<PAGE>

================================================================================
                    U.S. SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                  Form 10-KSB

 [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                              1934 [FEE REQUIRED]

     For the fiscal year ended...........................December 31, 1999

                                      OR

[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                           OF 1934 [NO FEE REQUIRED]

  For the transition period from...................to........................

                       Commission file number 000-25067


                           PRIVATE MEDIA GROUP, INC.
                (Name of Small Business Issuer in its Charter)




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


    Carrettera de Rubi 22-26, 08190 Sant Cugat del Valles, Barcelona, Spain
                   (Address of principal executive offices)

                                34-93-590-7070
                                --------------
                           Issuer"s telephone number

    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

     Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 __

     Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained herein, and no disclosure will be contained, to
the best of registrant"s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [_]

     The issuer"s revenues for the fiscal year ended December 31, 1999 were
$20,260,000

     At March 29, 2000, the aggregate market value of the voting stock and non-
voting common equity held by non-affiliates of the registrant was $297,284,415.
The aggregate market value has been computed by reference to the average bid and
asked price of the common stock on March 29, 2000. On such date the registrant
had 8,942,162 shares of Common Stock outstanding.

     Transitional Small Business Disclosure Format:  Yes ___  No X

================================================================================
<PAGE>

                                    PART I

ITEM 1.   DESCRIPTION OF BUSINESS

         This Report contains forward-looking statements that involve risk and
uncertainties. The Company's actual results could differ materially from those
anticipated in such forward looking statements as a result of certain factors,
including those set forth elsewhere in this Report.

                                  THE COMPANY

         PRIVATE MEDIA GROUP, INC. (the "Company" or "Private") is engaged in
the acquisition, refinement and delivery of adult feature products and services,
including a range of proprietary websites, digital versatile discs ("DVDs"),
unrated and adult feature magazines, videos and CD-Roms, the distribution and
licensing of its proprietary products and services on the Internet, including
magazines, videos, interactive services, adult novelty products and the Private
Circle fashion line, and TV Home Shopping for its proprietary and licensed
products" and other products, all oriented to the adult entertainment market.

         The Company is the publisher of Private, an internationally popular
X-rated magazine. Private was founded 35 years ago in Sweden, and was the first
full color, hard-core sex publication in the world. Today the Company produces
four X-rated magazines: Private, Pirate, Triple X and Private Sex. In addition,
a book, The Best of Private, is released annually. The X-rated magazines are
distributed in a network that presently covers approximately 200,000 points of
sale in over 35 countries throughout the world, with the potential to reach
nearly 500,000 points of sale through its existing distribution network.

         Since 1992, Private has also acquired and distributed adult motion
picture entertainment. As of December 31, 1999, the Company"s film library
contained 263 titles, and it expects to add approximately 66 additional titles
in 2000.

         In the last few years, Private films, Private magazines and Private
CD-Roms, have won a number of industry awards, including Best European Film (Hot
d'Or 1998), Best Screenplay (Hot d'Or 1998), Best Foreign Director (AVN 1999),
Best Foreign Release (AVN 1997, 1998, 1999, 2000) , Special Achievement Awards
(AVN 1997, Venus 1998), Best Production Company (Golden X 95), Best Director
(AVN 1998), Best International Movie (Venus 1999), Best Adult Video Web-Site
(AVN 2000), Best Adult Site on the Internet (Passie Magazine 1999) and Best
International Internet Site (Venus 1999). The Company"s films recently received
17 nominations in ten categories for the Hot d"Or Awards to be presented at
Cannes, France in May 2000.

         Since 1997 the Company has aggressively expanded its business
activities on the Internet by investing heavily in its initial Web site,
www.private.com and by licensing its trademarks and proprietary media to other
Web sites. In 1999 the Company opened two new Web sites, www.privatecinema.com
and www.Privatelive.com, to provide Internet access to proprietary videos and
live adult entertainment, and continued to implement its program to expand its
Internet licensing activities. The Company continues to invest in
state-of-the-art Internet hardware and software in order to maintain the highest
level of Internet service and to maximize revenue potential.

         The Company believes it is uniquely well positioned to exploit the
growing adult entertainment Internet market in view of a number of factors,
including (i) an extensive library of high quality media content developed over
the past 35 years, to which it retains exclusive worldwide rights, (ii) the
ability to generate new, high quality,

                                      -2-
<PAGE>

media content, (iii) its established industry position in the adult
entertainment market, and (iv) the Company"s financial ability to maintain and
upgrade its Internet infrastructure.

         In the Fall of 1998 the Company entered the TV Home Shopping market,
engaging in the sale of proprietary products on Swedish television. This new
area has been well received, and the Company intends to expand TV Home Shopping
to other territories in 2000.

         The Company operates in a regulated environment, requiring the Company
to be socially aware and sensitive to government strictures. Private takes great
care to comply with all applicable governmental laws and regulations in the
jurisdictions where it operates, including laws and regulations designed to
protect minors or which prohibit the distribution of obscene material. Moreover,
Private will not knowingly engage the services of businesses or individuals that
do not adhere to the same standards. In the 35 years that Private has conducted
business it has never been held to have violated any laws or regulations
regarding obscenity or the protection of minors. Private continually strives to
maintain the highest standards in the presentation of its media and other
products, as is evidenced by the numerous industry awards which have been
bestowed upon Private and its management over the years.

         The Private/Milcap Group currently distributes its products in the
following countries: Sweden, Denmark, Estonia, Latvia, Poland, Russia, the
United Kingdom, Germany, the Netherlands, Belgium, the Czech Republic, Slovenia,
Austria, Switzerland, Italy, Greece, France, Spain, Portugal, Canada, the
U.S.A., Mexico, Chile, Brazil, Paraguay, Uruguay, Argentina, South Africa,
Zimbabwe, Malawi, Botswana, Namibia, the Seychelles, Japan, Australia and New
Zealand. The distribution in these countries is conducted primarily by the
leading national independent distributors.

         The Company was organized in 1980 as a Utah corporation for the purpose
of acquiring or merging with an established business, and had no material
business activity prior to its acquisition of Milcap Media Limited ("MML"),
Cinecraft Limited and their subsidiaries in June 1998. See "Business-History."

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 1990, the Company changed its domicile to the State of Nevada. In
February 1997 the Company entered into a Letter of Intent with Electric
Entertainment Corp. ("EEC") to acquire EEC in exchange for stock of the Company
and the Company subsequently changed its name to Electric Entertainment
International, Inc. The transaction was consummated in June 1997 and was
rescinded in November 1997 based upon the Company's belief that financial
information furnished by EEC was false and misleading. In December 1997 the
Company changed its corporate name to Private Media Group, Inc. and declared a
one for five reverse split of its Common Stock.

         On December 19, 1997 the Company entered into acquisition agreements
with Milcap Media Limited (the "Milcap Acquisition Agreement") and Cinecraft
Limited (the "Cinecraft Acquisition Agreement") to acquire all of their
outstanding capital stock in exchange for 7,500,000 shares of Common Stock,
7,000,000 shares of the $4.00 Series A Preferred Stock, and 875,000 Common Stock
purchase warrants. These acquisitions were completed on June 12, 1998.

         The "Company" is sometimes referred to herein as Private Media Group,
Inc., Milcap, Private, the Milcap Media Group, or the Private/Milcap Group, and
includes Private Media Group, Inc. and its subsidiaries, incuding: Milcap Media
Limited (Cyprus) ("MML"), Cinecraft Limited (Gibraltar), Milcap Publishing Group
AB (Sweden)

                                      -3-
<PAGE>

("MPG"), Milcap Media Group S.L. (Spain) ("MMG"), Milcap Publishing Group Italy
Srl (Italy), Normcard AB (Sweden), Symbolic Productions S.L., and Private France
S.A.

Magazine Publications

         The Private/Milcap Group is the publisher of Private, an
internationally popular X-rated magazine. Private was founded 35 years ago, and
was the first full color, hard-core sex publication in the world. Today the
Company produces four X-rated magazines: Private, Pirate, Triple X and Private
Sex. In addition, a book, The Best of Private, is released annually. The X-rated
magazines are distributed on a network that covers approximately 200,000 points
of sale in over 35 countries throughout the world. The Company's two newest
magazines are Private Style and Private Life, which are produced by licensees of
Private with the same first-class quality as its older sisters, but are
significantly different when compared with the other four highly successful
magazines, as they are the first "soft-core" magazines in the Private/Milcap
Group.

Video and Film Productions

         Since 1992, the Private/Milcap Group has acquired and distributed adult
motion picture entertainment. These productions generally feature men and women
in a variety of erotic and adult sexual situations, generally in both hardcore
and softcore versions. The Company's activity includes the acquisition and
commissioning of feature videos (full length motion pictures produced on
videotape) and to some extent feature films (full length motion pictures
produced on film). Their distribution is organized primarily on videocassettes
(licensing or sale) and alternatively through pay television and cable
programming. The Company always maintains the ownership, copyrights and
administration of every film it finances and produces.

         Currently, the Company produces approximately 66 X-rated and 12 R-rated
movies per year and the distribution is through a world-wide network that covers
approximately 60,000 sales points, with the potential to reach more than
155,000. The first two monthly video labels released were Private Film and
Private Video Magazine. Both labels quickly received critical acclaim in leading
international magazines as well as numerous prestigious awards from industry
associations and major adult entertainment film festivals, including AVN,
Impulse d'Oro and Golden X. The next three monthly video labels successfully
introduced were Triple X, Private Stories and Private Gold. In May 1997, the
Company introduced Gaia, a new label released bi-monthly. During 1999 the
Company introduced the labels Pirate Video Deluxe, Private XXX, The Matador
Series and Peep Show Special, which are released monthly, and Private Black
Label, which is released bi-monthly.

         As of December 31, 1999, the Company owned a total of 263 movie titles,
and by the end of 2000 the total is expected to increase to 329 titles. Titles
are mainly available on videocassette and increasingly available on DVD and sold
by distributors, primarily to retail stores and wholesalers worldwide. Several
of the original motion picture programs have also been re-edited and licensed to
cable television operators. The Company owns perpetual distribution rights, and
thus far has not sold any third party distribution rights. The Company continues
to expand the marketing of its production into new international markets,
including the United States, generally by entering into national license
agreements with local distributors.

         During fiscal 2000, Management intends to continue to expand its video
and film operations by (i) distributing new videos and films on videocassette
and DVD with an aggressive release schedule, (ii) 100 titles of both new and
back-catalogue productions are planned to be released on DVD (iiI) increasing
its efforts to distribute its library and new titles into cable and satellite
television markets, e-commerce, TV Home Shopping, and other new international
markets, and (iv) actively seeking to acquire distribution rights to additional
titles produced by third parties.

                                      -4-
<PAGE>

         In 1998 Company started to release its movie titles on DVD. Sales of
DVD titles are expected to add to the already established sales per title. DVD
releases are currently at the rate of 4 per month and this rate is expected to
increase by the end of 2000.

Internet

  The Company's Internet team has combined the Private quality of its extensive
media library with the newest technology to create what it believes to be one of
the best adult Web sites: www.private.com. The Company sources and owns
worldwide proprietary rights to its library. The burgeoning growth of the e-
commerce market and increased access to the Internet by end-users has created a
unique opportunity for Private to leverage its proprietary assets through
marketing and distribution on the Web.  Since March 1998, Private's WWW Club
members have been able to view every Private magazine published by the Company
since 1965 and over 700 clips from over 100 films. In addition, this site
contains new games, chat rooms with models, previews of new releases and more.
The Company's initial Web site contains more than 100,000 Web pages and is
generating traffic of approximately 2,400,000 visitors per month and 144,000,000
requested pages per month.  Private currently maintains a staff of 28 full time
Internet employees and has invested heavily in state-of-the-art computer and
communications infrastructure.

  The Company is also licensing the right to use its trademarks and media
library on the Internet to third parties with independent Web sites, which is
beginning to generate significant royalty income.  Private also markets its
products on the Internet through distributor sites and shopping sites.

TV Home Shopping

         In the November 1998 the Company entered the TV Home Shopping market,
engaging in the sale of proprietary products, including videos, magazines and
proprietary adult pleasure products under the brand "The Private Collection," on
Swedish television This new area has been well received, and the Company intends
to expand TV Home Shopping to other territories and formats in 2000.

Other Markets

         CD-ROM Although the adult CD-Rom market has been declining during the
last year. CD-Rom titles are still being released. During 2000, the Company
expects to release six CD-Rom titles.

         Licensed Products. In April 1996, the Company launched a line of adult
pleasure products called Private Collection. In 1998 the Company commenced
marketing of a line of clothing under the brand name Private Circle through
Private Circle, Inc. In the near future the Company plans to extend the product
range with various additional lines of clothes, nutritional supplements, energy
soft drinks and personal skin care. For these new markets, the Company is
generally planning to earn royalties through the licensing of its major
trademarks. Channels of distribution for licensed products include conventional
distribution channels, e-commerce and TV Home Shopping.

                                      -5-
<PAGE>

THE ADULT ENTERTAINMENT INDUSTRY

         Despite nearly two decades of intense political campaigning against the
adult industry, consumer purchases of adult entertainment products have
increased dramatically. The industry that has come to be known broadly as adult
entertainment began its transformation two decades ago, with the advent of home
videos and the VCR. That revolution marked the beginning of the end of red-light
districts in cities, where adult book-stores, X-rated theatres, peep shows,
dingy strip joints and street prostitution once flourished.

         During the 1980s, the availability of adult movies on videocassette and
on cable television helped to legitimize the consumption of explicit material by
putting it in the home setting. The result has been the legitimization of
industry products by other businesses not traditionally associated with the
adult entertainment industry. Video stores, long distance telephone carriers,
satellite providers, cable companies, and even mutual funds, earn significant
returns by supplying or investing in adult entertainment either directly or
indirectly. The availability of adult-oriented media has accelerated in the
1990s as a result of growth in the Internet, resulting in increased
accessibility of adult-oriented media in the privacy of a person"s home.

         The distribution of sexually explicit material is intensely
competitive. Hundreds of companies now produce and distribute films to
wholesalers and retailers, as well as directly to the consumer. The low cost of
videotape and the introduction of low cost video tape recorders, along with the
minimal production budgets of many adult films, has resulted in much lower
barriers for entry in the adult entertainment industry, while the availability
of adult films on videocassette has virtually destroyed the adult theatre
business. The Internet has further intensified competition due to the relatively
low cost to establish a presence on the Internet, which can be as low as
$5,000-$10,000. However, because of the large number of adult-oriented Web sites
on the Internet, this has in turn fueled an ongoing demand for the creation and
licensing of fresh adult-oriented media.

         According to industry sources, in 1978 some 100 hard-core feature films
were produced at a typical cost in today's dollars of approximately $350,000,
while in 1999 over 14,000 new hard-core videos were released, some costing as
little as a few thousand dollars to produce. The bulk of this production is
represented by amateurish tapes and compilations. The Company is competing with
the portion of the market which involves the production of professionally
produced films with high production value.

       According to an industry report which appeared in US News and World
Report (released on February 10, 1997), Americans spent over $8 billion in 1996
on hard-core videos, peep-shows, live sex acts, adult cable programming, sexual
devices, computer porn and sex magazines. This amount is much larger than
Hollywood's domestic box office receipts and larger than all the revenues
generated by rock and country music recordings. The mainstream Hollywood film
industry collected some $6 billion per year, the recorded music industry $8
billion; theater, opera and ballet $1.7 billion. Only the magazine industry with
its $11 billion in U.S. sales is still competing with the adult industry for the
same fraction of the entertainment budget. The Company expects the adult
entertainment market to continue to grow, fueled in part by the growth of the
Internet.

Video Sales & Rental

       The Los Angeles Times (November 22, 1997) confirmed that sales and rental
of adult videos have increased 100% in the last five years. It added that
"seventy percent of VCR buyers in the first three years during which the devices
were on the market said that being able to view adult movies at home was a
primary reason they bought a VCR." The Video Software Dealers Association
(VSDA), the trade association for the entire home video

                                      -6-
<PAGE>

industry, estimated that more than 60,000 retail outlets in the United States
carry home videos; adult videocassettes are carried in more than 25,000 of these
retail outlets, including such major chains as The Wherehouse, Tower Video,
Palmer Video, Movies Unlimited, West Coast Video and others. In addition,
hundreds of small boutiques and large mail order companies sell adult tapes
directly to consumers. On the other hand, the 5,000-store Blockbuster Video,
which accounts for 30% of the rental marketplace, like many other large retail
chains, has opted not to carry adult videos.

       AVN (Adult Video News), the world's largest adult entertainment industry
trade publication which releases an annual poll of approximately 19,000 U.S.
retailers who subscribe to the AVN magazine, estimates that in 1997 hard-core
tapes generated over $828 million in adult video sales, while rental and sales
volume in video stores and adult stores, excluding mail orders, represented a
volume of $4.2 billion.

       Overall, for 1998 AVN reported that adult products represent 19.7% of the
U.S. video market (all stores, whether stocking adult or not). More than 33% of
the U.S."s rental and sales transactions involving adult tapes took place on the
West Coast; the average store on the West Coast stocks over 700 different adult
tapes for rental. According to AVN's poll, 71% of adult videos are rented by
men, 19% are rented by male/female couples, 7% are rented by male couples, 2%
are rented by women and 1% by women couples.

