U.S. SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549





Form 10-K







|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2009

OR



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

For the transition period from              to
            .

Commission file number 000-25067





PRIVATE MEDIA GROUP, INC.

(Name of Registrant as specified in its Charter)







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

537 Stevenson Street, San Francisco, California 94103

(Address of U.S. principal executive offices)

Calle de la Marina 16-18, Floor 18, Suite D, 08005 Barcelona, Spain

(Address of European principal executive offices)

U.S. (415) 575-9700, Europe 34-93-620-8090

(Issuers telephone number, including area code)





Securities registered pursuant to Section 12(b) of the Exchange Act:



|                               |  |                                                   
|------------------------------ |  | --------------------------------------------------
|Title of each class            |  | Name of each exchange on which
registered         
|Common Stock, $0.001 par value |  | The Nasdaq Stock Market LLC
(Nasdaq Global Market)

Securities registered pursuant to Section 12(g) of the Exchange Act: None





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes   ̈    No  
x

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act.

Yes   ̈    No  
x

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

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

Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated file, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Act).



|                            |  |  |  |                                      
|--------------------------- |  |  |  | -------------------------------------
|Large Accelerated Filer  ̈   |  |  |  | Accelerated Filer                    ̈
|Non-accelerated filer      ̈ |  |  |  | Smaller Reporting Company x          

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

At June 30, 2009, the aggregate market value of the voting stock and non-voting common equity held by non-affiliates of the
registrant was $17,169,297. The aggregate market value has been computed by reference to the last sales price of the common stock on June 30, 2009.

On May 11, 2010 the registrant had 20,705,823 shares of Common Stock outstanding.









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PART I



|ITEM 1. | BUSINESS
|------- | --------

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



| |  |  | our business development, operating development and financial condition;
| | - |  | ------------------------------------------------------------------------



| |  |  | our expectations of growth in demand for our products and services;
| | - |  | -------------------------------------------------------------------



| |  |  | the impact of competition on revenues and margins;
| | - |  | --------------------------------------------------



| |  |  | our expansion and acquisition plans;
| | - |  | ------------------------------------



| |  |  | the impact of expansion on our revenue potential, cost basis and margins;
| | - |  | -------------------------------------------------------------------------



| |  |  | the effects of regulatory developments and legal proceedings on our business;
| | - |  | -----------------------------------------------------------------------------



| |  |  | the impact of exchange rate fluctuations; and
| | - |  | ---------------------------------------------



| |  |  | our ability to obtain additional financing.
| | - |  | -------------------------------------------

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

Effective March 11,
2010, we implemented a 1:3 reverse stock split of our common stock. Accordingly, all share and per share values reflected have been adjusted to give effect to the reverse stock split.

THE COMPANY

OVERVIEW

Private Media Group, Inc., a US incorporated company, and its subsidiaries (together referred to hereinafter as
Private Media Group, Private, the Company we or us) is a leading international provider of high quality adult media content for a wide range of media platforms. Any references in this
report to Milcap Media Group refers to Milcap Media Group S.L.U.(Spain), and Milcap Media Limited refers to Milcap Media Limited (Cyprus).

Private Media Group, Inc. is incorporated in the State of Nevada. In accordance with Nevada law we maintain a registered office at 3230
Flamingo Road, Suite 156, Las Vegas, Nevada. Our European headquarters are located at the offices of one of our principal operating subsidiaries, Milcap Media Group, S.L.U, whose address is Calle de la Marina 16-18, Floor 18, Suite D, 08005
Barcelona, Spain, telephone +34-93-620 80 90. Our U.S. headquarters are located at 537 Stevenson Street, San Francisco, California 94103, telephone (415) 575-9700.

We acquire worldwide rights to still photography and motion pictures tailored to our specifications from independent producers/directors
and process these images into products suitable for popular media formats such as print publications, DVDs and electronic media content for Internet, mobile and broadcasting distribution. We distribute our adult media content directly, and through a
network of local affiliates and independent distributors,



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through multiple channels, including (1) newsstands, video rental stores, travel retail and adult bookstores, (2) mail order catalogues, (3) IPTV (Internet Protocol Television),
cable, satellite and hotel television programming, (4) over the Internet via proprietary and third party websites and (5) wireless telephony. In addition to media content, we also market and distribute branded leisure and novelty products
oriented to the adult entertainment lifestyle and generate additional sales through the licensing of our Private trademark to third parties. In the fiscal year ended December 31, 2009, we had net sales of EUR 23.1 million and a net
loss of EUR 20.5 million.

Our business was founded in 1965 and achieved initial success through our flagship publication,
Private, the first full color, hard-core sex publication in the world. Today, we produce one X-rated periodical magazine: Private. As of December 31, 2009, we had compiled a digital archive of more than two million photographs and
all of our 547 issues of print publications. Approximately 50,000 copies of our print publications are distributed together with DVDs each month at retail price of approximately Euro 14.50-19.50.

Since 1992, we have also acquired, processed and distributed adult motion picture entertainment. We acquire worldwide rights to motion
pictures that meet our exacting standards for entertainment content and production value from independent producers/directors, either under exclusive contracts or on a freelance basis. We then process these motion pictures to ensure consistent image
quality and prepare and customize them for distribution in several formats, including DVDs, broadcasting, which includes IPTV, cable, satellite and hotel television programming, and the Internet. Our proprietary motion pictures and those produced by
joint ventures in which we participate have received more than 180 industry awards since 1994, evidencing our success in setting high quality standards for our industry. As of December 31, 2009, our movie library contained 1,349 titles. We
expect to add more than 50 titles in 2010.

We license our content to cable & satellite television operators and IPTV
platforms as well as to hotels. Through different partnerships, we have also launched two television channels, The Private ChannelandPrivateSpice, which broadcast our content. Consumers pay for these products either on a
video-on-demand, pay-per-view or subscription basis.

Since 1997, we have expanded our presence in emerging electronic markets
such as the Internet, broadcasting and hand-held devices including both mobile phones, iPods and other MP4 players. We believe that these technologies represent a substantial growth opportunity for us in the future.

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

On January 20, 2009 we expanded our Internet operations through the acquisition of Game Link LLC and its affiliates, companies
engaged in digital distribution of adult content over the Internet and eCommerce development. GameLink is a leading US adult entertainment VOD and eCommerce platform through its GameLink.com website. The sites installed user base represents
over one million domestic and international customers and it serves over 100,000 users daily. Including 70,000 video titles, GameLink has the largest library of digital and physical adult media and novelties in the United States.

On October 29, 2009 we continued the ongoing expansion of our global digital media platform through the acquisition of Sureflix
Digital Distribution and its affiliates, companies engaged in the business of digital distribution of premium gay adult content. Sureflix is a leading global supplier of adult programming. The company operates a vast network of more than 100
pay-per-view VOD websites and has a North American broadcast presence. It represents premium production studios in global television broadcast (cable, satellite), mobile, IPTV and Internet VOD markets. Sureflix has not only in-depth knowledge of
adult programming, but also significant VOD technology and marketing expertise.

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



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History

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

On December 19, 1997 Private Media Group, Inc. entered into acquisition agreements with
Milcap Media Limited and Cine Craft Limited to acquire all of their outstanding capital stock in exchange for 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.
Private Media Group, Inc. completed these acquisitions on June 12, 1998. In connection with these acquisitions, in December 1997 the parent company changed its corporate name to Private Media Group, Inc. and declared a one for five reverse
split of its Common Stock.

On January 20, 2009 we expanded our Internet operations through the acquisition of Game Link
LLC and its affiliate, companies engaged in digital distribution of adult content over the Internet and eCommerce development.

On October 29, 2009 we continued the ongoing expansion of our global digital media platform through the acquisition of Sureflix
Digital Distribution and its affiliates, companies engaged in the business of digital distribution of premium gay adult content.

Our Strategy

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

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

To be at the forefront of the
adult entertainment industry in adapting new technology and distribution channels such as wireless and
IPTV1distribution of our content.By actively seeking out and utilizing advanced technologies such as Internet, digital cable and satellite television, IPTV and wireless devices to distribute our content, we expect to
increase revenues with minimal incremental cost.

To be able to deliver our entire movie library, including
metadata, via any new format in order to facilitate distribution and provide unparalleled service. We have developed an extensive library of motion pictures and other pictorial content. Until recently, this library was archived on a master
print, which would allow duplication in traditional media. New forms of electronic distribution provide us with an opportunity to use this content by distributing it through new forms of media, such as, Internet, IPTV broadcasting and wireless
devices.

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



|1 | IPTV (Internet Protocol Television) describes a system where a digital television service is delivered to subscribing consumers using the Internet Protocol over a
broadband connection.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Our Competitive Strengths

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

Recognized brand name

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

Established market position and distribution network

We have access to a well-established worldwide distribution network which has been built up over the past 40 years, including some +
100,000 points of sale in over 40 countries as of December 31, 2009. In many markets, we believe that our established presence hinders our competitors ability to break into the market. In some cases, exclusive distribution agreements
improve our market position further. This broad distribution network provides an effective channel to introduce new products and services and new formats for existing products and services. In electronic media categories, we have entered into
strategic alliances with a number of leading international service providers. In addition, we have assembled an internal team of Internet specialists to maintain and improve our Internet infrastructure and electronic products and services. In
January 2009 we expanded our Internet operations through the acquisition of Game Link LLC and its affiliate, companies engaged in digital distribution of adult content over the Internet and eCommerce development. On October 29, 2009 we
continued the ongoing expansion of our global digital media platform through the acquisition of Sureflix Digital Distribution and its affiliates, companies engaged in the business of digital distribution of premium gay adult content. Sureflix is a
leading global supplier of adult programming. We believe that our broad, multi-format distribution network affords our customers convenient access to high quality adult media content in the format of their choice.

Extensive library of high quality adult media content

We have an extensive library of high quality adult media content. As of December 31, 2009, our library included still photographs
developed for more than 500 back-issues of magazines and 1,000 movie titles. We hold exclusive worldwide rights to this entire content archive. This has enabled us to enter into distribution arrangements with a wide range of media content platforms,
including leading international telecoms and broadcasting companies. To facilitate electronic distribution of our products, we have converted our entire archive of print images into a digital format. Our video archive is now also stored in rich
media digital format, which can be converted into any known file format and delivered digitally online or on hard drives. We believe that this electronic archive constitutes one of the largest libraries of high quality adult media content in the
world.

Flexible operating structure and access to capital

We acquire adult media content from third-party producers/directors on a project basis. This approach gives us substantial flexibility in
terms of production volume and delivery time, significantly reduces our fixed production overhead and largely eliminates the risk to us of cost overruns in production. Because of our multiple product and service formats and broad distribution
network, we can afford to hire top directors in the industry, which we believe



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results in a higher quality product for our customers. Similarly, we reduce our fixed processing costs by outsourcing editing and duplication functions for most of our products, although we
retain oversight of the overall production process for cost and quality control purposes. As a public company with access to the capital markets we believe that we will have sufficient financial resources to increase our production and grow through
acquisitions without sacrificing our high quality standards. However, we cannot guarantee that funds will be available from the capital markets when needed.

Experienced professional management

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

Our Principal Products and Markets

Internet Services

We launched our first Internet website, private.com, in 1997. We now own a number of sites directed at specific customer bases,
including gamelink.com and maleflixxx.com. In January 2009 we expanded our Internet operations through the acquisition of Game Link LLC and its affiliate, companies engaged in digital distribution of adult content over the Internet and
eCommerce development. On October 29, 2009 we continued the ongoing expansion of our global digital media platform through the acquisition of Sureflix Digital Distribution and its affiliates, companies engaged in the business of digital
distribution of premium gay adult content. We also generate incremental sales by licensing our trademarks and proprietary adult media content for use on the websites of other companies.

Video

Since 1992, we have acquired and distributed adult motion picture entertainment. These productions generally feature men and women in a
variety of erotic and sexual situations, in hardcore and softcore versions. We maintain the ownership and copyrights of every movie we acquire. As of December 31, 2009, our movie library contained 1,349 movie titles. We expect to release more
than 50 movie titles in 2010, with distribution through our worldwide network. These products are sold by both traditional and technologically advanced distributors, and wholesalers worldwide. Distributors include national video store and newsstand
distribution networks, and Internet, IPTV, cable, satellite, mobile telephone network and hotel television operators.

Wireless - Mobile Entertainment

We launched our mobile content program in 2003. We generate revenues from wireless deals both on- and off-portal and our current principal
market is Europe. Our product offering currently consist of games and rich-media mobile downloads including; MMS, wallpapers, screensavers, video clips and video streaming.

Magazine Publications

We are the publisher of Private, an international X-rated magazine. Private was founded in 1965, and was the first full
color, hardcore sex publication in the world. We distribute the magazine through newsstands and other retail outlets.



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INTERNET SERVICES

Private Media Groups Internet team has combined its extensive media library with the most advanced technology to take advantage of
the growth of Internet access and new distribution methods. Private has developed several key product offerings which include a subscription based service and an Internet shop. In January 2009 we expanded our Internet operations through the
acquisition of Game Link LLC and its affiliate, companies engaged in digital distribution of adult content over the Internet and eCommerce development. On October 29, 2009 we continued the ongoing expansion of our global digital media platform
through the acquisition of Sureflix Digital Distribution and its affiliates, companies engaged in the business of digital distribution of premium gay adult content.

Websites

Private.com (www.private.com) is a membership site which offers access to high-quality adult content that includes full-length
Private movies, photosets, sex-stories, a full library of Private magazines in image and downloadable PDF format. In addition, subscribers receive access to live webcams. Premium content is also accessible through Private.com in a variety of
different formats. The site offers various payment methods to suit the ever-changing demands of the end-users that include credit card subscriptions, cards and online checks. All payments are made through a secured system and verification process
that are in-line with the International and local e-commerce regulations. Private.com acquires customers primarily through advertising in its DVDs, magazines and broadcast programming with minimal incremental cost. It also acquires new customers
through its affiliate program Private Cash.

Private VOD (www.privatevod.com) is an eCommerce site which offers a
catalogue of Private videos in multiple media formats including streaming and downloads to computers and mobile phones. The site is based on GameLinks outstanding technology for eCommerce sites.

GameLink.com.On January 20, 2009 we expanded our Internet operations through the acquisition of the company Game Link LLC
and its affiliates, companies engaged in digital distribution of adult content over the Internet and eCommerce development. GameLink is a leading US adult entertainment VOD and eCommerce platform through its GameLink.com website. The sites
installed user base represents over one million domestic and international customers and it serves over 100,000 users daily. Including 70,000 video titles, GameLink has the largest library of digital and physical adult media and novelties in the
United States. The Company offers VOD in multiple media formats including streaming and downloads to computers and mobile phones. GameLinks infrastructure is the most robust in the industry and is highly flexible, customizable and scalable
designed to support multiple retail strategies and products simultaneously. Additionally, through its related companies, GameLink offers third-party and white-label ecommerce solutions and development.

Maleflixxx.com.On October 29, 2009 we continued the ongoing expansion of our global digital media platform through the
acquisition of Sureflix Digital Distribution and its affiliates, companies engaged in the business of digital distribution of premium gay adult content. Sureflix is a leading global supplier of adult programming. The company operates a vast network
of more than 100 pay-per-view VOD websites and has a North American broadcast presence. It represents premium production studios in global television broadcast (cable, satellite), mobile, IPTV and Internet VOD markets. Sureflix has not only in-depth
knowledge of adult programming, but also significant VOD technology and marketing expertise.

The acquisitions of GameLink and
Sureflix are a significant development that will substantially contribute to our growth, while creating economies of scale. As part of our digital strategy, we have established that the combination of Private with major online retailers and
accomplished platform developers is the approach to achieving our goals in the rapidly changing business landscape. The combined content assets of Private and core competencies of GameLink and Sureflix offer a compelling new business model. We will
be expanding our joint Internet strategies globally with new formats and applications to be launched in 2010. In May 2010 we are launching our new private.com membership platform which we have been building since mid 2009. The new platform will
feature a number of proprietary sites and it will also be available as a white label version which we expect will attract adult content providers affiliate worldwide. The new platform is forecasted to improve conversion rates and receive twenty



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times more traffic compared to our existing membership platform. In addition, the new platform has been built to be substantially less labor intensive to operate compared to the existing one.
Following the rollout of the new membership platform, we will launch a new video-on-demand platform following the same concept. Both of the new platforms will be available in localized versions with respect to language and payment options.

Additionally, we will be developing improved interactive functionality for new media platforms such as IPTV and mobile, and
maximizing our content monetization with the existing vast Private library as well as aggregation of select international studios offering a wide range of content and genres for all platform needs. In April this year, GameLink, launched a
proprietary mobile solution enabling users to instantly stream over 15,000 movies. The platform is initially available on Smartphones such as the iPhone and Android phones at the url: www.gamelink.com. The mobile Internet platform is an extension of
GameLinks leading Video-on-Demand e-commerce platform, allowing consumers to purchase and consume content instantly. All content is available for future viewing in the customers virtual media center, stored in the companys
cloud. The platform has been optimized to work with Apple devices including the iPhone, iPod, the iPad as well as Android devices. In addition to streaming, consumers can choose to download their movies or purchase DVDs and novelties
from the globally accessible platform. A white label version of the mobile platform is available and is being marketed to adult studios and affiliates worldwide. Our objective is to become a major provider of an off-portal mobile platform solution
to all principal content providers in our industry. In contrast to Privates existing mobile content business, which is based on an on-portal model going through content aggregators and carriers, this new business is off-portal and provides
substantially improved margins as content is sold directly by Private to the consumer.

VIDEO

Production

In 1992, we began releasing movies under the Private label. Normally, we spend between $ 50,000 and $ 150,000 per acquired movie.
This amount includes post-production, master production and language customization. Generally, we create and design all artwork for promotional items and packaging and contracts for printing services. With respect to DVDs they are duplicated by
independent laboratories.

We do not produce movies ourselves, we acquire our content from independent producers that are
carefully selected for being the best in their genre on each particular time and are subject to strict quality controls. All producers assume production costs, obligations and legal responsibilities, including among other things, the delivery of
rights, model releases and all production and performers related paperwork. The free lance producers deliver the movies on digital masters to us. Digital Masters are customized, dubbed, sub-titled, duplicated and sent to different distributors and
duplication centers. All marketing material and artwork for video covers is created in-house.

As of December 31, 2009,
our movie library contained 1,349 movie titles. During 2010, we expect the total to increase by more than 50 titles. Almost all titles are available on any available format. We presently market our content in over 40 countries.



|                       |  |                    |  |             
|---------------------- |  | ------------------ |  | ------------
|MOVIE LIBRARY          |  | As of December 31,
|                       |  | 2009               |  | 2008        
|Title                  |  | No of Titles       |  | No of Titles
|Amandas Private Diary |  | 5                  |  | 5           
|Best - End of Year     |  | 13                 |  | 12          
|Best of by Private     |  | 114                |  | 98          
|Bukkakke               |  | 7                  |  | 7           
|Cum on my face         |  | 7                  |  | 7           
|Phantom Seducer        |  | 2                  |  | 2           
|Gaia                   |  | 6                  |  | 6           
|Horny Housewives       |  | 9                  |  | 9           
|Ionie Luvecoxxx        |  | 20                 |  | 20          



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|                                         |  |                    |  |             
|---------------------------------------- |  | ------------------ |  | ------------
|MOVIE LIBRARY                            |  | As of December 31,
|                                         |  | 2009               |  | 2008        
|Title                                    |  | No of Titles       |  | No of Titles
|Mansize                                  |  | 13                 |  | 13          
|Peepshow Special                         |  | 12                 |  | 12          
|Pirate Fetish Machine                    |  | 32                 |  | 32          
|Pirate Video                             |  | 12                 |  | 12          
|Pirate Video de Luxe                     |  | 16                 |  | 16          
|Private Auditions                        |  | 11                 |  | 10          
|Private Black Label                      |  | 56                 |  | 56          
|Private Blockbuster                      |  | 5                  |  | 4           
|Private Castings                         |  | 53                 |  | 53          
|Private Classics                         |  | 7                  |  |            
|Private Fetish                           |  | 5                  |  | 4           
|Private Films                            |  | 28                 |  | 28          
|Private Gold                             |  | 106                |  | 101         
|Private Independent                      |  | 1                  |  |            
|Private Interactive                      |  | 1                  |  | 1           
|Private Lesbian                          |  | 14                 |  | 9           
|Private Lust Treasures                   |  | 9                  |  | 9           
|Private Man                              |  | 14                 |  | 14          
|Private Mansize                          |  | 1                  |  |            
|Private Man - Stars                      |  | 12                 |  | 12          
|Private Movies                           |  | 49                 |  | 47          
|Private Porn Vacation                    |  | 3                  |  | 3           
|Private Reality Video                    |  | 26                 |  | 26          
|Private Specials                         |  | 29                 |  | 12          
|Private Sports                           |  | 12                 |  | 12          
|Private Stories                          |  | 27                 |  | 27          
|Private Superf*ckers                     |  | 12                 |  | 12          
|Private Exotic                           |  | 4                  |  | 4           
|Private Tropical                         |  | 35                 |  | 34          
|Private Video Magazine                   |  | 26                 |  | 26          
|Private X-Treme                          |  | 38                 |  | 37          
|Private XXX                              |  | 39                 |  | 39          
|Private-Ninn                             |  | 4                  |  | 4           
|Private-Penthouse Movies                 |  | 12                 |  | 12          
|The Best of the Year                     |  | 12                 |  | 12          
|The Matador Series                       |  | 15                 |  | 15          
|The Private Adventures of Pierre Woodman |  | 10                 |  | 10          
|The Private Life of                      |  | 66                 |  | 55          
|The Private Story of                     |  | 9                  |  | 9           
|Triple X Files                           |  | 12                 |  | 12          
|Triple X Video                           |  | 32                 |  | 32          
|Virtualia                                |  | 6                  |  | 6           
|When Pornstars Play                      |  | 6                  |  | 6           
|Private Blu-ray                          |  | 1                  |  |            
|Erotica (soft titles)                    |  | 273                |  | 264         
|                                         |  |                    |  |             
|Total                                    |  | 1,349              |  | 1,268       
|                                         |  |                    |  |             



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Distribution

We distribute our productions worldwide via digital files and digital masters. We license our movies to IPTV, cable and satellite
television networks and adult pay-per-view television channels. These licenses generally grant the operator a specific right of transmission and we retain the intellectual property rights of every production. We edit many of our new feature movie
releases into several versions depending on the media through which they are to be distributed. Versions edited for cable, satellite and hotel television programming may be less sexually explicit than the versions edited for home video distribution.
DVDs are sold or rented in video stores, sex shops, newsstands and other retail outlets, and where permitted, through direct mail.

Broadcasting

Cable and satellite television has brought adult media content into the privacy of the home. Technological developments, in particular the
evolution of digital broadcasting, has not only increased the number of channels that can be delivered directly to the home via satellite (DTH or DBS), IPTV and cable, but has also led to the development of on-demand technologies such as Video On
Demand (VOD) and Near Video On Demand (NVOD). The development of these services is benefiting the adult entertainment industry by providing a greater number of special interest channels allowing platform providers to target niche audience and also
provide premium tier, Pay-Per-View (PPV) and subscription services.

TV-Channels

Since launching our broadcasting business in 2000, we have rapidly expanded in Europe and Latin America. The broadcasting business was
launched through an exclusive joint venture agreement with International Film Productions and Distributions, Ltd., (IFPD). IFPD was a European-based television broadcasting company associated with major content providers that specialized
in the distribution of adult cable and satellite television channels. Under the joint venture agreement, IFPD was responsible for promoting and broadcasting two channels, namely Private Gold (hardcore) and Private Blue (soft core), globally. The
agreement provided the Company with 65% of the gross profits generated from the broadcast of these channels. In 2003 the joint venture was dissolved and the Company acquired the channel names Private Gold and Private Blue, but continued licensing
them to affiliated companies of IFPD under a two-year agreement with a minimum guarantee. The license was worldwide excluding North and Latin America and expired in 2005 when we entered into two new license agreements with RHF Productions Ltd for
the UK and Playboy TV International for Europe excluding the UK.

The Private Gold channel was originally launched in Europe
under an exclusive joint venture agreement with IFPD. As mentioned above, the Company later acquired the channel name and continued licensing it to an affiliate company of IFPD for a fixed fee. By the end of 2005, Private Gold had become the leading
Adult Pay-TV channel in Europe and was distributed via satellite and cable in 25 countries in the region. In November 2005 the agreement with IFPD expired and the Company and Playboy TV International signed a five-year agreement to merge their two
adult pay-TV channels, Private Gold and Spice Platinum, and thereby consolidating theirs market leadership in Europe. The new channel was launched under the name of Private Spice and under the terms of the agreement, Playboy TV International is
operating, distributing and marketing the new channel and Private provides content, brand and marketing support. Prior to the merging of the two channels, Spice Platinum had rapidly become one of Europes most sought after and fastest growing
premium adult networks reaching in over 15 countries. In May 2006, the Private Spice Channel was launched in Europe and the new channel makes available unique and proprietary quality content, offering flexible language tailoring and market
localization and platforms are able to offer their viewers a unique channel developed and serviced by the worlds leading adult television brands, while ensuring professional reliability and continuity. In 2010, the Private Spice agreement with
Playboy was renewed for another five years.

The Private Gold channel was also launched in Latin America in 2001, via the
joint venture agreement with IFPD and under a distribution agreement with Pramer S.C.A. The agreement was terminated in 2005 and in May the same year, the Company partnered with Playboy TV Latin America, by signing an exclusive agreement to operate
and distribute the Private branded channel throughout Latin America. Under the terms of the agreement, Playboy TV Latin America is operating and distributing the channel via its Pay TV distribution network. The channel is receivable in all of Latin
America. In 2009 the channel was re-branded to the Private Channel.



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IPTV driven Video-on-Demand

While European broadband users are signing up for IPTV services in the hundreds of thousands each month, making Europe
the biggest and fastest growing IPTV region in the world, we have successfully implemented part of our new media strategy and contracted for supplying content for
TVOD2services to a total of 38 major platform operators
in 24 countries in the region. During the twelve months leading up to July 2009 the European IPTV market grew by 51% to 13.6 million IPTV subscribers and by the end of the year we had gained more than 70% coverage. France remains the
champion IPTV country with more than 7 million subscribers and we cover 100% of this market.

General
Licensing

In Europe we license our content to channel operators. Typically we contract for a certain time period for a) a
set quantity of specific titles, or b) access to our entire library for a limited quantity of unspecified titles. The operators distribute via Digital Terrestrial Television (DTT) and Cable & Satellite and are spread across Europe and
include companies such as: TMC Content Group AG, Sky Italy and Canal+.

In-Room Entertainment

The Company also licenses the right to use its content to In-Room Entertainment operators.

DVDs

We
have entered into distribution agreements in Europe, North America and Australia. Under these distribution agreements we agree to provide a specific minimum number of new titles each month during the term of the agreement, and a licensee normally
serves as the exclusive distributor throughout its own country or language territory. In territories such as Germany, Scandinavia, Benelux, France, Italy, Canada, USA and Australia, we have expanded our relationships with our national distributor by
entering into multi-year, multi-product output agreements. In general, we believe that national distribution agreements enable us to have an ongoing branded presence in international markets and to generate higher and more consistent revenues, than
we could achieve selling directly to retailers.

WIRELESS  MOBILE CONTENT

We generate revenues from wireless deals both on and off portal. Our ability to effectively use and re-use our content
creates a high-margin business model for wireless since distribution costs are almost non-existent. The market currently consist of SMS, games and rich-media mobile downloads including; MMS, wallpapers, screensavers, video clips and video streaming.
During 2009, the distribution of Private content continued to increase and by the end of the year it was available to 1.2 billion handsets via 104 mobile network operators in 45 countries. The markets of Asia and the Americas are still
underexploited by us and therefore represent a significant growth potential. Furthermore, Mobile TV, increased penetration of Smart Phones and the implementation of age verification systems offer additional significant growth potential with both
current and future operators in 2009 and beyond3.



|2 | True Video On Demand - (TVOD) - TVOD is the ideal VOD service where individual users get immediate responses when interacting with the VOD system. With TVOD, the user
can not only get instant access to the program online and watch it on TV, but also be able to do any VCR or DVD-like commands on the VOD system with the same quick response time as it is when working a VCR or DVD.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3 | Juniper Research estimates in its white paper Monetising Adult Content on the Mobile (2008) that global revenues from all mobile adult services will rise from $2.2
billion in 2008 to $4.9 billion by 2013.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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MAGAZINE PUBLICATIONS

Our publishing operations include the publication of the adult magazines identified in the table below. All of these magazines are
distributed Europe, North America and Australia. Our magazines feature pictures of men and women engaged in erotic and sexually explicit situations. During 2009 we distributed approximately 50,000 copies of our print publications, packaged together
with our DVDs, per month at an average retail price of approximately (Euro) 14.50-19.50. Our current publication is Private.



|                        |  |                                                    |  |             
|----------------------- |  | -------------------------------------------------- |  | ------------
|MAGAZINE LIBRARY        |  | As of December 31,                                
|                        |  | 2009                                               |  | 2008        
|Title                   |  | No of Issues                                       |  | No of Issues
|Private                 |  | 216                                                |  | 210         
|Pirate                  |  | 111                                                |  | 111         
|Triple-X                |  | 85                                                 |  | 85          
|Private Sex             |  | 81                                                 |  | 75          
|Private Man             |  | 4                                                  |  | 4           
|Mansize                 |  | 4                                                  |  | 4           
|Special Editions        |  | 30                                                 |  | 30          
|Best of Private (Book)  |  | 15                                                 |  | 15          
|Special Editions (Book) |  | 1                                                  |  | 1           
|                        |  |                                                    |  |             
|Total                   |  | 547                                                |  | 535         
|                        |  |                                                    |  |             
|                        | 
|                        |  | Quantities of MagazinesProduced(Printed, not sold)
|Title                   |  | 2009                                               |  | 2008        
|Private                 |  | 169,676                                            |  | 211,931     
|Pirate                  |  |                                                   |  | 93,913      
|Triple-X                |  |                                                   |  | 72,948      
|Private Sex             |  | 93,725                                             |  | 114,467     
|Special Editions        |  |                                                   |  |            
|                        |  |                                                    |  |             
|Total                   |  | 263,401                                            |  | 493,259     
|                        |  |                                                    |  |             

Circulation

Our magazines are distributed to newsstands and other public retail outlets through a network of national distributors, who maintain a
local network of wholesale and retail distributors. Newsstand retail sales are permitted in most of Europe and we distribute our magazines to newsstands in: Norway, Sweden, Finland, Denmark, the Netherlands, Germany, Austria, Switzerland, Belgium,
France, Italy, Portugal and Spain. We ship copies of each issue in bulk to our wholesalers, who distribute on to local retailers. Independent distributors who distribute our magazines do so under individual firm sales distribution agreements.
Agreements with both national and independent distributors are normally subject to automatic yearly extensions unless either party terminates the arrangement.

Production, Distribution and Fulfillment

We print and ship all of our proprietary magazines from Barcelona, Spain. We determine the amount of printed publications bi-monthly with
input from each of our national distributors. Most of our products are packaged and delivered directly by the printer or supplier, while Milcap Media Group provides, customer service and payment processing.



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PROPRIETARY RIGHTS

General

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

Piracy Problems

Our content is constantly being pirated on the Internet. We have an internal program for challenging websites who publish our content
without permission. The program includes subscribing to different legal programs and services concerned with Internet piracy.

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

COMPETITION

General Considerations

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

Our primary competitors in the movie
industry are adult motion picture studios, with in-house production and post-production capabilities. These include U.S. producers such as Hustler, Vivid Film, Wicked Pictures and Evil Angel Productions. Some competitors are smaller, but locally or
regionally they are capable of quickly identifying niche markets that could compete for our customers.

Although we believe
our products are well-established in the adult entertainment industry, we compete with entities selling adult oriented products via any type of distribution network, including the Internet. Many of these products are similar to ours. Over the past
few years, the adult entertainment industry has undergone significant change. Traditional producers of softcore content as well as mainstream providers of media content have shifted to producing hardcore content. As a result, we face greater
competition to distribute hardcore content. This shift has also led to industry consolidation, creating fewer, more financially formidable competitors. Recently, the introduction of a large number of free content Internet sites that allow users to
access large libraries of content has created an even more challenging environment where both sales volume and margins are decreasing substantially.

Internet

The Internet market for adult oriented content has expanded dramatically over the past years. Because it costs as little as $5,000 to
establish an Internet presence, there is significant competition among distributors of adult media content over the Internet. There are numerous adult media content websites competing with ours, some of which are operated by companies that possess
global distribution, broadcasting and branding. Historically pay sites have contained most of the adult media content on the Internet, but recently tube sites, offering free content, have become a serious threat to both the Internet and
DVD distribution of adult entertainment.



