding December 31, 2001 .. 2,379,368 6.11/(1)/

Granted ........................ 1,690,000 6.02
Exercised ...................... 32,795 3.89
Forfeited ...................... 365,178 6.04/(1)/
----------
Outstanding December 31, 2002 .. 3,671,395 5.73/(1)/
==========

/(1)/ Weighted average information relates only to options vested
and priced through December 31, 2002. The exercise prices of
options for 253,500 share options will be determined based
upon the market price of the Company's stock on the respective
vesting dates of these options which vest in equal quarterly
installments from March 31, 2003 through December 31, 2003.

The Company applies APB 25, and related interpretations in accounting
for its stock based compensation to employees. Accordingly, no compensation
expense has been recognized for stock based compensation issued to employees.

F-29

PRIVATE MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)

Selected quarterly financial data for the years ended December 31, 2002
and 2001 is summarized as follows:

FOR THE YEAR 2002
-----------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
----------- ----------- ------------ ----------- -----------
EUR EUR EUR EUR EUR
(in thousands, except per share data)

Net sales..................... 9,262 11,027 11,060 8,061 39,410
Gross profit.................. 5,745 6,435 5,485 4,714 22,379
Net income.................... (1,218) 1,964 1,529 (1,935) 340

Net income per share:
Basic..................... (0.06) 0.06 0.04 (0.08) (0.04)
=========== =========== ============ =========== ===========
Diluted................... (0.06) 0.04 0.03 (0.08) (0.04)
=========== =========== ============ =========== ===========

Weighted average shares
outstanding:
Basic..................... 28,462,709 28,566,982 28,675,995 28,799,157 28,626,327
=========== =========== ============ =========== ===========
Diluted................... N/A 49,733,515 49,680,078 N/A N/A
=========== =========== ============ =========== ===========

FOR THE YEAR 2001
-----------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
----------- ----------- ------------ ----------- -----------
EUR EUR EUR EUR EUR
(in thousands, except per share data)

Net sales..................... 11,004 8,228 8,999 10,748 38,979
Gross profit.................. 6,893 5,381 6,478 6,400 25,152
Net income.................... 2,724 2,418 2,161 714 8,017

Net income per share:
Basic..................... 0.08 0.07 0.06 0.02 0.23
=========== =========== ============ =========== ===========
Diluted................... 0.05 0.05 0.04 0.02 0.16
=========== =========== ============ =========== ===========

Weighted average shares
outstanding:
Basic..................... 28,012,362 28,132,794 28,142,565 28,258,694 28,137,817
=========== =========== ============ =========== ===========
Diluted................... 49,551,663 49,663,649 49,649 601 49,997,518 49,679,835
=========== =========== ============ =========== ===========

(i) On February 27, 2001 the Company entered into an Asset Purchase
Agreement to acquire certain inventory and distribution contracts of
its U.S. distributor, Anton Enterprises, Inc. (d.b.a. Private USA).
The transaction was effectively closed on April 1, 2001.Prior to the
transaction described above, Anton Enterprises, Inc. (d.b.a. Private
USA), was the Company's North American distributor. Following the
transaction, operations of Private USA were briefly suspended, causing
a temporary decline in revenues from North American distribution
activities. The Company began full distribution operations in May,
2001.

F-30

PRIVATE MEDIA GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(ii) On April 8, 2001, the Company's Swedish subsidiary Peach Entertainment
Distribution AB entered into an agreement to sell its interest in
Private Circle, Inc. a company, the activities of which, the Company
may be deemed to control. This agreement was consummated on May 3,
2001 and the final consideration received in cash was EUR 2,933
thousand. The Company realized a net gain of EUR 1,862 thousand from
the sale.

(iii) In the fourth quarter of 2001 and the first and fourth quarter of 2002
the Company reported offering expenses of EUR 843, 1,401 and 168
thousand, respectively for the activities related to the planned
listing and secondary offering on the Frankfurt Stock Exchange, Neuer
Markt in Germany. The offering was postponed in January, 2002 due to
poor market conditions and the total costs of EUR 2,412 thousand
related to the offering were expensed.

20. RECENT ACCOUNTING PRONOUNCEMENTS

SFAS 144 was effective January 1, 2002, for the Company.. The adoption
of SFAS 144 did not have a material impact on the of the Company's results of
operations or financial position.

In June 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 146, Accounting for Costs Associated with
Exit or Disposal Activities (SFAS 146), which addresses financial accounting and
reporting for costs associatd with exit or disposal activities, and nullifies
EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)" which previously governed the accounting treatment for
restructuring charges. SFAS 146 applies to costs associated with an exit
activity that does not involve an entity newly acquired in a business
combination or with a disposal covered by SFAS 144. SFAS 146 will be applied
prospectively and is effective for exit or disposal activities initialted after
December 31, 2002. The Company does not expect the adoption of SFAS 146 to
materially impact its financial position, results of operation, or cash flows.

F-31