       Approximately 20 major producers, such as Private, Vivid, VCA and Metro
release the lion's share of adult high budget videos; approximately 80 smaller
firms fill in the gaps. See "Business-Competition."

DVD

       DVD (Digital Versatile Disc) has had an exceptional introduction to the
marketplace, easily outstripping the initial launch sales of VHS video and CDs.
In the first two complete years of the format's availability, 1998 and 1999,
over 5 million DVD players is estimated to have been sold in the US alone. This
compares with just 450,000 VHS players and 960,000 music CD players sold in
those formats' first two years. The world's major hardware manufacturers have
backed the DVD format virtually en masse, with over 100 models of DVD player
already on the market. Low cost players have recently become available for as
little as $200, paving the way for massive, widespread consumer interest and
potentially record-breaking sales.

       In line with the huge sale of DVD players, sales of DVD discs was
expected to reach 50 million units in the US by the end of 1999. The 3rd
European DVD Conference, held in 1999 in Portugal, concluded that this trend is
also being reflected in Europe, which is estimated to be approximately one year
behind the US. Superior to VHS, CD-Rom and laserdisc, DVDs produce almost
studio- quality pictures and the world's movie producers are rapidly supporting
the format, with Warner Home Video currently generating approximately 30% of it
revenues from DVD sales. Especially significant in this context is the fact that
65% of this revenue comes from back-catalogue titles.

                                      -7-
<PAGE>

Corporation and Greater Media offer explicit adult programming, such as that
available from Spice and Exxxtasy Networks.

       The Big Four U.S. cable providers are: TCI (Tele-Communications, Inc.),
Time Warner Cable, MediaOne and Comcast. TCI is the largest U.S. cable provider,
with over 16 million subscribers in 49 states. Besides the softcore adult-
oriented channels such as Playboy TV, AdulTVision, Spice Channel and The Adam &
Eve Channel, there are seven hardcore video channels available in the U.S.
exclusively on the C-Band dishes, which are: Eurotica, Exotica, Exxxtasy, True
Blue, X!, Xxxcite and XXXplore. Exotica, Exxxtasy and True Blue (New Frontier
Media, Inc.) offer uncensored hardcore material. Exxxtasy is the only U.S.
hardcore adult channel being beamed to Australia and the Pacific Rim.

       During 1998 Playboy Enterprises, Inc. and Spice Entertainment Companies,
Inc. entered into an agreement resulting in the combination of the two
companies. The Company believes that this merger reflects a trend towards the
consolidation of a fragmented industry.

       Less explicit material routinely available on a variety of cable
television networks heightens public acceptability and increases consumer
demand.

       Currently over 73,000,000 homes throughout Europe alone subscribe to
cable and satellite television. With recent technological advances allowing for
digitalization of television program delivery to TV sets a new world of
opportunities has opened. The full and near video on demand, ADSL TV, as well as
cable and satellite Pay-per-View (PPV) services allow viewers to have access to
past program libraries from the comfort of their own sofa. Adult entertainment
programming is perfectly tailored for these new media. Along with major
Hollywood blockbusters and sports events, it is the adult genre which gets to
drive the PPV services.

       The Company believes that the adult entertainment industry in general
will continue to experience significant growth in the coming years, particularly
as advances in technology and increasing access to the Internet will allow more
private and secure adult access to adult themed material.

CD-Roms

         Although the adult CD-Rom market has declined during the last years.
Adult CD-Rom titles are still being released. During 2000, the Company expects
to release six CD-Rom titles.

Phone Sex

       The Company estimates that phone sex represents a $1.5 billion dollar
industry in the U.S. alone. AT&T is one of the biggest carriers of phone sex.
Many in the industry believe phone sex will be outpaced by computer
video-conferencing, video streaming or live streaming. For the time being we
observe the dual co-existence of phone sex and live Internet sex, where Web
surfers communicate by telephone while simultaneously accessing live sites. The
Company earns royalties on approximately 20 phone lines operated by a third
party licensee.

                                      -9-
<PAGE>

The Company's Numbers

       The following table indicates the Company's production for 1998 and 1999
and estimates for 2000.

--------------------------------------------------------------------------------

                              THE PRIVATE LIBRARY

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
VIDEOS                       As of December 31, 1998  As of December 31, 1999   As of December 31, 2000 (est.)
------                       -----------------------  -----------------------   ------------------------------
<S>                          <C>                      <C>                       <C>
Labels                            No of Titles              No of Titles        No of Titles

Private                                150                      156              162  +6
Pirate                                 52                        58              64   +6
Triple-X                               26                        32              38   +6
Private Sex                            19                        25              31   +6
Special Editions                        1                        3                4   +1
Book Best of Private                   10                        11              12   +1
Total                                  214                      290              368  26 NEW RELEASES IN 2000

<CAPTION>
VIDEOS                       As of December 31, 1998  As of December 31, 1999   As of December 31, 2000 (est.)
------                       -----------------------  -----------------------   ------------------------------
<S>                          <C>                      <C>                       <C>
Labels                            No of Titles              No of Titles        No of Titles

Private Video Magazine                 26                        26              26   No more in production
Private Film                           28                        28              28   No more in production
Triple-X Video                         32                        32              32   No more in production
Private Video Stories                  27                        27              27   No more in production
Private Gold                           33                        39              45
Gaia                                    6                        6                6   No more in production
Pirate Video                           12                        12              12   No more in production
Triple -X Files                        12                        12              12   No more in production
Casting-X                              13                        19              25   +6
Best of Private                         3                        3                3   No more in production
Private Black Label                     4                        10              16   +6
Pirate Video Deluxe                                              6               12   +6
Private XXX                                                      6               12   +6
Special Compilations                   10                        16              23   +7
Amanda's Diary                          1                        5                5   No more in production
Peep Show Special                                                6               12   +6
Horny Housewives                                                 4               10   +6
The Matador Series                                               2                8   +6
The Story                                                        2                2   No more in production
Private Movie                                                    1                1   No more in production
Private & Penthouse Video                                        0                5   +5
Private Super F*****                                             1                7   +6
Soft Versions                           7                        27              39   +12
Total                                  214                      290              368  78 NEW RELEASES IN 2000
</TABLE>

MAGAZINE PUBLICATIONS

The Business

                                      -10-
<PAGE>

         The Company's publishing operations include the publication of the
above mentioned adult magazines, and occasionally the publication of newsstand
specials, calendars and paperback books. All these magazines, together with all
local editions, are printed under various trade names and are distributed in
approximately 35 countries worldwide. The Company publishes several editions of
the main magazines; all editions contain the same editorial material but provide
locally targeted content, in full cognizance of local governmental regulation
regarding explicit adult publications. Most of the Company's magazines feature
pictures of men and women engaged in erotic and sexually explicit situations;
the Company's most popular publications include Private, Pirate, Sex and Triple
X.

         Private Style, published in South Africa since 1997, and Private Life,
published in Greece in 1998, are currently the only softcore magazines. These
publications are not yet published on a regular basis.

<TABLE>
<CAPTION>
Quantities of Magazines                    Produced (1998)          Produced (1999)            Estimated (2000)
<S>                                      <C>                      <C>                      <C>
Private                                        681,710                  813,970                      780,000
Pirate                                         482,550                  641,750                      570,000
Triple X                                       493,820                  642,900                      590,000
Private Sex                                    359,060                  530,800                      470,000
Best of Private                                 73,400                   58,000                       60,000
Specials                                        56,000                  181,300                      120,000
</TABLE>

         The Company's publications offer a balanced variety of features and
have all gained a loyal customer base and a reputation for excellence by
providing a quality standard to the adult market industry, while maintaining
circulation leadership as the best-selling hardcore magazine. All publications
have long been known for their graphic excellence and features, and publish the
work of top artists and photographers. They are also renowned for their
pictorials of beautiful people. Because of the Company's high quality standards,
its magazines are among the highest priced magazines in the industry.

         All of the Company's publications are printed by independent third
parties. The Company has had a longstanding relationship with a printer in
Spain, and two other printers in the U.S. and in the U.K. respectively; these
latter two are also printers of other adult magazines that compete with the
Company's products; nonetheless, Management believes that generally there is an
adequate supply of printing services available to the Company at competitive
prices, should the need arise. All of the Company's production and printing
activities are coordinated through its operating facility, Milcap Media Group
S.L., located in Barcelona, Spain.

Circulation

         The Company's magazines have historically generated most of their
revenues from firm sales distribution. Distributors with rights to return and
retail circulation represent less than 35% of the current production. The
Company has contracted national licensing agreements in over 35 countries and
normally deals with a magazine distributor for every local distribution of its
publications. Single copy retail sales normally occur in adult book stores and
similar establishments. Newsstand retail sales are legally allowed only in
countries such as France, Italy, Spain, Germany and Portugal.

         Distribution of the magazine to newsstands and other public retail
outlets is accomplished through a network of national distributors, who maintain
a local network of several wholesale distributors and licensors.

                                      -11-
<PAGE>

Copies of the magazine are shipped in bulk to the wholesalers, who are
responsible for local retail distribution.

         Wholesalers of Back Catalogue are normally allowed to handle returns
from National Newsstand Networks on firm sales; this practice is only allowed
for magazines, while almost no return practice is allowed for videos and
CD-Roms.

         The distribution of the Company's magazines is handled exclusively by a
distributor pursuant to individual distribution agreements. Such agreements are
normally subject to yearly automatic extensions unless either party delivers a
termination notice. Normally, distributors also provide the Company with other
services, including management information and promotional and specialty
marketing services, and their marketing representatives usually solicit
national, regional and local retailers in an effort to expand the number of
retail outlets for the Company titles.

         The Company recognizes revenue from distributors" sales based on
estimated copy sales at the time each issue is delivered. Provisions for
expected returns are taken into consideration.

         The historical patterns of distribution have changed as a result of the
ongoing consolidation and the relationship with each distributor, which due to
the success of the publications and better terms and conditions, tend to prefer
a firm sale agreement as well.

         For a few years, the Company has been seeking to expand the use of its
magazines' editorial content and other assets across different media formats, in
order to capitalize on their existing brand names at a lower cost. The process
started in 1995 with the production of CD-Roms, but the main development has
been the re-editing of every Private magazine since 1965, which became available
on the Company's Web site in May 1998, and more recently on the Company"s TV
Home Shopping.

Production, Distribution and Fulfillment

         Four independent printers in Spain currently print most of the
Company"s magazines, books, brochures, video, and CD covers. Prices are subject
to the alteration of the price of raw materials (paper, ink, etc.). Any
alteration on printing prices must be by notification to the Company at least
three months in advance. Terms of payment are 60/90 days from date of invoice.

         With respect to color separation, pre-press and related services, the
Company is currently using its own color separation facilities and has the
support of tow independent suppliers using the latest technologies in this field
such as digital imposition and implementing the computer to plate process. The
Company believes that there is generally an adequate supply of alternative color
separation services available at competitive prices should the need arise. All
proprietary magazines are printed and shipped from Barcelona, Spain with the
exception of the U.K. distributor which receives all the magazines in digital
format and prepares its own layout and color separations before printing locally
adapted softer editions of all the magazine titles.

         To some extent, the actual print run varies each month and different
amounts are printed for each publication. The amount of printed publications is
determined bi-monthly with the input from each of the Company's national
distributors.

         The principal raw material necessary for the publication of the
Company's magazines are coated and uncoated paper. The Company's printers have a
number of paper supply arrangements and believe that those supply contracts
provide an adequate supply of paper for its needs and that, in any event,
alternative sources are available at competitive prices. Paper prices are
affected by a variety of factors, including demand, capacity, pulp

                                      -12-
<PAGE>

supply, and by general economic conditions.

         Most of the Company's products are packaged and delivered directly by
the printer or supplier, but fulfillment, warehousing, customer service and
payment processing are conducted principally by Milcap Media Group S.L.

         Milcap Media Group S.L. employs a staff of professionals to manage the
production and to oversee the printing, distribution and fulfillment of its
magazines. The Company is able to effectively produce and distribute all of its
publications, through the use of state-of-the-art design and production
technology, economies of scale and, in printing contracts, efficiencies in
subscription solicitation and fulfillment. Production systems for both graphics
and editing utilizes an integrated publishing environment that is networked with
satellite offices. Approximately 20 employees of the Company are engaged in the
production and distribution of the Company's publications.

Licensed Publishing

         In 1999 the Company signed a licensing agreement with K-OS Publications
Limited for the publication and distribution in Britain of two new consumer
titles bearing the Private trademark. "Private Life" magazine was first
published in the UK at the end of 1999, while "Private Style" magazine is set to
launch in 2000.

         Local publishing licensees will tailor their editions by mixing the
work of the Company's editors with their own editorial and pictorial material.
The Company will monitor the content of the licensed editions so that they
retain the distinctive style, look and quality of the other editions, while
meeting the needs of their respective markets.

VIDEO AND FILM PRODUCTIONS

The Business

         In fiscal 1992, the Company began releasing feature videos and films
under the Private label. Due to the recent success of titles such as The
Pyramid, The Fugitive and Tatiana, there has been a great consumer expectation
for new releases. The retail success of the Company's production can easily be
checked by consulting ratings and sales on some of the industry's monthly
publications such as AVN (for the U.S. market), Hot Video (for the French
market) and Video Impulse (for the Italian market).

         The Company's adult video or film products are in genres similar to its
general magazines and books. Because of the strong demand for this genre of
productions, the Company is able to fairly evaluate the international
distribution of every production and earn a quick return on its investment.
Normally, the Company's acquisition costs range between $25,000 and $125,000 per
movie, prior to the computation of the post-production, duplication and
distribution costs. Generally, Milcap Media Group S.L. creates and designs all
artwork for promotional items and packaging and contracts for printing services.
Since 1997, all videocassettes have been duplicated by

                                      -13-
<PAGE>

independent laboratories.

         The Company and several of the Company's original programs have
recently won awards of excellence, including a Special Achievement Award (AVN
1997) and Innovation Award (Venus 1998). The Company continues to expand its
video operations in international markets and is presently marketing video
products in over 35 countries worldwide.

         The Company finances all of its adult films and videos, and
arrangements with video and film producers are done on a flat fee basis; all
producers generally take care of all production costs and obligations, including
among other things, the delivery of models' releases. The principal source of
financing for all the motion pictures derives from the cash flow generated by
previous productions. To date, the Company has not solicited any external
financing for any of its acquisitions. Distribution rights may be limited to
specified territories, specified media and/or particular periods of time.

         Most of the Company's original programs have been licensed to cable
television networks and adult pay-per-view channels. In these circumstances, the
Company generally grants the TV channel owner a specific right of transmission
and always retains the intellectual property rights of every production. The
Company is currently engaged in negotiations regarding several potential
strategic alliances in order to expand its presence and revenue base into cable
TV, pay-per-view and satellite adult TV. Additionally, new technology, primarily
digital set-top converters, will dramatically increase channel capacity, and is
expected to contribute to the sales of adult video.

         The Company recently signed an exclusive joint venture with
International Film Productions and Distributions, Ltd. (IFPD). IFPD is a
European based television broadcasting company, associated with major content
providers, specializing in the distribution of cable and satellite-TV channels.
The agreement allows for the co-operation of both companies to create two new
adult television channels to be broadcast world-wide.

     Under the terms of the joint venture agreement International Film
Productions and Distributions, in return for Private providing its full viewing
content and trademarks, will ensure the promotion and broadcasting of the new
adult channels to be known as Private Gold and Private Blue to a multi-million
worldwide audience. The Private Gold channel will contain explicit hard core
material while the Private Blue channel will broadcast lighter soft core
material. Private Media Group will receive 65% of the gross profit generated
from the broadcast of, and advertising on the channels. Included within the
Agreement is an option for Private to acquire 65% of the equity at face value in
IFPD, thus becoming the majority shareholder of the channels.

         The Company has developed a video streaming software to allow
pay-per-view of its productions through it Web site. See "Business-Internet."

         Motion pictures shot on film generally offer better production quality,
utilize more elaborate production techniques and incur higher acquisition costs
than motion pictures shot on videotape. Many of the Company's new feature video
and film releases are edited into several versions depending on the media
through which they are distributed. In general, versions of the videos or films
edited for cable or pay-per-view television are less sexually explicit than the
versions edited for home video distribution.

         The Company has experienced significant competition from lower cost
competitors with respect to film and video. While there can be no assurance that
the Company will be able to maintain its current market share, it believes that
the strong brand recognition and the quality of its titles will result in the
ability to appeal more effectively to a broader range of adult audiences. The
format of Private videos is consistent with the style, quality and focus of the
Private brand. The Company believes that the quality of content and production
will continue to differentiate the Company from its competitors.

Distribution

         The Company distributes its productions worldwide via Beta masters,
videocassettes, laserdiscs and DVD's that are sold or rented in video stores,
sex shops, newsstands and other retail outlets, and occasionally, where allowed,
through direct mail. The Company's Web site recently contributed to boosting
video sales and Management expects this new medium, together with TV Home
Shopping, to become significant distribution

                                      -14-
<PAGE>

channels in the future.

         During the last six years, the Company entered into several
distributorship agreements in approximately 35 countries worldwide. Pursuant to
these distributorship agreements, either Milcap Publishing Group or occasionally
Milcap Media Group, provides monthly a minimum number of new titles 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
distributorship agreements, licensees are normally required to purchase a
minimum number of units for each monthly period during the term of the
agreement.