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Broadcasting

The distribution of adult movies on cable and satellite television systems and hotel pay-per-view systems is highly competitive.
Competition in this area is increasing in line with increasing consumer demand for hardcore adult entertainment generally. Our strongest geographical market position for cable and television and distribution is in Europe and Latin America, with the
channels, Private Spice and The Private Channel, and licensing arrangements with established European television networks, such as Canal+ and SKY Italy, and IPTV platforms operated by international telcos.

DVDs

The distribution of adult entertainment DVDs is a highly competitive business. Revenue generation for motion picture entertainment
products depends, in part, upon general economic conditions, but the competitive position of a producer or distributor is still greatly affected by the quality of, and public response to, the entertainment product it makes available to the
marketplace. Competition arises from established adult video producers and from independent companies distributing low-quality material. The introduction of a large number of free content Internet sites that allow users to access large libraries of
content has created an even more challenging environment where both sales volume and margins are decreasing substantially.

Magazines

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

EMPLOYEES

As of
December 31, 2007, 2008 and 2009 we employed 123, 97 and 168 people, respectively. 12 part time employees are included in the 2007, 2008 and 2009 numbers. The 2009 number of people includes the addition of 84 full time employees as a result of
the acquisitions of GameLink and Sureflix. Our employees in Spain are represented by two labor unions and we have never experienced a work stoppage. We believe that we have a good relationship with our employees.

GOVERNMENT REGULATION

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

Regulation of the Adult Entertainment Industry in the U.S.

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



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

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

The First and Fourteenth Amendments, however, do not protect the dissemination of obscene material, and several
states and communities in which our products are distributed have enacted laws regulating the distribution of obscene material, with some offenses designated as misdemeanors and others as felonies, depending on numerous factors. The consequences for
violating these state statutes are as varied as the number of states enacting them. Similarly, specific U.S. federal regulations prohibit the dissemination of obscene material. The potential penalties for individuals (including directors, officers
and employees) violating the Federal obscenity laws include fines, community service, probation, forfeiture of assets and incarceration. The range of possible sentences requires calculations under the Federal Sentencing Guidelines, and the amount of
the fine and the length of the period of the incarceration under those guidelines are calculated based upon the retail value of the unprotected materials. Also taken into account in determining the amount of the fine, length of incarceration or
other possible penalty are whether the person accepts responsibility for his or her actions, whether the person was a minimal or minor participant in the criminal activity, whether the person was an organizer, leader, manager or supervisor, whether
multiple counts were involved, whether the person provided substantial assistance to the government, and whether the person has a prior criminal history. In addition Federal law provides for the forfeiture of: (1) any obscene material produced,
transported, mailed, shipped or received in violation of the obscenity laws; (2) any property, real or personal, constituting or traceable to gross profits or other proceeds obtained from such offense; and (3) any property, real or
personal, used or intended to be used to commit or to promote the commission of such offense, if the court in its discretion so determines, taking into consideration the nature, scope and proportionality of the use of the property in the offense.

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

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

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



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

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

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

Child Pornography and Non-Mainstream Content

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

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

As indicated above, all of our products are all in compliance with 18 U.S.C. Section 2257 and all models performing in our
productions are 18 years of age or older. We specifically require compliance from the third-party producers/directors to which we acquire our contents.

Internet Regulation

Government regulation of the Internet is a rapidly developing area and, therefore, adds additional uncertainty to our business. New laws
or regulations relating to the Internet, or more aggressive application of existing laws, could decrease the growth of our websites, prevent us from making our content available in various jurisdictions or otherwise have a material adverse effect on
our business, financial condition and operating results. These new laws or regulations could relate to liability for information retrieved from or transmitted over the Internet, taxation, user privacy and other matters relating to our products and
services. For example, the U.S. government has recently



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enacted laws regarding website privacy, copyrights and taxation. Moreover, the application to the Internet of other existing laws governing issues such as intellectual property ownership and
infringement, pornography, obscenity, libel, employment and personal privacy is uncertain and developing.

Regulation of
the Internet outside the United States

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

SEASONALITY

Our
businesses are generally not seasonal in nature. However, June, July and August are typically impacted by smaller orders from some European and U.S. distributors, due to the holiday season.

AVAILABLE INFORMATION

As a public company, we are required to file annual, quarterly and special reports, proxy statements and other information with the SEC.
You may read and copy any of our materials on file with the SEC at the SECs Public Reference Room at 100 F Street N.E., Washington, DC 20549. Our filings are available to the public over the Internet at the SECs website at
http://www.sec.gov. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. We also make available copies of our Forms 8-K, 10-K, 10-Q, Proxy Statement and Annual Report at no charge
to investors through our website, http://www.prvt.com, as soon as reasonably practicable after filing such material with the SEC. Information on our website is not part of this Report.



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|ITEM 1A. | RISK FACTORS
|-------- | ------------

You
should carefully consider the risks described below, together with all of the other information contained in this Annual Report on Form 10-K in evaluating our business and us. If any of the following risks actually occur, our business, financial
condition or results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

As a result of operating losses our independent registered public accounting firm has substantial doubt about our ability to
continue as a going concern. In each of the past three years we have experienced losses from operations. At December 31, 2009, we had cash and cash equivalents of EUR 613,000. As a result of our operating losses our independent
registered public accounting firm has concluded that there is substantial doubt as to our ability to continue as a going concern, and have modified their report in the form of an explanatory paragraph describing the events that have given rise to
this uncertainty. Our ability to continue as a going concern is based on our ability to generate or obtain sufficient cash to meet our obligations on a timely basis and ultimately to attain profitable operations. We currently expect future
growth and a return to profitability provided that we are successful with the following objectives:



| |  |  | rolling out our Internet platforms, including: a) our newly built signature property and membership platform private.com, b) our cutting edge mobile
platform for Smartphones and c) our multinational eCommerce VOD platform;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | restructuring our affiliate programs on all properties to compete aggressively for, and attract, affiliate traffic;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | continuing the rollout of our content on cable and IPTV video-on demand platforms;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | completing the integration of businesses acquired in 2009;
| | - |  | ----------------------------------------------------------



| |  |  | consolidating and restructuring our operations into an efficient new media business;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | outsourcing of non-cost effective parts of our operations; and
| | - |  | --------------------------------------------------------------



| |  |  | identifying and exploring new online business opportunities which are less dependent on content.
| | - |  | ------------------------------------------------------------------------------------------------

If we are not successful in implementing the above objectives, or if we otherwise do not successfully respond to changing conditions in
the adult entertainment industry, we may continue to incur significant losses. There can be no assurance that we will be able to operate profitably in the future.

Our future capital requirements and needs for additional financing are uncertain.Although we expect that our available
cash resources and cash generated from operations will be sufficient to meet our presently anticipated working capital and capital expenditure requirements for at least the next 12 months based upon our present plan of operation, we may need to
raise additional funds to support more rapid growth or respond to unanticipated requirements. In this regard, we are presently engaged in a dispute with a third party lender regarding our obligations under a promissory note with an outstanding
principal balance of not less than $2.7 million. Although we believe that we have valid claims and defenses against the holder of the promissory note and its affiliates which may ultimately reduce our obligations relating to the promissory note, we
cannot assure you that we will be able to reach agreement with the holder of the promissory note or that we will ultimately prevail on our claims and defenses. An adverse outcome in this dispute would likely have a material impact upon our liquidity
if we are unable to obtain additional debt or equity financing to satisfy any resulting liability.

We currently have no
additional availability under our existing credit facilities and we cannot assure you that additional financing will be available to us in the future. The existence of a going concern exception by our auditors may make it more difficult to
obtain additional bank financing if and when required. If additional funds are raised through the issuance of equity securities, our shareholders percentage ownership will be reduced, they may experience additional dilution, or these newly
issued equity securities may have rights, preferences, or privileges senior to those of our current shareholders. Additional financing may not be available when needed on terms favorable to us, or at all. In this regard, in the past most of our bank
financing has included the guaranty of affiliated companies of our Chairman and principal shareholder, Berth Milton, and a pledge of shares of common stock owned by him or his affiliated companies. We cannot assure you that Mr. Milton or his
affiliated companies will guaranty future debt financings or that such guaranties will be sufficient to obtain future debt financings. If adequate funds are not



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available or are not available on acceptable terms, we may be unable to develop or enhance our products and services, take advantage of future opportunities, maintain the scope of our operations
or respond to competitive pressures or unanticipated requirements, which could harm our business.

Our business is
highly competitive.We compete in all aspects of our business, including price, promptness of service and product quality. We compete with a number of other businesses, offering various adult-oriented leisure-time activities, including
Playboy Enterprises, Inc., Vivid Entertainment, Larry Flynt Publications, Inc. (Hustler), and Beate Uhse AG. Some of our competitors have significantly greater market presence, name recognition and financial and technical resources than we do. In
addition, these companies may develop products or services that are more effective than our products or services and/or they may be more successful than us in marketing their products or services. We believe that the adult entertainment market will
continue to shift towards the use of explicit sexual content, our principal market, resulting in increased competition in this area of our business. In our Internet business, we compete with other adult media content websites as to the content of
their programming and the subscription fees that are offered to members. In addition, the growing availability of free adult entertainment through free websites has resulted in additional pressure on our business, which has adversely affected
revenues and margins.

Our business involves the provision of sexually explicit content which can create negative
publicity, lawsuits and boycotts.We are engaged in the business of providing adult-oriented, sexually explicit products worldwide. Many people regard our primary business as unwholesome. Various national and local governments, along with
religious and childrens advocacy groups, consistently propose and enact legislation to restrict the provision of, access to, and content of such entertainment. These groups also often file lawsuits against providers of adult entertainment,
encourage boycotts against such providers and mount negative publicity campaigns. In this regard, our magazines, and some of our distribution outlets and advertisers, have from time to time been the target of groups who seek to limit the
availability of our products because of their content. We expect to continue to be subject to these activities.

The
adult-oriented content of our websites may also subject us to obscenity or other legal claims by third parties. We may also be subject to claims based upon the content that is available on our websites through links to other sites and in
jurisdictions that we have not previously distributed content in. Implementing measures to reduce our exposure to this liability may require us to take steps that would substantially limit the attractiveness of our websites and/or their availability
in various geographic areas, which could negatively impact their ability to generate revenue.

In addition, some investors,
investment banks, market makers, lenders and others in the investment community may refuse to participate in the market for our common stock, financings or other activities due to the nature of our primary business. These refusals may negatively
impact the value of our common stock and our opportunities to attract market support.

We face online security risks in
connection with our Internet business. Online security breaches could materially adversely affect our business. Any well-publicized compromise of security could deter use of the Internet in general or use of the Internet to conduct
transactions that involve transmitting confidential information or downloading sensitive materials in particular. For example, events such as the November 2001 security breach of the Playboy.com website that allowed a computer hacker to steal
customers credit card numbers could deter current and future subscribers from using or subscribing to our website. In offering online payment services, we will increasingly rely on technology licensed from third parties to provide the security
and authentication necessary to effect secure transmission of confidential information, such as consumer credit card numbers. Advances in computer capabilities, new discoveries in the field of data encryption or other developments could compromise
or breach the methods and procedures that we use to protect our consumers transaction data. In addition, experienced programmers may attempt to steal proprietary information or cause interruptions in our services. To prevent such developments
we may need to expend significant capital and other resources to protect against these problems.

Continued imposition
of tighter processing restrictions by credit card associations and acquiring banks would make it more difficult to generate revenues from our websites.Our ability to accept credit cards as a form of payment for our online products and
services is critical to us. There are ongoing efforts by credit card associations to restrict the processing of credit cards for online adult-related content. To protect against such restrictions, we must invest heavily in new technologies to
protect against fraud. Unlike a merchant handling a sales transaction in a non-Internet environment, e-commerce merchants are fully responsible for all fraud perpetrated against them.



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Our ability to accept credit cards as a form of payment for our online products and services
could be restricted or denied for many reasons, including:



| |  |  | Visa Tier 1 capital ratio requirements for financial institutions have significantly reduced the total dollar sales volume of Visa credit card activity
that any bank can process in any given month;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | if we experience excessive chargebacks and/or credits;
| | - |  | -------------------------------------------------------



| |  |  | if we experience excessive fraud ratios;
| | - |  | ----------------------------------------



| |  |  | if there is a breach of our security resulting in a theft of credit card data;
| | - |  | ------------------------------------------------------------------------------



| |  |  | if there is a change in policy of the acquiring banks and/or credit card associations with respect to the processing of credit card charges for
adult-related content;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | tightening of credit card association chargeback regulations in international commerce;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | banks might choose not to accept accounts with adult-related content, in a similar manner to one bank in Spain which we previously used.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------

American Express has instituted a policy of not processing credit card charges for online, adult-related
content. If other credit card processing companies were to implement a similar policy, this could have a material adverse effect on our business, results of operations and financial condition.

We outsource our production and distribution. We acquire still photography and motion pictures from independent
producers/directors and we rely on third-party distributors to deliver our products to end-users through multiple distribution channels, including newsstands, the Internet and broadcasting. Our relationship with such producers/directors and
distributors is contractually based. We cannot guarantee that our contracts with directors will be fulfilled or that we will enter into new ones, in which case we may not have adequate content for our magazines and movies. Also, we cannot guarantee
that our contracts with distributors will be renewed, in which case we may not be able to sell new products through some or all channels or into some countries. Failure to secure new production contracts, to secure the fulfillment of current
contracts or to maintain our current distribution contracts could have a material adverse effect on our business, results of operations and financial condition.

We are dependent upon key employees. Our future success depends, to a significant degree, on the continued services of our
executive officers and other key personnel, including Berth Milton, Ilan Bunimovitz and Johan Gillborg. We have not procured key-man life insurance and there is no guarantee that we will be able to obtain such insurance in the future should we so
desire. Mr. Milton is the founder of our principal operating division, the Milcap Group, and has taken part in our management since the acquisition of the trademark Private in 1990. We cannot guarantee that we will be successful in retaining
his services in the future. We do not presently have employment agreements with many of our executive officers or key personnel. The loss of the services of any of them or an inability to continue to attract, motivate and retain highly qualified and
talented personnel, including software development technical personnel, could have a material adverse effect on our business and operating results.

We are subject to rapidly changing technology.We are engaged in businesses that have undergone rapid technological change
over the past few years. Therefore, we face risks inherent in businesses that are subject to rapid technological advancement and changes in consumer demands. This includes the possibility that a technology that we have invested in may become
obsolete, requiring us to invest in new technology. Our future success will depend, in part, on our ability to adapt to rapidly changing technologies, to enhance existing services and to develop and introduce a variety of new services to address
changing demands of our consumers.

New technological discoveries may render our equipment uneconomical or
obsolete.As technologies change, the equipment used in our markets may become obsolete. As a result, we subcontract and intend to continue to subcontract capital intensive or technically complex businesses such as editing, DVD replication
and other similar businesses. However, we may not have access to these subcontractors when their services are required, and their services may not be available on favorable terms.

Increased government regulation in the United States or abroad could limit our ability to deliver content and expand our
business. New laws or regulations relating to the Internet, or more aggressive application of existing



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

Cable system operators could also
become subject to new governmental regulations that could further restrict their ability to broadcast our programming. If new regulations make it more difficult for cable operators to broadcast our programming, our operating performance would be
adversely affected.

We face risks relating to our proprietary intellectual property rights.We rely on a
combination of copyright and trademark laws, trade secrets, software security measures, license agreements and non-disclosure agreements to protect our proprietary products. Despite these precautions, it may be possible for unauthorized third
parties to copy parts of, or otherwise obtain and use, our products without authorization, or to substantially use our concepts and market them, trading on our established customer base. Products sold over the Internet are particularly vulnerable to
piracy, particularly in some developing countries. In addition, we cannot be certain that others will not develop substantially equivalent or superseding products, thereby reducing the value of our proprietary rights. Confidentiality agreements with
our employees or license agreements with our customers may not provide meaningful protection for our proprietary information in the event of any unauthorized use or disclosure of that proprietary information.

We do not believe that our products infringe the proprietary rights of third parties, and we are not currently engaged in any
intellectual property litigation or proceedings. Nonetheless, in the future we could become the subject of infringement claims or legal proceedings by third parties with respect to current or future products. In addition, we may initiate claims or
litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. We cannot be sure that any lawsuits or other actions brought by us will be successful or that we will not be found to
infringe the intellectual property rights of third parties. In addition, to the extent we may desire, or are required, to obtain licenses to patents or proprietary rights of others, there can be no guarantee that any such licenses will be made
available on terms acceptable to us, if at all.

Enforcement of civil liabilities against Private Media Group and its
management may be difficult.Presently, most of our directors and officers reside outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon them or to enforce, in
courts outside the United States, judgments against these persons obtained in U.S. courts based upon the civil liability provisions of the U.S. federal securities laws. In addition, since a substantial portion of our assets are located outside the
United States, a judgment obtained in the United States against us may not be fully collectible within the United States.

There are risks associated with our foreign operations.A large part our operations are conducted outside the United
States. In addition, our growth strategy contemplates increased services to foreign customers and to domestic customers distributing programming to international markets. As a consequence of the global nature of our business, we will be exposed to
market risks from changes in interest rates and foreign currency exchange rates that may adversely affect our results of operations and financial condition. By virtue of our significant operations outside the United States, we will be subject to the
risks normally associated with cross-border business transactions and activities, including those relating to delayed payments from customers in some countries or difficulties in the collection of receivables generally.

In addition, we will be exposed to the risk of changes in social, political and economic conditions in the countries where we engage in
business. Political and economic instability in these countries could adversely affect our business activities and operations. Unexpected changes in local regulatory requirements, tariffs and other trade barriers and price or exchange controls could
limit operations and make the repatriation of profits difficult. In addition, the uncertainty of differing legal environments could limit our ability to effectively enforce our rights in some markets.

We are subject to risks relating to performers.Our movie, video and photo productions are subject to U.S. and foreign
regulations which govern the terms and conditions under which sexually explicit media productions may occur. We have adopted practices and procedures intended to ensure compliance with these regulations. Although these measures are intended to
protect us from liability under applicable U.S. and foreign laws governing sexually explicit media productions, we cannot guarantee that we will not be subject to successful legal attacks in the future.



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We do not expect to pay dividends on our common stock in the foreseeable
future. Although our shareholders may receive dividends if, as and when declared by our board of directors, we do not intend to pay dividends on our common stock in the foreseeable future. Therefore, you should not purchase our common stock
if you need immediate or future income by way of dividends from your investment.

We may issue additional shares of our
capital stock that could dilute the value of your shares of common stock. We are authorized to issue 110,000,000 shares of our capital stock, consisting of 100,000,000 shares of our common stock and 10,000,000 shares of our preferred stock.
At April 9, 2010, 20,705,745 shares of our common stock and no shares of our preferred stock were issued and outstanding. In connection with our acquisition of Game Link, LLC and its affiliate on January 20, 2009, 2,844,770 shares of our common
stock were issued and up to 1,531,799 shares of our common stock are issuable in the future. In connection with our acquisition of Sureflix Digital Distribution and its affiliates in October 2009 we issued securities convertible into 1,300,000
shares of our common stock and up to 700,000 shares of our common stock are issuable in the future. In addition, approximately 17,336 shares of our common stock were issuable upon the exercise of options or warrants.

Should we obtain additional financing, we may issue authorized and unissued shares of common stock at below current market prices or
preferred stock that could dilute the earnings per share and book value of your shares of our common stock.

There are
risks relating to the issuance of additional shares of preferred stock, including deterring attempts by third parties to acquire us.Our board of directors has the authority to issue up to 10,000,000 shares of preferred stock, none of which
are currently issued and outstanding, and to determine their price, and other rights, preferences, privileges and restrictions without any further vote or action by our stockholders. The rights of the holders of common stock are subject to, and may
be adversely affected by, the rights of the holders of any preferred stock, including preferred stock that we may issue in the future. If preferred stock is issued, it may rank senior to our common stock in respect of the right to receive dividends
and to participate in distributions or payments in the event of our liquidation, dissolution or winding up. The provisions in our articles of incorporation authorizing preferred stock could delay, defer or prevent a change of control and could
adversely affect the voting and other rights of holders of our common stock, including the loss of voting control to others, which could make it more difficult for a third party to acquire control of us.

Our Chairman of the Board owns a significant amount of our common stock, which may enable him to exercise significant influence or
control over our business and affairs, and he may have interests which differ from the other holders of our stock.Berth Milton, our Chairman, President and principal shareholder, owns up to 43.8% of our issued and outstanding stock.
Therefore, he may be able to effectively exercise significant influence or control over all matters requiring approval by our shareholders, including the election of directors and the approval of significant corporate transactions. His interests may
differ from the interests of other shareholders and, therefore, result in corporate decisions that may be disadvantageous to other shareholders. This concentration of ownership may also have the effect of delaying or preventing a change in control,
which could have a material adverse effect on our stock price.

Future sales of common stock by our Chairman or his
pledgees as a result of margin calls or foreclosures could adversely affect the price our common stock and could in the future result in a change in control of the Company.Our Chairman, Berth Milton, claims direct or indirect beneficial
ownership of 9,059,840 shares of our common stock, or approximately 43.8% of our outstanding common stock. Approximately 4,158,846 of these shares, or 20.1% of our outstanding shares, have been pledged by Mr. Milton or entities controlled by Mr.
Milton or are subject to liens in favor of third parties, including (1) 1,650,000 shares pledged by Slingsby Enterprises Limited to secure indebtedness of the Company of approximately $2.7 million to Consipio Holding BV, (2) 666,667 shares pledged
by Bajari Properties Limited to secure indebtedness of Fraserside Holdings Limited, a subsidiary of the Company, of approximately EUR 1 million and (3) 1,842,179 shares pledged by Mr. Milton in a personal margin brokerage account maintained by RS
Platou Markets AS to secure various purchases and forward contracts of Mr. Milton. In addition, Consipio Holding BV may have the right, under certain circumstances, to the pledge of up to an additional 3,950,000 shares as security for the
Companys approximately $2.7 million obligation. Depending on the status of the various loan obligations for which the shares serve as collateral and the trading price of our common stock, Mr. Milton or his affiliates may experience a
foreclosure or margin call that could result in the sale of the pledged shares, in the open market or otherwise. Unlike Mr. Milton, sales by these pledgees may not be subject to the volume limitations of Rule 144.

In particular, it is our understanding that two of the pledgees, holding 1,650,000 and 1,842,179, pledged shares, respectively, have made
various attempts to foreclose on the collateral of the pledged shares, and that Mr. Milton is currently involved in disputes regarding the pledged shares and a possible foreclosure and sale of these shares. A sale of pledged shares by pledgees could
result in a change of control of the Company, depending upon the number of shares sold and the ownership interests of other shareholders. In addition, sale of these shares, or the perception of possible future sales, could have a materially adverse
effect on the trading price of our common stock or make it more difficult for the Company to raise additional capital through sales of equity securities.

There may be adverse consequences to our shareholders and our business if our common stock ceases to be quoted on the NASDAQ Stock
Market or a principal stock exchange. To continue to be listed on the NASDAQ Stock Market, we must maintain certain requirements. If we fail to satisfy one or more of the requirements, our common stock may be delisted. If our common stock is
delisted, and does not become listed on another stock exchange, then it will be traded, if at all, in the over-the-counter market commonly referred to as the FINRA OTC Bulletin Board or the pink sheets. If this occurs, it may be more
difficult for you to sell our common stock.

If we are delisted from the NASDAQ Stock Market, your ability to sell your
shares of our common stock would also be limited by the penny stock restrictions, which could further limit the marketability of your shares. If our common stock is delisted and trades below $5.00 per share, it would come within the
definition of penny stock under SEC rules. The penny stock rules impose additional sales practice requirements on broker-dealers who sell securities to persons other than established customers and accredited investors. For transactions
covered by the penny stock rules, the broker-dealer must make a special suitability determination for the purchaser and receive the purchasers written agreement to the transaction prior to the sale. Consequently, if the penny stock rules were
to become applicable, this would affect the ability or willingness of broker-dealers to sell our securities, and accordingly would affect the ability of shareholders to sell their shares in the public market. These additional procedures could also
limit our ability to raise additional capital in the future



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|ITEM 1B. | UNRESOLVED STAFF COMMENTS
|-------- | -------------------------

Not applicable



|ITEM 2. | PROPERTIES
|------- | ----------

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

Since October 2007,
Milcap Media Group leases office space in Torre MAPFRE, located at Calle de la Marina 16-18, 08005 Barcelona, Spain, for a term of five years. Average monthly base rental expense is approximately $30,000. The office space is currently used primarily
by our departments providing marketing and administration services to the group. In addition, the office space serves as the European headquarters of Private Media Group, Inc. The lease also requires us to pay our proportionate share of the
buildings real estate taxes and operating expenses.

In January 2008 Milcap Media Group partly renewed the lease for
office space in the building located at Carretera de Rubi 22, 08173 Sant Cugat del Valles, Barcelona, Spain for a further term of five years. Average monthly base rental expense is approximately $ 27,000. The building is currently used by our
operating departments engaged in providing programming and logistic services for the group. In addition, Milcap Media Group leases warehouse space also located on Carretera de Rubi. The lease expires in May 2010 and the average monthly base rental
expense is approximately $ 14,000. We do not intend to renew the lease as we have outsourced our logistics operations.

In
connection with the acquisition of GameLink LLC by the Company, we entered into a lease of an approximately 10,000 square feet building used by GameLink in San Francisco, California. The lease extends through December 31, 2011, has a base rent
of $13,620 per month, and provides for GameLink to be responsible for property taxes and maintenance expenses during the term of the lease.

In connection with the acquisition of Sureflix by the Company, we entered into a lease of an approximately 5,250 square feet office space
used by Sureflix in Toronto, Canada. The lease extends through February 28, 2013, has a base rent of $8,132 per month, and provides for Sureflix to be responsible for property taxes and maintenance expenses during the term of the lease.

Currently, in addition to Barcelona, Spain, Toronto, Canada and San Francisco, California, the groups subsidiaries
lease office space in Stockholm, Sweden and Montreal, Canada.

We recognize rent expense on a straight-line basis over the
term of the leases. The leases also require us to pay our proportionate share of the buildings real estate taxes and operating expenses.



|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------

Consipio Holding BV
vs. Private Media Group, Inc. and Slingsby Enterprises Limited, United States District Court, Southern District of New York, Case No. 09-cv-4284.

On May 1, 2009, Consipio Holding BV filed a lawsuit against the Company asserting a claim for unspecified damages under a Note dated
December 21, 2001 in the original principal amount of $4,000,000, which was guaranteed by Slingsby Enterprises Limited, an affiliate of the Companys Chairman and principal shareholder. The guarantee is secured by 1,650,000 shares of the
Companys common stock. The Company filed its Answer and asserted several affirmative defenses. On March 26, 2010, the Court dismissed the lawsuit, finding that U.S. federal courts did not have jurisdiction over the subject matter of the
lawsuit. This dismissal does not prejudice Consipios ability to refile this lawsuit in another jurisdiction, should it choose to do so. For additional information relating to this litigation see Note 10 to the consolidated financial statements
under Other Debt for additional information regarding this obligation.



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Swedish Tax Authority Proceedings

In December 1999 the Company received final notification from the Swedish Tax Authority assessing its subsidiary in Cyprus for the tax
years 1995-1998 for a total amount of SEK 42,000,000 (approx. EUR 4.5 million) plus fines amounting to SEK 16,800,000 (approx. EUR 1.8 million) plus interest. The Swedish Tax Authority has taken the position that the subsidiary carried on business
in Sweden from a permanent establishment during the period in question and should therefore be taxed on the income attributable to the permanent establishment. The Company is of the view that no permanent establishment is at hand in Sweden. However,
the Administrative Court of Appeal has finally decided that a permanent establishment is at hand. The litigation is, however, still going on and the purpose is to finally decide the amounts to be attributed to the permanent establishment and thus
being taxed in Sweden. In February 2009, the County Administrative Court reduced the assessment for the tax years 1995-1998 to a total amount of SEK 12,600,000 (approx. EUR 1.1 million) plus fines. However, as a matter of fact the tax claim on the
Company has been extinguished according to Administrative Law. Only the claim related to the tax fine amounting to SEK 5,040,000 (approx. EUR 0.5 million) plus interest is valid. The Company has appealed the decision to the Administrative Court of
Appeal. The final outcome of this litigation will not be known for several years. Due to the fact that the final outcome of this matter is still uncertain, and the relatively minor claim now at stake, no amounts have been provided in the
Companys financial statements for this dispute.

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

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

Except as
disclosed above, neither Private Media Group, Inc. nor its subsidiaries is involved in any other litigation or arbitration proceedings which could have a material influence on our financial condition or results of operations.



|ITEM 4. | Not applicable
|------- | --------------



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PART II



|ITEM 5. | MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | ----------------------------------------------------------------------------------------------------------------

Market for Private Media Group, Inc. Common Stock

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



|               |  |      |      |     |   |     
|-------------- |  | ---- | ---- | --- | - | ----
|               |  | High |      | Low
|Fiscal 2009:   |  |      |      |     |   |     
|First Quarter  |  | $    | 3.87 |     | $ | 2.70
|Second Quarter |  | $    | 4.14 |     | $ | 1.68
|Third Quarter  |  | $    | 2.76 |     | $ | 1.80
|Fourth Quarter |  | $    | 3.60 |     | $ | 1.75
|               |  |     
|Fiscal 2008:   |  |      |      |     |   |     
|First Quarter  |  | $    | 6.54 |     | $ | 3.84
|Second Quarter |  | $    | 8.58 |     | $ | 3.66
|Third Quarter  |  | $    | 4.95 |     | $ | 0.36
|Fourth Quarter |  | $    | 5.85 |     | $ | 3.03

On April 9, 2010,
the last sales price reported on the NASDAQ Stock Market was $2.65. On October 19, 2009, there were approximately 1,866 beneficial owners of our common stock.

Dividend Policy

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

Reverse Stock Split

Effective March 11, 2010, we implemented a 1:3 reverse stock split of our common stock. As a result of the reverse stock split, the
Companys shareholders at the effective time of the reverse stock split received one new share of the Companys common stock in exchange for every three shares held. All fractional shares which would otherwise result from the reverse stock
split were rounded up to the nearest whole share in lieu of fractional shares, so that no cash was payable in lieu of fractional shares. The reverse stock split had no effect on the par value of the common stock or the number of authorized shares of
common stock. Corresponding adjustments have been made to the warrants, rights and options outstanding on the effective date to reflect adjusted exercise price terms. Accordingly, all share and per share values reflected have been adjusted to give
effect to the reverse stock split.



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Transfer Agent

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



|ITEM 6. | Not applicable
|------- | --------------



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|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

You should read this section together with the consolidated financial statements and the notes and the other financial data in this
Report. The matters that we discuss in this section, with the exception of historical information, are forward-looking statements within the meaning of the Private Securities Reform Act of 1995. Such forward-looking statements are subject to risks,
uncertainties and other factors which could cause our actual results to differ materially from those expressed or implied by such forward-looking statements. Potential risks and uncertainties relate to factors such as: (1) the timing of the
introduction of new products and services and the extent of their acceptance in the market; (2) our expectations of growth in demand for our products and services; (3) our ability to successfully implement expansion and acquisition plans;
(4) the impact of expansion on our revenue, cost basis and margins; (5) our ability to respond to changing technology and market conditions; (6) the effects of regulatory developments and legal proceedings with respect to our
business; (7) the impact of exchange rate fluctuations; and (8) our ability to obtain additional financing. The foregoing list of factors is not exhaustive. For a more complete list of factors that may cause results to differ materially
from projections, please refer to the Risk Factors section of this Form 10-K.

Overview

We are an international provider and distributor of adult media content. We acquire or license content from independent studios and
directors and process these images into products suitable for popular media formats such as digital media content for Broadcasting, Mobile and Internet distribution, and print publications and DVDs. In addition to media content, we also generate
additional sales through the licensing of our Private trademark to third parties.

On January 20, 2009 we expanded
our Internet operations through the acquisition of Game Link LLC and its affiliates, companies engaged in digital distribution of adult content over the Internet and eCommerce development. GameLink is a leading US adult entertainment VOD and
eCommerce platform through its GameLink.com website. The sites installed user base represents over one million domestic and international customers and it serves over100,000 users daily. Including 70,000 video titles, GameLink has one of the
largest libraries of digital and physical adult media and novelties in the United States.

On October 29, 2009 we
continued the ongoing expansion of our global digital media platform through the acquisition of Sureflix Digital Distribution and its affiliates, companies engaged in the business of digital distribution of premium gay adult content. Sureflix is a
leading global supplier of adult programming. The company operates a vast network of more than 100 pay-per-view VOD websites and has a North American broadcast presence. It represents premium production studios in global television broadcast (cable,
satellite), mobile, IPTV and Internet VOD markets. Sureflix has not only in-depth knowledge of adult programming, but also significant VOD technology and marketing expertise.