         Typically the licensees then customize, dub or subtitle the movie, as
appropriate, to meet the needs of individual markets. In countries such as the
U.S. and Germany, the Company has expanded its relationships with its national
distributor by entering into exclusive multi-year multi-product output
agreements.

         In countries such as France and Italy, the Company established local
subsidiaries for the purpose of owning or controlling the local distribution. In
the near future, the Company intends to renegotiate some of its national
distributorship agreements in order to vertically integrate the Company into its
chain of distribution. In general, national distribution agreements enable the
Company to have an ongoing branded presence in international markets and
generate higher and more consistent revenues, rather than selling on a direct
basis.

Video Duplication/Production Techniques

         Betacam masters are produced by Milcap Media Group S.L. and Milcap
Publishing Group and, from there, they are sent to the different distributors
and duplication centers. Certain distributors receive a master directly and do
their own duplication.

         All artwork to print the video covers is created at Milcap Media Group
S.L. Most of countries receive their own ready printed covers from Spain and
some countries print their own covers. Body labels for the videocassettes are
printed in Spain, and then mailed to the different distributors. All of the body
labels have a golden stamping for the control of pirate copies.

                                      -15-
<PAGE>

INTERNET SERVICES

The Present

     The Company believes it is uniquely well positioned to exploit the growing
adult entertainment Internet market in view of a number of factors, including
(i) an extensive library of high quality Internet media content developed over
the past 35 years, to which it retains exclusive worldwide rights, (ii) the
ability to generate new, high quality, media content on an ongoing basis, (iii)
its established industry position in the adult entertainment market, and (iv)
the Company's  financial ability to maintain and upgrade its Internet
infrastructure.

     In particular, the Company sources and owns the worldwide rights to its
extensive media library, with an archive of high quality media content built up
over the past 35 years and new material added each month.  This factor alone
distinguishes Private from most of its competitors on the Internet, who have to
regularly buy or license content from third parties to maintain and grow their
revenue base.  The Company is also able to offer a wide range of other
proprietary products, such as DVDs, CD-ROMs, magazines, videos, energy drinks
and supplements, adult pleasure products and the Private Circle fashion line.

     Private currently maintains staff of 28 full time Internet employees and
has invested heavily in state-of-the-art computer and communications
infrastructure.

     In view of the Company's strategic position, Private launched its initial
site on the Internet at www.private.com in 1997. This site is now one of the
Internet's most visited destination sites. Taking full advantage of the
technological capabilities of the medium, the private.com site contains several
editorial features from the Company's magazines and select photos from various
pictorials. The Company's site also promotes and sells the product range: DVDs
magazines, videos, CD-ROMs and collections. The Company have implemented its
Internet division by adding new hardware and a satellite connection to the
backbone of the Internet in the U.S. in order to administer increased traffic to
the private.com site. The new hardware and software are of the latest
technology, which may also help attract additional advertisers to this site and
its two new proprietary sites, privatecinema.com and privatelive.com, by
providing an opportunity to target a focused market from underdeveloped related
sites.

     Private.com, which represents over 100,000 Web pages, is currently
generating a traffic of approximately 2.400,000 unique visitors per month and
more than 144,000,000 requested pages per month. Currently, the members' area is
yielding up to 105 new members every day paying a yearly fee of $149.95 or
$29.95 for one month and as of March 29, 2000 there were over 10.000 active
members of private.com. The mailing list of the WWW Club exceeds 300.000
addresses and there are approximately 1500 new addresses per day added to the
list.

     Members at private.com are allowed to view thousands of pictures on the
site. Major attractions include x-files, pictures designed in new formats, such
as photo sets with pictures never shown before, slide shows and search engines.
The site is constantly updated with new material and the full archive of every
Private magazine that has been published and clips from all Private videos ever
edited.  The Company estimates that Club membership enables it to give its
customers more than $5,000 of product value for a $149.95 membership fee.

     In 1999 the Company opened two new Web sites, privatecinema.com and
privatelive.com, to provide on-line Internet access to proprietary videos and
live adult entertainment.  The Company believes that as of today it has the
capacity and the best technology available to distribute movies via satellite
link in this fast growing market .  The system transmission for
privatecinema.com provides users with all of the Company's video and film titles
available.  These videos are edited and cut into 10 and 12 minute stories.  The
prices range from $19.95 for a monthly subscription to $49.95 for a quarterly
subscription.

     Privatelive.com sells access to live adult entertainment at a billing rate
of $29.95 for a monthly subscription. The both services is included in the
membership of Private.com.

     The Company's proprietary sites, www.private.com www.privatelive.com and
                                      ---------------
www.privatecinema.com, take advantage of the Company's development of a user-
---------------------
friendly streaming video application which is fully browser compatible and does
not require any plug-in applications.  Offering high quality video-on-demand,
this software gives the Company a distinct competitive advantage. All the sites
is achieved by servers connected to a full optic redundant DS3 connection into
the Internet's MaeEast backbone in Washington, D.C.

     Private utilizes direct marketing of all of its products by e-mail, with a
current e-mailing list of 300.000 addresses.  The Company also has direct links
from its DVD and CD-Rom products to its Internet sites, where such products can
quickly be updated.

     The Company utilizes a SecureWebPay (Verisign) application which allows the
processing of credit card transactions whereby the credit card is checked on the
fly while sharing databases with financial institutions.

     Being socially aware and sensitive to government strictures, the Company
has in place a well known protection program for minors which can be controlled
by adults to limit access to the Company's Web sites.

Licensees

     The Company licenses the right to use its trademarks and photo and video
library to third parties, such as the owners of the following Web sites:
privategold.com, privatechannels.com sexclub.sex.se, privateusa.com,
private.com.ar, private.com.au, maxs.se and clubx.com.au, which are either
licensees or independent distributors.

     In December 1997, Milcap Media Limited entered into an Internet license
agreement with Cyber Entertainment Network, Fort Lauderdale, Florida (CEN),
whereby CEN, which is in the business of developing and operating various Web
adult sites, was granted use of the Web site privategold.com. The Company
provides the site with adult images and videos and is entitled to receive a
percentage of the gross revenues from fees collected with the sale of
memberships to the site.  The current revenue stream to Private exceeds $80,000
per month, an increase of 125% over 1999, with the number of unique visitors per
day as of January 2000 estimated at 250.000.  As of fourth quarter 1999, two
other licensed sites, privatechannels.com and sexclub.sex.se, achieved $180.000
in revenue and 75.000 unique visitors per day.

     In addition, 20 other licensed sites, including www.maxs.se, maxs.dk,
clubx.com.au, privateusa.com, private.com.br and private.com.ar, together
receive an estimated 15.000 unique visitors per day.  Further, an additional 200
virtual shops selling the Company's product catalog, including dvdempire.com,
dvdworld.co.uk, gatas.com.br, adultcatalog.com, adultzine.com, sextoys.com,
sexmachine.ch, dragon.ca and adultvideos-cd.com eroticashop.com, are estimated
to reach 100s of thousands unique visitors per day.

     No less than 10 Million unique visitors are browsing Private content on the
world wide web (WWW).

     The Company's Reseller Program, www.privatecash.com www.prvtshops.com,
                                     -------------------
provides the other Web sites with promotional material designed to sell
Private's product range.  The Program has continued its aim of attracting adult
industry and non-adult industry Web site owners and potential Web site owners to
sell Private's products by means of a 25% commission program, which is supported
by fulfillment from the Company's networks of worldwide local distributors.
There are today approximately 750 websites in the program and there are more
than 150 new sites added to the program every month.

     The Company is also exploring the growth of international language portals
where joint venture agreement will be signed with the most important Companies.
The first agreement was signed with Proel S.A., a Spanish-based Internet Service
Provider that specializes in the design, maintenance and management of
electronic publications served online through the Internet. The exclusive
agreement allows that two new Internet domain addresses, www.privatehispano.com
and www.privateportugues.com, in the Spanish and Portuguese languages
respectively, will be accessed from Proel's impending Internet portal,
www.inicia.com,  to the Spanish and Portuguese speaking world in Europe, Latin
--------------
America and the USA. The Company secured the exclusive adult link on the
www.inicia.com  portal as the Company could guarantee complete, fully-
--------------
interactive Web services with legal and worldwide copyright.

     The Company is in the process of negotiating agreements for several
important territories during the second quarter 2000.

The Future

     The Company believes that Internet sales and marketing programs presently
in place or expected to be implemented in the near future will allow Private to
expose its products to an estimated 1.000.000 unique visitors per day by the end
of the year 2000.  Private will continue to develop and implement new product
and marketing innovations designed to make Private the leading purveyor of adult
entertainment on the Internet.  Private intends to continue to capitalize on its
extensive library and brand loyalty established over many years.   In addition,
the Company is evaluating strategic alliances and potential acquisitions of
Internet related companies to augment internal growth.  Because the Internet is
uniquely suited for the sales and marketing of Private's adult entertainment
products in the privacy of the customer's home, Private anticipates that the
Internet market will provide a significant source of revenue in 2000 and beyond.

     In a recent report, Forrester Research, the leading independent research
firm that analyses technology change and its impact on business, consumers and
society claimed that 'more than 1 million North American households already
enjoy broadband access to the Internet, a number that is expected to reach 26
million subscribers by 2003'. The company is set to capitalize on the latest
developments in high-speed broadband technology as the demand for more content
increases. A new site is under development, www.privatespeed.com and will be
                                            --------------------
launched during the fourth quarter 2000.

                                      -16-
<PAGE>

CD-ROMS AND INTERACTIVE GAMES

The CD-Rom Market

         In the last few years, the Company entered into partnerships with
companies to create multimedia products, such as Video CD-Rom titles and several
kinds of Video Photo Discs and Interactive Games. Management has determined that
it is more efficient and cost effective to engage independent contractors to
digitize and convert the Company's motion pictures into the CD-Rom format and to
acquire proprietary distribution rights to CD-Rom interactive games authorized
by independent software developers. Accordingly, since 1997, the Company has
reduced its in-house technical workforce and has contracted the product
development and distribution process to outside specialists.

         Although the adult CD-Rom market has declined during the last years.
CD-Rom titles are still being released. During 2000, the Company expects to
release six CD-Rom titles.

Production, Distribution and Fulfillment

         Preparation of master CD-Rom discs, user manuals and promotional
materials, as well as duplication of the CD-Rom discs and printing of the user
manuals and packaging, has been and will continue to be performed by outside
developers. Management does not anticipate experiencing any material
difficulties or delays in the manufacture and packaging of its products.
Distribution of CD-Rom disc products is accomplished through the same
distribution network of wholesalers and retailers through which the Company
distributes its magazines and adult video products.

         The development of these kinds of products incurred minimal operating
costs during fiscal 1999 and have been financed through the cash flow generated
by the various operations.

CD-Rom Library

         Presently, the Company's CD-Rom library can be described as follows:

         Private Photo CD-Rom Discs

         This includes Private Collection (Vol. 1-4) and 12 other similar
CD-Roms. The program's floating control panel makes it easy to browse through
more than 2,000 color-pictures included on each CD-Rom. This type of CD-Rom is
easy to use and has graphical interfaces including interactive menus and slide
shows with background music.

                                      -17-
<PAGE>

         CD-Rom Interactive Adventures and PC Games

         This includes CD Sampler, Hard Core Gallery and Private CD-Rom
Magazine. These types of CD-Rom's are digitally encoded in MPEG/Quick Time
Format to ensure the highest available quality, integrated with sound, and at
the touch of a fingertip, users can find a vast selection of the Company's films
and magazines. Private CD-Rom Magazines are hybrids that play both on PC/Windows
and on Macintosh computers.

         The user of these interactive CD-Roms interacts and decides what will
or will not happen on the screen and has total control over the actual events.
Private Pleasure Park 1 & 2, Private Investigator (awarded 1996 Best Interactive
Game at the AMEE Award Show in Las Vegas), Private Prison and Private Castle are
examples of this type of production.

         The Company's PC games incorporate state-of-the-art technology in
advanced arcade PC games. The games combine exciting and challenging top level
computer games with hard-core or R-rated movies and pictures. The PC games run
in a PC/Windows environment and are compatible with Windows 98. Pornmania and
Porntris, which has been the best selling adult PC-Game in Europe since 1994,
are just two examples of this kind of production.

         The Company is competing with other CD-Rom producers such as VCA
Interactive, Disk Magic, Arcus Media Group, Digital Playground, PIXIS
Interactive, Venus Interactive and New Machine Publishing. Future product
releases by the Company will be dependent on the continued market acceptance of
its initial product releases.

OTHER ANCILLARY PRODUCTS AND SERVICES

The Laserdisc Market

         According to the LaserDisc Association, more than 2.0 million U.S.
households own a laserdisc player. The worldwide laserdisc household figure is
estimated to be in excess of 12.0 million with the heaviest concentrations in
Japan, Taiwan, Hong Kong, Singapore, Malaysia and Indonesia. The LaserDisc
Association estimates that the installed base of laserdisc households in the
U.S. will grow at a rate of 25% per year for the next year or two, and then see
little or no growth as the next Video Disc technology takes hold (see "DVD
Markets"). Laserdisc is primarily a sell-through business (not much rental
activity) and caters to upper-income households with home-theater installations.
Laserdisc employs an analog video technology along with a digital sound
technology to deliver twice the resolution of ordinary home video cassettes.
Laserdisc's popularity has grown over the past ten years among movie enthusiasts
for its "instant access" capabilities (similar to audio CD) and its durability
as a movie playback medium. Laserdisc's disadvantages include its size (12
inches in diameter), high retail price, and the limited amount of information
that can be placed on a single side of a disc (60 minutes maximum).

         Presently, the Company has only released approximately six of its
titles on laserdisc format. Due to the structure of its current network of
distributors, the Company is not emphasizing the production of laserdiscs, which
represents some sales in the U.S. and a quite small market in Japan. Private
Video Magazine 2, 3, and 4 and Private Film 6 (Lady in Spain) are still
available on laserdisc format. Since December 1997, most of the new releases are
now edited on DVD as a complement to the classic video format.

The Digital Versatile Disc Market ("DVD")

                                      -18-
<PAGE>

         The market for Digital Versatile Disc ("DVD") started to grow
dramatically beginning in the fourth quarter of 1998. In October 1996 a unified,
single standard was finalized for the mastering (with copy protection) and
replication of DVDs. It is widely believed that this unified DVD format will
make serious inroads into the market shares currently held by laserdisc and, to
a much greater extent, the video cassette recorder. DVD has several major
advantages over competing home video delivery technologies: 1) A single 5 1/4"
DVD can hold up to 135 minutes per side of high resolution digital full-motion
video and audio; 2) Instant access is available to a favorite scene; 3) DVD
contains significantly higher image and audio quality than laserdisc and video
tape; 4) Multiple language tracks can be incorporated on one disc; 5) Since DVD
is 100% digital, the cost of replication is comparable to CD-Rom or audio CD;
and 6) A relatively low replication cost will translate to a retail price for a
motion picture of under $20.00, giving this medium tremendous mass-market
potential.

         DVD has had an exceptional introduction to the marketplace, easily
outstripping the initial launch sales of VHS video and CDs. In the first two
complete years of the format's availability, 1998 and 1999, over 5 million DVD
players is estimated to have been sold in the US alone. This compares with just
450,000 VHS players and 960,000 music CD players sold in those formats' first
two years. The world's major hardware manufacturers have backed the DVD format
virtually en masse, with over 100 models of DVD player already on the market.
Low cost players have recently become available for as little as $200, paving
the way for massive, widespread consumer interest and potentially
record-breaking sales.

         In line with the huge sale of DVD players, sales of DVD discs are
expected to reach 50 million units in the US by the end of 1999. The 3rd
European DVD Conference, recently held in Portugal, concluded that this trend is
also being reflected in Europe, which is estimated to be approximately one year
behind the US. Superior to VHS, CD-Rom and laserdisc, DVDs produce almost
studio- quality pictures and the world's movie producers are rapidly supporting
the format, with Warner Home Video currently generating approximately 30% of it
revenues from DVD sales. Especially significant in this context is the fact that
65% of this revenue comes from back-catalogue titles, a fact that is
particularly important for Private Media Group, which possesses the largest
high-quality back-catalogue in the history of adult entertainment stretching, as
it does, back to the Company's foundation in 1965.

         Significantly, the Company already sets the standard for the worldwide
DVD and entertainment industries with each DVD released by the Company
possessing five language options as well as four other subtitled languages.
Currently, the majority of DVDs released in the US and, indeed, worldwide are
produced in one language. This is an enormous competitive advantage for the
Company, being hugely attractive to consumers on a global basis and vastly
expanding the Company's international marketing and sales potential. As a
consequence, this global presence is a significant factor in reducing the
Company's overall unit costs and increasing profit margins where other companies
have to either license country-by-country or manufacture each title in separate
languages. In addition, the manufacturing of each DVD title Master Disc, prior
to duplication, costs an initial $20,000, further restricting competitors'
ability to commit to the format and minimizing their international revenue
potential.

         Currently, mainstream movie titles are released on DVD in six Regional
Codes, or Zones, each in a different playing format, much like the difference
between VHS videos in the US (NTSC) and in Europe (PAL). This is predominantly
because producers do not control the worldwide rights to titles. the Company's
DVDs are playable in any region, in every country in the world, because the
Company owns and controls the global rights to everything it has produced since
its foundation in 1965.