We operate in a highly competitive, service-oriented market and are subject to changes in business, economic and competitive conditions.
Nearly all of our products compete with other products and services that utilize adult leisure time and disposable income. Although we believe our products are well-established in the adult entertainment industry, we compete with entities selling
adult oriented products via any type of distribution network, including the Internet. Many of these products are similar to ours. Over the past few years, the adult entertainment industry has undergone significant change. Traditional producers of
softcore content as well as mainstream providers of media content have shifted to producing hardcore content. As a result, we face greater competition to distribute hardcore content. This shift has also led to industry consolidation, creating fewer,
more financially formidable competitors. Recently, the introduction of a large number of free content Internet sites that allow users to access large libraries of content has created an even more challenging environment where both sales volume and
margins are decreasing substantially. In addition, the recent recession has shown that the adult industry is not immune to economic cycles.

Despite serious challenges in the market for online content, we expect healthy growth going forward. There are many reasons to be
optimistic about our opportunities and our Internet group has been working hard to position itself to take advantage of these opportunities.



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The primary source of growth is expected to come from a significant increase in traffic to
our online properties coupled with a much more sophisticated approach to traffic management. We are rebuilding our signature property, private.com, and are restructuring our affiliate programs in all properties to compete aggressively for affiliate
traffic. In addition to our technical systems, we have restructured our departments with resources highly skilled in affiliate traffic development and shifted our emphasis from account management towards sales. We have also developed solutions for
critical new markets: gay, international, and mobile. Finally, we have increased our efforts to defend against piracy of our content and the propagation of pirated content. The combination of the breadth of our premium assets and the scope of our
market reach give us a unique and very defensible position.

During 2009, the DVD market has continued to shrink, with sales
for our physical products declining by 50%. However, the DVD business is by no means dead even in this competitive landscape. The content providers that manage to survive the current clean out will control the DVD market going forward.

With respect to broadcasting, Private is a leading adult content provider in Europe currently partnering with 38 IPTV
operators. In addition to this we are providing content to leading Pay-TV operators. Our strategic partnerships prove to be solid and strong revenue generators and will continue to perform well.

Privates mobile on portal revenues declined again in 2009 after years of strong growth. We are still the most
distributed adult brand in the world and will monetize existing distribution as best as we can by going live with the few outstanding carriers and replacing non-performing content aggregators with new ones. Throughout 2008 and 2009 there has been a
huge increase in off-portal traffic. According to research firm Nielsen, the mobile Internet market has seen a 74% increase between February 2007 and February 2009. We are in the process of enabling smart phone users to browse, purchase and consume
our library of content on all of our web properties and expect to generate substantial growth from this initiative in the second half of 2010.

Through the acquisition of Gamelink and Sureflix, Private acquired a team of the most innovative and experienced developers in the adult
industry who will lead a product development effort focused on a clear goal: increasing qualified traffic to our web properties. There are three key strategies: opening our services to third parties to develop products on top of our platform;
developing applications that give our content hooks into emerging markets and devices; and developing widgets that will merge the unique data analytics we have with our vast product offering and enable sites to easily leverage our catalog and
transactional capabilities to their customers.

One Movie All Screens: the VOD landscape is an endless field of format
proliferation. Consumers are forced to purchase the same movie in a variety of different formats at various price points in order to view it on different devices. Our goal is to provide our customers with the ability to watch any movie in our
catalog on any screen available to them.

In addition to our R&D efforts for traffic generation, we will continue to
explore the most effective way to enable customers to view our movies on all screens. The primary focus of our R&D efforts will be on delivering content to the TV and enabling purchase and consumption on smart phones.

We generate revenues primarily through:



| |  | Internet e-commerce, subscriptions and licensing;
|- |  | -------------------------------------------------



| |  | the broadcasting of movies through IPTV (Internet Protocol Television), cable, satellite and hotel television programming;
|- |  | --------------------------------------------------------------------------------------------------------------------------



| |  | sales of DVDs and magazines;
|- |  | ----------------------------



| |  | sales of adult mobile content, B2B on-portal and B2C off-portal (wireless); and
|- |  | -----------------------------------------------------------------------------------



| |  | content, brand name and trademark licensing.
|- |  | --------------------------------------------



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



|                           |  |                          |  |        |  |       
|-------------------------- |  | ------------------------ |  | ------ |  | ------
|                           |  | Years ended December 31,
|                           |  | 2007                     |  | 2008   |  | 2009  
|                           |  | EUR                      |  | EUR    |  | EUR   
|                           |  | (in thousands)          
|Net sales by product group |  |                         
|Internet                   |  | 4,445                    |  | 4,218  |  | 13,129
|Broadcasting               |  | 7,086                    |  | 5,805  |  | 4,491 
|DVDs & Magazines           |  | 10,864                   |  | 7,687  |  | 3,843 
|Wireless                   |  | 2,596                    |  | 1,957  |  | 1,597 
|                           |  |                          |  |        |  |       
|Total                      |  | 24,990                   |  | 19,667 |  | 23,061
|                           |  |                          |  |        |  |       

Over time, we expect net sales from DVDs &
magazines to continue to decline as a percentage of net sales in relation to total net sales from Internet, broadcasting and wireless. We expect net sales from Internet and wireless broadcasting to grow during the coming years.

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

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

Our primary expenses include:



| |  | acquisition and licensing of content for our library of photographs and videos;
|- |  | -------------------------------------------------------------------------------



| |  | web page development costs;
|- |  | ---------------------------



| |  | printing, processing and duplication costs; and
|- |  | -----------------------------------------------



| |  | selling, general and administrative expenses.
|- |  | ---------------------------------------------

We released 72, 87 and 101 proprietary video titles during 2009, 2008 and 2007, respectively. The releases include both new and archival
material. We plan to release approximately 72 proprietary video titles in 2010.

Over the years, our cost of sales has been
fluctuating relative to net sales due to our use of new mediums for our products, such as the Internet, DVD broadcasting and wireless. We also incur significant intangible expenses in connection with the amortization of our library of photographs
and movies and capitalized development costs, which include the Internet. We amortize these tangible and intangible assets on a straight-line basis for periods of between three and five years.

Restructuring

During 2009 we have faced several organizational challenges as a result of the acquisitions and integration of the online businesses
GameLink and Sureflix into the group. Parallel with the integration, we are rebuilding our signature property, private.com, and restructuring our affiliate programs in all properties to compete aggressively for affiliate traffic. In addition, we
have restructured our departments with resources highly skilled in affiliate traffic development and shifted our emphasis from account management towards sales. We have also developed solutions for critical new markets: gay, international and
mobile. Furthermore, as a response to decreased margins in the adult entertainment industry, we have reviewed, analyzed and continued to restructure the operations of the non-online part of the business in order to become more cost effective. All
the aforementioned processes have had impact both in terms of lost sales and additional selling, general and administrative expenses. However, discounting non-recurring expenses and the addition of our newly acquired on-line companies, we reduced
selling, general and administrative expenses by EUR 2.6 million in 2009 compared to 2008.



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Furthermore, as a result of a new content strategy established in response to declining
sales and margins from our traditional DVD business, we reduced our investment in library by EUR 2.0 million, or 46%, compared to 2008. As part of the strategy, we also reduced the number of titles released by 17% compared to 2008. With respect
to revising content requirements and related investment we analyzed sales statistics for newly produced content vs. compilations, reviewed demand for newly produced content from digital new media distribution vs. traditional physical delivery and
analyzed sales statistics with respect to our content mix. Results indicated that a revised content strategy based on fewer releases and a different mix would have the desired effect on margins since unlike our traditional business digital new media
distribution is mainly dependent on our expansive library and not on new releases. In reducing our investment in library, we also renegotiated content acquisition and post-production agreements with third parties on favorable conditions to us. We
expect to maintain our revised content strategy going forward.

During 2010, we expect to benefit from the restructuring and
reduce costs and increase sales as we implement and launch new initiatives, such as fully combining our Internet assets, outsourcing major parts of our non-online operations and launching our new Internet platforms.

Critical Accounting Estimates

General

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

We
believe the following critical accounting policies are significantly affected by judgments and estimates used in the preparation of our consolidated financial statements.

Recognition of Revenue

The Companys primary sources of revenue are the sale of content delivered via Internet, broadcasting, DVD & magazines and
mobile phones.

Internet video on-demand offerings are sold directly via the Companys online retail websites and are
paid for almost exclusively by credit card. The Company recognizes revenue from video-on-demand when the service is rendered and collectability is reasonably assured, specifically, when the customers credit card is charged, which is, in most
cases, simultaneous with delivery of the on-demand video. Credit card payments accelerate cash flow and reduce the Companys collection risk, subject to the merchant banks right to hold back cash pending settlement of the transactions.
The Company also offers a prepaid video-on-demand service in which a customer purchases a number of minutes of on-demand video at a set rate per minute based on the number of minutes purchased. The rate per minute decreases as the number of prepaid
minutes increases. The Company records revenue from pre-pay customers as deferred revenue prior to commencement of services and recognizes revenue as the services are rendered. Prepaid minutes purchased under this program do not expire.

The Company also offers a customer loyalty program under which each members purchase of video on-demand, DVDs, movie downloads,
books, novelties or other items earns the member one point for each dollar spent. After accumulating 150 points, a customer may redeem the points for a $5 purchase. Points increase in value as they



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are accumulated and redeemed, with a maximum accumulation of 2,000 points, which may be redeemed for a $200 purchase. All of a customers points expire after 180 days of no purchase
activity. Because the value of the award points is not significant in relation to the value of the services or products purchased by the customer, the Company records a liability for the estimated cost of the discounted services or products to be
provided in the future.

Revenues from the sale of subscriptions to the Companys Internet website are deferred and
recognized ratably over the subscription period.

IPTV (Internet Protocol Television), satellite & cable broadcasting
revenues are recognized upon delivery when the following conditions have been met (i) license period of the arrangement has begun and the customer can begin its exploitation, exhibition, or sale (ii) the arrangement fee is fixed or
determinable and (iii) collection of the arrangement fee is reasonably assured. Such revenues may be generated by either a fixed license fee or as an agreed percentage of sales, based on sales reported each month by the Companys IPTV,
cable and satellite affiliates. The affiliates do not report actual monthly sales for each of their systems to the Company until approximately 6090 days after the month of service ends. This practice requires management to make monthly revenue
estimates based on historical experience for each affiliated system. Revenue is subsequently adjusted to reflect the actual amount earned upon receipt. Adjustments made to adjust revenue from estimated to actual have historically been immaterial.

DVDs & Magazines (physical products) are sold both to wholesalers, on firm sale basis, and via national newsstand
distributors, with the right to return. Our physical products are generally multi-lingual and the principal market is in Europe. Revenues from the sale of physical products where distributors are not granted rights-of-return are recognized upon
transfer of title, which generally occurs upon delivery. Revenues from the sale of physical products under consignment agreements with distributors are recognized based upon reported sales by the Companys distributors. Revenues from the sale
of physical products under agreements that grant distributors rights-of-return are recognized upon transfer of title, which generally occurs on delivery, net of an allowance for returned product. Distributors with the right to return are primarily
national newsstand distributors. Most of our products are bi-monthly (six issues per year) and remain on sale at a newsstand for a period of two months. Normally, all unsolds are reported to us within a period of four to six months from delivery.
There are normally two to four national newsstand distributors for all newspapers and periodicals operating in each country. A majority of our national newsstand distributors are members of Distripress, the international organization for publishers
and distributors, and carry out the distribution of the largest national and international newspapers and periodicals, including: Financial Times, Herald Tribune, Time, Newsweek, Vogue, etc. The Company uses specific return percentages per title and
distributor based on estimates and historical data. The percentages vary from 50-80%. Percentages are reviewed on an on-going basis. Magazines have an approximate retail price of EUR 11.50 (USD 15.95) per copy and are printed on glossy
high-quality paper at a cost of EUR 1.25 (USD 1.75). They are often shrink-wrapped in order to comply with local regulation or guidance for the sale of adult publications. In view of the high retail price, the margin and the physical quality of the
magazines and the fact that the content has a very long shelf-life since it is not particularly linked to time, trends, fashion or current events, the Company has always collected the returns from newsstands in order to make them
available for sale again. The Company operates scheduled re-distribution of returned magazines, via national newsstand distributors, together with DVDs as Magazine/DVD packs as a way of increasing DVD distribution. Since the national newsstand
distributors have the right to return, the DVD packs are returned and the magazines are broken out in order to be sold via an additional scheduled re-distribution as Megapacks and Superpacks (three different copies per pack). Returns from the sale
of Megapacks and Superpacks are destroyed. The retail price for products sold via re-distribution vary between EUR 14.95-19.95 (USD 20.75-27.70). Magazine returns not re-distributed as per above are sold on a firm sale basis to wholesalers as back
numbers at a lower price than new issues. The Company has historically sold all returned copies at an average price higher than, or equal, to cost.

Revenues from mobile content (wireless) sales are recognized based on sales reported each month by mobile operators via aggregators. The
aggregators do not report actual monthly sales for each of their operators to the Company until approximately 6090 days after the month of service ends. This practice requires management to make monthly revenue estimates based on historical
experience for each affiliated system. Revenue is subsequently adjusted to reflect the actual amount earned upon receipt. Adjustments made to adjust revenue from estimated to actual have historically been immaterial.



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Accounts receivable

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

Management reviews the allowance for doubtful accounts on at least a quarterly basis and adjusts the
balance based on their estimate of the collectability of specific accounts as well as a reserve for a portion of other accounts which have been outstanding for more than 180 days. This estimate is based on historical losses and information about
specific customers. After collection attempts have failed, the Company writes off the specific account.

Goodwill and Other
Intangible Assets

Goodwill represents the excess of the purchase price paid over the fair value of the net assets of
businesses acquired.

Other Intangible Assets represents the value attributable to: a) Customer base, which was acquired from
two of the Companys former distributors in the U.S. and in Canada in 2001 and 2003, respectively, (see Note 8). The amortization expense is calculated on a straight-line basis over 10 years for each acquisition, b) Broadcasting asset, which
was acquired from International Film Production and Distribution Limited in 2003 (see Note 8). At the time of acquisition, the asset was deemed to have an indefinite life and is not subject to amortization, and c) Trade and Domain names, which were
acquired from GameLink and Sureflix (see Notes 3 and 8). At the time of acquisition, the assets were deemed to have an indefinite life and are not subject to amortization.

Goodwill and indefinite lived intangible assets are reviewed annually for impairment (or more frequently if indicators of impairment
arise), see note 3 and 8. Further separable intangible assets that are not deemed to have an indefinite life are amortized over their expected useful lives.

Impairment of Long-Lived Assets

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

Inventories

Inventories are valued at the lower of cost or market, with cost principally determined on an average basis. Inventories principally
consist of DVDs and magazines held for sale or resale. The inventory is written down to the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those
projected by management, additional write-downs may be required. In December 2009, we wrote down the magazine inventory by EUR 0.8 million.

Results of Operations

2009 compared to 2008

Net sales. For the twelve months ended December 31, 2009, we had net sales of EUR 23.1 million compared to net sales of
EUR 19.7 million for the twelve months ended December 31, 2008, an increase of EUR 3.4 million, or 17%. The increase was the result of increased Internet sales offset by decreases in sales of DVD & Magazines, broadcasting and
wireless. Internet sales increased EUR 8.9 million to EUR 13.1 million, which represents an increase



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of 211% compared to the same period last year. The increase in Internet sales was the result of the acquisition of GameLink and Sureflix which contributed EUR 10.2 million and was offset by
a decrease of EUR 1.3 million in our prior Internet business. The decrease in the prior Internet business was the result of a complete reorganization of this business as a result of the rebuilding of the Private websites. Broadcasting sales
decreased EUR 1.3 million, or 23%, to EUR 4.5 million primarily as a result of a decrease in cabin royalties and title sales, offset by increases in TV-channel and video on demand sales via IPTV and cable. Wireless sales in the period
decreased EUR 0.4 million, or 18%, to EUR 1.6 million as a result of a reduced share in the consumer spend provided to aggregators and content providers by the telcos in general in this business. DVD & Magazine sales decreased EUR
3.8 million, or 50%, to EUR 3.8 million. The reduction in DVD & Magazine sales was primarily attributable to an industry wide decrease in DVD sales (see discussion under Outlook below).

Net sales in general were affected by changes in exchange rates. The annual average dollar exchange rate for the fiscal year 2009
compared to 2008 increased 6% which increased all our sales, cost and expenses in dollar by the same percentage. Fluctuations in exchange rates between the euro and the dollar can affect the comparability of our results from year to year. We
translate our consolidated subsidiaries whose functional currency is not the euro into the euro for reporting purposes. Income statement amounts are translated into euro using the average exchange rate for the fiscal year. The balance sheet is
translated at the year-end exchange rate.

Overall, net sales and margins were affected by the current state of world economy
and the impact of free adult content on the Internet. Going forward, we expect Internet, wireless and Broadcasting sales to increase (see discussion under Outlook below).

Cost of Sales. Our cost of sales was EUR 16.9 million for the twelve months ended December 31, 2009 compared to EUR
13.5 million for the twelve months ended December 31, 2008, an increase of EUR 3.4 million, or 25%. Included in cost of sales is Internet, broadcasting and wireless. printing, processing and duplication and amortization of library.
Internet cost was EUR 7.3 million for the twelve months ended December 31, 2009 compared to EUR 1.2 million for the twelve months ended December 31, 2008. Internet cost as a percentage of related sales in the period was 55%
compared to 28% in the same period last year. The increase of EUR 6.1 million was primarily the result of the acquisition of GameLink and Sureflix which contributed EUR 5.4 million. In addition, we are rebuilding our private.com membership site
and as a result of this we have incurred increased costs, including accelerated amortization of EUR 0.2 million of the old site which is being decommissioned in May 2010. Broadcasting and wireless cost was EUR 0.6 million for the twelve
months ended December 31, 2009 compared to EUR 0.6 million for the twelve months ended December 31, 2008. Broadcasting and wireless cost as a percentage of related sales in the period was 10% compared to 8% in the same period last
year. Printing, processing and duplication cost was EUR 3.1 million for the twelve months ended December 31, 2009 compared to EUR 5.4 million for the twelve months ended December 31, 2008, a decrease of EUR 2.3 million, or
42%. The decrease was primarily a reflection of the decrease in sales offset by the write-down of our magazine inventory by 50%. Printing, processing and duplication cost as a percentage of DVD & Magazine sales was 81% for the twelve months
ended December 31, 2009 compared to 70% in the same period last year. Amortization of library was EUR 5.8 million for the twelve months ended December 31, 2009 compared to EUR 6.3 million for the twelve months ended
December 31, 2008, which represents a decrease of EUR 0.5 million. Amortization of library does not vary with sales since it reflects the amortization of our investments in content which has been available for sale for a period of three to five
years.

Gross Profit. In the twelve months ended December 31, 2009, we realized a gross profit of EUR
6.2 million, or 27% of net sales compared to EUR 6.2 million, or 31% of net sales for the twelve months ended December 31, 2008. GameLink and Sureflix contributed EUR 4.8 million which was offset by EUR 4.8 million in
reduced gross profit from our other lines of business.

Selling, general and administrative expenses.Our selling,
general and administrative expenses were EUR 24.8 million for the twelve months ended December 31, 2009 compared to EUR 13.1 million for the twelve months ended December 31, 2008, an increase of EUR 11.8 million, or 90%. The
increase was primarily the result of the non-recurring expense of EUR 7.3 million associated with the full provision against related party receivable, see Note 13 to the consolidated financial statements, and the acquisition of GameLink and
Sureflix which added EUR 5.2 million. The total of EUR 12.5 million was offset by EUR 0.7 million net in reduced selling, general and administrative



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expenses in all other areas. The net EUR 0.7 million consisted of a reduction in payroll and general expenses of EUR 1.1 million and EUR 2.0 million, respectively, offset by an
increase of EUR 0.3 million in bad debt provision, EUR 0.2 million in depreciation and other non-recurring expenses of EUR 1.9 million, including investment write-off, expense related to closing down subsidiary and acquisition
expenses.

Discounting the effect of newly acquired companies and non-recurring expenses, the company reduced selling, general
and administrative expenses by EUR 2.6 million.

Overall, selling, general and administrative expenses included EUR
9.5 million of non-recurring expenses made up of: provision against related party receivable of EUR 7.3 million, investment write-off of EUR 1.0 million, expense related to closing down subsidiary of EUR 0.6 million and
acquisition related expenses of EUR 0.6 million.

Operating loss. We reported an operating loss of EUR
18.6 million for the twelve months ended December 31, 2009 compared to an operating loss of EUR 6.9 million for the twelve months ended December 31, 2008. The increase of EUR 11.7 million in operating loss was the result of
the increase in selling, general and administrative expenses.

Interest expense. We reported interest expense of EUR
0.4 million for the twelve months ended December 31, 2009, compared to EUR 0.3 million for the twelve months ended December 31, 2008.

Income tax expense/benefit. We reported an income tax expense of EUR 1.7 million for the twelve months ended
December 31, 2009, compared to an income tax benefit of EUR 1.8 million for the twelve months ended December 31, 2008. The income tax expense/benefit recorded for both 2009 and 2008 were deferred.

Net loss. We reported a loss of EUR 20.5 million for the twelve months ended December 31, 2009, compared to EUR
5.2 million for the twelve months ended December 31, 2008. The increase of EUR 15.3 million was primarily the result of increased selling, general and administrative expenses, including EUR 9.5 million of non-recurring expenses
and a difference in deferred tax of EUR 3.5 million.

2008 compared to 2007

Net sales. Our net sales in 2008 were EUR 19.7 million compared to EUR 25.0 million in 2007, a decrease of EUR
5.3 million, or 21%. Net sales in general were affected by the weakening dollar by EUR 0.3 million

DVD &
Magazine sales decreased EUR 3.2 million, or 29%, to EUR 7.7 million. The reduction in DVD & Magazine sales was primarily attributable to an industry wide decrease in DVD sales (see discussion under Outlook below). Due to the weakening
dollar4and the restructuring of our web sites, Internet
sales decreased EUR 0.2 million to EUR 4.4 million compared to the same period last year. Broadcasting sales decreased EUR 1.3 million, to EUR 5.8 million as a result of the absence of sales of EUR 2.25 million from a
non-recurring title licensing deal for German speaking Europe in 2007 offset primarily by an increase in video on demand sales via IPTV. Wireless sales decreased EUR 0.6 million to EUR 2.0 million in the period as a result of a
reorganization of content delivery structure. The reorganization was completed in the fall of 2008.

Net sales in general were
affected by changes in exchange rates. The annual average dollar exchange rate for the fiscal year 2008 compared to 2007 decreased 7% which reduced all our sales in dollar by the same percentage. Fluctuations in exchange rates between the euro and
the dollar can affect the comparability of our results from year to year. We translate our consolidated subsidiaries whose functional currency is not the euro into the euro for reporting purposes. Income statement amounts are translated into euro
using the average exchange rate for the fiscal year. The balance sheet is translated at the year-end exchange rate.

Cost
of Sales. Our cost of sales was EUR 13.5 million for 2008 compared to EUR 12.3 million for 2007, an increase of EUR 1.2 million, or 10%. Cost of sales as a percentage of sales was 69% for 2008 compared to 49% for 2007. We incur no
cost of sales in dollars and subsequently we did not benefit from the weakening dollar in 2008 compared to 2007.



|4 | Our Internet sites collect a significant part of their sales from US customers.
|- | -------------------------------------------------------------------------------



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Included in cost of sales is printing, processing and duplication, amortization of library
and Internet, broadcasting and wireless costs. Printing, processing and duplication cost was EUR 5.4 million for 2008 compared to EUR 4.1 million for 2007, an increase of EUR 1.3 million, or 32%. The increase was primarily the result
of a program to reduce inventory of DVDs and magazines. Printing, processing and duplication cost as a percentage of DVD & Magazine sales was 70% for 2008 compared to 37% for 2007. The increase was the result of an increase in sales volume
sold at a lower average price as part of the program to reduce inventory of DVDs and magazines. Amortization of library was EUR 6.3 million for 2008 compared to EUR 6.8 million for 2007, a decrease of EUR 0.5 million. Amortization of
library does not vary with sales since it reflects the amortization of our investments in content which has been available for sale for a period of three to five years. The decrease was the result of lower amounts invested in content released during
the period subject to amortization in 2008 compared to 2007. Internet, broadcasting and wireless costs was EUR 1.8 million for 2008 compared to EUR 1.4 million for 2008, an increase of EUR 0.4 million. Internet, Broadcasting and Wireless
cost as a percentage of related sales was 15% for 2008 compared to 10% for the same period last year. The increase was primarily the result of increased Internet cost.

Gross Profit. Our gross profit for 2008 was EUR 6.2 million, or 31% of net sales, compared to EUR 12.7 million, or 51%
of net sales for 2007. This represented a decrease of EUR 6.5 million, or 51%, compared to 2007. The decrease in gross profit of EUR 6.5 million was primarily the result of a EUR 4.5 million decrease in contribution to gross profit
from DVD & Magazine sales, a EUR 2.5 million decrease in contribution to gross profit from Internet, Broadcasting and Wireless sales offset by the decrease in amortization of library of EUR 0.5 million. As the we are transitioning from
traditional media to new media, our gross profit in 2008 has been impacted severely. However, during 2009, we expect gross profit to improve as new media sales is expected to increase and with low cost attached to it, positive impact on gross profit
will be immediate.

Selling, general and administrative expenses. Our selling, general and administrative expenses were
EUR 13.1 million for 2008 compared to EUR 13.6 million for 2007, a decrease of EUR 0.5 million. We attribute the decrease in selling, general and administrative expenses to a reduction in general expenses and bad debt provision of EUR
1.1 million and EUR 0.1 million, respectively, offset by an increase in depreciation and payroll of EUR 0.6 million and EUR 0.1 million, respectively.

Operating loss. We reported an operating loss of EUR 6.9 million for 2008 compared to EUR 0.9 million for 2007, an
increase of EUR 6.0 million. The increase in operating loss was primarily the result of the decrease in gross profit offset by reduced selling, general and administrative expenses.

Interest expense. Our interest expense was EUR 0.3 million for 2008, compared to EUR 0.3 million for 2007.

Income tax benefit. Our income tax benefit was EUR 1.8 million for 2008, compared to 0.5 million for 2007. The increase
in income tax benefit is a result of higher losses being recorded in jurisdictions with higher corporate tax rates.

Net
loss. Our net loss was EUR 5.2 million for 2008, compared to EUR 0.4 million for 2007. We attribute the decrease in net income in 2008 of EUR 4.8 million to increased operating loss offset by increased income tax benefit.

Liquidity and Capital Resources

We generate cash from our operating activities and borrowings from third parties. Our principal uses of cash include website development
and building our library of photographs and movies.

We reported a working capital surplus of EUR 1.3 million at
December 31, 2009, a decrease of EUR 14.6 million compared to the year ended December 31, 2008. The reduction in working capital is attributable to a decrease in current assets, represented by related party receivable, deferred tax
assets and inventories and an increase in current liabilities, primarily as a result of the acquisition of GameLink, offset by the reclassification of EUR 1.7 million of short-term borrowings into long-term borrowings as a result of the
refinancing of credit lines of EUR 0.7 million and EUR 1.0 million. see Note 10 to consolidated financial statements.



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Operating Activities

Net cash provided by our operating activities was EUR 3.3 million for 2009 compared to EUR 5.2 million for 2008, and was
primarily the result of net loss, as adjusted for non-cash transactions. We adjusted our net loss of EUR 20.5 million to reconcile it to net cash flows from operating activities. Adjustments included (1) deferred income taxes EUR
1.7 million, (2) depreciation of EUR 1.0 million, (3) bad debt provision of EUR 7.8 million, (4) write-down of magazine inventory of EUR 0.8 million, (5) amortization of other intangible assets of EUR
0.1 million, (6) impairment of goodwill of EUR 0.9 million, (7) write-off of investment of EUR 1.0 million, (8) amortization of web pages of EUR 2.1 million and (9) amortization of photographs and videos of
EUR 5.8 million, which resulted in an adjusted income of EUR 0.8 million. Changes in operating assets and liabilities added EUR 2.6 million net through trade accounts receivable, inventories, prepaid expenses and other current assets and
accounts payable trade totaling EUR 3.2 million, offset by EUR 0.7 million from, income taxes payable, related party receivable, and accrued other liabilities. The decrease in cash provided by operating activities for 2009 compared to 2008
is primarily the result of net loss, as adjusted for non-cash transactions, offset by changes in operating assets and liabilities.

Net cash provided by our operating activities was EUR 5.2 million for 2008 compared to EUR 7.6 million for 2007, and was
primarily the result of net loss, as adjusted for non-cash transactions and uses of cash related to changes in operating assets and liabilities. We adjusted our net loss of EUR 5.2 million to reconcile it to net cash flows from operating
activities. Adjustments included (1) depreciation of EUR 1.0 million, (2) bad debt provision of EUR 0.3 million, (3) amortization of other intangible assets of EUR 0.4 million and (4) amortization of photographs
and videos of EUR 6.3 million which was offset by EUR 1.9 million from deferred income taxes, which resulted in an adjusted income of EUR 1.1 million. Changes in operating assets and liabilities added EUR 4.1 million net through trade
accounts receivable, inventories, prepaid expenses and other current assets and income taxes payable totaling EUR 5.7 million, offset by EUR 1.6 million from, related party receivable, accounts payable trade and accrued other liabilities.
The decrease in cash provided by operating activities for 2008 compared to 2007 is primarily the result of net loss, as adjusted for non-cash transactions, offset by changes in operating assets and liabilities.

Net cash provided by our operating activities was EUR 7.6 million for 2007 compared to EUR 7.4 million for 2006, and was
primarily the result of net loss, as adjusted for non-cash transactions, offset by uses of cash related to changes in operating assets and liabilities. We adjusted our net loss of EUR 0.4 million to reconcile it to net cash flows from operating
activities. Adjustments included (1) depreciation of EUR 0.8 million, (2) bad debt provision of EUR 0.4 million, (3) amortization of other intangible assets of EUR 0.1 million and (4) amortization of photographs
and videos of EUR 6.8 million which was offset by EUR 0.6 million from deferred income taxes, which resulted in an adjusted income of EUR 7.1 million. Changes in operating assets and liabilities added EUR 0.5 million net through
inventories, accounts payable trade, accrued other liabilities and income taxes payable totaling EUR 1.5 million, offset by EUR 1.0 million from trade accounts receivable, related party receivable, prepaid expenses and other current
assets. The increase in cash provided by operating activities for 2007 compared to 2006 is primarily the result of changes in operating assets and liabilities.

Investing Activities

Net cash used in investing activities for the fiscal year ended December 31, 2009 was EUR 3.9 million. The investing activities were
investment in library of photographs and videos of EUR 2.3 million, which were carried out in order to maintain the 2009 and 2010 release schedules for videos and capital expenditure of EUR 1.6 million. Capital expenditures is primarily related
to investment in our websites. The decrease over the comparable twelve-month 2008 period is principally due to decreased investment in library. The decrease in investment in library is the result of our restructuring plans, see above under
Restructuring.

Net cash used in investing activities for the fiscal year ended December 31, 2008 was EUR 5.4
million. The investing activities were investment in library of photographs and videos of EUR 4.3 million, which were carried out in order to maintain the 2008 and 2009 release schedules for magazines, DVDs. In addition to investment in library
of



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photographs and videos, EUR 1.1 million was invested in capital expenditures. The decrease over the comparable twelve-month 2007 period is principally due to decreased investment in both
library and capital expenditures. The decrease in investment in library is the result of our restructuring plans, see above under Restructuring.

Net cash used in investing activities for the fiscal year ended December 31, 2007 was EUR 8.5 million. The investing activities were
investment in library of photographs and videos of EUR 7.1 million, which were carried out in order to maintain the 2007 and 2008 release schedules for magazines, DVDs. In addition to investment in library of photographs and videos, EUR
1.4 million was invested in capital expenditures. The increase over the comparable twelve-month 2006 period is principally due to increased investment in the library and the absence of cash flows from note receivable and cash received from sale
of building in 2006.

Financing Activities

Net cash provided by financing activities for the fiscal year ended December 31, 2009 was EUR 0.1 million, represented primarily
by net additions to long-term borrowings of EUR 1.6 million offset by EUR 1.5 million in net reduction of short-term borrowings, see Note 10. Borrowings, in the consolidated financial statements for further information.

Net cash provided by financing activities for the fiscal year ended December 31, 2008 was EUR 0.1 million, represented
primarily by additions to short-term borrowings of EUR 0.4 million offset by EUR 0.3 million in repayments on short and long-term borrowings.

Net cash provided by financing activities for the fiscal year ended December 31, 2007 was EUR 0.4 million, represented
primarily by additions to short-term borrowings of EUR 1.2 million as a result of increased bank line of credits offset by EUR 0.8 million in repayments on short and long-term borrowings. The main movements during the twelve-month period
ended December 31, 2007 are described as follows: (1) The balance of EUR 0.5 million on the EUR 1.65 million loan from an institutional lender was reduced by EUR 0.4 million and as of December 31, 2007 the remaining
balance on the loan was EUR 0.1 million. (2) The $4.0 million 7% Note held by Consipio Holding b.v. was reduced by EUR 0.4 million. As of December 31, 2007 the remaining balance on the Note was EUR 1.65 million. (3) The outstanding
borrowings on our credit lines were increased by EUR 1.2 million and as of December 31, 2007 the outstanding balance was EUR 2.6 million.

Liquidity

In each of the past three years we have experienced losses from operations. At December 31, 2009, we had cash and cash equivalents of
EUR 613,000. As a result of our operating losses our independent registered public accounting firm has concluded that there is substantial doubt as to our ability to continue as a going concern, and have modified their report in the form of an
explanatory paragraph describing the events that have given rise to this uncertainty. Our ability to continue as a going concern is based on our ability to generate or obtain sufficient cash to meet our obligations on a timely basis and
ultimately to attain profitable operations. We currently expect future growth and to return to profitability provided we are successful with the following objectives:



| |  |  | rolling out our Internet platforms, including: a) our newly built signature property and membership platform private.com, b) our cutting edge mobile
platform for Smartphones and c) our multinational eCommerce VOD platform;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | restructuring our affiliate programs on all properties to compete aggressively for, and attract, affiliate traffic;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | continuing the rollout of our content on cable and IPTV video-on demand platforms;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | completing the integration of businesses acquired in 2009;
| | - |  | ----------------------------------------------------------



| |  |  | consolidating and restructuring our operations into an efficient new media business;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | outsourcing of non-cost effective parts of our operations; and
| | - |  | --------------------------------------------------------------



| |  |  | identifying and exploring new online business opportunities which are less dependent on content.
| | - |  | ------------------------------------------------------------------------------------------------



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If we are not successful in implementing the above objectives, or if we otherwise do not
successfully respond to changing conditions in the adult entertainment industry, we may continue to incur significant losses. There can be no assurance that we will be able to operate profitably in the future.

Although we expect that our available cash resources and cash generated from operations will be sufficient to meet our presently
anticipated working capital and capital expenditure requirements for at least the next 12 months, we may need to raise additional funds to support more rapid growth or respond to unanticipated requirements. In this regard, we are presently engaged
in a dispute with a third party lender regarding our obligations under a promissory note. An adverse outcome in this dispute would likely have a material impact upon our liquidity if we are unable to obtain additional debt or equity financing to
satisfy any resulting liability. See Note 10 to the consolidated financial statements under Other Debt for additional information regarding this obligation.

We currently have no additional availability under our existing credit facilities. The existence of a going concern exception by our
auditors may make it more difficult to obtain additional bank financing if and when required. If additional funds are raised through the issuance of equity securities, our shareholders percentage ownership will be reduced, they may experience
additional dilution, or these newly issued equity securities may have rights, preferences, or privileges senior to those of our current shareholders. Additional financing may not be available when needed on terms favorable to us, or at all. In this
regard, in the past most of our bank financing has included the guaranty of affiliated companies of our Chairman and principal shareholder, Berth Milton, and a pledge of shares of common stock owned by him or his affiliated companies. We cannot
assure you that Mr. Milton or his affiliated companies will guaranty future debt financings or that such guaranties will be sufficient to obtain future debt financings. If adequate funds are not available or are not available on acceptable
terms, we may be unable to develop or enhance our products and services, take advantage of future opportunities, maintain the scope of our operations or respond to competitive pressures or unanticipated requirements, which could harm our business.

Outlook

We
have been transitioning our business model from linear to digital content production and distribution over the past two years and this has affected our margins. As DVD and magazines sales have rapidly declined, we have made substantial progress
moving to a digital business model with significant new media distribution deals and the monetization of our expansive library of content. We are now a leading adult content provider on the Internet and on all major digital platforms in Europe, and
as we continue to build out and get larger, we project significant growth in both sales and net income. Specifically, we project the biggest gains to be achieved through: Internet, broadcasting and wireless. During the twelve-month period ending
December 31, 2009, these platforms were responsible for 83% percent of our sales compared to 61% for the same period last year and 57% in 2007. Following is a discussion highlighting some of the important factors of our business going forward.

Internet

In January2009, we expanded our Internet operations through the acquisition of Game Link LLC and its affiliates, companies engaged in
digital distribution of adult content over the Internet and eCommerce development. GameLink is a leading US adult entertainment VOD and eCommerce platform through its GameLink.com website. The sites installed user base represents over one
million domestic and international customers and it serves over 100,000 users daily. Including 70,000 video titles, GameLink has the largest library of digital and physical adult media and novelties in the United States. The Company offers VOD in
multiple media formats including streaming and downloads to computers and iPhones. GameLinks infrastructure is the most robust in the industry and is highly flexible, customizable and scalable designed to support multiple retail strategies and
products simultaneously. Additionally, through its related companies, GameLink offers third-party and white-label ecommerce solutions and development.

In October 2009, we continued the ongoing expansion of our global digital media platform through the acquisition of Sureflix Digital
Distribution and its affiliates, companies engaged in the business of digital distribution of premium gay adult content. Sureflix is a leading global supplier of adult programming. The company operates a vast network of more than 100 pay-per-view
VOD websites and has a North American broadcast presence. It



- 37 -



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represents premium production studios in global television broadcast (cable, satellite), mobile, IPTV and Internet VOD markets. Sureflix has not only in-depth knowledge of adult programming, but
also significant VOD technology and affiliate program marketing expertise.

The acquisitions of GameLink and Sureflix are a
significant development that will substantially contribute to our growth, while creating economies of scale. As part of our digital strategy, we have established that the combination of Private with major online retailers and accomplished platform
developers is the approach to achieving our goals in the rapidly changing business landscape. The combined content assets of Private and core competencies of GameLink and Sureflix offer a compelling new business model. We will be expanding our joint
Internet strategies globally with new formats and applications to be launched in 2010. In May this year we are launching our new private.com membership platform which we have been building since mid 2009. The new platform will feature a number of
proprietary sites and it will also be available as a white label version which we expect will attract adult content providers affiliate worldwide. The new platform is forecasted to improve conversion rates and receive 20 times more traffic compared
to our existing membership platform. In addition, the new platform has been built to be substantially less labor intensive to operate compared to the existing one. Following the rollout of the new membership platform, we will launch a new
video-on-demand platform following the same concept. Both of the new platforms will be available in localized versions with respect to language and payment options.

Additionally, we will be developing improved interactive functionality for new media platforms such as IPTV and mobile, and maximizing
our content monetization with the existing vast Private library as well as aggregation of select international studios offering a wide range of content and genres for all platform needs. In April this year, GameLink, launched a proprietary mobile
solution enabling users to instantly stream over 15,000 movies. The platform is initially available on Smartphones such as the iPhone and Android phones at the url: www.gamelink.com. The mobile Internet platform is an extension of
GameLinks leading Video-on-Demand e-commerce platform, allowing consumers to purchase and consume content instantly. All content is available for future viewing in the customers virtual media center, stored in the companys
cloud. The platform has been optimized to work with Apple devices including the iPhone, iPod, the iPad as well as Android devices. In addition to streaming, consumers can choose to download their movies or purchase DVDs and novelties
from the globally accessible platform. A white label version of the mobile platform is available and is being marketed to adult studios and affiliates worldwide. Our objective is to become the main provider of an off-portal mobile platform solution
to all major content providers in our industry. In contrast to Privates existing mobile content business, which is based on an on-portal model going through content aggregators and carriers, this new business is off-portal and provides
substantially improved margins as content is sold directly by Private to the consumer.

Broadcasting

We are continuing to implement our new media strategy for growth of VOD (Video-on-Demand) via IPTV and to date we have contracted with 38
major platform operators in 24 countries in Europe, as the leading supplier of adult content. Currently we have gained more than 75% coverage of the European IPTV market and across all platforms. Going forward, we expect to increase our market
coverage in this expanding market.

Furthermore, the introduction of IPTV in Europe has challenged the Cable-TV industry and
subsequently cable operators are rapidly upgrading their systems to provide the same functionality as IPTV. In 2009 we have contracted with two leading cable operators in Western Europe and going forward we expect to add further Cable/VOD platforms
to our portfolio.

In relation to Private branded TV channels carrying our content in Europe and Latin America our partners
Playboy TV Latin America and Playboy TV International continue to improve distribution. During the past twelve months, Playboy TV Latin America increased the distribution significantly in Brazil, Argentina and Central America and we expect to see
positive impact from this going forward.



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Wireless  Adult Mobile Content

Privates mobile on portal revenues declined again in 2009 after years of strong growth. We are still the most
distributed adult brand in the world5and will monetize
existing distribution as best as we can by going live with the few outstanding carriers and replacing non-performing content aggregators with new ones. Throughout 2008 and 2009 there has been a huge increase in mobile off-portal traffic and
currently 5% of all searches on Google are made from mobile phones. With the Smartphone market growing
rapidly6,we are in the process of enabling Smartphone
users to browse, purchase and consume our library of content on all of our web properties and expect to generate substantial growth from this initiative already in the second half of 2010.

DVDs & Magazines

As we further transition into global digital content delivery, DVD pricing and volume is being affected considerably and as a result the
industry in general is experiencing a severe downturn in DVD sales. In view of the aforementioned, we continue to re-strategize our distribution of DVDs and Magazines to reduce any further negative impact of this downward DVD trend.



|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------

Not applicable.



|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | -------------------------------------------

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



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

Not applicable.



|ITEM 9A(T). | CONTROLS AND PROCEDURES
|----------- | -----------------------

Evaluation of
Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures designed to ensure that
information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the specified time periods. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to its management,
including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, the
Companys management evaluated, with the participation of the Companys Chief Executive Officer and Chief Financial Officer, the effectiveness of the Companys disclosure controls and procedures. Based on the evaluation, the
Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective as of December 31, 2009.



|5 | Private content is available to 1.2 billion handsets via 104 mobile network operators in 45 countries.
|- | ------------------------------------------------------------------------------------------------------

|6 | According to Parks Associates report of March, 2010, Smartphone: King of Convergence: the number of Smartphone users is expected to quadruple, exceeding 1
billion worldwide by 2014.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



- 39 -



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Changes in Internal Control Over Financial Reporting

There were no changes in the Companys internal control over financial reporting that occurred during the Companys fiscal
quarter ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

The Company does not expect that its disclosure controls and procedures or its internal control over financial reporting will prevent all
error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control
procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making
can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The
design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions;
over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to
error or fraud may occur and not be detected.

Managements Annual Report on Internal Control Over Financial Reporting

The Companys management is responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. The Companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with United States generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with United States generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of the Companys assets that could have a material effect on the financial statements.

Management assessed the effectiveness of the Companys internal control over financial reporting as of December 31, 2009. In
making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework . Based on this assessment, and on those criteria,
management concluded that the Companys internal control over financial reporting was effective as of December 31, 2009.

This annual report does not include an attestation report of the Companys registered public accounting firm regarding internal
control over financial reporting. Managements report was not subject to attestation by the Companys registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to
provide only managements report in this annual report.



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|ITEM 9B. | OTHER INFORMATION
|-------- | -----------------

Our
2009 Annual Meeting of Shareholders was held on December 16, 2009. The election results were as follows:

Proposal No. 1 
Election of Directors:



|                        |  |                          |  |                         |  |                         
|----------------------- |  | ------------------------ |  | ----------------------- |  | ------------------------
|Candidates for Director |  | Number ofSharesVoted for |  | Number ofSharesWithheld |  | Number ofSharesAbstained
|Berth H. Milton         |  | 34,549,582               |  | 1,819,311               |  | n/a                     
|Bo Rodebrant            |  | 35,088,063               |  | 1,285,550               |  | n/a                     
|Lluis Torralba          |  | 35,091,063               |  | 1,282,550               |  | n/a                     
|Daniel Sánchez          |  | 35,085,164               |  | 1,288,449               |  | n/a                     
|Johan G. Carlberg       |  | 35,085,164               |  | 1,288,449               |  | n/a                     
|Ilan Bunimovitz         |  | 34,577,538               |  | 1,791,355               |  | n/a                     

Proposal No. 2  Approve
Issuance of Shares of Common Stock:



|                           |  |                          |  |                           
|-------------------------- |  | ------------------------ |  | --------------------------
|Number of
Shares Voted for |  | Number of
Shares Against |  | Number of
Shares Abstained
|32,338,046                 |  | 1,113,461                |  | 10,170                    

Proposal No. 3 
Approve Amendment to Effect a Reverse Split:



|                           |  |                          |  |                           
|-------------------------- |  | ------------------------ |  | --------------------------
|Number of
Shares Voted for |  | Number of
Shares Against |  | Number of
Shares Abstained
|35,650,349                 |  | 512,291                  |  | 210,972                   

Proposal No. 4 
Approve 2009 Equity Incentive Plan:



|                           |  |                          |  |                           
|-------------------------- |  | ------------------------ |  | --------------------------
|Number of
Shares Voted for |  | Number of
Shares Against |  | Number of
Shares Abstained
|31,825,476                 |  | 1,620,246                |  | 15,955                    

Proposal No. 5 
Ratify BDO Auditores S.L. as Independent Accountant:



|                           |  |                          |  |                           
|-------------------------- |  | ------------------------ |  | --------------------------
|Number of
Shares Voted for |  | Number of
Shares Against |  | Number of
Shares Abstained
|36,196,120                 |  | 176,222                  |  | 1,271                     

No other matter was submitted to a
vote at the 2009 Annual Meeting.



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PART III



|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS
|-------- | --------------------------------

Identification of Directors, Executive Officers and Key Employees

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



|                                            |  |     |  |                                                                                                                                                              
|------------------------------------------- |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name                                        |  | Age |  | Position With the Company or Subsidiary                                                                                                                      
|Directors                                   |  |     |  |                                                                                                                                                              
|Berth H. Milton                             |  | 54  |  | Chairman of the Board, President and Director                                                                                                                
|Bo Rodebrant                                |  | 57  |  | Director                                                                                                                                                     
|Johan G. Carlberg                           |  | 50  |  | Director                                                                                                                                                     
|Daniel Sánchez                              |  | 41  |  | Director                                                                                                                                                     
|Ilan Bunimovitz                             |  | 54  |  | Chief Executive Officer, Executive Vice President of Online Media and Director                                                                               
|Eric Johnson                                |  | 48  |  | Director; President and CEO of Entruphema, Inc.                                                                                                              
|                                            |  |    
|Other Executitve Officers and Key Employees |  |     |  |                                                                                                                                                              
|Johan Gillborg                              |  | 47  |  | Secretary and Chief Financial Officer, Private Media Group, Inc.; Chairman, Private France S.A.; Chairman, Private Benelux; Administrator, Milcap Media
Group

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

Berth H. Milton was appointed to the Board of Directors
of the Company in February 1998 and was the Corporate Secretary from June 1998 until February 1999. In February 1999 Mr. Milton was appointed Chairman of the Board and Chief Executive Officer of Private, and served as Chief Executive Officer
until May 2002. In November 2003 Mr. Milton was reappointed President and Chief Executive Officer of the Company and remained as Chief Executive Officer until April 2009 until the appointment of Mr. Bunimovitz as CEO. Mr. Milton was
Administrator of Milcap Media Group from its inception until June 2000 and has been acting as an advisor to the Milcap Group since 1991. Mr. Milton is also active in several international industry and real estate projects and developments.

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

Johan G. Carlberg was appointed to
the Board of Directors in October 2004.Mr. Carlberg has operated his own import, trading and consulting business in the textile and fashion industry since the seventies. Mr. Carlberg holds a Degree in Business from the Stockholm Institute of
Business.

Daniel Sánchez was appointed to the Board of Directors in October 2004. Since January 2004, Mr. Sanchez has been
promoting, as a founding partner, the launching of a new private venture capital firm. Prior to entering the venture capital field, he held the position as Deputy Managing Director at Electrodomésticos Taurus, a consumer electronics company,
from 2002 to 2004. Between 1995 and 2002 he worked as a Manager in the field of mergers and acquisitions at Alpha Corporate, a well known international consultancy firm. Mr. Sanchez holds a Masters Degree in Business Administration from
the University of Chicago.



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Ilan Bunimovitzwas appointed to the Board of Directors in March 2009 pursuant to his Employment
Agreement with Private entered into in January 2009 in connection with the acquisition of Game Link LLC and its affiliate, companies engaged in the business of digital distribution of adult content over the Internet and online eCommerce development.
Mr. Bunimovitz was appointed as Executive Vice President of the Companys Online Media Division in January 2009. In April 2009, he was also appointed as Chief Executive Officer of the Company. Mr. Bunimovitz was the founder, chief
executive officer and co-owner of Game Link LLC prior to its acquisition by the Company, which he operated since its founding in 1993. Mr. Bunimovitz holds a Bachelors Degree in Psychology from Bar-Ilan University, Israel.

Eric Johnson was appointed to the Board of Directors in December 2009 pursuant to his Employment Agreement with Private entered into in October
2009 in connection with the acquisition of Sureflix Digital Distribution Inc. and Sureflix Digital Logistics Inc., companies engaged in the business of digital distribution of premium gay adult content. Mr. Johnson serves as the President and
CEO of Entruphema, Inc., a subsidiary of Private which operates the business of the Sureflix companies. Mr. Johnson has served as President, CEO and CFO for the Sureflix group of companies since 2003. Mr. Johnson holds the designations of
Chartered Accountant in Canada and C.P.A. in the United States and is a graduate of the University of Toronto where he earned his Bachelor of Commerce Degree.

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

Certain Relationships

Effective March 1, 2009, the Company appointed Ilan Bunimovitz as a director to fill the newly created vacancy on the Board, to serve
until the Companys next Annual Meeting of Shareholders. Mr. Bunimovitz was appointed as a director pursuant to his Employment Agreement with the Company and Game Link LLC, a subsidiary of the Company, entered into on January 20,
2009.Under the terms of the Employment Agreement the Company agreed to appoint Mr. Bunimovitz to its Board by March 1, 2009, and to nominate him to continue to serve as a director in 2009, 2010 and 2011 until such time as he ceases to be
employed by the Company. The Employment Agreement was entered into in connection with the acquisition of Game Link LLC and its affiliate by the Company on January 20, 2009, companies engaged in the business of digital distribution of adult
content over the Internet and online eCommerce development. Under a separate agreement entered into in connection with the acquisition of Game Link, Berth Milton has agreed to vote Private shares beneficially owned by him in favor of
Mr. Bunimovitzs election to the Board of Directors in 2009, 2010 and 2011, so long as he continues to be employed by the Company.

Effective December 17, 2009, the Company appointed Eric Johnson as a director pursuant to his Employment Agreement with the Company
and Entruphema Inc., a subsidiary of the Company, entered into on October 29, 2009. The Employment Agreement was entered into in connection with the acquisition of Entruphema and its affiliate, Sureflix Digital Distribution Inc. on
October 29, 2009. Under a separate agreement entered into in connection with the acquisition of Game Link, Berth Milton has agreed to vote Private shares beneficially owned by him in favor of Mr. Johnsons election to the Board of
Directors in 2010, 2011 and 2012, so long as he continues to be employed by the Company.

No other director or executive
officer serves pursuant to any arrangement or understanding between him or her and any other person. There are no family relationships between any of our directors or executive officers.



- 43 -



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Audit Committee

We maintain an Audit Committee in accordance with applicable SEC and Nasdaq rules. The Audit Committee is currently comprised of Johan
Carlberg, Bo Rodebrandt and Daniel Sánchez. All of the members of the Audit Committee are independent as defined in applicable Nasdaq listing requirements and SEC regulations, and each of them is able to read and understand
fundamental financial statements. The Board has determined that Daniel Sánchez is an audit committee financial expert as defined under applicable SEC regulations. The Audit Committee reviews and recommends to the Board, as it
deems necessary, the internal accounting and financial controls for the Company and the accounting principles and auditing practices and procedures to be employed in preparation and review of financial statements of the Company. The Audit Committee
makes recommendations to the Board concerning the engagement of independent public accountants and the scope of the audit to be undertaken by such accountants. The Audit Committee has adopted a written Audit Committee Charter.

Code of Ethics

We have
adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer and persons performing similar functions. Our code of ethics is filed as Exhibit 14.1 to this Annual Report on Form
10-K. We intend to satisfy the disclosure requirements under Item 10 of Form 8-K, regarding an amendment to or waiver from our code of ethics, by posting the required information on our corporate Internet website at www.prvt.com or as
otherwise permitted under applicable law.

Section 16(a) Beneficial Ownership Reporting Compliance

Based solely upon a review of Forms 3, 4 and 5 furnished to Private covering its 2009 fiscal year filed under Section 16(a) of the
Securities Exchange Act of 1934, each of Privates officers and directors complied with the reporting requirements under Section 16(a) for the 2009 fiscal year, except as follows. Berth Milton failed to file Form 4s reporting the sale of
1,307,822 shares in the period November 5-13, 2009.Eric Johnson failed to file a single Form 3 upon being appointed a director of Private in December 2009. Johan Carlberg and Daniel Sánchez failed to file a single Form 4 reporting the
grant of options for 1,000 and 3,334 shares, respectively, in December 2009.



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|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------

The following table summarizes all compensation paid to (i) our two Chief Executive Officers serving during in such capacity during
any part of 2009, and (ii) the other most highly compensated executive officer who was serving as an executive officer at the end of 2009 who earned compensation in excess of $100,000 in 2009, and (iii) the most highly compensated
executive officer in 2009 who earned compensation in excess of $100,000 in 2009 and who was not serving as an executive officer at the end of 2009; in each case for services rendered in all capacities to Private Media Group for the two fiscal years
ended December 31, 2008, and December 31, 2009. No other executive officer earned compensation in excess of $100,000 in 2009.

2009 Summary Compensation Table



|                                                                                                                                                                                 |      |            |         |              |        |                             |      |         |            
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | ---------- | ------- | ------------ | ------ | --------------------------- | ---- | ------- | -----------
|Name and Principal Position During Fiscal 2009                                                                                                                                   |      | FiscalYear |         | Salary($)(1) |        | All OtherCompensation($)(1) |      |         | Total($)(1)
|Berth H. Milton, President, CEO,(2)(3)
Director and Chairman of the Board                                                                                                        |      | 2009       |         | 625,000      |        | 25,000                      | (4)  |         | 650,000    
|                                                                                                                                                                                 | 2008 |            | 253,000 |              | 26,000 | (4)                         |      | 279,000
|Ilan Bunimovitz, CEO, Director, (5)
Executive Vice President Online Media Division, Private Media Group, Inc.; President, GameLink LLC; President,
eLine LLC                     |      | 2009       |         | 279,000      |        | 30,000                      | (6)  |         | 309,000    
|                                                                                                                                                                                 |      |            |         |              |        |                             |      |        
|                                                                                                                                                                                 |      |            |         |              |        |                             |      |        
|Johan Gillborg (7)
Chief Financial Officer and Secretary, Private Media Group, Inc.; Chairman, Private France S.A.; Chairman,
Private Benelux; Administrator, Milcap Media Group |      | 2009       |         | 206,000      |        |                            |      |         | 206,000    
|                                                                                                                                                                                 | 2008 |            | 205,000 |              |       |                             |      | 205,000
|                                                                                                                                                                                 |      |            |         |              |        |                             |      |        
|Peter T. Cohen (8)(9)
Chief Operating Officer, Private Media Group, Inc.                                                                                                         |      | 2009       |         | 85,000       |        | 69,000                      | (10) |         | 154,000    
|                                                                                                                                                                                 | 2008 |            | 295,000 |              |        |                             |      | 295,000



|(1) | Salary amounts received in non-US currency have been converted into dollars using the average exchange rate for the applicable year.
|--- | ------------------------------------------------------------------------------------------------------------------------------------

|(2) | Mr. Milton served as CEO until April 2009, at which time he was appointed as President. The Table includes compensation received by Mr. Milton in all
capacities in 2009.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Salary received in non-US currency, 450,000 euro in 2009 and 110,510 euro in 2008. As the salary paid to Mr. Milton for 2009 was not approved by the other
directors in 2009, in January 2010 the Board of Directors directed that three independent directors, acting as the Compensation Committee, determine and recommend to the Board of Directors an appropriate level of compensation for Mr. Milton for
2009 and 2010. In March 2010 the Board of Directors reduced Mr. Miltons 2009 salary to $432,000 (311,000 euro). The Board determined that the remaining $193,000 (139,000 euro) received by Mr. Milton as salary in 2009 would be
retained by Mr. Milton as a retention bonus provided he remains with the Company through December 31, 2011.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | The Company furnished security and local transportation for Mr. Milton and his immediate family in 2008 and 2009. The amounts in the Table represents the
non-business portion of such benefits, valued at the incremental cost to the Company.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Mr. Bunimovitz was appointed as Executive Vice President of the Companys Online Media Division on January 20, 2009. In April 2009 he was also
appointed as Chief Executive Officer of the Company. Table includes compensation received by Mr. Bunimovitz in all capacities in 2009.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Under Mr. Bunimovitzs employment agreement he receives a $1,500 per month non-accountable car allowance. He also receives health insurance coverage at an
amount of $16,000 per year under an executive plan which is available generally to Company employees. The Company also provided 401(k) matching at an amount of $4,000. The amount in the table represents the non-business portion of the car allowance
and the dollar amount of premiums paid by the Company for Mr. Bunimovitzs health insurance.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Salary received in non-US currency, 148,000 euro in 2009 and 139,000 euro in 2008.
|--- | ----------------------------------------------------------------------------------

|(8) | Mr. Cohen served as Chief Operating Officer until May 2009.
|--- | -----------------------------------------------------------

|(9) | Salary received in non-US currency, 61,000 euro in 2009 and 200,000 euro in 2008.
|--- | ---------------------------------------------------------------------------------

|(10) | Represents severance payment to Mr. Cohen. Under the terms of Mr. Cohens employment agreement he was entitled to receive a severance payment equal to
three months salary in the event of his termination. This amount was paid in non-US currency, 50,000 euro in 2009.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

No bonuses
or stock awards were granted to any of the named executive officers in 2008.



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Compensation Committee Interlocks and Insider Participation

During the last fiscal year Mr. Milton has acted as the Compensation Committee. Mr. Milton served as our Chief Executive Officer
during part of 2009 and served as Chairman and President during all of 2009. During the last fiscal year, none of our executive officers served on our Board of Directors or Compensation Committee of any other entity whose officers served either on
our Board of Directors or Compensation Committee.

Grants of Plan-Based Awards in the Last Fiscal Year

There were no plan-based awards granted to the individuals named in the Summary Compensation Table above for the year ended
December 31, 2009.

Outstanding Equity Awards at 2009 Fiscal Year-End

No stock options, stock awards or equity incentive plan awards were issued in 2009 or were outstanding at the end of 2009.

Option Exercises and Stock Vesting During 2009

No stock options were exercised during 2009 by the individuals named in the Summary Compensation Table. No stock awards were issued or
outstanding during fiscal 2009.

Employment Contracts, Termination of Employment Contracts and Change in Control Arrangements

We generally do not enter into long-term employment agreements with our executive officers. We generally do not enter into
severance agreements or similar agreements providing for payments upon termination of employment or change-in-control. Such agreements, when entered into, are negotiated on a case-by-case basis. We have not entered into any employment agreements or
severance agreements with the named executive officers other than Ilan Bunimovitz and Peter Cohen.

Ilan Bunimovitz was
appointed as a director in March 2009 pursuant to his Employment Agreement with the Company and Game Link LLC, a subsidiary of the Company, entered into on January 20, 2009. The Employment Agreement was entered into in connection with the
acquisition of Game Link LLC and eLine LLC by the Company on January 20, 2009, companies engaged in the business of digital distribution of adult content over the Internet and online eCommerce development. Mr. Bunimovitz was the founder
and chief operating officer of Game Link LLC and an indirect co-owner of Game Link LLC and eLine, LLC. The Employment Agreement provides for Mr. Bunimovitz to serve as Executive Vice President of the consolidated Internet and Internet-related
business conducted by the Company and its subsidiaries for a period of three years, subject to earlier termination by either party under specified circumstances. Under the terms of the Employment Agreement the Company agreed to appoint
Mr. Bunimovitz to its Board by March 1, 2009, and to nominate him to continue to serve as a director in 2009, 2010 and 2011 until such time as he ceases to be employed by the Company. The Employment Agreement provided for
Mr. Bunimovitz to receive an annual base salary of $281,828, $271,070 and $302,648 in the first, second and third years of the employment term. He is also entitled to receive stock options on the same terms as stock options granted to Berth
Milton, the Companys Chairman, President and principal shareholder, during the term of the Employment Agreement, in an amount which is proportionate to the relative stock ownership as between Mr. Bunimovitz and Mr. Milton. If the
Company terminates Mr. Bunimovitzs employment during the term of the Employment Agreement other than for cause, or if Mr. Bunimovitz terminates his employment with the Company for good reason, then
Mr. Bunimovitz is entitled to continue to receive his monthly base salary for the remaining period of the three year term.In April 2009 Mr. Bunimovitz was also appointed as the Companys Chief Executive Officer, and his Employment
Agreement was modified to provide for an annual base salary in each of the three years of his employment term of $295,000 per year. Mr. Bunimovitzs Employment Agreement also provides for a non-accountable monthly car allowance of $1,500
per month and health insurance benefits equivalent to benefits afforded to other executive officers of the Company.



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---

Effective November 2006, we entered into an employment agreement with Peter Cohen in
connection with his employment by Private as its Chief Operating Officer. Mr. Cohens employment is terminable upon not more than 30 days notice. We agreed to pay him a salary of $200,000 per annum plus certain relocation costs of up to
EUR 24,000. Effective September 2007 his base salary of $200,000 per annum was increased to EUR 200,000 per annum. Mr. Cohen was also eligible to receive an annual performance bonus, upon the achievement of specified goals in each fiscal
year, commencing in 2007, based upon the amount of increase in annual operating income after 2006. The agreement provided for an annual bonus of between EUR 20,000  100,000, depending upon the amount of increase in operating income in the
applicable fiscal year. No bonus was paid or accrued for 2007 or 2008, as the financial targets were not achieved. The agreement also provided that if Mr. Cohen is terminated by Private other than for cause, he is entitled to a severance
payment equal to one month of salary if terminated prior to October 30, 2007, and three months of salary if terminated at any time thereafter. Mr. Cohen ceased to be employed by the Company in May 2009 and received three months of
severance pay in accordance with his agreement.

Director Compensation During 2009

The following table summarizes all compensation paid to our non-employee directors during 2009.

2009 DIRECTOR COMPENSATION TABLE



|                      |  |                                |  |                |  |                        |  |                                          |  |                           |  |            
|--------------------- |  | ------------------------------ |  | -------------- |  | ---------------------- |  | ---------------------------------------- |  | ------------------------- |  | -----------
|Name                  |  | FeesEarnedor Paidin Cash($)(1) |  | StockAwards($) |  | OptionAwards($) (2)(5) |  | Non-EquityIncentive 
PlanCompensation($) |  | All 
OtherCompensation($) |  | Total($)(1)
|Bo Rodebrant          |  |                               |  |               |  |                       |  |                                         |  |                          |  |           
|Lluis Torralba        |  |                               |  |               |  |                       |  |                                         |  |                          |  |           
|Johan G. Carlberg (3) |  | 6,944                          |  |               |  | 820                    |  |                                         |  |                          |  | 7,764      
|Daniel Sánchez (4)    |  | 13,889                         |  |               |  | 2,734                  |  |                                         |  |                          |  | 16,623     



|(1) | Fee earned in non-US currency have been converted into dollars using the average exchange rate for the applicable year.
|--- | -----------------------------------------------------------------------------------------------------------------------

|(2) | Reflects the fair market value amount at the date of grant using the assumptions set forth in Note 18 to the financial statements included elsewhere in this Annual
Report.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The director earned 5,000 euro in non-US currency and, as of December 31, 2009, the director had 9,000 options outstanding.
|--- | ---------------------------------------------------------------------------------------------------------------------------

|(4) | The director earned 10,000 euro in non-US currency and, as of December 31, 2009, the director had 30,000 options outstanding.
|--- | -----------------------------------------------------------------------------------------------------------------------------

|(5) | In 2009 Messrs. Sánchez and Carlberg were each granted options to acquire 3,334 and 1,000 shares, respectively, of Privates common stock at an exercise
price of $1.89 per share, being the fair market value of our common stock on the date of grant, which options vest in October 2010 and expire in October 2013.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

We have agreed to pay Daniel
Sánchez a fee of EUR 2,000, and Johan Carlberg a fee of EUR 1,000, for each board and committee meeting attended. With respect to Bo Rodebrant, we have agreed to pay a fee of EUR 1,000, for each committee meeting attended.