         The Company's DVDs are also 'Internet Activated', which means that when
one plays the DVD in a personal computer (PC), one also gets a direct link to
Private's websites where one can not only view the massive high-quality content,
but also take out membership to www.private.com and view the huge mail-order

                                      -19-
<PAGE>

shopping area. The Company can also add 'extras' to each DVD, 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 for the user.

THE PRIVATE COLLECTION

The Market

         The Company, together with some of its licensees, are currently working
on the development, marketing and distribution of high-quality branded
merchandise. The Company's 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. In the
November 1998 the Company entered the TV Home Shopping market, engaging in the
sale of proprietary products, including videos, magazines and proprietary adult
pleasure products under the brand "The Private Collection," on Swedish
television This new area has been well received, and the Company intends to
expand TV Home Shopping to other territories and formats in 2000.

The Private Collection

         On November 30, 1995, Milcap Media Limited entered into a license
agreement with Private Collection International, Inc. ("PCI") in Los Angeles,
California, and granted the licensee the 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 productions, condoms, dolls,
jelly products, massagers, playing cards and all other items that fall into
these product groups, except the rights to greeting and trading cards, leather
and other apparels and lingerie which have been licensed on a non-exclusive
basis. The term of the agreement is seven years. In consideration for the rights
granted, the licensee agreed to pay a royalty equal to ten percent of the gross
product receipts. The licensee agreed, among other things, to pay a guaranteed
minimum royalty of $100,000 for the first year of the term, $200,000 for the
second year of the term and $400,000 for the third year of the term. In March
1998 the Company agreed to amend the original license agreement accepting, among
other things, a flat $175,000 fee for the 1997 calendar year and a modification
in the royalty calculation.

         In 1999, the ownership of PCI was transferred to Doc Johnson
Enterprises, California, USA. Under the new ownership the Company's agreement
with Private Collection was renegotiated. Under the new five-year agreement, Doc
Johnson Enterprises has the exclusive world worldwide right of manufacture,
distribution, sub-contracting, marketing, advertising and promotion of a range
of adult novelty products under the brand name 'The Private Collection'. Private
Media Group will, in turn, receive royalty income on a quarterly basis,
incorporating a guaranteed minimum royalty effective from the second year of the
agreement.

         Private Media Group also has the right to purchase at a special rate an
unlimited amount of products manufactured under the agreement for its own
distribution through the Internet, TV Home Shopping and similar media.

         Doc Johnson, in business for 23 years and based in California, is a
leader worldwide in the adult manufacturing and distribution business. Doc
Johnson's reputation for innovative creativity and state-of-the-art mold making
technology and manufacturing facilities, coupled with high standards of quality,
have gained Doc Johnson recognition as the world's premier maker of adult
novelty products.

         Under the terms of the agreement, Doc Johnson Enterprises agrees to
maintain the high standards of

                                      -20-
<PAGE>

quality for which Private and Doc Johnson have become renowned to market `The
Private Collection' with a pricing policy similar to that of comparable
merchandise under the Doc Johnson brand name and to do its utmost in ensuring
that the Private and Doc Johnson brands are products will co-exist in the market
by using a suitable marketing strategy. Private Media Group will promote `The
Private Collection' through its diverse range of media products and services.

Nutritional Supplements, Drinks and Other Similar Products

     In October 1997 the Company entered into a licensing agreement with RH-
Patent & Original AB of Hagersten Sweden, an international agency of St.
Raphael, Inc., a U.S. production entity, with the intent to expand the market
for nutritional supplements such as Private Passion, Private Kick, Cold Relief,
Metabolize 2000, Sleep Eeze, Maxi Charge, and personal care products such as
Brazilian Bronze, Waistline Management, Cellulite Regulator Gel and Tight
Factor.

     The licensee has labeled existing government approved products such as
guarana-based energy drinks and aphrodisiacs, with Private, Private Passion and
Private Kick, to be distributed within the current distribution network as well
as in new markets. These products are also promoted for mail order and on the
Internet

     In 1999 the Company signed an exclusive agreement with K-OS Distribution
(UK) Limited for the distribution in Britain and Ireland of its Private Dynamite
energy drink. An integral part of the five-year agreement is that K-OS can
engage sub-distributors, licensees and selling agents within the stated
territory to further distribute, promote and sell the product. Private Dynamite
is a premium-priced energy drink that can be imbibed either straight from the
can or used as a mixer. The product comes in an attractive collector-style can
featuring a series of non-explicit pictures of Private stars.

     The UK energy drinks market is currently worth over 100,000,000 pounds
sterling per annum and is the fastest growing sector of the soft drinks market.
In 1998 over 150,000,000 litres of energy drinks were consumed and the market is
continuing to grow. In initial product tests, it was found that over 85% of
adults participating preferred Private Dynamite to competitive products.
Distribution of Private Dynamite commenced in late 1999.


Private Circle, Inc.

     During the last few years, the Company invested in the production and
distribution of promotional casual clothing such as: T-shirts, sweat shirts,
rugby shirts, polo shirts, pique shirts, shorts, wind breakers, beach towels,
swim suits, training suits, sunglasses, belts, shirts, bath robes, sweaters,
trousers and baseball caps. Some of the production was sold by the Company's
distributors, but most of it was given away as marketing tools.

     In May 1998 the Company entered into a Letter of Intent with Mr. Danny Cook
and Ms. Quamilla Carlsson, two fashion designers d/b/a Zabata Clothing, Los
Angeles, California. Subject to the terms and conditions of a definitive
agreement, the Company was to grant to the designers, the non-transferable and
exclusive license to use the trademarks in connection with the manufacturing,
distribution and marketing of their collection. At the same time, the Company
was to acquire all of the assets of Zabata Clothing and enter into a joint
venture to form a new entity to pursue a new clothing business.   Subsequent to
the end of 1998 a definitive agreement was concluded among the parties, which
instead provided for Private Circle, Inc. to be formed as a separate entity
financed by the Company, with the designers maintaining responsibility for its
day to day operations and design and creative issues. The Company has an option
to take over 100% of Private Circle, Inc's shares at nominal value, thus
becoming the sole owner of the business.

     Private Circle, was established in May 1998 to create and design a "fashion
forward" street wear clothing line primarily for men and women in the 18-to-30
age bracket.   To-date Private Circle has centered mainly around the United
States where already it has gained recognition from many of the top boutiques
and boasts accounts such as Patricia Field (New York), Villains (San Francisco),
Rag Factory (Los Angeles)  Untitled (Chicago) and Hot Topic which is located in
various cities throughout the USA.  This year's Spring Collection was first seen
at the Urban Alternative 2000 Fashion Show in Los Angeles where the California
Apparel News described it as "a polished, sophisticated collection of
contemporary street wear".

     Private Circle, which is also distributed in the UK and Canada, has
succeeded in almost every major city in USA.  Distribution will also extend to
Japan and a showroom in Tokyo will be opened in the Autumn of 2000. Further
information as well as designs can be viewed at www.privatecircle.com .

                                      -21-
<PAGE>

STRATEGIES

General

         To capitalize on its international name recognition and extensive high
quality media library, the Company continues to increase its international
product marketing activities, specifically targeting growth for its licensing
business and several other activities. The Company's marketing strategy is to
license and/or distribute its high-quality publications and adult home videos
worldwide, both through the expansion of traditional distribution channels, and
by aggressively exploiting the Internet and Home TV Shopping markets.
Additionally, the Company licenses its trademarks for use on various consumer
products, such as apparel, trendy streetwear and accessories, cosmetics and
beverages. The Company's business and operating strategy is designed to provide
strong revenue growth and increase profitability by improving the performance of
existing titles, launching and/or acquiring additional publications and
developing other ancillary revenue streams, either proprietary or under license
agreements, in order to better capitalize on its internationally-recognized
brands, an extensive high quality media library and efficient operations.

         In addition, the Company is planning to achieve growth through
acquisitions of existing business enterprises. The structure of the adult
entertainment industry is such that there are just a few large corporations, and
the Company believes that none of them have an international presence as the
Company does in the markets where Private competes. In addition, just a few of
these corporations are publicly traded, and the Company believes that none of
these publicly traded companies which compete directly with the Company have the
financial capability and the market liquidity necessary to attract other
businesses under merger or acquisition agreements.

         Management believes that because its Common Stock is publicly traded
and the Company has an international presence, it will be in a position to
acquire many of the hundreds of privately-owned adult entertainment businesses,
which typically have limited financing and personnel, and who often, as a result
of limited capital resources, have no other alternative but to continue their
business as it is. Management believes that, as a public company, it will be
able to attract privately-held acquisition candidates at a much lower
price/earning multiple than that of the Company.

Marketing

         By using its core publications as platforms for launching new
"spin-off" publications, the Company has efficiently developed and produced a
diverse and profitable portfolio of highly-specialized adult publications. The
Company believes that it has a competitive advantage as a result of its
editorial staff's ability to identify potential markets for new publications,
and the Company's ability to gain access to newsstand distribution channels has
enabled its new publications to become better established in several new
markets. In relation to the video distribution the strategy is to increase sales
of sell-through cassettes on a worldwide basis and to launch additional labels
in order to increase profits. All of the titles in the Video Library will also
become available on DVD and this is expected to add to the already established
sales per title. Furthermore, the Company is currently negotiating to commence
TV broadcasting of material adapted to what is legally accepted in each
territory.

Internet

         Recently the Company has deployed substantial human and financial
resources into developing and implementing its Internet operations. For this
purpose the Company hired highly qualified people and set up a separate
division. The prime objective of this division is to offer the most unique
services available on the Web, including the recently launched video-on-demand
(privatecinema.com) and live-sex (privatelive.com). The Internet division offers
products and services both for the Company and for other companies in the
Internet marketplace.

                                      -22-
<PAGE>

The Company believes that the Internet division will be a strong revenue
provider and that the Internet will ultimately compete with home video viewing
in the future. See "Internet Services."

Operations

         Management has identified and implemented operating improvements that
have resulted in significant cost savings through personnel reductions, lower
lease costs, tighter purchasing procedures and controls and restructuring the
Company's relationships with its principal vendors. In addition, the Company
adopted a new operating policy that provides for one or more of the following
actions if any of its publications generate continued losses: (i) discontinue or
sell such magazine; (ii) merge such magazine with the Company's existing
magazines; or (iii) enter into strategic partnerships with third parties. The
Company will remain focused on identifying additional operating improvements to
further increase its operating efficiencies and profit margins.

Miscellaneous

         The Company believes that there are numerous opportunities to increase
ancillary revenues by leveraging the editorial content and the
internationally-recognized brands of the Company's existing publications through
worldwide licensing arrangements, strategic joint ventures, retail alliances,
affinity group marketing, electronic software and games.

                                      -23-
<PAGE>

DISTRIBUTION METHODS, PRICE POLICIES AND PIRACY PROBLEMS

Distribution Methods and Price Policies

a.  National Newsstand Networks

         The distribution of magazines, videos and CD-Roms is based on an agreed
allocation, VAT excluded, based upon the cover price between the Company and the
National Newsstand Network.

    Advantages

    These distributors are very easy to deal with as they manage themselves most
    of the time; they have solid companies and are most reliable; they also
    generally pay on time. This distribution method is also a very good
    instrument when the Company wants to run statistics on sales, as it can get
    a good input on the situation regarding every local market. As far as
    magazines are concerned, this type of agreement can allow the distribution
    of the highest volume of copies in a specific market. As a result of
    reaching many local retailers and sales points throughout the territories,
    it also brings the best margin per copy.

    Disadvantages

    Magazine distributors with a right to return the products can create some
    problems for the Company, but on the other end, returns do not really go
    wasted, as these are purchased by distributors who only handle old issues of
    the product (See: Wholesalers of Back Catalogue). As far as video
    distributors are concerned, a right to return the products is not beneficial
    for the Company, as it is not always easy to sell the returns (custom made,
    per language and layout). The end-user price obtainable for CD-Rom products
    through this distribution channel is 30-50% lower than for traditional
    CD-Rom channels (the maximum end-user price obtainable is 150-200% of a
    magazine cover price distributed through the same channels). This market is
    most suited for some older products (12-36 month), where the consumer cut
    price will not affect the market price in the other distribution channels.
    There is still not the same market for CD-Rom return products as there is
    for traditional magazines, i.e. distributors who only deal with old issues
    of the magazines (See: Wholesalers of Back Catalogue/Magazines). The
    duplication price of a CD-Rom combined with the extra packaging costs for
    adding the CD-Rom to the cover of a magazine or similar product carrier
    (needed in most countries for distributive/regulative purposes), adds to the
    total cost of each product; CD-Roms are in this case more sensitive for
    damages from transportation and need to be handled with care throughout the
    return process.

    For all products, a common disadvantage of this distribution method is that
    the conditions of payment are in general quite long, i.e. between 90 and 180
    days.

b.  Wholesalers

    Advantages

    For magazines, videos and CD-Roms, this is the traditional way of
    distribution and in some territories also the only possible way of
    distribution; it is a satisfactory form of sale from a cash flow point of
    view, because the conditions of payment are 0-30 days. Another advantage, as
    far as magazines are concerned, in comparison with the National Newsstand
    Networks, is that the Company does not get any returns with this kind of
    distribution. As for CD-Roms, this is the best system to ensure the highest
    possible end-user price.

    Disadvantages

                                      -24-
<PAGE>

    As far as magazines and videos are concerned, this method gives the Company
    less control of the distribution within the territories, resulting in
    overflow into other territories; it also gives it a low margin per copy, in
    comparison with the National Newsstand Networks. In the case of CD-Roms,
    since it is very expensive for the wholesalers to finance their stock, it is
    important for the Company to keep a good inventory for timely deliveries on
    short notice.

3.  Licensees

    The sale of magazines to licensees is based on an agreed allocation of the
    cover price, after the distributors' variable costs, such as printing and
    color separations. Videos are sold to licensees on an agreed allocation
    after the distributors industrial costs.

    Advantages

    For magazines, this is a very cost effective way of distributing, as the
    distributors take all the costs for printing, etc. and the Company only
    collects the royalties, generally producing good cash flow. Logistics are
    very simple and uncomplicated. As far as videos are concerned, licensees
    know their market very well as they have their own sales force that
    efficiently work up all the shops in the territory and in this way maximize
    the sales. This is also in many cases the only way to reach the video rental
    stores. As for CD-Roms, having a licensor (i.e. territorial distributor) who
    acts as a wholesaler for CD-Rom products with a stock on consignment is
    financially smart. The financial burden of the stock is moved from the
    wholesaler to the Company, where the actual invested money into the products
    is substantially less than to the wholesaler. In some cases the wholesaler
    is charged half or full duplication costs to minimize the Company's cash
    exposure. This enables the wholesaler to always keep plenty of products in
    stock to service his customers who order very frequently and need delivery
    within one or two days.

    Disadvantages

    As far as magazines are concerned, a negative effect of this method is that
    the Company has less control over the printing when it comes to volumes and
    quality, as this is controlled by the distributors themselves; it gives the
    Company the lowest margin of all the different distribution methods. In
    regards to videos, this method is more labor intensive, and it takes longer
    for the distributors to pay. In regards to CD-Roms, allowing the licensor to
    keep products on consignment means that the Company has to have a good
    financial trust in each licensor to guarantee at least the duplication and
    transportation costs, against any licensee's default.

                                      -25-
<PAGE>

d.  Wholesalers of Back Catalogue

    Advantages

    With this distribution method, the Company has the possibility to sell all
    the returned products received from the distributors in the National
    Newsstand Networks. As the Company can use a different price policy on the
    Back Catalogue, it is able to sell the magazines at a lower price, enabling
    the marketing division to operate in territories with a lesser economy, i.e.
    opening new markets.

    Disadvantages

    As many of these distributors can often be found in developing and
    unstructured countries, they can be labor intensive to work with; these
    distributors seldom pay on time.

e.  Internet

    Advantages

    This way of distributing increases the total sales points in every area as a
    result of the customer accessing the products easier. It creates an in-house
    customer base, and gives the Company a high margin per product sold,
    averaging 60% in 1998. This is the ultimate way of distributing the
    Company's products.. Apart from sales of the products via mail order, there
    is an opportunity to sell parts of the videos for the customer's demand,
    i.e. pay-per-view. The customer gets an option to preview samples of the
    videos, and then purchase the actual video. See "Internet Services." As far
    as CD-Roms and DVDs are concerned, this a rapidly growing market, as
    consumers on the Internet are very likely to have CD-Rom and/or DVD
    capabilities.

    Disadvantages

    The Internet distribution provides a great tool of marketing cross borders.
    However, it is important to take advantage of the current infrastructure in
    terms of culture, language, package and handling issues.

f.  Mail Order

    Advantages

    For magazines and videos, this distribution channel gives the Company the
    possibility to get extra sales in forms of Back Catalogue products on a Firm
    Sale basis (See: Wholesalers of magazines). Buyers often order high volumes
    and are well established companies; logistics are simple as the products
    have already been produced and prepared before. As far as videos are
    concerned, the requests for compilation tapes put together from old
    material, such as The Best of Private, are one way of creating extra sales
    at very low cost.

    Disadvantages

    The Company doesn't get a very high average price per copy for magazines and
videos.

 Piracy Problems

                                      -26-
<PAGE>

According to figures from the Motion Picture Association of America, annual
losses from video piracy are an estimated $250 million in the U.S. alone, and
close to $2.5 billion worldwide; adult video represents approximately 14% of the
video business.