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|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|-------- | --------------------------------------------------------------

The following table presents certain information as of April 9, 2010, regarding the beneficial ownership of our common stock by:



| |  |  | each of our directors and the named executive officers individually,
| | - |  | --------------------------------------------------------------------



| |  |  | all persons known by us to be beneficial owners of five percent or more of our common stock, and
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | all of our directors and executive officers as a group.
| | - |  | -------------------------------------------------------

Unless otherwise indicated in the footnotes below, the persons and entities named in the table have sole voting and investment power as
to all shares beneficially owned.



|                                                                |  |                                        |     |  |                              |  
|--------------------------------------------------------------- |  | -------------------------------------- | --- |  | ---------------------------- | -
|Name and Address                                                |  | Number of
SharesBeneficially Owned (1) |     |  | PercentBeneficiallyOwned (1) |  
|Berth H. Milton (2)                                             |  | 9,059,840                              | (3) |  | 43.8                         | %
|RS Platou Markets AS (4)                                        |  | 2,929,672                              | (5) |  | 14.1                         | %
|Ilan Bunimovitz (6)                                             |  | 1,875,950                              |     |  | 9.1                          | %
|Eric Johnson                                                    |  | 130,000                                | (7) |  | *                            |  
|Johan Gillborg (2)                                              |  | 35,000                                 |     |  | *                            |  
|Bo Rodebrant (2)                                                |  |                                       |     |  | *                            |  
|Daniel Sánchez (2)                                              |  | 10,002                                 | (8) |  | *                            |  
|Johan G. Carlberg (2)                                           |  | 3,000                                  | (9) |  | *                            |  
|Peter T. Cohen (2)                                              |  |                                       |     |  |                             |  
|All Executive Officers and Directors as a group (8 people) (10) |  | 11,113,792                             |     |  | 53.3                         | %



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

|(1) | Beneficial ownership is determined in accordance with rules of the U.S. Securities and Exchange Commission. The calculation of the percentage of beneficial ownership is
based upon 20,705,745 shares of common stock outstanding on April 9, 2010. In computing the number of shares beneficially owned by any shareholder and the percentage ownership of such shareholder, shares of common stock which may be acquired by
such shareholder upon exercise or conversion of warrants or options which are currently exercisable or exercisable within 60 days of April 9, 2010, are deemed to be exercised and outstanding. Such shares, however, are not deemed outstanding for
computing the beneficial ownership percentage of any other person. Except as indicated by footnote, to our knowledge, 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) | His address is c/o Milcap Media Group SLU, Calle de la Marina 16-18 Floor 18 Suite D, 08005 Barcelona, Spain.
|--- | -------------------------------------------------------------------------------------------------------------

|(3) | Includes 1,842,179 shares held in Mr. Miltons margin brokerage account with RS Platou Markets. RS Platou also claims beneficial ownership and sole voting and
investment power of these 1,842,179 shares under the terms of pledge agreements entered into between RS Platou and Mr. Milton. Also includes 1,650,000 shares of common stock owned of record by Slingsby Enterprises Limited and 666,667 shares of
common stock owned of record by Bajari Properties Limited, which shares are pledged to third parties to secure payments of loans from third parties to us.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Its address is Post Office Box 1474 Vika, Oslo, Norway N-0116.
|--- | --------------------------------------------------------------

|(5) | Based upon information reported by RS Platou Markets AS on Schedule 13G filed with the SEC on February 16, 2010. Includes 1,842,179 shares held in
Mr. Miltons margin brokerage account with, RS Platou Markets. Berth Milton also claims beneficial ownership and sole voting and investment power of these 1,842,179 shares.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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---

|(6) | His address is c/o GameLink LLC, 537 Stevenson Street, San Francisco CA 94103, USA.
|--- | -----------------------------------------------------------------------------------

|(7) | Represents shares issuable upon conversion of Class A Preference Shares of Entruphema, Inc., a subsidiary of the Company.
|--- | -------------------------------------------------------------------------------------------------------------------------

|(8) | Represents 10,002 shares issuable upon exercise of Options issued under employee stock option plans owned by Mr. D. Sánchez.
|--- | ----------------------------------------------------------------------------------------------------------------------------

|(9) | Represents 3,000 shares issuable upon exercise of Options issued under employee stock option plans owned by Mr. Carlberg.
|--- | -------------------------------------------------------------------------------------------------------------------------

|(10) | Includes 13,002 shares issuable upon exercise of outstanding Options under employee stock option plans.
|---- | -------------------------------------------------------------------------------------------------------

Equity Compensation Plan Information

We have an expired Employee Stock Option Plan (the 1999 Plan) and a new Equity Incentive Plan (the 2009 EIP)
available. The 1999 Plan, was in effect until its expiration on March 1, 2009. The 1999 Plan authorized us to grant stock options exercisable for up to an aggregate of 2,400,000 shares of common stock. No stock options may be granted under the
1999 Plan, following its expiration. At December 31, 2009, options for 13,002 shares were outstanding under the 1999 Plan. The 2009 EIP was shareholder approved and came into effect on December 16, 2009. It allows the Company to grant
incentive stock options, non-statutory stock options, restricted stock, unrestricted stock and other equity-based awards, such as stock appreciation rights, phantom stock awards, and restricted stock units, which we refer to collectively as Awards.
The Company may issue up to 2,066,667 shares of its common stock pursuant to Awards granted. Shares pursuant to Awards that have expired or are forfeited will be returned to the 2009 EIP.

Full details of the plans are included in Note 18 to the financial statements and are summarized below as of December 31, 2009:



|        |  |                                                                                                                                                |  |   |          
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ---------
|(  a  ) |  | Number of securities to be issued upon exercise of outstanding options, warrants and rights                                                    |  |   | 17,336   
|(  b  ) |  | Weighted-average exercise price of outstanding options, warrants and rights                                                                    |  | $ | 6.77     
|(  c  ) |  | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in row (a) above) |  |   | 2,062,333

We do not maintain any other
equity compensation plans.



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|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|-------- | -------------------------------------------------------------------------

Related Transactions

Guaranty of Commerzbank Note by Affiliate of Berth Milton

In December 2001 the groups holding company, Private Media Group, Inc., borrowed $ 4.0 million from Commerzbank AG pursuant to
a Note originally due on December 20, 2002. The Note bore interest at an annual rate of 7%, payable quarterly, with the entire principal amount and accrued interest originally due on December 20, 2002. The Note is guaranteed by Slingsby
Enterprises Limited, an affiliate of Berth Milton, Privates Chairman, President and principal shareholder, and the guaranty is secured by 1,650,000 shares of Private Media Group, Inc. common stock. In December 2002 Commerzbank AG agreed to
extend the maturity date of the Note to March 20, 2003. In April 2003 the Note was acquired by Consipio Holding b.v. from Commerzbank AG, and Consipio and Private reached an agreement-in-principle with Consipio to extend the maturity of the
Note until April 2008. However, Consipio and Private were unable to reach final agreement on other terms and conditions relating to the restructured Note. Accordingly, in December 2003 Consipio notified Private and Slingsby Enterprises that Private
was in default under the Note, and demanded $3.4 million as payment in full of all outstanding principal and interest under the Note. The Company continued to make regular payments on the Note, including principal and accrued interest, through
February 2008. In April 2008 Consipio requested Private to pay the remaining balance of the Note, without indicating the amount due. Private in turn requested that Consipio provide a statement of the amount due and the basis for its calculation. In
response, Consipio demanded payment of $3,194,000 as settlement in full of the Note, to be received by May 9, 2008. This calculation was made using an interest rate of 9.9%, as opposed to the 7% rate provided under the original terms of the
Note. Consipio also advised that if payment was not received on such date it would institute litigation, in which event Consipio would claim that the amount due under the Note should be denominated in Euro, rather than U.S. dollars. In August 2008
Consipio notified Private that the Note was in default and that it intended to exercise its rights under the Note and the pledge of shares by Slingsby of Private common stock. Private believes that the amount due under the Note at May 9, 2008,
including accrued interest, was no more than $2.4 million ($2.7 million at December 31, 2009), utilizing an interest rate of 7%. On May 1, 2009, Consipio filed a lawsuit in U.S. District Court against the Company asserting a claim for
unspecified damages under the Note. The Company and Slingsby filed their Answer and asserted several affirmative defenses. On March 26, 2010, the Court dismissed the lawsuit, finding that U.S. federal courts did not have jurisdiction over the
subject matter of the lawsuit. This dismissal does not prejudice Consipios ability to refile this lawsuit in another jurisdiction, should it choose to do so.

Guaranty of EUR One Million Loan by Affiliate of Berth Milton

In December 2007 an affiliate of Mr. Milton agreed to guarantee a bank line of credit agreement of Euro 1.0 million entered into
by one of the Companys European subsidiaries, which was originally due on December 31, 2008, and was subsequently extended until it expired in December 31, 2009. On December 11, 2009, the credit line of Euro 1.0 million was
refinanced with a six year term loan by an institutional lender at an interest rate of EURIBOR + 1.2%. Interest is payable annually starting December 11, 2010 and the loan is repayable in equal annual installments over a five year period
starting December 11, 2011 (the December 2009 Refinancing). The December 2009 Refinancing was arranged and guaranteed by an affiliate of Berth Milton and the guaranty is secured by 666,667 shares of Private common stock beneficially
owned by Mr. Milton.

Unsecured Loans to Slingsby Enterprises Limited

We have unsecured loans to Slingsby Enterprises Limited (Slingsby), an entity controlled by Mr. Milton (the
Slingsby Loans). The Slingsby Loans bear interest at the rate of EURIBOR+1% per annum and have no maturity date. During 2009 the highest amount outstanding was EUR 7.25 million. As of December 31, 2009, and March 31, 2010, EUR
7.25 million and EUR 7.3 million, respectively, remained outstanding on these loans, including interest. No payments of principal or interest have been made in respect of the Slingsby Loans.

In connection with the acquisition of Game Link LLC by the Company on January 20, 2009, in order to induce the sellers to consummate
the acquisition, Slingsby Enterprises Limited entered into an agreement (the



- 50 -



---

GameLink Letter Agreement) with the Company and the sellers with regard to the partial repayment of the Slingsby Loans. Under the GameLink Letter Agreement, in each of the fiscal
years ended December 31, 2009, 2010, and 2011, Slingsby is required to repay not less than EUR one million, either in cash or in Private common stock valued at its fair market value as determined by the disinterested directors of Private, to be
applied first to accrued interest and then to principal of the loan. At December 31, 2009, Slingsby had not made the EUR one million payment due on such date.

In January 2010 Mr. Milton advised the Companys Board of Directors that Slingsby did not make the EUR one million payment due
under the GameLink Letter Agreement on December 31, 2009, as he had arranged for the EUR one million December 2009 Refinancing on terms favorable to the Company and arranged for the pledge of 666,667 shares of common stock beneficially owned by
Mr. Milton to secure the December 2009 Refinancing. In February 2010 the Companys independent directors determined that it was not in the best interest of the Company to enforce the December 31, 2009 EUR one million payment
obligation under the GameLink Letter Agreement, in view of its determination that the arrangement by Mr. Milton of December 2009 Refinancing was done in good faith and was in the best interests of the Company and that Mr. Miltons
involvement in the refinancing was an important factor in completing this financing, but that the payments due in 2010 and 2011 would remain in place.

The independent directors further determined that the terms of the Slingsby Loan should be renegotiated with Mr. Milton to reflect
reasonable market terms in view of a number of factors, including the size of the loan, the failure of Slingsby Enterprises Limited to make the scheduled payment due on December 31, 2009, the absence of any security for the loan and the absence
of a fixed maturity date or agreed payment schedule sufficient to repay the full amount of the Slingsby Loan. Mr. Milton proposed to restructure the payment terms of the Slingsby Loan to provide for a personal guaranty of the Slingsby Loan by
Mr. Milton, a fixed maturity date of five years, and payments of EUR 1 million, in cash or Private common stock, in 2011 and 2012. However, the Company and Mr. Milton have not yet been able to reach agreement on the material terms of
the restructuring of the Slingsby Loan. Both the Company and Mr. Milton intend to continue further discussions regarding restructuring the terms of the Slingsby Loan. However, based upon the payment history of the loan to date and the absence
of any security for the Slingsby Loan at this time, the Company has determined to fully provide against the Loan until such time as the terms of the Slingsby Loan are modified to provide adequate assurances of the collectability of the Slingsby
Loan.

The terms of the GameLink Letter Agreement provide that it may not be amended without the consent of the GameLink
sellers, which includes Ilan Bunimovitz. These terms require payments of the Slingsby Loan of EUR1 million, in cash or Private common stock, on or before December 31, 2009, 2010 and 2011. Therefore, any restructuring of the Slingsby Loan which
requires a modification of the payment terms in the GameLink Letter Agreement will be subject to obtaining the consent of the GameLink sellers. As of the date of this report the GameLink sellers have not agreed to waive or defer any required
payments, including the payment required to be made by Slingsby to Private on December 31, 2009.

Game Link Agreements

In January 2009 the Company completed the acquisition of Game Link LLC and eLine LLC, companies engaged in the business of
digital distribution of adult content over the Internet and online eCommerce development. Mr. Bunimovitz was the founder and chief operating officer of Game Link LLC and an indirect co-owner of Game Link LLC and eLine, LLC. In consideration of
the acquisition of Ilan Bunimovitzs interests in Game Link LLC and eLine LLC, he received 2,066,725 shares of the Companys common stock and he is entitled to receive up to an additional 1,112,852 shares of common stock if the
combined EBITDA of the digital media operations of the Company and Game Link meet specified targets in 2009, 2010 and 2011. The total value of the shares received and to be received by Mr. Bunimovitz in connection with the acquisition, assuming
the EBITDA targets are met in 2009, 2010 and 2011, is EUR 7,418,271 (USD 9,634,118), based on the closing price of the Companys common stock on January 20, 2009. The Company and the sellers have not yet determined whether the EBITDA
target has been met for 2009.

In connection with the acquisition by the Company of Game Link LLC and its affiliate, Game Link
LLC entered into a lease agreement with 537 Stevenson Street L.L.C., a limited liability company which is 50% owned by Mr. Bunimovitz, providing for the lease by Game Link LLC of the land and building used by Game Link in San Francisco,
California. The lease extends through December 31, 2011, has a base rent of $13,620 per month, and provides for Game Link to be responsible for property taxes and maintenance expenses during the term of the lease.



- 51 -



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Sureflix Transactions

Effective December 17, 2009, the Company appointed Eric Johnson as a director pursuant to his Employment Agreement with the Company
and Entruphema Inc., a subsidiary of the Company (Entruphema), entered into on October 29, 2009. The Employment Agreement was entered into in connection with the acquisition of Entruphema and its affiliate, Sureflix Digital
Distribution Inc. on October 29, 2009, companies engaged in the business of digital distribution of premium gay adult content. Mr. Johnson was the chief executive officer and a minority owner of Entruphema prior to its acquisition by
Private on October 29, 2009.

The Employment Agreement provides for Mr. Johnson to serve as Chief Executive Officer
of Entruphema for a period of three years, subject to earlier termination by either party under specified circumstances. Under the terms of the Employment Agreement the Company agreed to appoint Mr. Johnson to its Board by December 31,
2009, and to nominate him to continue to serve as a director in 2010 and 2011 until such time as he ceases to be employed by Entruphema. The Employment Agreement provides for Mr. Johnson to receive an annual base salary of CAD 235,000 during
each year of the three year employment term. If Entruphema terminates Mr. Johnsons employment during the term of the Employment Agreement other than for cause, or if Mr. Johnson terminates his employment with the
Entruphema for good reason, then Mr. Johnson is entitled to continue to receive his monthly base salary for the remaining period of the three year term.

In consideration of the acquisition of Mr. Johnsons interest in Entruphema, he is receiving non-voting Class A Preference
Shares of Entruphema convertible into 130,000 shares of the Companys common stock, and he is entitled to receive additional Class A Preference Shares convertible into up to 70,000 shares of the Companys common stock if the combined
EBITDA of the digital media operations of the Company and Entruphema meet specified targets in the three months ended December 31, 2009, the two 12-month periods ending December 31, 2010 and 2011, and the nine month period ending
September 30, 2012.

The total value of the shares received and to be received by Mr. Johnson in connection with the
acquisition, assuming the EBITDA targets are met, is $474,000, based on the closing price of the Companys common stock on October 29, 2009. The total value of the acquisition of Entruphema by the Company, based upon shares received and to
be received by all of the sellers of Entruphema common stock in the transaction, including Mr. Johnson, assuming the EBITDA targets are met, is $4,740,000, based on the closing price of the Companys common stock on October 29, 2009.

Review and Approval of Related Party Transactions

Our Audit Committee is responsible for the review and approval of all related party transactions required to be disclosed to the public
under SEC rules. This procedure, which is contained in the written charter of our Audit Committee, has been established by our Board of Directors in order to both meet the requirements of applicable Nasdaq rules requiring review and approval of
related party transactions, and to serve the interests of our shareholders. In addition, we maintain a written Code of Ethics which requires all employees, including our officers, to disclose to the Audit Committee any material relationship or
transaction that could reasonably be expected to give rise to a personal conflict of interest. Related party transactions are reviewed and approved by the Audit Committee on a case-by-case basis. Under existing, unwritten policy no related party
transaction can be approved by the Audit Committee unless it is first determined that the terms of such transaction is on terms no less favorable to us than could be obtained from an unaffiliated third party on an arms-length basis and is otherwise
in our best interest.

Director Independence

All of the members of our Board of Directors are independent as defined in Nasdaq Stock Market Rule 5605(a)(2) other than
Berth Milton, who is our Chairman and President, Ilan Bunimovitz, our CEO, and Eric Johnson, who is President of Entruphema, Inc., a subsidiary of Private.



- 52 -



---

Our Board of Directors has an Audit Committee and a Compensation Committee. Our Board of
Directors does not have a formal nominating committee. Therefore, all decisions regarding director nominations are addressed by the entire Board of Directors, subject to the approval of a majority of the independent directors. All of the members of
the Audit Committee are independent under applicable SEC and Nasdaq listing rules.

Mr. Rodebrandt was appointed to the
Audit Committee on January 14, 2010, on an interim basis, to replace Lluis Torralba. Prior to his appointment to the Audit Committee, a company owned and operated by Mr. Rodebrandt provided services to a subsidiary of Private, for which it
was paid fees of less than $120,000 in 2007, 2008, 2009 and 2010.



|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|-------- | --------------------------------------

Fees Paid to BDO Auditores S.L.

Following is information regarding fees billed by BDO Auditores S.L. for services rendered to the Company in 2008 and 2009.

Audit Fees. The aggregate fees billed to the Company by the Companys principal accountant, BDO Auditores S.L., for the audit
of the Companys annual financial statements and for the review of the financial statements included in the Companys quarterly reports on Form 10-Q totaled $130,000 and $275,000 in 2008 and 2009, respectively. Audit fees consist of fees
for the audit and review of the Companys financial statements, statutory audits, consents and assistance with and review of documents filed with the SEC.

Audit-Related Fees. BDO Auditores S.L. did not provide any assurance or related services which are not included under Audit
Fees in 2008 and 2009, respectively.

Tax Fees. BDO Auditores S.L. did not provide any tax compliance, tax
advice, or tax planning services in 2008 and 2009, respectively.

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit
Services of Independent Auditors

The Audit Committee pre-approves all audit and permissible non-audit services provided by
the Companys independent auditors. These services may include audit services, audit-related services, tax and other services. Pre-approval is generally provided for up to one year, and any pre-approval is detailed as to the particular service
or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent auditors in
accordance with this pre-approval, and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis. During 2008 and 2009, all services provided by BDO Auditores S.L. were
pre-approved by the Audit Committee in accordance with this policy.



- 53 -



---

PART IV



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



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



| | 1. | Financial Statements.
| | -- | ---------------------

See Consolidated Financial Statements.



| | 2. | Financial Statement Schedules.
| | -- | ------------------------------

See Schedule II.



| | 3. | Exhibits.
| | -- | ---------

See Exhibit Index.



- 54 -



---

INDEX TO EXHIBITS



|            |  |                                                                                                                                                                                                                                                                                                                                     
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Document                                                                                                                                                                                                                                                                                                             
|            | 
|(4) 2.1     |  | Agreement and Plan of Reorganization dated as of January 20, 2009, by and among Private Media Group, Inc., PRVT Acquisition Corp. I, PRVT Acquisition Corp. II, Game Link LLC, eLine,
LLC, Mamas LLC, ThinkForward, Inc. GreenCine, Inc., Ilan Bunimovitz, Andrew Sullivan, Dennis Woo and Peter Marinac.                          
|            | 
|(5) 2.2     |  | Acquisition Agreement dated as of October 9, 2009, by and among Private Media Group, Inc., 2220445 Ontario Inc., Entruphema Inc., 2062249 Ontario Inc., Eric Johnson, Erik Schannen
and Michel Lozier, and Eric Johnson in his capacity as Sellers Representative.                                                                  
|            | 
|3.1         |  | Restated Articles of Incorporation                                                                                                                                                                                                                                                                                                  
|            | 
|3.2         |  | Articles of Amendment to the Articles of Incorporation                                                                                                                                                                                                                                                                              
|            | 
|3.3         |  | Certificate of Amendment to Articles of Incorporation                                                                                                                                                                                                                                                                               
|            | 
|(1) 3.4     |  | Amended and Restated Bylaws                                                                                                                                                                                                                                                                                                         
|            | 
|*4.1        |  | Specimen Common Stock Certificate.                                                                                                                                                                                                                                                                                                  
|            | 
|(8) 4.2     |  | Exchange and Support Agreement dated October 29, 2009, by and among Private Media Group, Inc., 2220445 Ontario Inc., Entruphema Inc., 2062249 Ontario Inc., Eric Johnson, Erik
Schannen and Michel Lozier, and Eric Johnson in his capacity as Sellers Representative, including Schedule A thereto (Exchangeable Share Provisions).
|            | 
|*10.1       |  | Milcap Acquisition Agreement dated December 19, 1997                                                                                                                                                                                                                                                                                
|            | 
|*10.2       |  | Cinecraft Acquisition Agreement dated December 19, 1997                                                                                                                                                                                                                                                                             
|            | 
|**10.3      |  | 7% Note Due 2002 from the Registrant to Commerzbank AK.                                                                                                                                                                                                                                                                             
|            | 
|++10.4      |  | Amendment No.1 to the 7% Note Due 2002                                                                                                                                                                                                                                                                                              
|            | 
|+10.5       |  | Share Purchase Agreement dated as of December 9, 2002, by and among Fraserside Holdings Limited, Luthares Investments N.V. and Stichting de Oude Waag.                                                                                                                                                                              
|            | 
|(1) 10.6    |  | Consulting Agreement dated September 29, 2006, by and between the Company and Peter Cohen, as amended by letter dated September 29, 2006.                                                                                                                                                                                           
|            | 
|(3) 10.7    |  | Employment Agreement dated as of January 20, 2009, by and among Ilan Bunimovitz, Game Link LLC and Private Media Group, Inc.                                                                                                                                                                                                        
|            | 
|10.8        |  | Amended and Restated Employment Agreement dated as of October 8, 2009, by and among Ilan Bunimovitz, Game Link LLC and Private Media Group, Inc.                                                                                                                                                                                    
|            | 
|(6) 10.9    |  | Employment Agreement dated as of October 29, 2009, by and among Eric Johnson, Entruphema Inc. and Private Media Group,
Inc.                                                                                                                                                                                                         



- 55 -



---

|          |  |                                                                                                                           
|--------- |  | --------------------------------------------------------------------------------------------------------------------------
|          | 
|++10.10   |  | Amended and Restated 1999 Employee Stock Option Plan                                                                      
|          | 
|(7) 10.11 |  | 2009 Equity Incentive Plan                                                                                                
|          | 
|(2) 14.1  |  | Code of Ethics                                                                                                            
|          | 
|21        |  | Subsidiaries.                                                                                                             
|          | 
|23.1      |  | Consent of BDO Auditores S.L.                                                                                             
|          | 
|23.2      |  | Consent of Odenberg, Ullakko, Muranishi & Co. LLP                                                                         
|          | 
|31.1      |  | Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.                                         
|          | 
|31.2      |  | Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.                                         
|          | 
|32.1      |  | Certification of CEO and CFO Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 2002.



|* | 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 Registration Statement on Form S-1 (SEC File No. 333-69654).
|-- | ------------------------------------------------------------------------------------------------------------

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

|++ | Incorporated by reference from the registrants Annual Report on Form 10-K for the year ended December 31, 2002.
|-- | ----------------------------------------------------------------------------------------------------------------

|(1) | Incorporated by reference from the registrants Annual Report on Form 10-K for the year ended December 31, 2006.
|--- | ----------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference from the registrants Annual Report on Form 10-K for the year ended December 31, 2003.
|--- | ----------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference from the registrants Interim Report on Form 8-K filed with the SEC on March 6, 2009.
|--- | ---------------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference from the registrants Current Report on Form 8-K filed with the SEC on January 23, 2009. Schedules and exhibits to the Agreement
have been omitted pursuant to Section 601(b)(2) of Regulation S-K. Private agrees to furnish supplementally a copy of any omitted schedule or exhibit upon the request of the SEC.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Incorporated by reference from the registrants Current Report on Form 8-K filed with the SEC on October 16, 2009. Schedules and exhibits to the Agreement have
been omitted pursuant to Section 601(b)(2) of Regulation S-K. Private agrees to furnish supplementally a copy of any omitted schedule or exhibit upon the request of the SEC.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Incorporated by reference from the registrants Current Report on Form 8-K filed with the SEC on December 23, 2009.
|--- | -------------------------------------------------------------------------------------------------------------------

|(7) | Incorporated by reference from the registrants definitive Proxy Statement filed with the SEC on November 3, 2009.
|--- | ------------------------------------------------------------------------------------------------------------------

|(8) | Incorporated by reference from the registrants Current Report on Form 8-K filed with the SEC on November 3, 2009.
|--- | ------------------------------------------------------------------------------------------------------------------



- 56 -



---

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: May 24, 2010 |  | PRIVATE MEDIA GROUP, INC.
|                    |  |                          
|                    |  | By:                       |  | /s/ Ilan Bunimovitz             
|                    |  |                           |  | Ilan Bunimovitz, Chief Executive
|                    |  |                           |  | Officer                         

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



|                                        |  |                                                   |  |             
|--------------------------------------- |  | ------------------------------------------------- |  | ------------
|Name                                    |  | Title                                             |  | Date        
|                                        |  |                                                  
|/s/ Berth H. Milton
Berth H. Milton     |  | Chairman of the Board, Director                   |  | May 24, 2010
|                                        | 
|                                        |  |                                                  
|/s/ Ilan Bunimovitz
Ilan Bunimovitz     |  | Chief Executive Officer, Director                 |  | May 24, 2010
|                                        | 
|                                        |  |                                                  
|/s/ Johan Gillborg
Johan Gillborg       |  | Chief Financial Officer, Chief Accounting Officer |  | May 24, 2010
|                                        | 
|                                        |  |                                                  
|/s/ Bo Rodebrant
Bo Rodebrant           |  | Director                                          |  | May 24, 2010
|                                        | 
|                                        |  |                                                  
|/s/ Johan G. Carlberg
Johan G. Carlberg |  | Director                                          |  | May 24, 2010
|                                        | 
|                                        |  |                                                  
|/s/ Daniel Sánchez
Daniel Sánchez       |  | Director                                          |  | May 24, 2010
|                                        |  |                                                  
|/s/ Eric Johnson
Eric Johnson           |  | Director                                          |  | May 24, 2010
|                                        | 



- 57 -



---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Shareholders of Private Media Group, Inc.



|1. | We have audited the accompanying consolidated balance sheets of Private Media Group, Inc. as of December 31, 2008 and 2009 and the related consolidated statements
of income and comprehensive income, shareholders ́ equity, and cash flows for the three years in the period ended December 31, 2009. We have also audited the schedule listed in the accompanying index. These financial statements and
schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We did not audit the consolidated financial statements of ThinkForward,
Inc., a wholly-owned subsidiary, which consolidated statements reflect at December 31, 2009 total assets constituting 5% and total revenues constituting 42% of the related consolidated totals. Those consolidated statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for ThinkForward, Inc., is based solely on the report of those auditors.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2. | We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements
and schedule, 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.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. | In our opinion, based on our audits and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Private Media Group, Inc. at December 31, 2008 and 2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in
conformity with accounting principles generally accepted in the United States of America.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. | The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements,
the Company has suffered recurring losses from operations over the past years and has not yet reestablished profitable operations. These factors raise substantial doubt about its ability to continue as a going concern. Managements plans in
regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. | Also, in our opinion, the schedule presents fairly, in all material responses, the information set forth therein.
|-- | -----------------------------------------------------------------------------------------------------------------



|                      
|----------------------
|/s/ BDO Auditores S.L.
|BDO AUDITORES S.L.    
|                      
|Barcelona, Spain      
|May 17, 2010          



F - 1



---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Shareholders of Think Forward, Inc.

We
have audited the accompanying consolidated balance sheet of ThinkForward, Inc. (the Company) as of December 31, 2009 and the related consolidated statements of operations, changes in shareholders ́ deficit, and cash flows for
the year then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides 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
ThinkForward, Inc. at December 31, 2009, and the results of its operations and its cash flows the year then ended in conformity with accounting principles generally accepted in the United States of America.



|                                          
|------------------------------------------
|/s/ Odenberg, Ullakko, Muranishi & Co. LLP
|                                          
|San Francisco, California                 
|May 17, 2010                              



F - 2



---

PRIVATE MEDIA GROUP, INC.