The biggest piracy problem concerns the business done on markets where
pornography is illegal or in countries with a poor economic situation. This is
the situation mainly in the eastern states of Europe, such as Russia, Poland,
Rumania, etc. Many of these eastern markets are so destroyed with piracy that it
is more or less impossible to distribute the Company's products there. The
piracy causes such a disturbed price structure that it does not leave any
margins for the Company to sell its products in these territories. It is also
very difficult to claim rights with reference to the copyright laws. This is a
problem for everyone doing business in these markets.

Another upcoming piracy problem that the Company will have to face regularly
concerns the Internet. The question is how to confirm that all the different
mail order sites selling Private products actually sell the original products,
and not pirated copies. The problem lies in the distribution procedures, which
in the case of Internet, is straight from the Internet provider's order page to
the end consumer. Another problem connected with the Internet is fast advancing
video streaming where the possibilities to control the origin of what is shown
are almost none.

Very unfortunately, when it comes to the piracy problems in the Eastern States
of Europe there is not much that can be done, except for acceptance of the
situation. Also in regards to mail order, it is very difficult to control what
is actually happening. Most of these piracy situations are handled by the
Company's legal counsel who attempt to resolve them or litigate, on a
case-by-case basis. When it comes to the Internet, one solution could be the
appointment of so called "Web Police", one for each territory. Private believes
that it faces less piracy than other competitors. Piracy activity is most
pervasive with regard to the distribution of videos. However, Private's
distributors distribute a vast array of products, including CD-Roms, DVDs and
adult novelty products. Private believes that its distributors are less likely
to engage in video piracy as this would jeopardize their distribution of the
entire line of distributed Private products.

In July 1998 the Company launched a new program which it hopes will reduce
piracy. The program allows any person to sell the Company's products online on
the Internet through a "Private Online Shop." By agreeing to link the
independent representative's website to the Company's homepage, the independent
representative will be allowed to offer Private products for sale directly to
its customers. In turn, the independent representative is required to purchase
merchandise directly from the national distributor. This marketing arrangement
is expected to allow the Company to increase its points of sale throughout the
world for a very low cost.

PROPRIETARY RIGHTS

The Company believes that it has developed strong brand awareness within each of
its magazines' and videos' targeted markets. As a result, the Company regards
its branded magazine titles and logos to be valuable assets and believes that
its trademarks are vital to the success and future growth of all of the
Company's businesses.

The Company has filed trademark registration applications with respect to most
of its trade names and logos. The Company believes that the name recognition and
image that it has developed in each of its markets significantly enhance
customer response to its sales promotions. Accordingly, trademarks and
copyrights are important to the Company's business and the Company intends to
aggressively defend them throughout the world as it constantly monitors the
marketplace for counterfeit products. Consequently, it initiates legal
proceedings from time to time to prevent unauthorized use of the trademarks.

                                      -27-
<PAGE>

COMPETITION

General Considerations

Nearly all of the Company's products compete with other products and services
that utilize leisure time or disposable income. The businesses in which the
Company competes are in general, highly competitive and service-oriented. The
Company has few long-term or exclusive service agreements with its customers.
Business generation is based primarily on customer satisfaction with
reliability, timeliness, quality and price. The Company believes that the
extensive and longstanding international operations, its name, its image and
reputation, as well as the quality of its distributors, provide a significant
competitive advantage over many other competitors seeking to establish a similar
business.

Although its magazines and videos are well established and high quality products
in the adult industry, the Company is in competition with entities selling
similar products at retail as well as by direct marketing, regardless of whether
the products being offered are similar to the Company's products.

Magazines

The Company meets with minimal direct competition from other publishers of adult
magazines and paperback books as well as all other forms of print media adult
entertainment. The Company's publications are in general unique in their style
and format and it is almost impossible to name any major competitor in this
field. As far as magazines are concerned, the only similar business is
represented by Rodox N.V. a Dutch/Danish corporation printing approximately
20,000 copies of monthly hardcore magazines.

Magazines such as Playboy, Penthouse, Hustler or similar editorial publications
do not compete with the Company's publication, since they are considered to be
soft-core publications. There are several hardcore publications in each country
where the Company's magazines are sold, but in general, they are printed in
limited edition and lower quality than the Company's publications and therefore
the Company is not fearing at present any major competition on this end of its
business.

As far as the U.S. market is concerned, none of the competitors publishes or
distributes more than 5,000 copies per month, while Private USA, Inc. currently
exceeds 10,000 sold copies of each magazine per month. In addition, none of
these competitors normally own any pictorials.

Video

The production and distribution of video and cable television products are
highly competitive, as each competes with the other as well as with other forms
of entertainment. Furthermore, there is increased competition in the television
industry evidenced by the increasing number and variety of basic cable,
satellite and pay television services now available. Revenues for motion picture
entertainment product 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. There is strong competition throughout the adult
video industry, both from adult video producers and from independent companies
distributing amateurish material.

The Company's primary competitors in the video industry area are adult motion
picture studios, with in-house production and post production capabilities.
Other competitors are smaller, but locally or domestically, they are capable of
quickly identifying niche markets that could compete for the Company's
customers. In addition, the

                                      -28-
<PAGE>

Company also competes with other forms of media, including broadcast and cable
television, direct marketing, electronic media and adult Web sites.

Management believes that none of its competitors have larger worldwide
distribution or have greater financial resources than the Company. The closest
competitors are U.S. producers such as VCA Pictures or Vivid Film; smaller
competitors are Wicked Pictures, Evil Angel Productions or Metro Global Media
Inc., but all these competitors have a distribution in the U.S. market, while
they are relatively less represented worldwide.

Internet

As indicated above, the Internet market for adult oriented content is booming
and the number of adult sites competing with the Company's is in excess of
30,000 http addresses, most of which are free sites and currently some of them
can claim a higher daily traffic than the Company's site.

In addition to internal expansion of Internet activities and establishment of
strategic alliances, the Company is planning to achieve growth through
acquisitions of existing business enterprises. The structure of the adult
entertainment industry is such that there are just a few large corporations and
none of them have an international presence as the Company does. In addition,
only a few of these corporations are publicly traded and among these few, the
Company believes that none currently have the financial capability and the
market liquidity necessary to attract other businesses under merger or
acquisition agreements.

CD-Rom and Interactive Games

There are several competitors that have already released adult CD-Rom titles and
interactive games, many of whom have significantly greater technical and
marketing resources than those of the Company's licensees. Management believes
that new competitors are increasing their focus on the consumer software market,
which will result in greater competition for this kind of product. Management is
not concerned by this situation because it believes that this area of the
Company's activity will never represent a significant percentage of its overall
business.

EMPLOYEES

         As of March 1, 2000, the Company (including its subsidiaries) employed
93 persons on a full-time basis.

The Company's 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 over a
two month period the activities of a writer, a pencil artist, an inker, a
colorist and a printer. The majority of this work is performed at the Company's
premises.

The photographers and producers consist of freelancers who generally are paid on
a per-assignment basis. The Company has entered into agreements with certain
photographers or movie directors and writers under which such persons have
agreed to provide their services to the Company on an exclusive basis, generally
for a period of one to three years. Pierre Woodman is the main movie producer
currently under such exclusivity agreement.

                                      -29-
<PAGE>

The Company believes that it has good relationships with its employees.
Currently, none of the Company's employees are represented by any labor union.

                                      -30-
<PAGE>

GOVERNMENT REGULATION

The Company operates in a regulated environment, requiring the Company to be
socially aware and sensitive to government strictures. Private takes great care
to comply with all applicable governmental laws and regulations in the
jurisdictions where it operates, including laws and regulations designed to
protect minors or which prohibit the distribution of obscene material. Moreover,
Private will not knowingly engage the services of businesses or individuals that
do not adhere to the same standards. In the 35 years that Private has conducted
business it has never been held to have violated any laws or regulations
regarding obscenity or the protection of minors. Private continually strives to
maintain the highest standards in the presentation of its media and other
products, as is evidenced by the numerous industry awards which have been
bestowed upon Private and its management over the years.

Following is a description of some of the laws and regulations in the U.S. which
impact the adult entertainment industry. It is not an exhaustive description of
all such laws. Moreover, the regulatory environment is constantly changing in
the geographical areas in which Private conducts 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 the Company does not submit its 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 films and videos distributed by the Company, if so
rated, would most likely fall into the "NC-17 - No Children Under 17 Admitted"
rating category because of depiction of nudity and their sexually explicit
content.

The right to distribute adult videocassettes, magazines and CD-Rom products is
protected by the First and Fourteenth Amendments to the United States
Constitution, which prohibit Congress or the various 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 the Company's
products are distributed, have enacted laws regulating the distribution of
obscene material with some offenses designed as misdemeanors and others as
felonies, depending on numerous factors. The consequences for violating the
State statutes are as varied as the number of States enacting them. Similarly,
18 U.S.C. Sections 1460-1469 contain the Federal prohibitions with respect to
the dissemination of obscene material, and 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 require 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 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.

                                      -31-
<PAGE>

With respect to the realm of potential penalties facing an organization such as
the Company, 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 United States 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.

The Company is not directly engaged in the wholesale distribution of its
products to U.S. wholesalers and/or retailers. The Company believes that owners
of Private USA, Inc., its U.S. distributor, have taken steps to ensure
compliance with all Federal, State and local regulations regulating the content
of its motion pictures and print products, by staying abreast of all legal
developments in the areas in which its motion pictures and print products are
distributed and by specifically avoiding distribution of its motion pictures and
print products in areas where the local standards clearly or potentially
prohibit these products. In addition, Private USA, Inc. often requires that all
video material be reviewed by an independent advisory panel comprised of two
psychologists, a certified sex therapist, licensed marriage and family
therapist, a certified sex educator and a licensed independent clinical social
worker. Their review is directed to aspects of serious scientific value as set
forth in the Miller test, because that aspect of the test is not limited by
community standards but is concerned with whether a reasonable person would find
such value in the material, taken as a whole. In light of Private USA's efforts
to review, regulate and restrict the distribution of its materials, Management
believes that the distribution of the Company's products does not violate any
statutes or regulations.

Many of the communities in the areas in which Private USA, Inc. offers or
intends to offer products or franchises, have enacted zoning ordinances
restricting the retail sale of adult entertainment products. Management believes
that Private USA, Inc. intends to supply products only in locations where the
retail sale of adult entertainment products is permitted.

In February 1996, U.S. Congress passed the Telecommunications Act (the "Act"),
and President Clinton signed it into law. Certain provisions of the 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
nonsubscribing cable customers. This is called "bleeding." The practical effect
of Section 505 of the Act ("Section 505") 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 Act are significant and

                                      -32-
<PAGE>

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. Management believes that the Company's revenues will be
marginally materially adversely affected as a result of enforcement of Section
505. In addition, as digital technology (which is unaffected by Section 505)
becomes more available, the Company believes that ultimately the impact will be
insignificant.

The National Defense Authorization Act of 1997 was signed into law in September
1996. One section of that legislation that began as the Military Honor and
Decency Act (the "Military Act") bans the sale or rental of sexually oriented
written or videotaped material on property under the jurisdiction of the
Department of Defense. A Federal Court has permanently enjoined enforcement of
the Military Act and has prohibited the Department of Defense from changing its
acquisition and stocking practices based on the Military Act. The government has
filed an appeal and a decision by the Appellate Court is pending. The Military
Act, if applicable to the Company's products and enforceable, would prohibit the
sale of the Company's magazines and videos at commissaries, PX's and ship
stores, and would adversely affect a portion of the Company's sales attributable
to such products. Based on preliminary estimates and current sales levels at
such locations, the Company believes that any such impact would be immaterial.

As discussed above, U.S. 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 (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 the Company must defend itself and/or join
with other companies in the adult programming business to protect its rights,
the Company may incur significant expenses that could have a material adverse
effect on the Company's business and operating results.

Child Pornography

The content of every single adult tape on the shelves of every video and adult
store in the U.S. involves consenting adults. Roughly 90% of the 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. The Company's 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 Federal 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 the Company's Custodian
of Records, and available for inspection by law enforcement. Mrs. Gloria
Leonard, an Officer of Private USA, Inc. is currently the President of the Free
Speech Coalition.

Child Pornography Prevention Act of 1996 goes beyond what was defined in
existing law. The new law is directed for the most part at depictions where no
minors are involved at all, with a few exceptions such as situations where a
photo of a minor and a photo of an adult are merged by computer to create a
photo of a minor engaging in sexual activities where the minor never actually
did so ("appear to be" or "convey the impression" approach). This law is
currently still not approved by the government and seems to be extremely
questionable when it comes to

                                      -33-
<PAGE>

enforcement and control.

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

SEASONALITY

The Company's businesses are generally not seasonal in nature. However, June,
July and August are typically impacted by smaller orders from some European and
the 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.

ITEM 2.  DESCRIPTION OF PROPERTIES

LEASES

During 1997, the Company relocated its principal administrative and operating
offices from Stockholm, Sweden to Barcelona, Spain. The Barcelona facility
houses the Company's administrative, editorial and operational offices, the data
center, customer service, and some of the warehouse and fulfillment facilities.
With the acquisition of the French distributor at the end of 1997, the Company
also inherited some office space in Paris, France. Currently, the Company leases
office space in Stockholm, Barcelona and Paris.

Since May 27, 1997, Milcap Media Group S.L. is lessee under an initial 5-year
lease representing its operating corporate office. The lease is effective from
the May 27, 1997 (2d floor), November 1st, 1997 (1st floor) and October 3rd,
1997 (roof-surface for Internet satellite antennas) and represents approximately
1,300 square meters of corporate headquarters space located at Carrettera de
Rubi 22-26, 08190 Sant Cugat del Valles, Barcelona, Spain. Average monthly base
rental expense is approximately $9,400. The rent expense is being charged to
operations on a straight-line basis over the extended term of the lease.
Additionally, the lease requires the Company to pay its proportionate share of
the building's real estate taxes and operating expenses. The majority of this
space is used by all of the Company's operating groups, primarily for post
production.

Private France S.A. is 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 $1,067. The rent expense is being charged to operations, on a
monthly basis.

Private France S.A. also leases space for its warehousing facilities at RD S.L.,
B.P 2 - 28410 Saint-Lubin-de-la-Haye, at a price of $41 per pallet per month
(the quantity of pallets varies from month to month).

Milcap Publishing Group AB maintains its headquarters in Starrbacksgatan 3,
Sundbyberg, Sweden and consists of currently lease free office space. This space
is utilized by the Swedish executive and administrative personnel.

Private Media Group, Inc. maintains an office in the U.S. at 3230 Flamingo Road,
Suite 156, Las Vegas, Nevada 89121. Presently, no office space is rented and the
above address is simply a mailing address.

ITEM 3.  LEGAL PROCEEDINGS

                                      -34-
<PAGE>

On June 7, 1999 the Swedish tax authority, Skattemyndigheten i Stockholm (the
"Tax Authority"), instituted a proceeding against Milcap Media Limited, a
subsidiary of the Company, in the Administrative Court in Stockholm to seize
assets as security in the event that the Tax Authority issues an assessment for
corporate income tax against Milcap Media Limited. Although no tax assessment at
that time had been issued, the Tax Authority was of the opinion that Milcap
Media Limited has a permanent establishment in Sweden and therefore owes
corporate income tax in Sweden for the income tax years 1995, 1996, 1997 and
1998. For purposes of the seizure proceeding the Tax Authority has based the
amount of the seizure request on an arbitrary amount in the amount of SEK
17,737,882, which is not based upon the actual financial results of Milcap Media
Limited. As a consequence thereof the Tax Authority filed and obtained an order
from the Administrative Court in Stockholm, without prior notice to Milcap Media
Limited, to seize assets up to SEK 17,700,000 of Milcap Media Limited.

On December 20, 1999, Milcap Media Limited received an official decision from
the Tax Authority with a statement that the Tax Authority has arbitrarily
assessed Milcap Media Limited for the tax years mentioned above for a total
amount of SEK 150,000,000, which is not based upon the actual financial results
of Milcap Media Limited. The effective tax on the arbitrary assessment will
amount to around SEK 42,000,000 plus fines amounting to SEK 16,800,000. In
addition interest is payable on those amounts. However, Milcap Media Limited is
in the process of appealing the assessment to the Administrative Court in
Stockholm. The Company believes that the final outcome of the appeal will take
many years, and Milcap Media Limited will ask for a postponement of payment of
the taxes and fees until the case is finally determined.

Milcap Media Limited believes that the opinion of the Tax Authority is without
legal basis as Milcap Media Limited conducts no operations in Sweden and has no
permanent establishment in Sweden. Accordingly, the Company believes that the
opinion of the Tax Authority is incorrect and that no tax will be due when the
case finally determined.

The Company is 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 are vigorously defended by the Company.

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

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market For the Company's Common Stock

The Common Stock of the Company has traded on the Nasdaq National Market since
February 1, 1999 under the symbol APRVT. Prior thereto the 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 NASD, Inc. Quotations
represent inter-dealer prices, do not include retail markups, markdowns or
commissions and may not represent actual transactions.

                                    High        Low
                                    ----        ---

Fiscal 1999:

                                      -35-
<PAGE>

       First Quarter               $ 10 1/4                 $ 14 5/8
       Second Quarter              $ 12 1/4                 $ 26 7/8
       Third Quarter               $ 11 3/4                 $ 20 3/8
       Fourth Quarter              $ 13 1/2                 $ 19 7/16


Fiscal 1998:

       First Quarter               $ 11 1/2                 $ 6 3/8
       Second Quarter              $ 12 3/4                 $ 7 13/16
       Third Quarter               $ 13 7/8                 $ 9 7/16
       Fourth Quarter              $ 12 1/2                 $ 10


On March 29, 2000 , the closing price of the Common Stock was $36.25 per share.
On March 29, 2000, the Company had approximately 550 holders of record of its
Common Stock.

All quotations prior to June 12, 1998, the date of the acquisition of Milcap
Media Ltd. and CineCraft Ltd., reflect the price of the Common Stock of the
inactive shell company. The Company believes that the sharp increase in the
price of the Common Stock during the first three quarters of 1997 reflected the
acquisition by the Company of Electric Entertainment Corp., which transaction
was subsequently rescinded in November 1997. See "Business-History."

Dividend Policy

The Company did not pay and cash dividends during its last fiscal year and the
Board of Directors does not contemplate doing so in the near future. The Company
currently intends to retain all earnings to finance the development and
expansion of its operations, and does not anticipate paying cash dividends on
its shares of Common Stock in the foreseeable future. The Company's future
dividend policy will be determined by its 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 future credit agreements.

Transfer Agent

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

                                      -36-
<PAGE>

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

   The following discussion should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in this Report.

Results of Operations

1999 compared to 1998

     Net sales. The Company reported net sales of SEK 172.8 million for the year
     ---------
ended December 31, 1999, which, compared to net sales of SEK 165.1 million for
the year ended December 31, 1998, represents an increase of SEK 7.7 million, or
4.7%. The increase was mainly attributable to DVD and Internet sales, offset by
a decrease in CD-Rom and video sales. Sales of magazines remained approximately
the same in 1999 as in 1998. DVD sales for the year ended December 31, 1999 was
SEK 8.4 million and should not be compared with the twelve-month 1998 period
since the Company released only a few titles in 1998 and the market was not
ready. The main part of the DVD sales took place during the three months ended
December 31, 1999. The Company's 1999 release schedule for DVDs included
eighteen titles and during 2000 the Company is planning to release 50 new titles
and 50 back-catalogue titles. Internet sales increased 185% to SEK 16.6 million
compared to the year ended 1998. The increase in Internet sales compared to the
year ended 1998 was particularly apparent in the three months ended December 31,
1999, where it increased 249% compared to the same period in 1998. The
management believes that the growth in DVD and Internet sales will continue in
2000. The net sales reported does not include revenue from the agreements made
and announced during 1999 concerning Penthouse/Private co-production and
distribution and the UK licensing of the magazines Private Life and Private
Style. Net sales arising from the agreements will be reported according to US
GAAP.

     Cost of Sales. The Company reported cost of sales of SEK 79.8 million for
     -------------
the year ended December 31, 1999, which, compared to cost of sales of SEK 71.3
million for the year ended December 31, 1998, represents an increase of SEK 8.5
million, or 12%. The gross profit for the year ended December 31, 1999 was SEK
93.0 million, or 53.8% of net sales, which compared to gross profit for the year
ended December 31, 1998 of SEK 93.9 million, or 56.9% of net sales, represents a
decrease of 3.1% in the gross profit margin. The decrease is the result of lower
margins on video sales and increased amortization of photographs and videos.

     Selling, general and administrative expenses. The Company reported selling,
     --------------------------------------------
general and administrative expenses of SEK 60.4 million for the year ended
December 31, 1999, which, compared to selling, general and administrative
expenses of SEK 52.4 million for the year ended December 31, 1998, represents an
increase of SEK 8.0 million, or 15.3%. The increase was primarily attributable
to the Company's investment in Internet related activities, the start-up of DVD
production and the introduction of the Company on Nasdaq National Market. The
investment expenses associated with Internet activities are expected to continue
in 2000. The increase of selling, general and administrative expenses in 1999
compared to 1998 was considerably less than that of 1998 compared to 1997 and
management believes that the increases seen over the past years have leveled out
and except for the investment expenses associated with Internet activities,
increases for 2000 will be less.

     Interest expense. The Company reported interest expense of SEK 1.47 million
     ----------------
for the year ended December 31, 1999, which, compared to interest expense of SEK
0.74 million for the year ended December 31, 1998, represents an increase of SEK
0.73 million. The increase is the result of higher average short-term borrowings
outstanding in 1999 compared to 1998, partially offset by reduced long-term
borrowings.

     Income taxes. The Company reported income tax expense of SEK 0.9 million
     ------------
for the year ended December 31, 1999 as compared to an income tax expense of SEK
1.4 million for the year ended December 31, 1998. The decrease of SEK 0.5
million is primarily attributable to less of the Company's profits being
recorded in tax jurisdictions where there is a higher corporate tax than
compared to other tax jurisdictions.

     Net income. The Company reported net income of SEK 31.8 million as compared
     ----------
to SEK 40.0 million for the year ended December 31, 1998. The decrease in 1999
net income was primarily attributable to increased cost of sales and general and
administrative expenses offset by increased sales.

Liquidity & Capital Resources

     The Company reported a working capital surplus of SEK 108.7 million for the
year ended December 31, 1999, an increase of SEK 36.3 million compared to the
year ended December 31, 1998. The increase is principally attributable to
increased accounts receivable related to increased sales and increased
inventories and prepaid expenses and other current assets.

     Net cash provided by operating activities was SEK 32.2 million for the year
ended December 31, 1999 and was primarily the result of net income and
adjustments to reconcile net income to net cash flows from operating activities.
The net income of SEK 31.8 million and the adjustments to reconcile net income
to net cash flows from operating activities, representing amortization of
photographs and videos of SEK 29.4 million, depreciation of SEK 2.9 million and
deferred taxes of SEK 0.1 million, provided a total of SEK 64.2 million. The
total of SEK 64.2 million was then primarily reduced by the increases in trade
accounts receivable, related party receivable, inventories, prepaid expenses and
other current assets, income taxes payable and accrued other liabilities
totaling SEK 32.8 million, offset by SEK 0.8 million from accounts payable
trade. Net cash provided by operating activities was SEK 36.9 million for the
year ended December 31, 1998. The decrease in cash provided by operating
activities in 1999 compared to 1998 is principally the result of changes in
operating assets and liabilities in 1999.

     Net cash used in investing activities for the year ended December 31, 1999
was SEK 49.2 million. The investing activities was principally investment in
library of photographs and videos of SEK 33.7 million which was carried out in
order to maintain the 1999/2000 release schedule. In addition to investment in
library of photographs and videos, SEK 5.3 million was invested in capital
expenditures and SEK 10.2 million in other assets. The increase over the
comparable twelve-month 1998 period was principally due to increased investments
in other assets related to the long-term loan to Private Circle.

     Net cash provided by financing activities for the year ended December 31,
1999 was SEK 20.1 million represented by SEK 21.8 million from conversion of
warrants, offset by a decrease in short-term borrowings of SEK 1.3 million on
the line of credit and repayments on long-term loans of SEK 0.4 million. The
increase over the comparable twelve-month 1998 period was primarily due to the
conversion of warrants.

     The Company has historically relied on positive cash flows from operations
and equity financing to finance working capital needs and investing activities.
The Company expects to have adequate working capital for the next twelve months.
During this period the Company intends to rely on positive cash flows from
operations and equity financing to finance working capital needs and necessary
investing activities. The Company's long-term expansion plans will require
additional sources of funding. The Company plans to meet these funding
requirements through a combination of increases in short-term credit lines,
additional long-term borrowings and/or equity financing.

                                      -37-
<PAGE>

                                   PART III


ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

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, their age and the office they hold with the
Company. Executive officers and employees serve at the discretion of the Board
of Directors. All directors hold office until the next annual meeting of
stockholders of the Company and until their successors have been duly elected
and qualified.

<TABLE>
<CAPTION>
                                                                         Position With the
                                                                         -----------------
      Name                                             Age             Company or Subsidiary
      ----                                             ---             ---------------------
      Directors
      ---------
      <S>                                              <C>       <C>
         Berth H. Milton  .........................    44        Chief Executive Officer, President
                                                                   and Director; Administrator of MMG

         Alfredo M. Villa .........................    38        Director, Secretary, Private Media
                                                                   Group, Inc.

         Bo Rodebrant .............................    46        Director

         Robert L. Tremont ........................    55        Director


      Other Executive Officers and Key Employees
      ------------------------------------------

         Claes Henrik Marten Kull .................    34        Chief Marketing Officer, Private Media
                                                                   Group, Inc.; Marketing Manager, MMG

         Javier Sanchez ...........................    37        Chief Operating Officer, Private Media Group,
                                                                   Inc.; General Manager, MMG

         Johan Gillborg ...........................    37        Chief Financial Officer, Private Media
                                                                   Group, Inc.; Chairman and Managing
                                                                   Director of Milcap Publishing Group AB

         Jean-Pierre Michel .......................    46        Managing Director of Private France S.A.
</TABLE>

The following table sets forth certain information with respect to the persons
who are members of the Board of Directors, executive officers or key employees
of the Company:

Berth H. Milton was appointed to the Board of Directors in February 1998 in
conjunction with the beginning of the final phase of due diligence process
related to the acquisition of the Milcap Group by the Company in June

                                      -38-
<PAGE>

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. Mr. Milton is one of the most well known and reputable
figures in the industry, has been Administrator of MMG since its inception 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

         Alfredo M. Villa has been a Director of the Company since December
1996, and served as the Company"s President and CEO from December 1996 until
February 1999. Mr. Villa holds a masters degree in economics from the University
of Geneva, Switzerland and attended Bocconi University in Milan, Italy. He has
over 13 years of experience with the Swiss banking industry. Mr. Villa is
currently Chairman and CEO of SCF Societa di Consulenza Finanziaria S.A., a
Swiss corporation specializing in asset management, mergers, acquisitions, and
investment banking, where he has served since 1994. Prior to that Mr. Villa was
an asset manager with several other European financial institutions. In
addition, Mr. Villa was Chairman of the Board of Alma Grafiche Srl, of Milan,
Italy, a leader in the high quality printing of books and magazines from 1995
until February 1998.

Bo Rodebrant was appointed as a Director of the Company in August 1998. Mr.
Rodebrant has operated his own accountancy and management consulting services,
R&S Ekonomiservice, since 1986. Prior thereto 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.

Robert L. Tremont was appointed to the Board of Directors in September 1998.
Since 1980 Mr. Tremont has owned and operated a number of businesses in the
adult entertainment industry. Mr. Tremont is a principal in Sundance Associates
and Private Collection International, Inc., which companies are exclusive
distributors for most of the Company's products in the United States and Mexico.
He has also been active in political and lobbying activities for the adult
entertainment industry, serving for several years as President of the Free
Speech Coalition. Mr. Tremont received a Bachelors of Arts degree from the
University of Minnesota and a Masters of Arts degree from the University of the
Americas in Mexico City.

Claes Henrik Marten Kull joined the Milcap Group in 1992 as a sales manager, and
has been Milcap Group's Marketing Manager since 1993, and was appointed Chief
Marketing Officer of Private Media Group, Inc. 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 Milcap Group in 1992, approximately
25 new countries have been opened up. 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, which is one of Sweden's
largest companies. 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 MMG, member of
the Board of MMG and Private France S.A., and minority shareholder of Milcap
Media Group S.L. 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 since 1994. 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.

                                      -39-
<PAGE>

Gillborg served as 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.

Jean-Pierre Michel has been the Managing Director of Private France S.A. since
1994, when he started the distribution business which was purchased by MMG in
1997. Prior to joining the Milcap Group, Mr. Michel was the COO of Polygram
France and was mainly active in the marketing division. Prior thereto he was
active in the video and magazine industry and was sales manager for Antares,
Sevres, France and Echo S.A., Boulogne, France.

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

Section 16(a) Beneficial Ownership Reporting Compliance

Based solely upon a review of Forms 3 and 5 furnished to the Company covering
its 1999 fiscal year filed under Section 16(a) of the Securities Exchange Act of
1934, each of the Company's directors, officers and beneficial owners of more
than 10% of the Company's Common Stock who are identified in the table appearing
in Item 11 of this Report did not file Form 5 on a timely basis.

                                      -40-
<PAGE>

ITEM 10.  EXECUTIVE COMPENSATION

The following table summarizes all compensation paid to the Company's Chief
Executive Officer and to the Company's other most highly compensated executive
officers other than the Chief Executive Officer whose total annual salary and
bonus exceeded $100,000 (the "Named Executive Officers"), for services rendered
in all capacities to the Company during the fiscal years ended December 31,
1999, 1998 and 1997. No other executive officer of the Company earned
compensation in excess of $100,000 in each of these periods.

                          Summary Compensation Table

<TABLE>
<CAPTION>
                                                                                            Long Term
                                                                                          Compensation
                                                                                             Awards
                                                                                           ------------

             Name and                                                                       Securities
     Principal Position During                Fiscal     Annual Compensation                Underlying             All Other
            Fiscal 1999                        Year           Salary($)                     Options (#)         Compensation($)
     -------------------------                 ----       -----------------                ------------        -----------------
   <S>                                        <C>        <C>                              <C>                  <C>
     Berth H. Milton ..................        1999            151,000                          ---                  ---
     President and CEO (1)                     1998            144,000                          ---                  ---
                                               1997            145,500                          ---                  ---

     Javier Sanchez....................        1999            150,262                          ---                  ---
     Chief Operating Officer, Private          1998            143,274                          ---                  ---
     Media Group, Inc., General                1997              4,000                          ---                  ---
     Manager, MMG.
</TABLE>

   _______________
   (1)  Mr. Milton was appointed as the Company"s CEO in February 1999.

In June 1998 Mr. Milton received 175,000 Warrants to acquire Private Common
Stock at $4.00 per share in connection with the Company's acquisition of Milcap
Media Limited and Cinecraft Limited. See "Business History."

                                      -41-
<PAGE>

Option Grants in the Last Fiscal Year

         The following table sets forth certain information at December 31,
1999, 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


<TABLE>
<CAPTION>
                                            % of Total
                                            ----------
                        Number of            Options/
                        ---------            --------
                        Securities             SARs
                        ----------             ----
                        Underlying          Granted to
                        ----------          ----------
                       Options/SARs          Employees        Exercise or Base
                       ------------          ---------        ----------------
    Name                Granted(#)         In Fiscal Year       Price($/Sh)         Expiration Date
    ----                ----------         --------------       ----------          ---------------
-------------------------------------------------------------------------------------------------------------
<S>                    <C>                 <C>                <C>                   <C>
Berth H. Milton           60,000                6.0                 12.50               March 2009
-------------------------------------------------------------------------------------------------------------
Javier Sanchez            60,000                6.0                 12.50               March 2009
-------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------
</TABLE>

        The following table summarizes certain information regarding the number
and value of all options to purchase Common Stock of the Company held by the
Chief Executive Officer and those other executive officers named in the Summary
Compensation Table.


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


<TABLE>
<CAPTION>
                                                                                                   Value of
                                                                                                   --------
                                                                                                  Unexercised
                                                                                                  -----------
                                                                                                 In-the-Money
                                                                                                 ------------
                                                                           Number of             Options/SARs
                                                                           ---------             ------------
                                                                          Securities            At Fiscal Year
                                                                          ----------            --------------
                                                                          Underlying                 End($)*
                                                                          ----------                 -------
                                                                          Unexercised
                                                                          -----------
                        Shares Acquired                                  Options/SARs          Exercisable/Unexer
                        ---------------                                  ------------          ------------------
      Name               On Exercise(#)     Value Realized ($)           At Fiscal Year              -cisable
      ----               --------------     ------------------           --------------              ---------
                                                                             End
                                                                             ---
<S>                     <C>                 <C>                          <C>                   <C>
-----------------------------------------------------------------------------------------------------------------
Berth H. Milton               -                     -                       60,000                $ 330,000
-----------------------------------------------------------------------------------------------------------------
Javier Sanchez                -                     -                       60,000                $ 330,000
-----------------------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------------------
</TABLE>

                                      -42-
<PAGE>

*Based on the closing price of the Company's Common Stock on the last day of the
fiscal year ended December 31, 1999.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table presents certain information as of January 31, 2000,
regarding the beneficial ownership of Common Stock by (i) each of the directors
and Named Executive Officers of the Company individually, (ii) all persons known
by the Company to be beneficial owners of five percent or more of the Common
Stock, and (iii) all directors and executive officers of the Company as a group.
Unless otherwise noted, the persons listed below have sole voting and investment
power and beneficial ownership with respect to such shares.