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                          |  |                |   |  |        |   |  |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | - |  | ------ | - |  | ------ | -
|                                                                                                                                                          |  | December 31,   |  
|                                                                                                                                                          |  | 2008           |   |  | 2009   |   |  | 2009   |  
|                                                                                                                                                          |  | EUR            |   |  | EUR    |   |  | USD    |  
|                                                                                                                                                          |  | (in thousands) |  
|ASSETS                                                                                                                                                    |  |                |   |  |        |   |  |        |  
|Cash and cash equivalents                                                                                                                                 |  | 552            |   |  | 613    |   |  | 889    |  
|Trade accounts receivable - net (Note 4)                                                                                                                  |  | 6,066          |   |  | 5,382  |   |  | 7,801  |  
|Related party receivable (Note 13)                                                                                                                        |  | 7,038          |   |  |       |   |  |       |  
|Inventories - net (Note 5)                                                                                                                                |  | 5,038          |   |  | 2,439  |   |  | 3,535  |  
|Deferred income tax asset (Note 12)                                                                                                                       |  | 6,188          |   |  | 4,478  |   |  | 6,490  |  
|Prepaid expenses and other current assets                                                                                                                 |  | 1,238          |   |  | 866    |   |  | 1,255  |  
|                                                                                                                                                          |  |                |   |  |        |   |  |        |  
|TOTAL CURRENT ASSETS                                                                                                                                      |  | 26,120         |   |  | 13,779 |   |  | 19,970 |  
|Library of photographs and videos - net (Note 7)                                                                                                          |  | 15,138         |   |  | 11,635 |   |  | 16,862 |  
|Property, plant and equipment - net (Note 6)                                                                                                              |  | 3,154          |   |  | 6,685  |   |  | 9,689  |  
|Other intangible assets (Note 8)                                                                                                                          |  | 2,971          |   |  | 5,212  |   |  | 7,554  |  
|Goodwill (Note 3)                                                                                                                                         |  | 2,132          |   |  | 10,524 |   |  | 15,252 |  
|Other investments (Note 9)                                                                                                                                |  | 1,022          |   |  |       |   |  |       |  
|Other assets                                                                                                                                              |  | 321            |   |  | 675    |   |  | 978    |  
|                                                                                                                                                          |  |                |   |  |        |   |  |        |  
|TOTAL ASSETS                                                                                                                                              |  | 50,859         |   |  | 48,510 |   |  | 70,304 |  
|                                                                                                                                                          |  |                |   |  |        |   |  |        |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                      |  |                |   |  |        |   |  |        |  
|Short-term borrowings (Note 10)                                                                                                                           |  | 4,401          |   |  | 3,080  |   |  | 4,464  |  
|Current portion of long-term borrowings (Note 10)                                                                                                         |  |               |   |  | 222    |   |  | 322    |  
|Accounts payable trade                                                                                                                                    |  | 3,816          |   |  | 6,207  |   |  | 8,996  |  
|Income taxes payable (Note 12)                                                                                                                            |  | 1,087          |   |  | 1,089  |   |  | 1,578  |  
|Deferred income taxes (Note 12)                                                                                                                           |  | 24             |   |  | 24     |   |  | 35     |  
|Accrued other liabilities (Note 11)                                                                                                                       |  | 920            |   |  | 1,884  |   |  | 2,730  |  
|                                                                                                                                                          |  |                |   |  |        |   |  |        |  
|                                                                                                                                                          |  |                |  
|TOTAL CURRENT LIABILITIES                                                                                                                                 |  | 10,249         |   |  | 12,506 |   |  | 18,125 |  
|Contingent consideration payable (Note 3)                                                                                                                 |  |               |   |  | 4,703  |   |  | 6,816  |  
|Long-term borrowings (Note 10)                                                                                                                            |  |               |   |  | 1,898  |   |  | 2,751  |  
|Related party payable (Note 13)                                                                                                                           |  |               |   |  | 69     |   |  | 100    |  
|                                                                                                                                                          |  |                |   |  |        |   |  |        |  
|TOTAL LIABILITIES                                                                                                                                         |  | 10,249         |   |  | 19,176 |   |  | 27,792 |  
|                                                                                                                                                          |  |                |  
|SHAREHOLDERS EQUITY (Note 14)                                                                                                                            |  |                |   |  |        |   |  |        |  
|                                                                                                                                                          |  |                |  
|$4.00 Series A Convertible Preferred Stock 10,000,000 shares authorized, none issued and outstanding at December 31, 2008
and 2009, respectively          |  |               |   |  |       |   |  |       |  
|Common Stock, $.001 par value, 100,000,000 shares authorized 17,860,165 and 20,704,934 issued and outstanding at
December 31, 2008 and 2009, respectively |  | 885            |   |  | 869    |   |  | 1,259  |  
|Additional paid-in capital                                                                                                                                |  | 21,728         |   |  | 30,466 |   |  | 44,154 |  
|Retained earnings                                                                                                                                         |  | 22,074         |   |  | 1,564  |   |  | 2,266  |  
|Accumulated other comprehensive income                                                                                                                    |  | (4,077         | ) |  | (3,565 | ) |  | (5,167 | )
|                                                                                                                                                          |  |                |   |  |        |   |  |        |  
|TOTAL SHAREHOLDERS EQUITY                                                                                                                                |  | 40,610         |   |  | 29,334 |   |  | 42,512 |  
|                                                                                                                                                          |  |                |   |  |        |   |  |        |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                |  | 50,859         |   |  | 48,510 |   |  | 70,304 |  
|                                                                                                                                                          |  |                |   |  |        |   |  |        |  

See accompanying notes to consolidated financial statements



F - 3



---

PRIVATE MEDIA GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME



|                                             |  |                          |   |  |        |   |  |         |   |  |         |  
|-------------------------------------------- |  | ------------------------ | - |  | ------ | - |  | ------- | - |  | ------- | -
|                                             |  | Years ended December 31, |  
|                                             |  | 2007                     |   |  | 2008   |   |  | 2009    |   |  | 2009    |  
|                                             |  | EUR                      |   |  | EUR    |   |  | EUR     |   |  | USD     |  
|                                             |  | (in thousands)           |  
|Net sales                                    |  | 24,990                   |   |  | 19,667 |   |  | 23,061  |   |  | 33,422  |  
|Cost of sales                                |  | 12,305                   |   |  | 13,505 |   |  | 16,864  |   |  | 24,440  |  
|                                             |  |                          |   |  |        |   |  |         |   |  |         |  
|Gross profit                                 |  | 12,685                   |   |  | 6,161  |   |  | 6,197   |   |  | 8,982   |  
|Selling, general and administrative expenses |  | 13,599                   |   |  | 13,061 |   |  | 24,833  |   |  | 35,990  |  
|                                             |  |                          |   |  |        |   |  |         |   |  |         |  
|Operating income (loss)                      |  | (914                     | ) |  | (6,900 | ) |  | (18,636 | ) |  | (27,009 | )
|Interest expense                             |  | 272                      |   |  | 323    |   |  | 389     |   |  | 563     |  
|Interest income                              |  | 275                      |   |  | 257    |   |  | 234     |   |  | 339     |  
|                                             |  |                          |   |  |        |   |  |         |   |  |         |  
|Income (loss) before income taxes            |  | (911                     | ) |  | (6,965 | ) |  | (18,790 | ) |  | (27,232 | )
|Income tax (benefit)                         |  | (506                     | ) |  | (1,777 | ) |  | 1,720   |   |  | 2,493   |  
|                                             |  |                          |   |  |        |   |  |         |   |  |         |  
|Net Income (loss)                            |  | (405                     | ) |  | (5,188 | ) |  | (20,510 | ) |  | (29,725 | )
|                                             |  |                          |   | 
|Other comprehensive income:                  |  |                          |   |  |        |   |  |         |   |  |         |  
|Foreign currency translation adjustments     |  | (224                     | ) |  | (959   | ) |  | 512     |   |  | 742     |  
|                                             |  |                          |   |  |        |   |  |         |   |  |         |  
|Comprehensive income                         |  | (629                     | ) |  | (6,147 | ) |  | (19,999 | ) |  | (28,983 | )
|                                             |  |                          |   |  |        |   |  |         |   |  |         |  
|                                             |  |                          |   | 
|Net income (loss) per share:                 |  |                          |   |  |        |   |  |         |   |  |         |  
|Basic                                        |  | (0.03                    | ) |  | (0.30  | ) |  | (0.99   | ) |  | (1.43   | )
|                                             |  |                          |   |  |        |   |  |         |   |  |         |  
|Diluted                                      |  | (0.03                    | ) |  | (0.30  | ) |  | (0.99   | ) |  | (1.43   | )
|                                             |  |                          |   |  |        |   |  |         |   |  |         |  

See accompanying notes to consolidated financial statements



F - 4



---

PRIVATE MEDIA GROUP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY



|                                                   |  |              |   |                          |         |  |                  |   |  |                                     |   |  |                           |   |  |         |  
|-------------------------------------------------- |  | ------------ | - | ------------------------ | ------- |  | ---------------- | - |  | ----------------------------------- | - |  | ------------------------- | - |  | ------- | -
|                                                   |  | Common stock |   | Additionalpaid-incapital |         |  | Retainedearnings |   |  | Accumulatedothercomprehensiveincome |   |  | Totalshare-holdersequity |  
|                                                   |  | Shares       |   |                          | Amounts |  |                  |   | 
|                                                   |  |              |   |                          | EUR     |  | EUR              |   |  | EUR                                 |   |  | EUR                       |   |  | EUR     |  
|Balance at January 1, 2007                         |  | 17,716,055   |   |                          | 867     |  | 20,675           |   |  | 27,667                              |   |  | (2,893                    | ) |  | 46,334  |  
|Repurchase of common stock                         |  | (1,000       | ) |                          |        |  | (8               | ) |  |                                    |   |  |                          |   |  | (8      | )
|Shares issued for investment (Note 9)              |  | 145,109      |   |                          |        |  | 1,022            |   |  |                                    |   |  |                          |   |  | 1,022   |  
|Stock based compensation                           |  |             |   |                          |        |  | 28               |   |  |                                    |   |  |                          |   |  | 28      |  
|Translation adjustment                             |  |             |   |                          |        |  |                 |   |  |                                    |   |  | (224                      | ) |  | (224    | )
|Net loss                                           |  |             |   |                          |        |  |                 |   |  | (405                                | ) |  |                          |   |  | (405    | )
|                                                   |  |              |   |                          |         |  |                  |   |  |                                     |   |  |                           |   |  |         |  
|Balance at December 31, 2007                       |  | 17,860,165   |   |                          | 867     |  | 21,718           |   |  | 27,262                              |   |  | (3,118                    | ) |  | 46,747  |  
|Stock based compensation                           |  |             |   |                          |        |  | 9                |   |  |                                    |   |  |                          |   |  | 9       |  
|Translation adjustment                             |  |             |   |                          |        |  |                 |   |  |                                    |   |  | (959                      | ) |  | (959    | )
|Net loss                                           |  |             |   |                          |        |  |                 |   |  | (5,188                              | ) |  |                          |   |  | (5,188  | )
|                                                   |  |              |   |                          |         |  |                  |   |  |                                     |   |  |                           |   |  |         |  
|Balance at December 31, 2008                       |  | 17,860,165   |   |                          | 867     |  | 21,727           |   |  | 22,074                              |   |  | (4,077                    | ) |  | 40,610  |  
|Shares issued in acquisition (Note 3)              |  | 2,844,770    |   |                          | 2       |  | 6,642            |   |  |                                    |   |  |                          |   |  | 6,644   |  
|Exchangeable shares issued in acquisition (Note 3) |  |             |   |                          |        |  | 2,095            |   |  |                                    |   |  |                          |   |  | 2,095   |  
|Stock based compensation                           |  |             |   |                          |        |  | 3                |   |  |                                    |   |  |                          |   |  | 3       |  
|Translation adjustment                             |  |             |   |                          |        |  |                 |   |  |                                    |   |  | 512                       |   |  | 512     |  
|Net loss                                           |  |             |   |                          |        |  |                 |   |  | (20,150                             | ) |  |                          |   |  | (20,150 | )
|                                                   |  |              |   |                          |         |  |                  |   |  |                                     |   |  |                           |   |  |         |  
|Balance at December 31, 2009                       |  | 20,704,934   |   |                          | 869     |  | 30,466           |   |  | 1,564                               |   |  | (3,565                    | ) |  | 29,334  |  
|                                                   |  |              |   |                          |         |  |                  |   |  |                                     |   |  |                           |   |  |         |  

See accompanying notes to consolidated financial statements



F - 5



---

PRIVATE MEDIA GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                       |  |                          |   |  |        |   |  |         |   |  |         |  
|-------------------------------------------------------------------------------------- |  | ------------------------ | - |  | ------ | - |  | ------- | - |  | ------- | -
|                                                                                       |  | Years ended December 31, |  
|                                                                                       |  | 2007                     |   |  | 2008   |   |  | 2009    |   |  | 2009    |  
|                                                                                       |  | EUR                      |   |  | EUR    |   |  | EUR     |   |  | USD     |  
|                                                                                       |  | (in thousands)           |  
|Cash flows from operating activities:                                                  |  |                          |   |  |        |   |  |         |   |  |         |  
|Net income (loss)                                                                      |  | (405                     | ) |  | (5,188 | ) |  | (20,510 | ) |  | (29,725 | )
|Adjustment to reconcile net income to net cash flows provided by operating activities: |  |                          |   |  |        |   |  |         |   |  |         |  
|Deferred income taxes                                                                  |  | (636                     | ) |  | (1,856 | ) |  | 1,710   |   |  | 2,478   |  
|Depreciation                                                                           |  | 819                      |   |  | 1,026  |   |  | 982     |   |  | 1,423   |  
|Stock based compensation                                                               |  | 28                       |   |  | 9      |   |  | 3       |   |  | 4       |  
|Bad debt provision                                                                     |  | 367                      |   |  | 333    |   |  | 7,817   |   |  | 11,329  |  
|Write-down of magazine inventory                                                       |  |                         |   |  |       |   |  | 806     |   |  | 1,167   |  
|Investment write-off                                                                   |  |                         |   |  |       |   |  | 1,022   |   |  | 1,481   |  
|Impairment of goodwill                                                                 |  |                         |   |  | 293    |   |  | 884     |   |  | 1,281   |  
|Amortization of other intangible assets                                                |  | 124                      |   |  | 124    |   |  | 124     |   |  | 180     |  
|Amortization of web pages                                                              |  |                         |   |  |       |   |  | 2,080   |   |  | 3,015   |  
|Amortization of photographs and videos                                                 |  | 6,832                    |   |  | 6,332  |   |  | 5,838   |   |  | 8,461   |  
|Changes in operating assets and liabilities, net of acquisitions:                      |  |                          |   |  |        |   |  |         |   |  |         |  
|Trade accounts receivable                                                              |  | (274                     | ) |  | 2,192  |   |  | 384     |   |  | 556     |  
|Related party receivable                                                               |  | (317                     | ) |  | (298   | ) |  | (198    | ) |  | (287    | )
|Inventories                                                                            |  | 1,124                    |   |  | 2,112  |   |  | 2,010   |   |  | 2,913   |  
|Prepaid expenses and other current assets                                              |  | (497                     | ) |  | 1,285  |   |  | 573     |   |  | 831     |  
|Accounts payable trade                                                                 |  | 163                      |   |  | (1,096 | ) |  | 270     |   |  | 391     |  
|Income taxes payable                                                                   |  | 257                      |   |  | 97     |   |  | (172    | ) |  | (249    | )
|Accrued other liabilities                                                              |  | 15                       |   |  | (149   | ) |  | (312    | ) |  | (452    | )
|                                                                                       |  |                          |   |  |        |   |  |         |   |  |         |  
|Net cash provided by operating activities                                              |  | 7,601                    |   |  | 5,216  |   |  | 3,310   |   |  | 4,797   |  
|Cash flows used in investing activities:                                               |  |                          |   |  |        |   |  |         |   |  |         |  
|Investment in library of photographs and videos                                        |  | (7,101                   | ) |  | (4,292 | ) |  | (2,335  | ) |  | (3,384  | )
|Capital expenditures                                                                   |  | (1,370                   | ) |  | (1,136 | ) |  | (1,575  | ) |  | (2,282  | )
|Cash received in acquisitions                                                          |  |                         |   |  |       |   |  | 333     |   |  | 483     |  
|Investment in other assets                                                             |  | (7                       | ) |  | 36     |   |  | (288    | ) |  | (417    | )
|                                                                                       |  |                          |   |  |        |   |  |         |   |  |         |  
|Net cash used in investing activities                                                  |  | (8,478                   | ) |  | (5,392 | ) |  | (3,864  | ) |  | (5,600  | )
|Cash flow provided by financing activities:                                            |  |                          |   |  |        |   |  |         |   |  |         |  
|Short-term borrowings - repayments                                                     |  | (399                     | ) |  | (166   | ) |  | (1,620  | ) |  | (2,348  | )
|Short-term borrowings - additions                                                      |  | 1,200                    |   |  | 365    |   |  | 129     |   |  | 188     |  
|Long-term borrowings - repayments                                                      |  | (430                     | ) |  | (111   | ) |  | (143    | ) |  | (208    | )
|Long-term borrowings - additions                                                       |  |                         |   |  |       |   |  | 1,738   |   |  | 2,519   |  
|                                                                                       |  |                          |   |  |        |   |  |         |   |  |         |  
|Net cash (used in) provided by financing activities                                    |  | 371                      |   |  | 88     |   |  | 104     |   |  | 150     |  
|Foreign currency translation adjustment                                                |  | (224                     | ) |  | (959   | ) |  | 512     |   |  | 742     |  
|                                                                                       |  |                          |   |  |        |   |  |         |   |  |         |  
|Net increase (decrease) in cash and cash equivalent                                    |  | (730                     | ) |  | (1,047 | ) |  | 61      |   |  | 89      |  
|Cash and cash equivalents at beginning of the year                                     |  | 2,329                    |   |  | 1,599  |   |  | 552     |   |  | 800     |  
|                                                                                       |  |                          |   |  |        |   |  |         |   |  |         |  
|Cash and cash equivalents at end of the year                                           |  | 1,599                    |   |  | 552    |   |  | 613     |   |  | 889     |  
|                                                                                       |  |                          |   |  |        |   |  |         |   |  |         |  
|Cash paid for interest                                                                 |  | 244                      |   |  | 162    |   |  | 220     |   |  | 319     |  
|                                                                                       |  |                          |   |  |        |   |  |         |   |  |         |  
|Cash paid for taxes                                                                    |  |                         |   |  |       |   |  |        |   |  |        |  
|                                                                                       |  |                          |   |  |        |   |  |         |   |  |         |  
|Repurchase of common stock (non-cash transaction)                                      |  | 8                        |   |  |       |   |  |        |   |  |        |  
|                                                                                       |  |                          |   |  |        |   |  |         |   |  |         |  

See accompanying notes to consolidated financial statements



F - 6



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PRIVATE MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. The company and basis of presentation

Private Media Group, Inc. (the Company) was originally incorporated on September 23, 1980 as Glacier Investment Company,
Inc. under the laws of the State of Utah and, effective November 24, 1997, after a series of interim name changes, changed its name to Private Media Group Inc. Effective June 12, 1998 the Company acquired Cine Craft Limited (Cine
Craft), a Gibraltar corporation and Milcap Media Limited (Milcap), a Republic of Cyprus corporation. Prior to the acquisitions the Company was a holding company with no operations. Milcap and its subsidiaries and Cine Craft
operated under common control and were engaged in the acquisition, refinement and distribution of video and photo rights for adult feature magazines and movies (videocassettes and DVDs) through distributors and via the Internet. During the
year ended December 31, 2000, the Company established two new wholly owned subsidiaries, one in Sweden (Peach Entertainment Distribution AB, Peach) and one in the Republic of Cyprus (Fraserside Holdings Ltd.,
Fraserside). These subsidiaries were formed to carry on the business of Milcap Publishing Group AB (Sweden) and Milcap (Cyprus), respectively.

Solely for the convenience of the reader, the accompanying consolidated financial statements as of December 31, 2009 and for the
twelve months then ended have been translated into United States dollars (USD) at the rate of EUR 0.69 per USD 1.00 the Exchange Rate of the European Central Bank on December 31, 2009. The translations should not be construed
as a representation that the amounts shown could have been, or could be, converted into US dollars at that or any other rate.

Effective March 11, 2010, we implemented a 1:3 reverse stock split of our common stock. Accordingly, all share and per share values
reflected have been adjusted to give effect to the reverse stock split.

In each of the past three years we have experienced
losses from operations. At December 31, 2009, we had cash and cash equivalents of EUR 613,000. As a result of our operating losses our independent registered public accounting firm has concluded that there is substantial doubt as to our ability
to continue as a going concern, and have modified their report in the form of an explanatory paragraph describing the events that have given rise to this uncertainty. Our ability to continue as a going concern is based on our ability to
generate or obtain sufficient cash to meet our obligations on a timely basis and ultimately to attain profitable operations. We currently expect future growth and to return to profitability provided we are successful with the following objectives:



| |  |  | rolling out our Internet platforms, including: a) our newly built signature property and membership platform private.com, b) our cutting edge mobile
platform for Smartphones and c) our multinational eCommerce VOD platform;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | restructuring our affiliate programs on all properties to compete aggressively for, and attract, affiliate traffic;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | continuing the rollout of our content on cable and IPTV video-on demand platforms;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | completing the integration of businesses acquired in 2009;
| | - |  | ----------------------------------------------------------



| |  |  | consolidating and restructuring our operations into an efficient new media business;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | outsourcing of non-cost effective parts of our operations; and
| | - |  | --------------------------------------------------------------



| |  |  | identifying and exploring new online business opportunities which are less dependent on content.
| | - |  | ------------------------------------------------------------------------------------------------

If we are not successful in implementing the above objectives, or if we otherwise do not successfully respond to changing conditions in
the adult entertainment industry, we may continue to incur significant losses. There can be no assurance that we will be able to operate profitably in the future.

2. Summary of significant accounting policies

Principles of Consolidation

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



F - 7



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PRIVATE MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Foreign Currency

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

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

For the year ended December 31, 2007, the aggregate exchange loss included in determining net income amounted to EUR
33 thousand and for the years ended December 31, 2008 and 2009 the aggregate exchange gain included in determining net income amounted to EUR 222 thousand and EUR 95 thousand, respectively.

Should the Company choose to pay dividends, although the Companys current intention is to re-invest the un-remitted earnings of its
foreign subsidiaries, dividends would be declared and paid in euro.

Recognition of Revenue

The Companys primary sources of revenue are the sale of content delivered via Internet, broadcasting, DVD & magazines and
mobile phones.

Internet video on-demand offerings are sold directly via the Companys online retail websites and are
paid for almost exclusively by credit card. The Company recognizes revenue from video-on-demand when the service is rendered and collectability is reasonably assured, specifically, when the customers credit card is charged, which is, in most
cases, simultaneous with delivery of the on-demand video. Credit card payments accelerate cash flow and reduce the Companys collection risk, subject to the merchant banks right to hold back cash pending settlement of the transactions.
The Company also offers a prepaid video-on-demand service in which a customer purchases a number of minutes of on-demand video at a set rate per minute based on the number of minutes purchased. The rate per minute decreases as the number of prepaid
minutes increases. The Company records revenue from pre-pay customers as deferred revenue prior to commencement of services and recognizes revenue as the services are rendered. Prepaid minutes purchased under this program do not expire.

The Company also offers a customer loyalty program under which each members purchase of video on-demand, DVDs, movie downloads,
books, novelties or other items earns the member one point for each dollar spent. After accumulating 150 points, a customer may redeem the points for a $5 purchase. Points increase in value as they are accumulated and redeemed, with a maximum
accumulation of 2,000 points, which may be redeemed for a $200 purchase. All of a customers points expire after 180 days of no purchase activity. Because the value of the award points is not significant in relation to the value of the services
or products purchased by the customer, the Company records a liability for the estimated cost of the discounted services or products to be provided in the future.

Revenues from the sale of subscriptions to the Companys Internet website are deferred and recognized ratably over the subscription
period.

IPTV (Internet Protocol Television), satellite & cable broadcasting revenues are recognized upon delivery
when the following conditions have been met (i) license period of the arrangement has begun and the customer can begin its exploitation, exhibition, or sale (ii) the arrangement fee is fixed or determinable and (iii) collection of the
arrangement fee is reasonably assured. Such revenues may be generated by either a fixed license fee or as an agreed percentage of sales, based on sales reported each month by the Companys IPTV, cable and satellite affiliates. The affiliates do
not report actual monthly sales for each of their systems to the Company until approximately 60 - 90 days after the month of service ends. This practice requires management to make monthly revenue estimates based on historical experience for each
affiliated system. Revenue is subsequently adjusted to reflect the actual amount earned upon receipt. Adjustments made to adjust revenue from estimated to actual have historically been immaterial.

DVDs & Magazines (physical products) are sold both to wholesalers, on firm sale basis, and via national newsstand distributors,
with the right to return. Our physical products are generally multi-lingual and the principal market is in Europe. Revenues from the sale of physical products where distributors are not granted rights-of-return are recognized upon transfer of title,
which generally occurs upon delivery. Revenues from the sale of physical



F - 8



---

PRIVATE MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



products under consignment agreements with distributors are recognized based upon reported sales by the Companys distributors. Revenues from the sale of physical products under agreements
that grant distributors rights-of-return are recognized upon transfer of title, which generally occurs on delivery, net of an allowance for returned product. Distributors with the right to return are primarily national newsstand distributors. Most
of our products are bi-monthly (six issues per year) and remain on sale at a newsstand for a period of two months. Normally, all unsolds are reported to us within a period of four to six months from delivery. There are normally two to four national
newsstand distributors for all newspapers and periodicals operating in each country. A majority of our national newsstand distributors are members of Distripress, the international organization for publishers and distributors, and carry out the
distribution of the largest national and international newspapers and periodicals, including: Financial Times, Herald Tribune, Time, Newsweek, Vogue, etc. The Company uses specific return percentages per title and distributor based on estimates and
historical data. The percentages vary from 50-80%. Percentages are reviewed on an on-going basis. Magazines have an approximate retail price of EUR 11.50 (USD 15.95) per copy and are printed on glossy high-quality paper at a cost of EUR 1.25
(USD 1.75). They are often shrink-wrapped in order to comply with local regulation or guidance for the sale of adult publications. In view of the high retail price, the margin and the physical quality of the magazines and the fact that the content
has a very long shelf-life since it is not particularly linked to time, trends, fashion or current events, the Company has always collected the returns from newsstands in order to make them available for sale again. The Company operates
scheduled re-distribution of returned magazines, via national newsstand distributors, together with DVDs as Magazine/DVD packs as a way of increasing DVD distribution. Since the national newsstand distributors have the right to return, the DVD packs
are returned and the magazines are broken out in order to be sold via an additional scheduled re-distribution as Megapacks and Superpacks (three different copies per pack). Returns from the sale of Megapacks and Superpacks are destroyed. The retail
price for products sold via re-distribution vary between EUR 14.95-19.95 (USD 20.75-27.70). Magazine returns not re-distributed as per above are sold on a firm sale basis to wholesalers as back numbers at a lower price than new issues. The Company
has historically sold all returned copies at an average price higher than, or equal, to cost.

Revenues from mobile content
(wireless) sales are recognized based on sales reported each month by mobile operators via aggregators. The aggregators do not report actual monthly sales for each of their operators to the Company until approximately 60 - 90 days after the month of
service ends. This practice requires management to make monthly revenue estimates based on historical experience for each affiliated system. Revenue is subsequently adjusted to reflect the actual amount earned upon receipt. Adjustments made to
adjust revenue from estimated to actual have historically been immaterial.

Use of Estimates

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

Inventories

Inventories are valued at the lower of cost or market, with cost principally determined on an average basis. Inventories
principally consist of DVDs and magazines held for sale or resale.

Library of Photographs & Videos

The items in the library comprise our content used for distribution on various formats. Currently these are principally
DVD, IPTV, cable & satellite television and broadband (for films) and magazines and Internet broadband (for photos). All our content is sold or licensed repeatedly, unlike inventory items which are sold only once. Furthermore the content is
not only sold on one particular release, or issue, but is also re-edited and included for sale on compilations such as Best of.. titles and publications.

The film library is sold or licensed on various formats such as DVD, television, and Internet, in different markets and territories. The
current rate of technological advance means that we are continually finding new distribution platforms for our content. Recent examples of this would be IPTV and broadcasting via digital cable and satellite television with pay-per-view (PPV) and
video-on-demand (VOD) abilities. The film library includes: a) films,



F - 9



---

PRIVATE MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



which represent the content, i.e., the edited movie including soundtrack. b) translations, sound dubbing, & sub-titles, which are required to customize each movie in terms of language
for all territories, and c) Digital Manipulation for DVD Masters, which is required to digitize the movie and create menus and language options in order to produce a master to be used to duplicate DVDs from.

The photo library comprises purchased photographic material used for print and internet publications. Our photographic material is used
initially in one issue of our four principal magazine titles. However it will normally subsequently be used in later special editions. The print publications are typically printed once and thereafter they are sold over a period of several years, as
discussed previously. Internet publications are sold via membership fees charged at the Companys websites. Photos are also licensed to other internet and print publishers.

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

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. Website development costs involving the provision of additional functions or features to the website, including graphics and related software, are included in property, plant and equipment
and are amortized on a straight-line basis over 3-5 years. In the years ended December 31, 2008 and 2009 the Company has capitalized EUR 530 thousand and EUR 1,276 thousand respectively of costs related to the development of its
website including graphics and related software.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price paid over the fair value of the net assets of businesses acquired.

Other Intangible Assets represents the value attributable to: a) Customer base, which was acquired from two of the Companys former
distributors in the U.S. and in Canada in 2001 and 2003, respectively, (see Note 8). The amortization expense is calculated on a straight-line basis over 10 years for each acquisition, b) Broadcasting asset, which was acquired from International
Film Production and Distribution Limited in 2003 (see Note 8). At the time of acquisition, the asset was deemed to have an indefinite life and is not subject to amortization, and c) Trade and Domain names, which were acquired from GameLink and
Sureflix (see Notes 3 and 8). At the time of acquisition, the assets were deemed to have an indefinite life and are not subject to amortization.

Goodwill and indefinite lived intangible assets are reviewed annually for impairment (or more frequently if indicators of impairment
arise), see note 3 and 8. Further separable intangible assets that are not deemed to have an indefinite life are amortized over their expected useful lives.

Impairment of Long-Lived Assets

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

Advertising Costs

Advertising costs are charged to income as incurred. The total advertising costs were EUR 1,812 thousand, EUR 1,120 thousand and
EUR 858 thousand for the years ended December 31, 2007, 2008 and 2009, respectively.



F - 10



---

PRIVATE MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Shipping and Handling Costs

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

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. The Company assesses the recoverability of deferred tax assets and records a valuation allowance when it believes it is not more likely than not that they will be
recovered.

Cash Equivalents

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

Concentration of Credit Risk

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

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

Basic and Diluted Earnings Per Share

Basic earnings per common share is computed by dividing income available to common shareholders by the
weighted-average number of shares of common stock outstanding, including exchangeable shares issued on October 29, 2009, in the Sureflix acquisition, see Note 3, during the period. As of December 31, 2009, exchangeable shares equivalent to
1,300,000 shares of common stock was outstanding. Diluted earnings per common share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to
include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options and unvested stock grants. The
dilutive effect of potentially dilutive securities is reflected in diluted earnings per common share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Companys common
stock can result in a greater dilutive effect from potentially dilutive securities.

Fair Value Measurements

The Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities
that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which
the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk.

Stock-based compensation

The Company accounts for stock-based payment transactions in which the Company receives employee services in exchange for (a) equity
instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprises equity instruments or that may be settled by the issuance of such equity instruments. Stock-based compensation cost for stock awards is
measured based on the closing fair market value of the Companys common stock on the date of grant. Stock-based compensation cost for stock options is estimated at the grant date based on each options fair-value as calculated by the
Black-Scholes option-pricing model. The Company recognizes stock-based compensation cost as expense ratably on a straight-line basis over the requisite service period.



F - 11



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PRIVATE MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Recent Accounting Pronouncements

In January 2010, FASB issued ASU No. 2010-06  Improving Disclosures about Fair Value Measurements. This update provides
amendments to Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair
value measurements and describe the reasons for the transfers. 2) Activity in Level 3 fair value measurements. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity
should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number). This update provides amendments to Subtopic 820-10 that clarify existing disclosures as follows:
1) Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial
position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2) Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation
techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications
of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair
value measurements. These disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company is currently evaluating the impact of this ASU, however, the Company does not
expect the adoption of this ASU to have a material impact on its consolidated financial reporting.

3. Acquisitions

GameLink Acquisition

On January 20, 2009, Private Media Group, Inc. (Private) completed the acquisition of 100% of the business of Game Link
LLC and its affiliate, eLine, LLC collectively (GameLink). The GameLink companies are engaged in the business of digital distribution of adult content over the Internet and online eCommerce development. As a result of the acquisition,
Private is expecting to be a leading global digital distributor of adult content over the Internet.

The goodwill of EUR
7,974 thousand arising from the acquisition consists largely of the acquired know-how related to digital distribution of adult content over the Internet and online eCommerce development, economies of scale and synergies expected from combining
the operations of Private and GameLink. None of the goodwill recognized is expected to be deductible for income tax purposes.



F - 12



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PRIVATE MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The following table summarizes the consideration paid for GameLink and the amounts of the assets
acquired and liabilities assumed recognized at the acquisition date:



|                                                                           |  |                |  
|-------------------------------------------------------------------------- |  | -------------- | -
|                                                                           |  | January, 20    |  
|                                                                           |  | 2009           |  
|                                                                           |  | EUR            |  
|                                                                           |  | (in thousands) |  
|Consideration                                                              |  |                |  
|Equity Instruments (2,844,770 common shares of Private)                    |  | 6,644          |  
|Contingent consideration arrangement (1,531,799 common shares of Private)  |  | 3,575          |  
|                                                                           |  |                |  
|Fair value of total consideration                                          |  | 10,219         |  
|                                                                           |  |                |  
|                                                                           | 
|Recognized amounts of identifiable assets acquired and liabilities assumed |  |                |  
|Financial assets                                                           |  | 233            |  
|Inventory                                                                  |  | 217            |  
|Property, plant, and equipment                                             |  | 3,371          |  
|Identifiable intangible assets                                             |  | 1,904          |  
|Financial liabilities                                                      |  | (3,480         | )
|                                                                           |  |                |  
|Total identifiable net assets                                              |  | 2,245          |  
|Goodwill                                                                   |  | 7,974          |  
|                                                                           |  |                |  
|                                                                           |  | 10,219         |  
|                                                                           |  |                |  

The Company incurred EUR 190 thousand in acquisition-related costs, which are included in selling,
general, and administrative expenses in Privates income statement for the twelve months ending December 31, 2009.

The acquisition was accomplished by the merger of two wholly-owned subsidiaries of Private into the two parent companies of the GameLink
businesses, with the shareholders of those entities receiving 2,844,770 shares of Private Common Stock in exchange for 100% of their common stock. In addition, the former shareholders are entitled to receive up to an additional 1,531,799 shares of
Private Common Stock if the combined EBITDA of the online digital media operations of Private and GameLink meet specified targets in 2009, 2010 and 2011. The total fair value of the acquisition, which assumes the EBITDA targets are met in 2009, 2010
and 2011, is EUR 10,219 thousand (USD 13,272 thousand).

Using an exchange rate of EUR 0.75 per 1.00 USD, the
combined EBITDA targets of the online digital media operations of Private and GameLink which the contingent consideration arrangement stipulates for each of the years below are:



|     |  |               
|---- |  | --------------
|     |  | USD           
|     |  | (in thousands)
|2009 |  | 5,210         
|2010 |  | 8,013         
|2011 |  | 9,329         
|     |  |               
|     |  | 22,552        
|     |  |               



F - 13



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PRIVATE MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The manner in which the contingent consideration is earned in relation to the combined
EBITDA targets is as follows:

For each of the years ended December 31, 2009, 2010 and 2011 in which the actual EBITDA of
the online digital media operations equals or exceeds the target EBITDA, the former owners of GameLink (the Former Owners) are entitled to receive 510,600 shares of Private Common Stock.