<TABLE>
<CAPTION>
                                               Number of Shares
Name and Address (1)                        Beneficially Owned (1)      Percent Beneficially Owned
--------------------                        ----------------------      --------------------------
<S>                                         <C>                         <C>
Berth H. Milton (2)                                  7,842,494                   53.7%

Senate Limited (3)
3 Bell Lane, Gibraltar                               1,675,000                   18.7%

Chiss Limited (4)
3 Bell Lane, Gibraltar                               1,400,000                   15.7%

Bajari Properties Limited (5)
7 Myrtle Street, Douglas, Isle of Man                  625,000                    7.0%

Pressmore Licensing Limited
P.O. Box N-341, Nassau, Bahamas                        625,000                    7.0%

Perrystone Trading Limited
P.O. Box 171, Providenciales, Turks & Caicos           625,000                    7.0%

Solidmark (Gibraltar) Ltd.
3 Bell Lane, Gibraltar                                 625,000                    7.0%

Churchbury Limited
3 Bell Lane, Gibraltar                                 625,000                    7.0%

Kingston Finance Ltd.
Wickhams Cay, Road Town, Tortola, BVI                  625,000                    7.0%

Alfredo M. Villa (6)
Lugano, Switzerland                                     15,000                     *

Marten Kull (7)                                        132,500                     *
</TABLE>

                                      -43-
<PAGE>

Johan Gillborg (8)                                92,500              *

Javier Sanchez (9)                                70,000              *

Robert L. Tremont (10)                             3,000              *

Bo Rodebrant (11)                                 40,750              *

All Executive Officers and Directors
    as a group (12)                            8,196,244            49.1%

________

   *   Denotes less than 1%

   (1) Beneficial ownership is determined in accordance with rules of the
       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 upon exercise or conversion of warrants or
       Preferred Stock which are currently exercisable or exercisable within 60
       days of January 31, 2000, are deemed outstanding for 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 7,000,000 shares of Common Stock issuable upon conversion of
       7,000,000 of the Company"s $4.00 Series A Convertible Preferred Stock and
       150,494 shares of Common Stock which have accrued as dividends on the
       Preferred Stock. Mr. Milton is indirectly the beneficial owner of the
       7,000,000 $4.00 Series A Convertible Preferred Stock and 150,494 shares
       of Common Stock owned of record by Slingsby Enterprises Limited. Also
       includes (i) 625,000 shares of Common Stock owned by Bajari Properties
       Limited, of which Mr. Milton is the sole shareholder, (ii) 7,000 shares
       of Common Stock issuable upon exercise of Warrants owned by Mr. Milton,
       and (iii) 60,000 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) Cornelia Strehl is the sole shareholder of Senate Limited and, therefore,
       may be deemed to be the beneficial owner of these shares.

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

   (5) Berth Milton is the sole shareholder of Bajari Properties Limited.
       Therefore, these shares may be deemed to be beneficially owned by Mr.
       Milton and are also reflected as being beneficially owned by Mr. Milton,
       individually, in the above table.

   (6) Mr. Villa's address is Corso Elvezia 4, CH-6900 Lugano, Switzerland.

   (7) Includes 75,000 shares of Common Stock issuable upon exercise of Warrants
       owned by Mr. Kull and 57,500 shares issuable upon exercise of Options
       issued under the Employee Stock Option Plan. His address is c/o

                                      -44-
<PAGE>

       the Company, Carrettera de Rubi 22-26, 08190 Sant Cugat del Valles,
       Barcelona, Spain.

   (8) Includes 35,000 shares of Common Stock issuable upon exercise of Warrants
       owned by Mr. Gillborg and 57,500 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.

   (9) Includes 10,000 shares of Common Stock issuable upon exercise of Warrants
       owned by Mr. Sanchez and 60,000 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.

(10) Includes 3,000 shares of Common Stock issuable upon exercise of Warrants
owned by Mr. Tremont. His address is c/o the Company, Carrettera de Rubi 22-26,
08190 Sant Cugat del Valles, Barcelona, Spain.

(11) Includes 2,500 shares of Common Stock issuable upon exercise of Warrants
owned by Mr. Rodebrant. His address is c/o the Company, Carrettera de Rubi 22-
26, 08190 Sant Cugat del Valles, Barcelona, Spain.

(12) Includes 7,000,000 shares of Common Stock issuable upon conversion of the
outstanding Series A Preferred Stock, 125,000 shares of Common Stock issuable
upon exercise of outstanding Warrants and 273,250 shares issuable upon exercise
of outstanding Options under the Employee Stock Option Plan.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Certain Relationships

     No Director or executive officer of the Company is related to any other
Director or executive officer. None of the Company's officers or Directors hold
any directorships in any other public entity. There are currently two outside
directors on the Company's Board of Directors.

Related Transactions

         The Company has a short-term loan to an entity controlled by Mr. Milton
in the amount of SEK 4,946,000 and SEK 5,955,000 at December 31, 1998 and 1999,
respectively. The loan bears interest at the rate of 10% per annum and has no
maturity date.

         On March 31, 1998, two of the Company's wholly owned subsidiaries,
together with Zebra Forvaltings AB, Sweden ("Zebra"), an affiliated company of
Berth Milton, purchased all of the outstanding capital stock of Viladalt S.L.,
Spain ("Viladalt") from its shareholders, none of whom are related to the
Company or Mr. Milton, for the sum of approximately $2,685,000. It was agreed
that the Company's subsidiaries would own 69% of the Viladalt shares, Zebra
would own 31% of the Viladalt shares, and that each party would be responsible
for its proportionate share of the purchase price. To avoid the appearance of a
conflict of interest Zebra has agreed to sell its interest in Viladalt to the
Company at Zebra's cost when and if the Viladalt interest is sold by the
Company. The principal asset of Viladalt is a country house in the Barcelona,
Spain area known as Casa Retol de la Sarra. The Viladalt property was acquired
by the Company as a real estate investment and is presently being utilized as a
filming location for certain of the Company's upcoming releases.

         Milcap Publishing Group, a wholly owned subsidiary of the Company, is a
party to an exclusive

                                      -45-
<PAGE>

Distribution Agreement with Sundance Associates, Inc. ("Sundance") which has
been in effect since 1995. Robert Tremont, a Director of the Company, is the
sole shareholder of Sundance. Under the terms of the Distribution Agreement
Milcap granted to Sundance the exclusive rights to distribute in the United
States and Mexico specified products, including magazines, videos and digital
media such as CD-ROM's and laser discs. Royalties are paid by Sundance to Milcap
in accordance with an agreed royalty schedule. The Distribution Agreement
automatically renews for successive one year terms and is cancellable by either
party prior to the end of each one year term. During the 12 month periods ended
December 31, 1998 and December 31, 1999 Sundance paid royalties to Milcap of
$2,247,392 and $2,123,564, respectively.

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

                                      -46-
<PAGE>

          ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

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

          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 1999.

                                      -47-
<PAGE>

                               INDEX TO EXHIBITS
                               -----------------


Exhibit
No.            Description of Document
---            -----------------------

    *3.1       Articles of Incorporation

    *3.2       Amended and Restated 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     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.

   **21        Subsidiaries of the Registrant

     23.1      Consent of Ernst & Young AB

                                      -48-
<PAGE>

    27.1       Financial Data Schedule

___________________
*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.

                                      -49-
<PAGE>

                                  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 29, 2000                   PRIVATE MEDIA GROUP, INC.


                                          By: /s/ Berth H. Milton
                                              ---------------------------------
                                              Berth H. Milton, 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.


<TABLE>
<CAPTION>
           Name                               Title                         Date
           ----                               -----                         ----
 <S>                                  <C>                                <C>
  /s/ Berth H. Milton                 Chairman of the Board, Chief       March 29, 2000
  -----------------------------
       Berth H. Milton                Executive Officer and Director


  /s/ Alfredo M. Villa                Director                           March 29, 2000
  -----------------------------
      Alfredo M. Villa


  /s/ Johan Gillborg                  Chief Financial Officer, Chief     March 29, 2000
  -----------------------------
  Johan Gillborg                      Accounting Officer


  /s/ Bo Rodebrant                    Director                           March 29, 2000
  -----------------------------
  Bo Rodebrant


  /s/ Robert L. Tremont               Director                           March 29, 2000
  -----------------------------
      Robert L. Tremont
</TABLE>

                                      -50-
<PAGE>

                        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, and its subsidiaries as of December 31, 1999 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, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in 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 provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Private
Media Group, Inc, and its subsidiaries as of December 31, 1999 and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1999, in conformity with generally
accepted accounting principles in the United States of America.


Stockholm, Sweden
March 28, 2000



Ernst & Young AB
----------------


/s/ Tom Bjorklund
-----------------
Tom Bjorklund
<PAGE>

                           PRIVATE MEDIA GROUP, INC.
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                       December 31,
                                                                              ----------------------------
                                                                                   1999            1999
                                                                              ------------    ------------
                                                                                   SEK             USD
                                                                                      (in thousands)
<S>                                                                           <C>             <C>
ASSETS
Cash and cash equivalents.................................................           7,370             864
Trade accounts receivable - (Note 4)......................................          67,992           7,971
Related party receivable (Note 13)........................................           6,821             800
Inventories - net (Note 5)................................................          40,209           4,714
Prepaid expenses and other current assets (Note 6)........................          15,973           1,873
                                                                              ------------    ------------
TOTAL CURRENT ASSETS......................................................         138,365          16,221

Library of photographs and videos - net (Note 8)..........................          83,885           9,834
Property, plant and equipment - net (Note 9)..............................          11,973           1,404
Other assets (Note 7).....................................................          26,585           3,117
                                                                              ------------    ------------
TOTAL ASSETS..............................................................         260,808          30,575
                                                                              ============    ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings (Note 10)...........................................             475              56
Accounts payable trade....................................................          21,177           2,483
Income taxes payable......................................................             797              93
Deferred tax liability (Note 12)..........................................             755              89
Accrued other liabilities (Note 11).......................................           6,439             755
                                                                              ------------    ------------
TOTAL CURRENT LIABILITIES.................................................          29,644           3,475

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, 50,000,000.................................           8,003             938
shares authorized 8,867,289
issued and outstanding
Additional paid-in capital................................................          32,716           3,835
Stock dividends to be distributed.........................................           9,368           1,098
Retained earnings.........................................................         180,660          21,179
Accumulated other comprehensive income....................................             416              49
                                                                              ------------    ------------
TOTAL SHAREHOLDERS' EQUITY................................................         231,163          27,100
                                                                              ------------    ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................         260,808          30,575
                                                                              ============    ============
</TABLE>

                See notes to consolidated financial statements

                                      -1-
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                 Years ended
                                                                                 December 31,
                                                                   --------------------------------------
                                                                       1998          1999          1999
                                                                   -----------   -----------   ----------
                                                                        SEK           SEK          USD
<S>                                                                  <C>           <C>           <C>
                                                                                (in thousands)
Net sales.......................................................       165,104       172,822       20,260
Cost of sales...................................................        71,272        79,794        9,355
                                                                   -----------   -----------   ----------
Gross profit....................................................        93,883        93,027       10,906
Selling, general and administrative expenses....................        52,365        60,370        7,077
                                                                   -----------   -----------   ----------
Operating profit................................................        41,468        32,657        3,828
Interest expense................................................           745         1,474          173
Interest income.................................................           731         1,506          177
                                                                   -----------   -----------   ----------
Income before income tax........................................        41,455        32,689        3,832
Income taxes....................................................         1,445           932          109
Net income......................................................        40,010        31,757        3,723
                                                                   -----------   -----------   ----------
Other comprehensive income:
Foreign currency adjustments....................................           353            63            7
Comprehensive income............................................        40,363        31,820        3,730
                                                                   ===========   ===========   ==========

Net income per share:
Basic...........................................................          5.14          3.77         0.44
                                                                   ===========   ===========   ==========
Diluted.........................................................          2.60          2.02         0.24
                                                                   ===========   ===========   ==========
</TABLE>

                See notes to consolidated financial statements

                                      -2-
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                                            Accumu-
                                                                                                                             lated
                                                                            Addi-           Stock                            other
                                                                            tional        Dividends                         compre-
                          Common stock             Preferred stock         Paid-in          to be         Retained          hensive
                        Shares      Amounts     Shares        Amounts      capital        distributed     earnings          income
                       ---------    -------    ---------      -------    -----------      -----------     --------          -------
                                      SEK                       SEK          SEK              SEK            SEK              SEK
                                                                                          -----------
<S>                    <C>          <C>        <C>            <C>        <C>              <C>             <C>              <C>
Balance at             7,500,000      7,992    7,000,000            -              -                -      126,809                -
January 1, 1998
Shares issued in         581,669          5            -            -            731                -            -                -
reverse acquisition
Exchange rate                  -          -            -            -              -                -            -              353
changes
Conversion of             50,000          -            -            -          1,613                -            -                -
warrants
Stock dividends to             -          -            -            -              -            5,642       (5,642)               -

be distributed
Net income                     -          -            -            -              -                -       40,010                -
                       ---------    -------    ---------      -------    -----------      -----------     --------         --------
Balance at             8,131,669      7,997    7,000,000            -          2,344            5,642      161,177              353
December 31, 1998
Exchange rate                  -          -            -            -              -                -            -               63
changes
Conversion of            650,000          5            -            -         21,826                -            -                -
warrants
Stock dividends           85,620          1            -            -          8,546           (5,642)           -                -
Stock dividends to             -          -            -            -              -            9,368      (12,273)               -
be distributed
Net income                     -          -            -            -              -                -       31,756                -
                       ---------    -------    ---------      -------    -----------      -----------     --------         --------
Balance at
December 31, 1999      8,867,289      8,003    7,000,000            -         32,716            9,368      180,660              416
                       =========    =======    =========      =======    ===========      ===========     ========         ========

<CAPTION>
                          Total
                          Share-
                         holders'
                          equity
                           SEK
                        --------
<S>                     <C>
Balance at               134,801
January 1, 1998
Shares issued in             736
reverse acquisition
Exchange rate                353
changes
Conversion of              1,613
warrants
Stock dividends to             -
be distributed
Net income                40,010
                        --------
Balance at               177,513
December 31, 1998
Exchange rate                 63
changes
Conversion of             21,831
warrants
Stock dividends            2,905
Stock dividends to        (2,905)
be distributed
Net income                31,756

                        --------
Balance at
December 31, 1999        231,163
                         =======
</TABLE>

                See notes to consolidated financial statements

                                      -3-
<PAGE>

                           PRIVATE MEDIA GROUP, INC.
                     CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                        ---------------------------------------
                                                                          1998             1999          1999
                                                                        --------         --------       -------
                                                                          SEK              SEK            USD
                                                                                      (in thousands)
<S>                                                                     <C>           <C>               <C>
Cash flows from operating activities:
Net income.....................................................          40,010           31,757          3,723
Adjustment to reconcile net income to net cash
 flows from operating activities:
   Deferred taxes..............................................             378              125             15
   Depreciation................................................           2,336            2,879            338
   Amortization of photographs and videos......................          17,899           29,362          3,442
Effects of changes in operating assets and liabilities:
   Trade accounts receivable...................................          (8,018)         (12,342)        (1,447)
   Related party receivable....................................          (5,178)          (1,643)          (193)
   Inventories.................................................         (10,391)          (9,320)        (1,093)
   Prepaid expenses and other current assets...................          (4,922)          (6,877)          (806)
   Accounts payable trade......................................             380              788             92
   Income taxes payable........................................             152             (214)           (25)
   Accrued other liabilities...................................           4,301           (2,302)          (270)
                                                                        -------          -------         ------
Net cash provided by operating activities......................          36,946           32,214          3,776
Cash flows from investing activities:
Investment in library of photographs and videos................          29,886           33,683          3,949
Capital expenditures...........................................           4,884            5,306            622
Investments in other assets....................................           4,279           10,194          1,195
Cash acquired in reverse acquisition...........................            (736)               -              -
                                                                        -------          -------         ------
Net cash used in investing activities..........................          38,313           49,183          5,766
Cash flow from financing activities:
Conversion of warrants.........................................           1,613           21,831          2,559
Repayments on long-term loan...................................            (329)            (394)           (46)
Short-term borrowings..........................................             198           (1,327)          (156)
                                                                        -------          -------         ------
Net cash (used in) provided by financing activities............           1,482           20,111          2,358
Foreign currency translation adjustment........................             353               63              7
                                                                        -------          -------         ------
Net (decrease) increase in cash and cash equivalents  .........             467            3,205            376
Cash and cash equivalents at beginning of the period...........           3,698            4,165            488
                                                                        -------          -------         ------
Cash and cash equivalents at end of the period.................           4,165            7,370            864
                                                                        =======          =======         ======

Cash paid for interest.........................................             544            1,017            119
                                                                        =======          =======         ======

Cash paid for taxes............................................             332              646             76
                                                                        =======          =======         ======
</TABLE>

                See notes to consolidated financial statements

                                      -4-
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   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. The acquisition has been accounted for as a
reverse acquisition whereby the Company is 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 value on June 12, 1998, the assets and liabilities of
the Company remained at their historical cost following the acquisition.

     The accompanying financial statements have been presented in Swedish Kronor
("SEK") which is the principal currency in which Cine Craft and Milcap generate
their cash flows.

     Solely for the convenience of the reader, the accompanying consolidated
financial statements as of December 31, 1999 and for the twelve months then
ended have been translated into United States dollars ("USD") at the rate of SEK
8.53 per USD 1.00 the exchange rate of the Swedish Riksbank on December 31,
1999. The translations should not be construed as a representation that the
amounts shown could have been, our could be, converted into US dollars at that
or any other rate.

2.   Summary of Significant Accounting Policies

Principles of Consolidation

     The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries.

     All significant intercompany transactions and balances have been
eliminated.

     The financial statements of the Company and its subsidiaries are measured
in the currency in which that company primarily conducts its business (the
functional currency). The functional currency of all the Company's foreign
operations is the applicable local currency. When translating functional
currency

                                      -5-
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

financial statements into Swedish Kronor, year-end exchange rates are applied to
asset and liability accounts, while average annual rates are applied to income
statement accounts. Adjustments resulting from this process are recorded in a
separate component of shareholders' equity.

   Foreign currency transaction gains and losses resulting from the settlement
of amounts receivable or payable denominated in a currency other than the
functional currency are credited or charged to income.