If there is a shortfall in the actual EBITDA compared to the target EBITDA in any year, instead of receiving 510,600 target shares for
that year, the Former Owners are entitled to receive a pro rata portion of the target shares for that year, based upon the ratio between the actual EBITDA and the target EBITDA for that year. In such event, if the actual EBITDA required in the
following year(s) exceeds the target EBITDA, in addition to the 510,600 target shares earned for the following year(s),the Former Owners are entitled to recover all or a portion of unearned target shares from the prior year(s) based upon the amount
by which actual EBITDA exceeds the target EBITDA in the subsequent year.

The contingent consideration of EUR
3,575 thousand was valued at its acquisition date fair value using the lattice model. The Company believes that the target EBITDA will be reached by the end of the contingency period. The contingent consideration is classified as a liability
and will be re-measured at its current fair value each reporting period until the contingency is resolved.

The fair value of
the acquired property, plant, and equipment of EUR 3,371 thousand is based on the cost to recreate GameLinkss website, using the principle of substitution which determines value based on the estimated cost of replacing the technology with
one of similar functionality. The asset was determined to have an estimated useful life of three years.

The fair value of the
identifiable intangible assets of EUR 1,904 thousand, comprises trade and domain names. The trade and domain names are considered to be inseparable and have name recognition in the adult merchandise market as well as contractual protection. The
asset was valued based on the relief-from-royalty method and have an indefinite estimated useful life.

The amounts of
GameLinks revenue and earnings included in Privates consolidated income statement for the twelve months ended December 31, 2009, and the pro forma revenue and earnings of the combined entity had the acquisition date been
January 1, 2008, are:



|                                                                |  |                |  |          |  
|--------------------------------------------------------------- |  | -------------- |  | -------- | -
|                                                                |  | Revenue        |  | Earnings |  
|                                                                |  | EUR            |  | EUR      |  
|                                                                |  | (in thousands) | 
|Actual from January 20, 2009  December 31, 2009                |  | 9,468          |  | (176     | )
|Supplemental pro forma from January 1, 2009  December 31, 2009 |  | 23,627         |  | (20,574  | )
|Supplemental pro forma from January 1, 2008  December 31, 2008 |  | 30,795         |  | (5,619   | )

Sureflix
Acquisition

On October 29, 2009, Private Media Group, Inc. (Private) completed the acquisition of 100% of
the business of Entruphema Inc. and Sureflix Digital Distribution Inc.,(Sureflix). The Sureflix companies are engaged in the business of digital distribution of premium gay adult content over the Internet and online eCommerce
development. As a result of the acquisition, Private is expecting to be a leading global digital distributor of gay adult content over the Internet.

The goodwill of EUR 1,302 thousand arising from the acquisition is provisional pending receipt of the final valuation and consists
largely of the acquired know-how related to digital distribution of adult content over the Internet and online eCommerce development, economies of scale and synergies expected from combining the operations of Private and Sureflix. None of the
goodwill recognized is expected to be deductible for income tax purposes.



F - 14



---

PRIVATE MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The following table summarizes the consideration paid for Sureflix and the amounts of
the assets acquired and liabilities assumed recognized at the acquisition date:



|                                                                                          |  |                |  
|----------------------------------------------------------------------------------------- |  | -------------- | -
|                                                                                          |  | October, 29    |  
|                                                                                          |  | 2009           |  
|                                                                                          |  | EUR            |  
|                                                                                          |  | (in thousands) |  
|                                                                                          |  |                |  
|Consideration                                                                             |  |                |  
|Equity Instruments (the equivalent of 1,300,000 common shares of Private)                 |  | 2,095          |  
|Contingent consideration arrangement (the equivalent of 700,000 common shares of Private) |  | 1,128          |  
|                                                                                          |  |                |  
|Fair value of total consideration                                                         |  | 3,223          |  
|                                                                                          |  |                |  
|                                                                                          | 
|Recognized amounts of identifiable assets acquired and liabilities assumed                |  |                |  
|Financial assets                                                                          |  | 648            |  
|Property, plant, and equipment                                                            |  | 1,665          |  
|Identifiable intangible assets                                                            |  | 462            |  
|Financial liabilities                                                                     |  | (854           | )
|                                                                                          |  |                |  
|Total identifiable net assets                                                             |  | 1,921          |  
|Goodwill                                                                                  |  | 1,302          |  
|                                                                                          |  |                |  
|                                                                                          |  | 3,223          |  
|                                                                                          |  |                |  

The Company incurred EUR 249 thousand in acquisition-related costs, which are included in selling,
general, and administrative expenses in Privates income statement for the twelve months ending December 31, 2009.

The acquisition was accomplished by the merger of a newly formed wholly-owned subsidiary of Private into the parent company of the
Sureflix businesses, with the shareholders of those entities receiving 3,900,000 Class A Preference Shares of the newly formed Private subsidiary, which shares are exchangeable for 1,300,000 shares of Private Common Stock, in exchange for 100%
of their common stock.

In addition, the former shareholders are entitled to receive up to an additional 2,100,000
Class A Preference Shares of the newly formed Private subsidiary, which shares are exchangeable for 700,000 shares of Private Common Stock, if the combined EBITDA of the digital media operations of Private and the acquired companies meet
specified targets in the three months ending December 31, 2009, the two 12-month periods ending December 31, 2010 and 2011, and the nine month period ending September 30, 2012. The total fair value of the acquisition, which assumes
the EBITDA targets are met in 2009, 2010, 2011 and 2012, is EUR 3,223 thousand (USD 4,740 thousand).

Using an exchange
rate of EUR 0.75 per 1.00 USD, the combined EBITDA targets of the online digital media operations of Private and Sureflix, which the contingent consideration arrangement stipulates for each of the periods, are:



|                                   |  |               
|---------------------------------- |  | --------------
|                                   |  | USD           
|                                   |  | (in thousands)
|Three-months ending Dec. 31, 2009  |  | 1,503         
|Twelve-months ending Dec. 31, 2010 |  | 9,012         
|Twelve-months ending Dec. 31, 2011 |  | 10,373        
|Nine-months ending Sep. 30, 2012   |  | 7,898         
|                                   |  |               
|                                   |  | 28,785        
|                                   |  |               

The manner in which the contingent consideration is
earned in relation to the combined EBITDA targets is as follows:

For each of the three month period ending December 31,
2009, the two 12-month periods ending December 31, 2010 and 2011, and the nine month period ending September 30, 2012, in which the actual EBITDA of the online digital media operations equals or exceeds the target EBITDA, the former owners
of Sureflix (the Former



F - 15



---

PRIVATE MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Owners) are entitled to receive a quantity of Class A Preference Shares of the newly formed Private subsidiary, which shares are exchangeable for 58,333, 233,333, 233,333 and 175,000
shares of Private Common Stock, respectively.

If there is a shortfall in the actual EBITDA compared to the target EBITDA in
any period the Former Owners are entitled to receive a pro rata portion of the target shares for that year, based upon the ratio between the actual EBITDA and the target EBITDA for that year. In such event, if the actual EBITDA required in the
following period(s) exceeds the target EBITDA, in addition to the target shares earned for the following period(s), the Former Owners are entitled to recover all or a portion of unearned target shares from the prior period(s) based upon the amount
by which actual EBITDA exceeds the target EBITDA in the subsequent year.

The contingent consideration of EUR
1,128 thousand was valued at its acquisition date fair value using the lattice model. The Company believes that the target EBITDA will be reached by the end of the contingency period. The contingent consideration is classified as a liability
and will be re-measured at its current fair value each reporting period until the contingency is resolved.

The fair value of
the acquired property, plant, and equipment of EUR 1,665 thousand is provisional pending receipt of the final valuation.

The fair value of the identifiable intangible assets of EUR 462 thousand, comprises trade and domain names. The trade and domain
names have an indefinite estimated useful life. The fair value of these assets is provisional pending receipt of the final valuation.

The amounts of Sureflixs revenue and earnings included in Privates consolidated income statement for the twelve months ended
December 31, 2009, and the pro forma revenue and earnings of the combined entity had the acquisition date been January 1, 2008, are:



|                                                                |  |                |  |          |  
|--------------------------------------------------------------- |  | -------------- |  | -------- | -
|                                                                |  | Revenue        |  | Earnings |  
|                                                                |  | EUR            |  | EUR      |  
|                                                                |  | (in thousands) | 
|Actual from October 29, 2009  December 31, 2009                |  | 729            |  | 3        |  
|Supplemental pro forma from January 1, 2009  December 31, 2009 |  | 26,904         |  | (20,477  | )
|Supplemental pro forma from January 1, 2008  December 31, 2008 |  | 25,454         |  | (5,453   | )

4. Trade accounts
receivable

Trade accounts receivable consist of the following:



|                                     |  |                |   |  |        |  
|------------------------------------ |  | -------------- | - |  | ------ | -
|                                     |  | December 31,   |  
|                                     |  | 2008           |   |  | 2009   |  
|                                     |  | EUR            |   |  | EUR    |  
|                                     |  | (in thousands) |  
|Trade accounts receivable            |  | 7,454          |   |  | 7,169  |  
|Allowance for doubtful accounts      |  | (1,388         | ) |  | (1,787 | )
|                                     |  |                |   |  |        |  
|Total trade accounts receivable, net |  | 6,066          |   |  | 5,382  |  
|                                     |  |                |   |  |        |  

Management reviews the allowance for doubtful accounts on at least a quarterly basis and adjusts the balance
based on their estimate of the collectability of specific accounts as well as a reserve for a portion of other accounts which have been outstanding for more than 180 days. This estimate is based on historical losses and information about specific
customers. After collection attempts have failed, the Company writes off the specific account.



F - 16



---

PRIVATE MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



5. Inventories

Inventories consist of the following:



|                              |  |                |  |      
|----------------------------- |  | -------------- |  | -----
|                              |  | December 31,  
|                              |  | 2008           |  | 2009 
|                              |  | EUR            |  | EUR  
|                              |  | (in thousands)
|Magazines for sale and resale |  | 2,394          |  | 805  
|DVDs                          |  | 2,330          |  | 1,417
|Other                         |  | 314            |  | 217  
|                              |  |                |  |      
|                              |  | 5,038          |  | 2,439
|                              |  |                |  |      

6. Property, plant and equipment

Property, plant and equipment consist of the following:



|                                         |  |                |   |  |         |  
|---------------------------------------- |  | -------------- | - |  | ------- | -
|                                         |  | December 31,   |  
|                                         |  | 2008           |   |  | 2009    |  
|                                         |  | EUR            |   |  | EUR     |  
|                                         |  | (in thousands) |  
|Equipment & Furniture                    |  | 10,063         |   |  | 10,463  |  
|Website Development                      |  | 2,911          |   |  | 8,832   |  
|Production Database                      |  | 957            |   |  | 1,229   |  
|Accumulated depreciation                 |  | (10,776        | ) |  | (13,838 | )
|                                         |  |                |   |  |         |  
|Total Property, Plant and Equipment, net |  | 3,154          |   |  | 6,685   |  
|                                         |  |                |   |  |         |  



F - 17



---

PRIVATE MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



7. Library of photographs & videos

Library of photographs & videos consist of the following:



|                                           |  |                |  |       
|------------------------------------------ |  | -------------- |  | ------
|                                           |  | December 31,  
|                                           |  | 2008           |  | 2009  
|                                           |  | EUR            |  | EUR   
|                                           |  | (in thousands)
|Gross:                                     |  |                |  |       
|Photographs                                |  | 7,739          |  | 7,796 
|Videos                                     |  | 49,834         |  | 51,071
|Translations, Sound Dubbing, & Sub-Titles  |  | 12,810         |  | 13,623
|Digital Manipulation for DVD Masters       |  | 9,765          |  | 9,992 
|Digital Manipulation for Broadband Masters |  | 584            |  | 584   
|                                           |  |                |  |       
|                                           |  | 80,732         |  | 83,067
|                                           |  |                |  |       
|Less accumulated depreciation:             |  |                |  |       
|Photographs                                |  | 7,367          |  | 7,586 
|Videos                                     |  | 39,332         |  | 43,291
|Translations, Sound Dubbing, & Sub-Titles  |  | 9,501          |  | 10,558
|Digital Manipulation for DVD Masters       |  | 8,819          |  | 9,417 
|Digital Manipulation for Broadband Masters |  | 576            |  | 581   
|                                           |  |                |  |       
|                                           |  | 65,594         |  | 71,432
|                                           |  |                |  |       
|Net:                                       |  |                |  |       
|Photographs                                |  | 372            |  | 211   
|Videos                                     |  | 10,503         |  | 7,780 
|Translations, Sound Dubbing, & Sub-Titles  |  | 3,309          |  | 3,066 
|Digital Manipulation for DVD Masters       |  | 946            |  | 575   
|Digital Manipulation for Broadband Masters |  | 8              |  | 3     
|                                           |  |                |  |       
|                                           |  | 15,138         |  | 11,635
|                                           |  |                |  |       

8. Goodwill and Other Intangible Assets

Other intangible assets consist of the following:



|                              |  |                          |  |                   |  |               |  |       |       |  |       |   |  |       |   |  |       |  
|----------------------------- |  | ------------------------ |  | ----------------- |  | ------------- |  | ----- | ----- |  | ----- | - |  | ----- | - |  | ----- | -
|                              |  | Years ended December 31, | 
|                              |  | 2008                     |  | 2009              |  | 2009          |  | 2008  |       |  | 2009  |   |  | 2008  |   |  | 2009  |  
|                              |  | Broadcasting asset       |  | Trade/domainnames |  | Customer base |  |       | Total | 
|                              |  | EUR                      |  | EUR               |  | EUR           |  | EUR   |       |  | EUR   |   |  | EUR   |   |  | EUR   |  
|                              |  | (in thousands)           | 
|Beginning of year             |  | 2,525                    |  | 2,525             |  |              |  | 1,240 |       |  | 1,240 |   |  | 3,765 |   |  | 3,765 |  
|Acquisition value (cost)      |  |                         |  |                  |  | 2,366         |  | 0     |       |  | 0     |   |  | 0     |   |  | 2,366 |  
|                              |  |                          |  |                   |  |               |  |       |       |  |       |   |  |       |   |  |       |  
|End of year                   |  | 2,525                    |  | 2,525             |  | 2,366         |  | 1,240 |       |  | 1,240 |   |  | 3,765 |   |  | 6,131 |  
|                              |  |                          |  |                   |  |               | 
|Accumulated amortization, beg |  |                         |  |                  |  |              |  | (670  | )     |  | (794  | ) |  | (670  | ) |  | (794  | )
|Amortization                  |  |                         |  |                  |  |              |  | (124  | )     |  | (124  | ) |  | (124  | ) |  | (124  | )
|                              |  |                          |  |                   |  |               |  |       |       |  |       |   |  |       |   |  |       |  
|Accumulated amortization, end |  |                         |  |                  |  |              |  | (794  | )     |  | (918  | ) |  | (794  | ) |  | (918  | )
|                              |  |                          |  |                   |  |               |  |       |       |  |       |   |  |       |   |  |       |  
|Net book value                |  | 2,525                    |  | 2,525             |  | 2,366         |  | 446   |       |  | 322   |   |  | 2,971 |   |  | 5,212 |  
|                              |  |                          |  |                   |  |               |  |       |       |  |       |   |  |       |   |  |       |  

Broadcasting asset and trade/domain names are deemed to have an indefinite life and are not subject to
amortization. The estimated amortization expense for customer base for the two years ended December 31, 2010 and 2011 is EUR 124 thousand per year. The estimated amortization expense the year ended December 31, 2012 is EUR 74
thousand.



F - 18



---

PRIVATE MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Goodwill consist of the following:



|                                                 |  |                         |   |  |        |  
|------------------------------------------------ |  | ----------------------- | - |  | ------ | -
|                                                 |  | Years endedDecember 31, |  
|                                                 |  | 2008                    |   |  | 2009   |  
|                                                 |  | EUR                     |   |  | EUR    |  
|                                                 |  | (in thousands)          |  
|Beginning of year (cost)                         |  | 2,900                   |   |  | 2,900  |  
|Acquisition value (cost) (a)                     |  |                         |   |  | 9,276  |  
|                                                 |  |                         |   |  |        |  
|End of year                                      |  | 2,900                   |   |  | 12,176 |  
|                                                 |  |                        
|Accumulated amortization & impairment, beginning |  | (475                    | ) |  | (768   | )
|Amortization & impairment (b)                    |  | (293                    | ) |  | (884   | )
|                                                 |  |                         |   |  |        |  
|Accumulated amortization & impairment, ending    |  | (768                    | ) |  | (1,652 | )
|                                                 |  |                         |   |  |        |  
|Net book value                                   |  | 2,132                   |   |  | 10,524 |  
|                                                 |  |                         |   |  |        |  

(a) During 2009, the Company acquired the two eCommerce businesses, GameLink and Sureflix, and the related
goodwill was EUR 7,974 thousand and EUR 1,302 thousand, respectively, see Note 3.

(b) As a result of impairment
reviews performed in 2008 and 2009, the goodwill related to our video distribution company in the Benelux countries was reduced by EUR 293 thousand and 884 thousand, respectively. As of December 31, 2009 the remaining goodwill
amounted to EUR 458 thousand.

9. Other investments

In November 2007 the Company entered into two agreements to acquire shares of HCE (publ) (HCE), a mainstream content aggregator
operating HomeTV (www.hometv.se), a broadband Video-On-Demand (VOD) platform in Scandinavia. In two private offerings the Company acquired: (1) 2,000,000 common shares of HCE at SEK 1.95 per share and paid the subscription price for these
shares by issuing 169,565 shares of our common stock to HCE; and (2) an additional 2,000,000common shares of HCE at SEK 2.80 per share together with stock purchase warrants entitling the Company to acquire an additional 2,000,000 shares at
SEK 1.95 per share until November 2009, and paid the subscription price for the shares and warrants by issuing 265,762 shares of our common stock to HCE. Following the transaction the Company held 17.2% of the outstanding shares in HCE. The
aggregate purchase price of EUR 1,021,978 was computed using applicable market rates at the time of the transaction and is recorded at cost under other investments. As of December 31, 2009 the Companys shareholding was 14% and upon review
of HCEs market value and performance, management deemed it appropriate to write off the investment in its entirety.



F - 19



---

PRIVATE MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



10. Borrowings

Short- and long-term borrowings are comprised of the following:



|                                         |  |                |  |      
|---------------------------------------- |  | -------------- |  | -----
|                                         |  | December 31,  
|                                         |  | 2008           |  | 2009 
|                                         |  | EUR            |  | EUR  
|                                         |  | (in thousands)
|Short-term borrowings:                   |  |                |  |      
|Banks                                    |  | 2,600          |  | 1,090
|Other debt                               |  | 1,801          |  | 1,990
|                                         |  |                |  |      
|                                         |  | 4,401          |  | 3,080
|                                         |  |                |  |      
|Current portion of long-term borrowings: |  |                |  |      
|Banks                                    |  |               |  | 109  
|Other debt                               |  |               |  | 113  
|                                         |  |                |  |      
|                                         |  |               |  | 222  
|                                         |  |                |  |      
|Long-term borrowings:                    |  |                |  |      
|Banks                                    |  |               |  | 1,600
|Other debt                               |  |               |  | 298  
|                                         |  |                |  |      
|                                         |  |               |  | 1,898
|                                         |  |                |  |      

Banks

The Companys European subsidiaries have existing bank line of credit agreements under which these subsidiaries may borrow up to EUR
1.1 million. Borrowings under the lines of credit during 2009 were charged at variable interest rates of EURIBOR+1.4%-3.5% and fixed interest rates of 5.5%-6.75%. As of December 31, 2009, the credit lines were fully utilized.

In October, 2009 credit lines of EUR 750 thousand was partially re-financed by institutional lenders. The re-financing was split
into: a) a one year loan of EUR 130 thousand at an interest rate of 4.4% repayable in equal monthly installments, b) a three year loan of EUR 450 thousand at an interest rate of 4.4%, repayable in equal monthly installments over a two year
period starting October, 2010 and c) a three year loan of EUR 150 thousand at an interest rate of 5.35%, repayable in semiannual installments over a two year period starting October, 2010.

On December 11, 2009 a credit line of EUR 1.0 million was re-financed by an institutional lender at an interest rate of EURIBOR
+ 1.2%. Interest is payable annually starting December 11, 2010. The loan is repayable in equal annual installments over a five year period starting December 11, 2011. The loan is guaranteed by an affiliate of the Privates Chairman
and principal shareholder and the guaranty is secured by 666,667 shares of Private Media Group, Inc. Common Stock.

Other
debt

In December 2001 the groups holding company, Private Media Group, Inc., borrowed $ 4.0 million from
Commerzbank AG pursuant to a Note originally due on December 20, 2002. The Note bore interest at an annual rate of 7%, payable quarterly, with the entire principal amount and accrued interest originally due on December 20, 2002. The Note
is guaranteed by Slingsby Enterprises Limited, an affiliate of Privates Chairman and principal shareholder, and the guaranty is secured by 1,650,000 shares of Private Media Group, Inc. Common Stock. In December 2002 Commerzbank AG agreed to
extend the maturity date of the Note to March 20, 2003. In April 2003 the Note was acquired by Consipio Holding B.V. from Commerzbank AG, and Consipio and Private reached an agreement-in-principle with Consipio to extend the maturity of the
Note until April 2008. However, Consipio and Private were unable to reach final agreement on other terms and conditions relating to the restructured Note. Accordingly, in December 2003 Consipio notified Private and Slingsby Enterprises that Private
was in default under the Note, and demanded $3.4 million as payment in full of all outstanding principal and interest under the Note. The Company continued to make regular payments on the Note, including principal and accrued interest, through
February 2008. In April 2008 Consipio requested Private to pay the remaining balance of the Note, without indicating the amount due.



F - 20



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PRIVATE MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Private in turn requested that Consipio provide a statement of the amount due and the basis for its calculation. In response, Consipio demanded payment of $3,194,000 as settlement in full of the
Note, to be received by May 9, 2008. This calculation was made using an interest rate of 9.9%, as opposed to the 7% rate provided under the original terms of the Note. Consipio also advised that if payment was not received on such date it would
institute litigation, in which event Consipio would claim that the amount due under the Note should be denominated in Euro, rather than U.S. dollars. Private believes that the amount due under the Note at May 9, 2008, including accrued
interest, was no more than $2.4 million, utilizing an interest rate of 7%. In August 2008 Consipio notified Private that the Note was in default and that it intended to exercise its rights under the Note and the pledge of shares by Slingsby of
Private Common Stock. No payments have been made under the Note since February 2008, and the Note provides for interest to accrue on the unpaid principal amount of the Note until paid in full. Private believes that the amount due under the Note at
December 31, 2009, including accrued interest, was no more than $2.7 million (EUR 1.85 million), utilizing an interest rate of 7%. On May 1, 2009, Consipio Holding BV filed a lawsuit against the Company asserting a claim for unspecified
damages under the Note. The Company filed its Answer and asserted several affirmative defenses. On March 26, 2010, the Court dismissed the lawsuit, finding that U.S. federal courts did not have jurisdiction over the subject matter of the
lawsuit. This dismissal does not prejudice Consipios ability to refile this lawsuit in another jurisdiction, should it choose to do so.

The Companys newly acquired US subsidiary, GameLink, has various lease purchase arrangements and leases meeting certain criteria
are treated as financing leases and, accordingly, assets acquired under such leases are capitalized and a corresponding liability representing the present value of the future lease payments is recorded. GameLink leases essentially all of its
computers and website hosting equipment under these types of leases, which generally have terms of 3-5 years. The leases are collateralized by the underlying equipment. At December 31, 2009, the net book value of computer and web hosting
equipment subject to the capital leases was EUR 243 thousand. In addition, GameLink has several other credit arrangements which as of as of December 31, 2009 amounted to EUR 309 thousand. These credit arrangements range from short-term to three
years at interest rates of 7%-13.25%.

11. Accrued other liabilities

Accrued other liabilities are comprised of the following:



|                          |  |                |  |      
|------------------------- |  | -------------- |  | -----
|                          |  | December 31,  
|                          |  | 2008           |  | 2009 
|                          |  | EUR            |  | EUR  
|                          |  | (in thousands)
|Accrued expenses          |  | 35             |  | 549  
|Deferred income           |  | 305            |  | 1,052
|Taxes and social security |  | 342            |  | 283  
|Other                     |  | 239            |  |     
|                          |  |                |  |      
|                          |  | 920            |  | 1,884
|                          |  |                |  |      



F - 21



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PRIVATE MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



12. Income taxes

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



|              |  |                          |   |  |        |   |  |         |  
|------------- |  | ------------------------ | - |  | ------ | - |  | ------- | -
|              |  | Years ended December 31, |  
|              |  | 2007                     |   |  | 2008   |   |  | 2009    |  
|              |  | EUR                      |   |  | EUR    |   |  | EUR     |  
|              |  | (in thousands)           |  
|USA           |  | (1,290                   | ) |  | (1,762 | ) |  | (4,875  | )
|International |  | 379                      |   |  | (5,204 | ) |  | (13,915 | )
|              |  |                          |   |  |        |   |  |         |  
|              |  | (911                     | ) |  | (6,966 | ) |  | (18,790 | )
|              |  |                          |   |  |        |   |  |         |  

The provision for income taxes consisted of the following in the years ended December 31, 2007, 2008,
and 2009:



|                               |  |                          |   |  |        |   |  |      
|------------------------------ |  | ------------------------ | - |  | ------ | - |  | -----
|                               |  | Years ended December 31,
|                               |  | 2007                     |   |  | 2008   |   |  | 2009 
|                               |  | EUR                      |   |  | EUR    |   |  | EUR  
|                               |  | (in thousands)          
|Current                        |  |                          |   |  |        |   |  |      
|State                          |  | 1                        |   |  | 1      |   |  | 3    
|Foreign                        |  | 128                      |   |  | 78     |   |  | 7    
|                               |  |                          |   |  |        |   |  |      
|Current tax expense            |  | 128                      |   |  | 79     |   |  | 10   
|Deferred                       |  |                          |   |  |        |   |  |      
|Federal                        |  | (177                     | ) |  | (684   | ) |  | 258  
|State                          |  | (29                      | ) |  | (112   | ) |  | 42   
|Foreign                        |  | (428                     | ) |  | (1,060 | ) |  | 1,410
|                               |  |                          |   |  |        |   |  |      
|Deferred tax expense/(benefit) |  | (634                     | ) |  | (1,856 | ) |  | 1,710
|                               |  |                          |   |  |        |   |  |      
|Income tax expense/(benefit)   |  | (506                     | ) |  | (1,777 | ) |  | 1,720
|                               |  |                          |   |  |        |   |  |      

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



|                                      |  |                          |    |  |       |    |  |        |   
|------------------------------------- |  | ------------------------ | -- |  | ----- | -- |  | ------ | --
|                                      |  | Years ended December 31, |   
|                                      |  | 2007                     |    |  | 2008  |    |  | 2009   |   
|US federal statutory income tax rate  |  | 35.00                    | %  |  | 35.00 | %  |  | 35.00  | % 
|Aggregate effect of foreign tax rates |  | 34.37                    | %  |  | (8.43 | %) |  | (15.62 | %)
|Permanent differences                 |  |                          |    |  |       |    |  |        |   
|Items not deductible for tax purposes |  | (17.09                   | %) |  | 0.00  | %  |  | (0.09  | %)
|Prior period adjustments              |  | 52.27                    | %  |  | (1.80 | %) |  | (10.75 | %)
|Other                                 |  | 5.33                     | %  |  | 3.59  | %  |  | 1.80   | % 
|Movement in valuation allowances      |  | (54.51                   | %) |  | (2.87 | %) |  | (19.47 | %)
|                                      |  |                          |    |  |       |    |  |        |   
|Total tax provision                   |  | 55.38                    | %  |  | 25.48 | %  |  | (9.13  | %)
|                                      |  |                          |    |  |       |    |  |        |   

The Company has not recognized a deferred tax asset for the interest income accrued by
Milcap Media Ltd (MML)for the current year based on a temporary legislation that went into effect in the taxable years beginning on or after
January 1st, 2006 and expiring in the taxable year
beginning after December 31st, 2009. Such legislation
changed the definition of Subpart F income to exclude interest income received or accrued from certain controlled foreign corporations that are related parties during the stated taxable years. As such the interest MML accrued on its loan to
Fraserside Holdings Ltd (Fraserside) was not subject to US



F - 22



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PRIVATE MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



and state taxation. Because a deferred tax asset should not have been recognized for the years 2006 and 2007, an adjusting entry was made to reverse the portion of this deferred tax asset and
reclassify it to prior year net operating losses.

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



|                                   |  |                |   |  |        |  
|---------------------------------- |  | -------------- | - |  | ------ | -
|                                   |  | December 31,   |  
|                                   |  | 2008           |   |  | 2009   |  
|                                   |  | EUR            |   |  | EUR    |  
|                                   |  | (in thousands) |  
|Deferred Tax Assets:               |  |                |   |  |        |  
|Provisions for sales returns       |  | 11             |   |  | (1     | )
|Provision for bad debts            |  | 111            |   |  | 26     |  
|Differences in fixed assets        |  | 204            |   |  | 39     |  
|Deferred expenses/revenues         |  | (120           | ) |  | (53    | )
|NOL carryforwards                  |  | 5,998          |   |  | 9,487  |  
|Investment in subsidiaries         |  | 1,463          |   |  | 996    |  
|Tax credits                        |  |               |   |  | 240    |  
|Other                              |  | 2              |   |  | 113    |  
|                                   |  |                |   |  |        |  
|                                   |  | 7,669          |   |  | 10,847 |  
|Less: Valuation allowance          |  | (1,482         | ) |  | (6,369 | )
|                                   |  |                |   |  |        |  
|                                   |  | 6,188          |   |  | 4,478  |  
|Deferred Tax Liabilities:          |  |                |   |  |        |  
|Spanish leasing benefits           |  | (15            | ) |  | (14    | )
|Investment Incentives              |  | (10            | ) |  | (10    | )
|                                   |  |                |   |  |        |  
|Net deferred tax asset/(liability) |  | 6,164          |   |  | 4,454  |  
|                                   |  |                |   |  |        |  

The Companys deferred tax assets, net of valuation allowances, are primarily located in the United
States and Cyprus, which is where the Company expects to record most of its future earnings.



F - 23



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PRIVATE MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Net Operating Loss Carryforward

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



|              |  |                      
|------------- |  | ---------------------
|              |  | Year endedDecember 31
|              |  | 2009                 
|              |  | EUR(in thousands)    
|United States |  | 12,404               
|Sweden        |  | 3,313                
|Cyprus        |  | 11,953               
|Spain         |  | 6,517                
|Holland       |  | 635                  
|France        |  | 424                  
|Canada        |  | 307                  
|              |  |                      
|              |  | 35,552               
|              |  |                      

Cyprus, the United States and Spain are the
jurisdictions in which nearly all of the NOLs have been generated. NOLs in Cyprus post-2000 may be carried forward indefinitely. The NOLs in the United States may be carried back 2 years and carried forward for 20 years, while the NOLs in Spain may
only be carried forward for 15 years.

No provision has been made for United States federal and state taxes or foreign taxes
that may result from future remittances of undistributed earnings of the Companys foreign subsidiaries because it is expected that all such earnings will be permanently reinvested in these foreign operations.

The Companys subsidiaries file income tax returns in numerous tax jurisdictions, including the United States, several U.S. states
and several non-U.S. jurisdictions, primarily in Europe. The statute of limitations varies by the various jurisdictions in which we operate. Because of the number of jurisdictions in which we file tax returns, in any given year the statute of
limitations in certain jurisdictions may lapse without examination within the 12-month period from the balance sheet date. Other than the recurring effect of changes in unrecognized tax benefits due to the lapse of the statute of limitations, none
of which are expected to be individually significant, management believe there are no other reasonably possible changes that will significantly impact the amount of tax benefits recognized in the Companys financial statements within the
12-month period from the balance sheet date. The Company has substantially concluded all US Federal and State income tax matters for years up to and including 2004 and 2002 respectively, and all foreign income tax matters for years up to 2003.

The Companys practice is to recognize interest and penalties related to income tax matters in interest and other
expenses respectively. Interest and penalties amounting to EUR 472 thousand were accrued as of December 31, 2009, of which EUR 66 thousand was recognized as interest expense during the year then ended.