Inventories

   Inventories are valued at the lower of cost or market, with cost principally
determined on an average basis. Inventories consists principally of video
cassettes and magazines held for resale.

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.

   The Company evaluates the carrying value of property, plant and equipment for
potential impairment on an ongoing basis.

Recognition of Revenue

   Revenue from the sale of magazines and other related products is recognized
upon delivery. Revenue from the sale of video and DVD products is recognized
based upon reported sales to retail customers by the Company's distributors.
Provisions for expected returns of product are recorded. Revenue from Internet
sales are recognized based upon receipts from customers or reported sales to
customers by the Company's licensees.

Advertising Costs

   Advertising costs are charged to income as incurred, see note 18.

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".

                                      -6-
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   It is the Company's current intention to re-invest the unremitted earnings of
its non-U.S. subsidiaries indefinitely and accordingly no provision for U.S.
income taxes or foreign withholding taxes has been provided.

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.  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.

Cash Equivalents

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

Concentration of Credit Risk

   Financial instruments that potentially subject the Company to concentrated
credit risks consist primarily of cash and trade receivables. Credit risk on
trade receivables is minimized as a result of the use of bank guarantees and
credit control. The Company maintains cash and equivalents with various
financial institutions.  The Company policy is designed to limit exposure to any
one institution.

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"
(SFAS 128) (see Note 15).

Fair Value of Financial Instruments

   The carrying value of financial instruments such as cash, accounts
receivable, accounts payable and short-term borrowings approximate their fair
value based on the short-term maturities of these instruments.

                                      -7-
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Use of Estimates

   The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

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 No. 25 ("APB 25"), "Accounting
for Stock Issued to Employees," 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
grant date.

3. Business Acquisition

   On June 12, 1998, the Company acquired (a) all of the outstanding common
stock of Cine Craft in exchange for the issuance of 7,500,000 shares of common
stock and 700,000 common stock purchase warrants of the Company, and (b) all of
the outstanding common stock of Milcap in exchange for the issuance of 7,000,000
shares $4.00 series A convertible preferred stock and 175,000 common stock
purchase warrants of the Company. Generally accepted accounting principles
require that the Company be considered the acquired company for financial
statement purposes (a reverse acquisition) even though the entity will continue
to be called Private Media Group, Inc. Therefore, the acquisition has been
recorded as a recapitilization of Cine Craft and Milcap. The effects of the
reverse acquisition have been  reflected for all share amounts in the
accompanying financial statements. The Company had no operations at the time of
the reverse acquisition. The shares issued in the reverse acquisition represent
the outstanding shares of the Company at the date of the reverse acquisition.

4. Trade Accounts Receivable

   Trade accounts receivable consist of the following:

                                                            December 31,
                                                                1999
                                                          ----------------
                                                                SEK
                                                           (in thousands)
Trade accounts receivable..............................             69,999
Allowance for doubtful accounts........................             (2,007)
                                                          ----------------
 Total trade accounts receivable.......................             67,992
                                                          ================

                                      -8-
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. Inventories

   Inventories consist of the following:

                                                            December 31,
                                                                1999
                                                          ----------------
                                                                SEK
                                                           (in thousands)
Magazines..............................................             19,798
Video cassettes........................................             15,214
DVDs...................................................              3,106
Other..................................................              2,090
                                                          ----------------
                                                                    40,209
                                                          ================

6. Prepaid Expenses and other current assets

   Included in prepaid expenses and other current assets at December 31, 1999,
is and amount of SEK 9,000 thousand representing VAT receivable from the Spanish
Tax Authority.

7. Other Assets

   Included in other assets at December 31, 1999, are the amounts of SEK
15,189 thousand representing an investment in certain land and building and SEK
9,391 thousand representing long-term loans to Private Circle, Inc. USA. The
loans bear interest at a rate of 9% payable annually. The current balance
including accrued interest amounts to SEK 10,002 thousand at December 31, 1999

                                      -9-
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


8.   Library of photographs & videos

     Library of photographs & videos consist of the following:

<TABLE>
<CAPTION>
                                                                            December 31,
                                                                                1999
                                                                       -------------------
                                                                                SEK
                                                                           (in thousands)
<S>                                                                    <C>
Gross:
Photographs........................................................                 30,667
Videos.............................................................                135,399
Translations, Sound Dubbing, & Sub-Titles for Video Library........                 31,720
                                                                       -------------------
                                                                                   197,786
                                                                       ===================
Less accumulated depreciation:
Photographs........................................................                 22,780
Videos.............................................................                 74,450
Translations, Sound Dubbing, & Sub-Titles for Video Library........                 16,671
                                                                       -------------------
                                                                                   113,901
                                                                       ===================
Net:
Photographs........................................................                  7,887
Videos.............................................................                 60,949
Translations, Sound Dubbing, & Sub-Titles for Video Library........                 15,049
                                                                       -------------------
                                                                                    83,885
                                                                       ===================
</TABLE>

9.   Property, Plant and Equipment

     Property, plant and equipment consist of the following:

<TABLE>
<CAPTION>
                                                                            December 31,
                                                                                1999
                                                                       -------------------
                                                                                SEK
                                                                           (in thousands)
<S>                                                                    <C>
Equipment & Furniture..............................................                 20,594
Accumulated Depreciation...........................................                 (8,621)
                                                                       -------------------
Total Property, Plant and Equipment, net...........................                 11,973
                                                                       ===================
</TABLE>

10.  Short-term Borrowings

     The Company's Swedish subsidiary has a line of credit amounting to SEK
1,000 thousand. Use of the credit facility is charged at 9.75%, which is equal
to the Swedish banks' current official interest rate, and which was the rate of
interest on outstanding borrowings at December 31, 1999. The renewal date of the
facility is every calendar quarter. The line of credit is guaranteed by the
Company's principal shareholder. The Company pays an annual facility fee of
2.00% on the line of credit amount. At December 31, 1999 there were no
borrowings under the line of credit.

                                     -10-
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     The Company's Spanish subsidiary has a line of credit amounting to SEK 515
thousand. Use of the credit facility is charged at 5.50%, which is equal to the
Spanish banks' current official interest rate, and which was the rate of
interest on outstanding borrowings at December 31, 1999. At December 31, 1999
the borrowings under the line of credit of SEK was 370 thousand. The Company's
Spanish subsidiary also has a SEK 105 thousand short term loan. Interest on the
loan is 7.71% and payable monthly.

11.  Accrued Other Liabilities

     Accrued other liabilities is comprised of the following:

                                                    December 31,
                                                        1999
                                                   --------------
                                                         SEK
                                                   (in thousands)
Accrued expenses................................            4,812
Taxes and social security.......................              467
Deposits........................................              542
Salary expense..................................              197
Other...........................................              421
                                                    -------------
                                                            6,439
                                                    =============

12.  Income Tax

     Pretax income (loss) for the years ended December 31, 1998 and 1999 was
taxed in the following jurisdictions:

                                             December 31,
                                      ----------------------------
                                          1998            1999
                                      ------------    ------------
                                         (SEK in thousands)
USA................................         (1,366)         (7,165)
Gibraltar..........................         37,232          35,772
Cyprus.............................          1,424           1,888
Sweden.............................          2,260           2,011
Spain..............................          1,565             207
France.............................            388              68
Other..............................            (48)            (92)
                                      ------------    ------------
                                            41,455          32,689
                                      ============    ============

                                     -11-
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The components of the provision for income tax (benefit) are as follows:

                                                    December 31,
                                            ----------------------------
                                                1998            1999
                                            ------------    ------------
                                                (SEK in thousands)
Current
     Cyprus.............................              65              86
     Sweden.............................             242             481
     Spain..............................             746             221
     France.............................              14              19

Deferred
     Sweden.............................             378             125
     Spain..............................               -               -
                                            ------------    ------------
                                                   1,445             932
                                            ============    ============

     The Company's deferred tax liabilities relate principally to income
appropriated to a tax allocation reserve, which will be subject to taxation
after five years.

     A reconciliation of income taxes determined using the Swedish statutory
rate of 28% to actual income taxes provided is as follows:

                                                        December 31,
                                                  -------------------------
                                                     1998           1999
                                                  ----------     ----------
                                                      (SEK in thousands)

Income tax expenses at statutory rates..........      11,607          9,154
Income in Gibraltar not subject to tax..........     (10,424)       (10,016)
Foreign tax rate differential...................        (133)          (413)
Losses for which no tax benefit was recorded....         396          2.032
Other, net......................................          (1)           175
                                                  ----------     ----------
Income tax provided.............................       1,445            932
                                                  ==========     ==========

13.  Related Party Transactions

     The Company has short term loans receivable of SEK 5,955 thousand at
December 31, 1999. The loans bear interest at a rate of 10% payable annually and
are due from entities controlled by the Company's principal shareholder. The
current balance including accrued interest amounts to SEK 6,809 thousand at
December 31, 1999.

         Milcap Publishing Group, a wholly owned subsidiary of the Company, is a
party to an exclusive Distribution Agreement with Sundance Associates, Inc.
("Sundance") which has been in effect since 1995. Robert Tremont, a Director of
the Company, is the sole shareholder of Sundance. Under the terms of the
Distribution Agreement Milcap granted to Sundance the exclusive rights to
distribute in the United States and Mexico specified products, including
magazines, videos and digital media such as CD-ROM's and laser discs. Royalties
are paid by Sundance to Milcap in accordance with an agreed royalty schedule.
The Distribution Agreement automatically renews for successive one year terms
and is cancellable by either party prior to the end of each one year term.
During the 12 month periods ended December 31, 1998 and December 31, 1999
Sundance paid royalties to Milcap of $2,247,392 and $2,123,564, respectively.

                                     -12-
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. 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.

Common stock

     The Company is authorized to issue 50,000,000 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.

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 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 one basis. Additionally, at any time
the common stock of the Company has a closing price of less than $4.00 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. 64,873 shares of common
stock will be distributed in 2000 with respect to 1999 stock dividends. This
amount is shown in shareholders' equity under stock dividend to be distributed.

Common stock warrants

     The Company has issued 875,000 common stock warrants which are exercisable
at any time by the holder thereof until December 31, 2000 at an exercise price
of $4.00 per share. The number of warrants exercised during the years ended
December 31, 1998 and 1999 amounted to 50,000 and 650,000, respectively.

                                     -13-
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.  Earnings per Share

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

                                                           Years ended
                                                           December 31,
                                                 -------------------------------
                                                      1998             1999
                                                 --------------   --------------
Numerator:

Net income (SEK in thousands)                            40,010           31,757
                                                 ==============   ==============

Denominator:

Denominator for basic earnings per share -            7,790,835        8,423,264
 Weighted average shares

Effect of dilutive securities:
   Preferred stock                                    7,000,000        7,000,000
   Common stock warrants and options                    523,878          208,604
   Stock dividends to be distributed                     59,049           64,873
                                                 --------------   --------------

Denominator for diluted earnings per share -
 weighted average shares and assumed
 conversions                                         15,373,761       15,969,740
                                                 ==============   ==============

Earnings per share (SEK)
Basic                                                      5.14             3.77
Diluted                                                    2.60             2.02
                                                 ==============   ==============

16.  Commitments and Contingent Liabilities

     The Company leases certain property and equipment under operating leases.
The rental payments under these leases are charged to operations as incurred.
Rental expense for the years ended December 31, 1998 and 1999 amounted to SEK
2,251 thousand and SEK 3,321 thousand, respectively. Future minimum payments
under non-cancelable leases as of December 31, 1999 are as follows:

     Year          (SEK in thousands)
     ----          ------------------
     2000                2,644
     2001                2,339
     2002                1,228
     2003                  659
     2004                   16
     2005                    0
     Thereafter              0

     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 plus fines amounting to SEK 16,800,000 plus
interest. The Company believes the assessment is without merit and is

                                     -14-
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

in the process of appealing the assessment to the Administrative Court in
Stockholm. The final outcome of the appeal is expected to take several years and
the Company intends to ask for a postponement of payment of the taxes and fees
until the case is settled.

     Due to the early stages of this matter and the uncertainty regarding the
ultimate resolution, no amounts have been provided in the Company's financial
statements for this dispute.

     Management is not aware of any matters that could give rise to any material
liability to the Company that would have a material adverse effect on the
Company's financial condition or results of operations.

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 and movies.

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

<TABLE>
<CAPTION>
                                                                   December 31,
                                                        -------------------------------------
                                                              1998                 1999
                                                        ----------------     ----------------
Net Sales                                                          (SEK in thousands)
<S>                                                     <C>                  <C>
   USA                                                                 -                    -
   Gibraltar........................................              37,000               35,151
   Cyprus...........................................              63,317               66,391
   Sweden...........................................             117,635              113,325
   Spain............................................             116,060              137,918
   France...........................................              12,027                9,035
   Eliminations.....................................            (180,935)            (188,998)
                                                        ----------------     ----------------
Total...............................................             165,104              172,822
                                                        ================     ================
</TABLE>

Eliminations principally relates to revenue arising from trademark, license and
distribution agreements between the Gibraltar, Cyprus, Sweden and Spain
companies.

<TABLE>
<CAPTION>
                                                                   December 31,
                                                        -------------------------------------
                                                              1998                1999
                                                        ----------------     ----------------
                                                               (SEK in thousands)
<S>                                                     <C>                  <C>
Operating profit
USA.................................................              (1,366)              (7,165)
Gibraltar...........................................              37,000               35,150
Cyprus..............................................               1,423                1,889
Sweden..............................................               2,066                  456
Spain...............................................               1,884                2,267
France..............................................                 509                  152
Other...............................................                 (48)                 (92)
                                                        ----------------     ----------------
Total...............................................              41,468               32,657
Interest income (expense), net......................                 (14)                  32
                                                        ----------------     ----------------
Income before income taxes..........................              41,455               32,689
                                                        ================     ================
</TABLE>

                                     -15-
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Long-lived assets
USA.................................................           -           -
Gibraltar...........................................           -           -
Cyprus..............................................      76,809      84,124
Sweden..............................................      15,225      26,344
Spain...............................................      11,531      11,044
France..............................................       1,801         870
Other...............................................         137          62
                                                         -------     -------
Total...............................................     105,503     122,444
                                                         =======     =======

   Export sales from Sweden to unaffiliated customers amounted to SEK 96.7
million and SEK 109.6 million for the years ended December 31, 1998 and 1999,
respectively. Export sales from Spain to unaffiliated customers amounted to SEK
46.5 million and SEK 17.6 million for the years ended December 31, 1998 and
1999, respectively. Export sales from Cyprus to unaffiliated customers amounted
to SEK 3.4 million and SEK 14.9 million for the years ended December 31, 1998
and 1999, respectively. Export sales from other geographic areas are
insignificant.

18.  Advertising Costs

   The total advertising costs were SEK 3,391 thousand and SEK 2,559 thousand
for the years ended December 31, 1998 and 1999, respectively.

19.  Stock-Based Compensation

   On March 1, 1999 the Company adopted the 1999 Employee Stock Option Plan
("the Plan"). The Plan provides for the issuance of up to 1,200,000 shares of
the Company's common stock to employees, consultants and advisors of the
company. From the inception of the Plan through December 31, 1999, stock options
to purchase an aggregate of 993,250 shares of the Company's common stock were
granted under the Plan. At December 31, 1999, a total of 990,500 options were
outstanding. 376,375 stock options vested March 1, 1999 and are exercisable at
$12.50 per share, the market price of the Company's common stock at that date.
The remaining 614,125 stock options vest in 19 equal quarterly installments
commencing June 30, 1999. The exercise price of each installment of options
which vests after March 1, 1999 is equal to the fair market value of the
Company's common stock on the date each installment vests. The options are
exercisable on the date they vest. The stock options expire 10 years after the
date of grant.

                                     -16-
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   A summary of stock option activity for the year ended December 31, 1999 is a
follows:

<TABLE>
<CAPTION>
                                                          Weighted
                                                           average
                                       Number of        exercise price
                                         shares         in US dollars
                                        ---------       --------------
<S>                                    <C>              <C>
Outstanding                                     -                  -
December 31, 1998

Granted......................             993,250              13.39/(1)/

Exercised....................                   -                  -

Forfeited....................               2,750              14,79/(1)/
                                        ---------

Outstanding                               990,500              13,39/(1)/
December 31, 1999............
                                        =========
</TABLE>

(1) Weighted average informations relates only to options vested and priced
    during 1999. The remaining options will be priced based upon the market
    price of the Company's stock when such options vest in the future.

    At December 31, 1999 options as to 466,625 shares were vested and
exercisable with exercise prices ranging from $12.50 to $18.00.

    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. 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 proforma net income for
1999 would have been a loss of SEK 2,618,000. Proforma basic loss per share
would have been SEK 0.31 for 1999 and diluted loss per share would have been SEK
0.17.

    The weighted average fair value of options granted during 1999 was estimated
at $8.91 per share, based upon the Black-Scholes option-price model with the
following weighted average assumptions: 0% dividend yield, expected volatility
of 46-70%, risk-free interest rate of 5.24-6.44% and expected life of 9.5-10
years.

20.  Recent Pronouncements

    In June 1998, the FASB issued Statement No. 133, Accounting for Derivitive
Instruments and for Hedging Activities. Statement No. 133 is effective for
fiscal years beginning after June 15, 1999. Statement No. 133 will not affect
the Company as it does not enter into derivitive or hedging activities.

                                     -17-