In December 1999 the Company received final notification from the Swedish Tax Authority assessing its subsidiary in Cyprus for the tax
years 1995-1998 for a total amount of SEK 42,000,000 (approx. EUR 4.5 million) plus fines amounting to SEK 16,800,000 (approx. EUR 1.8 million) plus interest. The Swedish Tax Authority has taken the position that the subsidiary carried on business
in Sweden from a permanent establishment during the period in question and should therefore be taxed on the income attributable to the permanent establishment. The Company is of the view that no permanent establishment is at hand in Sweden. However,
the Administrative Court of Appeal has finally decided that a permanent establishment is at hand. The litigation is, however, still going on and the purpose is to finally decide the amounts to be attributed to the permanent establishment and thus
being taxed in Sweden. In February 2009, the County Administrative Court reduced the assessment for the tax years 1995-1998 to a total amount of SEK 12,600,000 (approx. EUR 1.1 million) plus fines. However, as a matter of fact the tax claim on the
Company has been extinguished according to Administrative Law. Only the claim related to the tax fine amounting to SEK 5,040,000 (approx. EUR 0.5 million) plus interest is valid. The Company has appealed the decision to the Administrative Court of
Appeal. The final outcome of this litigation will not be known for several years. Due to the fact that the final outcome of this matter is still uncertain, and the relatively minor claim now at stake, no amounts have been provided in the
Companys financial statements for this dispute.



F - 24



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PRIVATE MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



13. Related party transactions

Guaranty of Commerzbank Note by Affiliate of Berth Milton

In December 2001 the groups holding company, Private Media Group, Inc., borrowed $ 4.0 million from Commerzbank AG pursuant to
a Note originally due on December 20, 2002. The Note bore interest at an annual rate of 7%, payable quarterly, with the entire principal amount and accrued interest originally due on December 20, 2002. The Note is guaranteed by Slingsby
Enterprises Limited, an affiliate of Berth Milton, Privates Chairman, President and principal shareholder, and the guaranty is secured by 1,650,000 shares of Private Media Group, Inc. common stock. In December 2002 Commerzbank AG agreed to
extend the maturity date of the Note to March 20, 2003. In April 2003 the Note was acquired by Consipio Holding b.v. from Commerzbank AG, and Consipio and Private reached an agreement-in-principle with Consipio to extend the maturity of the
Note until April 2008. However, Consipio and Private were unable to reach final agreement on other terms and conditions relating to the restructured Note. Accordingly, in December 2003 Consipio notified Private and Slingsby Enterprises that Private
was in default under the Note, and demanded $3.4 million as payment in full of all outstanding principal and interest under the Note. The Company continued to make regular payments on the Note, including principal and accrued interest, through
February 2008. In April 2008 Consipio requested Private to pay the remaining balance of the Note, without indicating the amount due. Private in turn requested that Consipio provide a statement of the amount due and the basis for its calculation. In
response, Consipio demanded payment of $3,194,000 as settlement in full of the Note, to be received by May 9, 2008. This calculation was made using an interest rate of 9.9%, as opposed to the 7% rate provided under the original terms of the
Note. Consipio also advised that if payment was not received on such date it would institute litigation, in which event Consipio would claim that the amount due under the Note should be denominated in Euro, rather than U.S. dollars. In August 2008
Consipio notified Private that the Note was in default and that it intended to exercise its rights under the Note and the pledge of shares by Slingsby of Private common stock. Private believes that the amount due under the Note at May 9, 2008,
including accrued interest, was no more than $2.4 million ($2.7 million at December 31, 2009), utilizing an interest rate of 7%. On May 1, 2009, Consipio filed a lawsuit in U.S. District Court against the Company asserting a claim for
unspecified damages under the Note. The Company and Slingsby filed their Answer and asserted several affirmative defenses. On March 26, 2010, the Court dismissed the lawsuit, finding that U.S. federal courts did not have jurisdiction over the
subject matter of the lawsuit. This dismissal does not prejudice Consipios ability to refile this lawsuit in another jurisdiction, should it choose to do so.

Guaranty of EUR One Million Loan by Affiliate of Berth Milton

In December 2007 an affiliate of Mr. Milton agreed to guarantee a bank line of credit agreement of Euro 1.0 million entered into
by one of the Companys European subsidiaries, which was originally due on December 31, 2008, and was subsequently extended until it expired in December 31, 2009. On December 11, 2009, the credit line of Euro 1.0 million was
refinanced with a six year term loan by an institutional lender at an interest rate of EURIBOR + 1.2%. Interest is payable annually starting December 11, 2010 and the loan is repayable in equal annual installments over a five year period
starting December 11, 2011 (the December 2009 Refinancing). The December 2009 Refinancing was arranged and guaranteed by an affiliate of Berth Milton and the guaranty is secured by 666,667 shares of Private common stock beneficially owned
by Mr. Milton.

Unsecured Loans to Slingsby Enterprises Limited

We have unsecured loans to Slingsby Enterprises Limited (Slingsby), an entity controlled by Mr. Milton (the
Slingsby Loans). The Slingsby Loans bear interest at the rate of EURIBOR+1% per annum and have no maturity date. During 2009 the highest amount outstanding was EUR 7.25 million. As of December 31, 2009, and March 31, 2010, EUR
7.25 million and EUR 7.3 million, respectively, remained outstanding on these loans, including interest. No payments of principal or interest have been made in respect of the Slingsby Loans and as of December 31, 2009, the loans have
been fully provided against.

In connection with the acquisition of Game Link LLC by the Company on January 20, 2009, in
order to induce the sellers to consummate the acquisition, Slingsby Enterprises Limited entered into an agreement (the



F - 25



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PRIVATE MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



GameLink Letter Agreement) with the Company and the sellers with regard to the partial repayment of the Slingsby Loans. Under the GameLink Letter Agreement, in each of the fiscal
years ended December 31, 2009, 2010, and 2011, Slingsby is required to repay not less than EUR one million, either in cash or in Private common stock valued at its fair market value as determined by the disinterested directors of Private, to be
applied first to accrued interest and then to principal of the loan. At December 31, 2009, Slingsby had not made the EUR one million payment due on such date.

In January 2010 Mr. Milton advised the Companys Board of Directors that Slingsby did not make the EUR one million payment due
under the GameLink Letter Agreement on December 31, 2009, as he had arranged for the EUR one million December 2009 Refinancing on terms favorable to the Company and arranged for the pledge of 666,667 shares of common stock beneficially owned by
Mr. Milton to secure the December 2009 Refinancing. In February 2010 the Companys independent directors determined that it was not in the best interest of the Company to enforce the December 31, 2009 EUR one million payment
obligation under the GameLink Letter Agreement, in view of its determination that the arrangement by Mr. Milton of December 2009 Refinancing was done in good faith and was in the best interests of the Company and that Mr. Miltons
involvement in the refinancing was an important factor in completing this financing, but that the payments due in 2010 and 2011 would remain in place.

The independent directors further determined that the terms of the Slingsby Loan should be renegotiated with Mr. Milton to reflect
reasonable market terms in view of a number of factors, including the size of the loan, the failure of Slingsby Enterprises Limited to make the scheduled payment due on December 31, 2009, the absence of any security for the loan and the absence
of a fixed maturity date or agreed payment schedule sufficient to repay the full amount of the Slingsby Loan. Mr. Milton proposed to restructure the payment terms of the Slingsby Loan to provide for a personal guaranty of the Slingsby Loan by
Mr. Milton, a fixed maturity date of five years, and payments of EUR 1 million, in cash or Private common stock, in 2011 and 2012. However, the Company and Mr. Milton have not yet been able to reach agreement on the material terms of
the restructuring of the Slingsby Loan. Both the Company and Mr. Milton intend to continue further discussions regarding restructuring the terms of the Slingsby Loan. However, based upon the payment history of the loan to date and the absence
of any security for the Slingsby Loan at this time, the Company has determined to fully provide against the Loan until such time as the terms of the Slingsby Loan are modified to provide adequate assurances of the collectability of the Slingsby
Loan.

The terms of the GameLink Letter Agreement provide that it may not be amended without the consent of the GameLink
sellers, which includes Ilan Bunimovitz. These terms require payments of the Slingsby Loan of EUR1 million, in cash or Private common stock, on or before December 31, 2009, 2010 and 2011. Therefore, any restructuring of the Slingsby Loan which
requires a modification of the payment terms in the GameLink Letter Agreement will be subject to obtaining the consent of the GameLink sellers. As of the date of this report the GameLink sellers have not agreed to waive or defer any required
payments, including the payment required to be made by Slingsby to Private on December 31, 2009.

Game Link Agreements

In January 2009 the Company completed the acquisition of Game Link LLC and eLine LLC, companies engaged in the business of
digital distribution of adult content over the Internet and online eCommerce development. Mr. Bunimovitz was the founder and chief operating officer of Game Link LLC and an indirect co-owner of Game Link LLC and eLine, LLC. In consideration of
the acquisition of Ilan Bunimovitzs interests in Game Link LLC and eLine LLC, he received 2,066,725 shares of the Companys common stock and he is entitled to receive up to an additional 1,112,852 shares of common stock if the
combined EBITDA of the digital media operations of the Company and Game Link meet specified targets in 2009, 2010 and 2011. The total value of the shares received and to be received by Mr. Bunimovitz in connection with the acquisition, assuming
the EBITDA targets are met in 2009, 2010 and 2011, is EUR 7,418,271 (USD 9,634,118), based on the closing price of the Companys common stock on January 20, 2009. The Company and the sellers have not yet determined whether the EBITDA
target has been met for 2009.

In connection with the acquisition by the Company of Game Link LLC and its affiliate, Game Link
LLC entered into a lease agreement with 537 Stevenson Street L.L.C., a limited liability company which is 50% owned by Mr. Bunimovitz, providing for the lease by Game Link LLC of the land and building used by Game Link in San Francisco,
California. The lease extends through December 31, 2011, has a base rent of $13,620 per month, and provides for Game Link to be responsible for property taxes and maintenance expenses during the term of the lease.



F - 26



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PRIVATE MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Sureflix Transactions

Effective December 17, 2009, the Company appointed Eric Johnson as a director pursuant to his Employment Agreement with the Company
and Entruphema Inc., a subsidiary of the Company (Entruphema), entered into on October 29, 2009. The Employment Agreement was entered into in connection with the acquisition of Entruphema and its affiliate, Sureflix Digital
Distribution Inc. on October 29, 2009, companies engaged in the business of digital distribution of premium gay adult content. Mr. Johnson was the chief executive officer and a minority owner of Entruphema prior to its acquisition by
Private on October 29, 2009.

In consideration of the acquisition of Mr. Johnsons interest in Entruphema, he
is receiving non-voting Class A Preference Shares of Entruphema convertible into 130,000 shares of the Companys common stock, and he is entitled to receive additional Class A Preference Shares convertible into up to 70,000 shares of
the Companys common stock if the combined EBITDA of the digital media operations of the Company and Entruphema meet specified targets in the three months ended December 31, 2009, the two 12-month periods ending December 31, 2010 and
2011, and the nine month period ending September 30, 2012.

The total value of the shares received and to be received by
Mr. Johnson in connection with the acquisition, assuming the EBITDA targets are met, is $474,000, based on the closing price of the Companys common stock on October 29, 2009. The total value of the acquisition of Entruphema by the
Company, based upon shares received and to be received by all of the sellers of Entruphema common stock in the transaction, including Mr. Johnson, assuming the EBITDA targets are met, is $4,740,000, based on the closing price of the
Companys common stock on October 29, 2009.

14. Shareholders equity

Reverse stock split

The Company implemented a 1:3 reverse stock split on March 11, 2010, whereby each holder of Common Stock received one share of Common
Stock for each three shares owned on the record date. Corresponding adjustments have been made to options outstanding and any shares issuable to reflect the reverse stock split. Accordingly, all share and per share values have been adjusted to give
effect to the reverse stock split.

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, and Milcap Media Ltd. The ability of the Company to pay dividends is dependent on the transfer of accumulated earnings from these subsidiaries. The Companys
current intention is to re-invest the unremitted earnings of its foreign subsidiaries. In addition the Company is restricted from payment of dividends under the terms of its Note agreement (Note 10).

Common Stock

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

During 2000 the Companys Board of Directors
authorized the repurchase of up to 10% of the Companys outstanding common shares. Such purchases may be made from time to time in the open market for an indefinite period of time. As of December 31, 2009 no shares had been repurchased.

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.



F - 27



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PRIVATE MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



15. Earnings (loss) per share

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



|                                                                                             |  |                          |   |  |            |   |  |            |  
|-------------------------------------------------------------------------------------------- |  | ------------------------ | - |  | ---------- | - |  | ---------- | -
|                                                                                             |  | Years ended December 31, |  
|                                                                                             |  | 2007                     |   |  | 2008       |   |  | 2009       |  
|Numerator: (EUR in thousands)                                                                |  |                          |   |  |            |   |  |            |  
|Net income (loss)                                                                            |  | (405                     | ) |  | (5,188     | ) |  | (20,510    | )
|                                                                                             |  |                          |   |  |            |   |  |            |  
|Denominator:                                                                                 |  |                          |   |  |            |   |  |            |  
|Denominator for basic earnings per share  weighted average shares outstanding               |  | 17,734,121               |   |  | 17,860,165 |   |  | 20,773,440 |  
|Effect of dilutive securities:                                                               |  |                          |   |  |            |   |  |            |  
|Common stock warrants, convertible notes, options and other dilutive securities              |  | n/a                      |   |  | n/a        |   |  | n/a        |  
|                                                                                             |  |                          |   |  |            |   |  |            |  
|Denominator for diluted earnings per share  weighted average shares and assumed conversions |  | n/a                      |   |  | n/a        |   |  | n/a        |  
|                                                                                             |  |                          |   |  |            |   |  |            |  
|Earnings (loss) per share (in EUR)                                                           |  |                          |   |  |            |   |  |            |  
|Basic                                                                                        |  | (0.02                    | ) |  | (0.29      | ) |  | (0.99      | )
|                                                                                             |  |                          |   |  |            |   |  |            |  
|Diluted                                                                                      |  | (0.02                    | ) |  | (0.29      | ) |  | (0.99      | )
|                                                                                             |  |                          |   |  |            |   |  |            |  

For 2007 and 2008 diluted impact of potentially dilutive securities is anti-dilutive therefore diluted and
basic loss per share is EUR 0.02 and EUR 0.29, respectively. The equivalent of 36,964 and 2,011 common shares derived from dilutive securities such as options, warrants and convertible notes is excluded from the diluted earnings per share for 2007
and 2008 as they are anti-dilutive. For 2009, basic earnings per share include exchangeable shares equivalent to the weighted average number of 224,384 shares of common stock outstanding in the period.

16. Commitments and contingent liabilities

The Company leases certain property and equipment under non-cancelable operating leases. Certain of these leases contain renewal options.
Rental payments under these leases are charged to operations on a straight-line basis with any differential recognized as deferred rent in the balance sheet. The rental payments under these leases are charged to operations as incurred. Rental
expense for the years ended December 31, 2007, 2008 and 2009 amounted to EUR 701 thousand, EUR 879 thousand and EUR 1,293 thousand, respectively.



F - 28



---

PRIVATE MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Future minimum payments under non-cancelable leases as of December 31, 2009 are as
follows:



|     |  |                  
|---- |  | -----------------
|Year |  | EUR(in thousands)
|2010 |  | 1,042            
|2011 |  | 732              
|2012 |  | 469              
|2013 |  | 56               
|2014 |  |                 
|     |  |                  
|     |  | 2,299            
|     |  |                  

17. Operations by geographical area

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

Information concerning net sales from the Companys geographic locations is
summarized as follows:



|             |  |                          |   |  |         |   |  |         |  
|------------ |  | ------------------------ | - |  | ------- | - |  | ------- | -
|             |  | Years ended December 31, |  
|             |  | 2007                     |   |  | 2008    |   |  | 2009    |  
|             |  | EUR                      |   |  | EUR     |   |  | EUR     |  
|             |  | (in thousands)           |  
|Net Sales    |  |                          |  
|USA          |  | 851                      |   |  | 550     |   |  | 10,435  |  
|Gibraltar    |  | 807                      |   |  | 525     |   |  | 581     |  
|Cyprus       |  | 11,975                   |   |  | 8,860   |   |  | 7,940   |  
|Sweden       |  | 8,515                    |   |  | 6,441   |   |  | 6,441   |  
|Spain        |  | 16,098                   |   |  | 14,670  |   |  | 14,670  |  
|France       |  | 650                      |   |  | 325     |   |  | 325     |  
|Benelux      |  | 1,231                    |   |  | 755     |   |  | (1      | )
|Canada       |  | 621                      |   |  | 316     |   |  | 889     |  
|             |  |                          |   |  |         |   |  |         |  
|Eliminations |  | (15,758                  | ) |  | (12,775 | ) |  | (18,218 | )
|             |  |                          |   |  |         |   |  |         |  
|Total        |  | 24,990                   |   |  | 19,667  |   |  | 23,061  |  
|             |  |                          |   |  |         |   |  |         |  

Eliminations principally relates to inter-group revenue arising from trademark, license and distribution
agreements between the Companys subsidiaries in the USA and Europe.

Information on the Companys long-lived assets
held in different geographic locations is summarized as follows:



|                         |  |                |  |       
|------------------------ |  | -------------- |  | ------
|                         |  | December 31,  
|                         |  | 2008           |  | 2009  
|                         |  | EUR            |  | EUR   
|                         |  | (in thousands)
|Long-lived assets        |  |                |  |       
|USA                      |  | 1,192          |  | 12,549
|Canada                   |  | 416            |  | 3,784 
|Cyprus                   |  | 17,636         |  | 13,734
|Sweden                   |  | 4,642          |  | 3,874 
|Spain                    |  | 807            |  | 772   
|Other European countries |  | 47             |  | 19    
|                         |  |                |  |       
|Total                    |  | 24,739         |  | 34,731
|                         |  |                |  |       

For the years ended 2007, 2008 and 2009, no customer
accounted for more than 10% of consolidated revenues.



F - 29



---

PRIVATE MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



|                           |  |                          |  |        |  |       
|-------------------------- |  | ------------------------ |  | ------ |  | ------
|                           |  | Years ended December 31,
|                           |  | 2007                     |  | 2008   |  | 2009  
|                           |  | EUR                      |  | EUR    |  | EUR   
|                           |  | (in thousands)          
|Net sales by product group |  |                         
|Internet                   |  | 4,445                    |  | 4,218  |  | 13,129
|Broadcasting               |  | 7,086                    |  | 5,805  |  | 4,491 
|DVDs & Magazines           |  | 10,864                   |  | 7,687  |  | 3,843 
|Wireless                   |  | 2,596                    |  | 1,957  |  | 1,597 
|                           |  |                          |  |        |  |       
|Total                      |  | 24,990                   |  | 19,667 |  | 23,061
|                           |  |                          |  |        |  |       

18. Stock-based compensation

The Company has an expired Employee Stock Option Plan (the 1999 Plan) and a new Equity Incentive Plan (the 2009
EIP) available as described below. The compensation cost charged against income for the twelve-month periods ended December 31, 2008 and 2009 was EUR 10 thousand and EUR 3 thousand, respectively, which is included in selling,
general and administrative expense. The charge of compensation cost had no impact on tax since none of the option beneficiaries are taxable in the U.S. and tax rules are different in the beneficiaries respective tax jurisdictions.

The 1999 Plan

The 1999 Plan, which was in effect until its expiration on March 1, 2009, allowed the Company to grant options to purchase common
stock to designated employees, executive officers, directors, consultants, advisors and other corporate and divisional officers of Private Media Group. The 1999 Plan authorized the Company to grant stock options exercisable for up to an aggregate of
2,400,000 shares of common stock. No stock options may be granted under the 1999 Plan, following its expiration, on March 1, 2009.

Under the expired plan, the purchase price (exercise price) of option shares had to be at least equal to the fair market value of such
shares on the date the stock option was granted. The stock option was exercisable for a period of ten years from the date of grant or such shorter period as was determined by the Company. Each stock option under the plan provided that it was
exercisable in full or in cumulative or non-cumulative installments, and each stock option was exercisable from the date of grant or any later date specified in the option. Unless otherwise provided by the Company, an optionee could not exercise a
stock option unless from the date of grant to the date of exercise the optionee remained continuously in the Companys employ. At December 31, 2009, options for 13,002 shares were still outstanding under the 1999 Plan.

The 2009 EIP

The 2009 EIP is shareholder approved and came into effect on December 16, 2009. It allows the Company to grant incentive stock
options, non-statutory stock options, restricted stock, unrestricted stock and other equity-based awards, such as stock appreciation rights, phantom stock awards, and restricted stock units, which we refer to collectively as Awards. The Company may
issue up to 2,066,667 shares of its common stock pursuant to Awards granted. Shares pursuant to Awards that have expired or are forfeited will be returned to the 2009 EIP.



F - 30



---

PRIVATE MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The Company may grant Awards under the 2009 EIP to employees, directors and consultants
of Private Media Group. No Awards may be granted after the 2009 EIP expires on December 15, 2019. The purchase price (exercise price) of option shares must be at least equal to the fair market value of such shares on the date the stock option
is granted or such later date the Company may specify. Each Award may provide that it is exercisable in full or in cumulative or non-cumulative installments, and each Award is exercisable from the date of grant or any later date specified in the
Award. Awards must expire within a period of ten years from the date of grant or such shorter period as is determined by the Company. Unless otherwise provided by the Company, an Award holder may not exercise an Award unless from the date of grant
to the date of exercise the holder remains continuously in the Companys employ.

At December 31, 2009, Awards for
2,062,333 shares were available for future grant under the 2009 EIP. Awards become exercisable on their respective vesting dates with vesting terms determined by management and approved by the Companys compensation committee.

A summary of stock option activity for the year ended December 31, 2009 is a follows:



|                              |  |                 |  |                                     |  |                                       |  |                                           
|----------------------------- |  | --------------- |  | ----------------------------------- |  | ------------------------------------- |  | ------------------------------------------
|                              |  | Number ofShares |  | Weighted-AverageExercisePricein USD |  | Weighted-AverageRemainingLifein Years |  | AggregateIntrinsicValue7 inThousandsof USD
|Outstanding January 1, 2009   |  | 629,640         |  | 14.97                               |  |                                       |  |                                           
|Granted                       |  | 4,334           |  | 1.89                                |  |                                       |  |                                           
|Exercised                     |  |                |  |                                    |  |                                       |  |                                           
|Forfeited                     |  | 616,638         |  | 15.11                               |  |                                       |  |                                           
|                              |  |                 |  |                                     |  |                                       |  |                                           
|Outstanding December 31, 2009 |  | 17,336          |  | 6.77                                |  | 2.3                                   |  |                                          
|                              |  |                 |  |                                     |  |                                       |  |                                           
|Exercisable December 31, 2009 |  |                |  |                                    |  |                                      |  |                                          
|                              |  |                 |  |                                     |  |                                       |  |                                           

Stock-based compensation cost for stock awards is
measured based on the closing fair market value of the Companys common stock on the date of grant.

Stock-based
compensation cost for option awards is measured on the date of grant using the Black-Scholes option pricing model. The following general assumptions are used: a) expected volatility is based on historical volatility of our stock, b) expected life is
determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior, c) risk-free interest rate is based on the
U.S. Treasury yield curve in effect at the time of grant and d) dividend yield is zero based on the Companys current dividend policy.

During the twelve-month periods ended December 31, 2007, 2008 and 2009 grants for 7,000, 7,000 and 4,334 shares for each year,
respectively, were made. The following assumptions were used in calculating the fair value:



|                            |  |      |          |   |      |   |      |      |  |   |      |  
|--------------------------- |  | ---- | -------- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                            |  | 2007 |          |   | 2008 |   |      | 2009 | 
|Expected volatility         |  |      | 52%-55   | % |      |   | 50   | %    |  |   | 70   | %
|Expected dividend yield     |  |      |         |   |      |   |     |      |  |   |     |  
|Expected term (in years)    |  |      | 2.5      |   |      |   | 2.5  |      |  |   | 2.36 |  
|Risk-free interest rate     |  |      | 4.4%-4.9 | % |      |   | 2.96 | %    |  |   | 3.49 | %
|Weighted average fair value |  | $    | 3.24     |   |      | $ | 1.20 |      |  | $ | 0.82 |  

As of
December 31, 2009, there was USD 3 thousand of total unrecognized compensation cost related to nonvested option granted under the Plan. The cost is expected to be recognized over a weighted-average period of 0.8 years. The total fair value
of all options vested and outstanding at December 31, 2008 and 2009, was USD 4.5 million and USD 42 thousand, respectively.



|7 | The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of our common
stock for the options that were in-the-money at December 31, 2009.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F - 31



---

PRIVATE MEDIA GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



19. Selected quarterly financial data (unaudited)

Selected quarterly financial data for the years ended December 31, 2009 and 2008 is summarized as follows:



|                                     |  |                                       |   |  |               |   |  |              |   |  |               |   |  |            |  
|------------------------------------ |  | ------------------------------------- | - |  | ------------- | - |  | ------------ | - |  | ------------- | - |  | ---------- | -
|                                     |  | For the year 2009                     |  
|                                     |  | FirstQuarter                          |   |  | SecondQuarter |   |  | ThirdQuarter |   |  | FourthQuarter |   |  | Total      |  
|                                     |  | EUR                                   |   |  | EUR           |   |  | EUR          |   |  | EUR           |   |  | EUR        |  
|                                     |  | (in thousands, except per share data) |  
|Net sales                            |  | 5,804                                 |   |  | 6,175         |   |  | 5,757        |   |  | 5,325         |   |  | 23,061     |  
|Gross profit                         |  | 2,239                                 |   |  | 2,145         |   |  | 2,163        |   |  | (349          | ) |  | 6,197      |  
|Net income (loss)                    |  | (835                                  | ) |  | (1,553        | ) |  | (1,205       | ) |  | (16,917       | ) |  | (20,510    | )
|Net income (loss) per share:         |  |                                       |   |  |               |   |  |              |   |  |               |   |  |            |  
|Basic                                |  | (0.04                                 | ) |  | (0.08         | ) |  | (0.06        | ) |  | (0.78         | ) |  | (0.99      | )
|                                     |  |                                       |   |  |               |   |  |              |   |  |               |   |  |            |  
|Diluted                              |  | (0.04                                 | ) |  | (0.08         | ) |  | (0.06        | ) |  | (0.78         | ) |  | (0.99      | )
|                                     |  |                                       |   |  |               |   |  |              |   |  |               |   |  |            |  
|Weighted average shares outstanding: |  |                                       |   |  |               |   |  |              |   |  |               |   |  |            |  
|Basic                                |  | 20,042,454                            |   |  | 20,704,934    |   |  | 20,704,934   |   |  | 21,614,934    |   |  | 20,773,440 |  
|                                     |  |                                       |   |  |               |   |  |              |   |  |               |   |  |            |  
|Diluted                              |  | n/a                                   |   |  | n/a           |   |  | n/a          |   |  | n/a           |   |  | n/a        |  
|                                     |  |                                       |   |  |               |   |  |              |   |  |               |   |  |            |  
|                                     | 
|                                     |  | For the year 2008                     |  
|                                     |  | FirstQuarter                          |   |  | SecondQuarter |   |  | ThirdQuarter |   |  | FourthQuarter |   |  | Total      |  
|                                     |  | EUR                                   |   |  | EUR           |   |  | EUR          |   |  | EUR           |   |  | EUR        |  
|                                     |  | (in thousands, except per share data) |  
|Net sales                            |  | 5,251                                 |   |  | 5,200         |   |  | 4,557        |   |  | 4,658         |   |  | 19,667     |  
|Gross profit                         |  | 1,855                                 |   |  | 1,638         |   |  | 1,188        |   |  | 1,480         |   |  | 6,161      |  
|Net income (loss)                    |  | (840                                  | ) |  | (826          | ) |  | (1,039       | ) |  | (2,483        | ) |  | (5,188     | )
|Net income (loss) per share:         |  |                                       |   |  |               |   |  |              |   |  |               |   |  |            |  
|Basic                                |  | (0.02                                 | ) |  | (0.02         | ) |  | (0.02        | ) |  | (0.04         | ) |  | (0.10      | )
|                                     |  |                                       |   |  |               |   |  |              |   |  |               |   |  |            |  
|Diluted                              |  | (0.02                                 | ) |  | (0.02         | ) |  | (0.02        | ) |  | (0.04         | ) |  | (0.10      | )
|                                     |  |                                       |   |  |               |   |  |              |   |  |               |   |  |            |  
|Weighted average shares outstanding: |  |                                       |   |  |               |   |  |              |   |  |               |   |  |            |  
|Basic                                |  | 17,860,165                            |   |  | 17,860,165    |   |  | 17,860,165   |   |  | 17,860,165    |   |  | 17,860,165 |  
|                                     |  |                                       |   |  |               |   |  |              |   |  |               |   |  |            |  
|Diluted                              |  | n/a                                   |   |  | n/a           |   |  | n/a          |   |  | n/a           |   |  | n/a        |  
|                                     |  |                                       |   |  |               |   |  |              |   |  |               |   |  |            |  



|a. | In the three month period ending December 31, 2009 the Company recorded a write-down of magazine inventory of EUR 806 thousand in cost of sales.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------



|b. | In the three month period ending December 31, 2009 the Company recorded selling, general and administrative expenses of a non-recurring nature totaling EUR 8,657
thousand. The non-recurring expenses were made up of: provision against related party receivable of EUR 7,250 thousand, investment write-off of EUR 1,022 thousand and acquisition related expenses of EUR 385 thousand.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|c. | As a result of impairment reviews performed in 2008 and 2009, goodwill related to the Companys video distribution company in the Benelux countries was reduced by
EUR 293 thousand and 884 thousand, respectively. The relevant charge was recorded in selling, general and administrative expenses in the three month periods ending December 31, 2008 and 2009.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|d. | In the three month periods ending March 31, June 30 and September 30, 2009 the Company recorded income tax benefit of EUR 576 thousand, EUR
713 thousand and EUR 298 thousand, respectively, while in the three month period ending December 31, 2009 the Company recorded an income tax charge of EUR 3,306 thousand.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F - 32



---

SCHEDULE II

PRIVATE MEDIA GROUP, INC.

VALUATION AND QUALIFYING ACCOUNTS

(in thousands)



|                                                                            |  |                |  |                      |  |            |  |               |   |  |              
|--------------------------------------------------------------------------- |  | -------------- |  | -------------------- |  | ---------- |  | ------------- | - |  | -------------
|                                                                            |  |                |  | Additions charged to |  |            |  |               |  
|                                                                            |  | Openingbalance |  | Costs andexpenses    |  | Revenue(a) |  | Deductions(b) |   |  | Endingbalance
|                                                                            |  | EUR            |  | EUR                  |  | EUR        |  | EUR           |   |  | EUR          
|Description                                                                 |  |                |  |                      |  |            |  |               |   |  |              
|Allowance deducted in the balance sheet from the asset to which it applies: |  |                |  |                      |  |            |  |               |   |  |              
|                                                                            |  |                |  |                      | 
|Year ended December 31, 2009:                                               |  |                |  |                      |  |            |  |               |   |  |              
|Allowance for magazine returns                                              |  | 207            |  |                     |  | 407        |  | (510          | ) |  | 104          
|                                                                            |  |                |  |                      |  |            |  |               |   |  |              
|Allowance for doubtful accounts                                             |  | 1,389          |  | 567                  |  |            |  | (168          | ) |  | 1,788        
|                                                                            |  |                |  |                      |  |            |  |               |   |  |              
|                                                                            |  |                |  |                      | 
|Year ended December 31, 2008:                                               |  |                |  |                      |  |            |  |               |   |  |              
|Allowance for magazine returns                                              |  | 308            |  |                     |  | 843        |  | (945          | ) |  | 207          
|                                                                            |  |                |  |                      |  |            |  |               |   |  |              
|Allowance for doubtful accounts                                             |  | 1,269          |  | 333                  |  |            |  | (214          | ) |  | 1,389        
|                                                                            |  |                |  |                      |  |            |  |               |   |  |              
|                                                                            |  |                |  |                      | 
|Year ended December 31, 2007:                                               |  |                |  |                      |  |            |  |               |   |  |              
|Allowance for magazine returns                                              |  | 802            |  |                     |  | 1,010      |  | (1,504        | ) |  | 308          
|                                                                            |  |                |  |                      |  |            |  |               |   |  |              
|Allowance for doubtful accounts                                             |  | 1,124          |  | 367                  |  |           |  | (223          | ) |  | 1,268        
|                                                                            |  |                |  |                      |  |            |  |               |   |  |              

Notes:

|(a) | Represents provisions for expected returns of magazines from national distribution networks which are charged to net revenues.
|--- | ------------------------------------------------------------------------------------------------------------------------------

|(b) | Represents settlements on returns provisions previously recorded, and write-offs less recoveries on doubtful accounts.
|--- | ----------------------------------------------------------------------------------------------------------------------