<PAGE>

===============================================================================

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

                                  Form 10-KSB

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

         For the fiscal year ended..................December 31, 2000

                                       OR

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

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

                        Commission file number 000-25067

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

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

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

                                 34-93-590-7070
                           -------------------------
                           Issuer's telephone number
<TABLE>
<S>                                                                  <C>
Securities registered pursuant to Section 12(b) of the Exchange Act: None

Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock
</TABLE>

      Check whether the issuer (1) filed all reports required to be filed by
 Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
 shorter period that the registrant was required to file such reports), and (2)
 has been subject to such filing requirements for the past 90 days.

 Yes [X] No [_]

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

      The issuer's revenues for the fiscal year ended December 31, 2000 were
$27,052,830.

      At March 23, 2001, the aggregate market value of the voting stock and non-
voting common equity held by non-affiliates of the registrant was $174,696,914.
The aggregate market value has been computed by reference to the average bid
and asked price of the common stock on March 23, 2001.  On such date the
registrant had 27,881,913 shares of Common Stock outstanding.

      Transitional Small Business Disclosure Format:   Yes [_]   No [X]

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

                                    PART  I

ITEM 1.  DESCRIPTION OF BUSINESS


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

                                  THE COMPANY

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

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

     Since 1992, Private has also acquired and distributed adult motion picture
entertainment.   As of December 31, 2000, the Company's film library contained
328 titles, and it expects to add approximately 60 titles in 2001.

     In the last few years, Private films and DVDs, Private magazines and
Private Web-sites, have won 57 industry awards, including Best European Film
(Hot d'Or 1998), Best Screenplay (Hot d'Or 1998), Best Foreign Director (AVN
1999), Best Foreign Release (AVN 1997, 1998, 1999, 2000, 2001) , Special
Achievement Awards (AVN 1997, Venus 1998), Best Production Company (Golden X
95), Best Director (AVN 1998), Best International Movie (Venus 1999), Best Adult
Video Web-Site (AVN 2000), Best Adult Site on the Internet (Passie Magazine
1999) and Best International Internet Site (Venus 1999), Best International Web
Site (Award du X/Brussels 2000), Best Foreign Vignette Tape (AVN 2001), Best
Foreign Vignette Series (AVN 2001). The Company's films recently received 15
nominations in nine categories for the Hot d'Or Awards to be presented at
Cannes, France in May 2001.

     Since 1997 the Company has aggressively expanded its business activities on
the Internet by investing heavily in its initial Web site,  www.private.com, and
by licensing its trademarks and proprietary content to other Web sites.  In 1999
the Company opened two new Web sites, www.privatecinema.com and
www.Privatelive.com, to provide Internet access to proprietary videos and live
adult entertainment, and continued to implement its program to expand its
Internet licensing activities.  The Company continues to invest in state-of-the-
art Internet hardware and software in order to maintain the highest level of
Internet service and to maximize revenue potential and in 2000 the Company
launched the Web sites www.jocpoc.com (for personals), and www.privatespeed.com
                       --------------                      --------------------
(broadband delivery of video content).

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

                                      -2-
<PAGE>

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

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

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

History

     The parent company, Private Media Group, Inc., was originally incorporated
in 1980 as a Utah corporation under the name Glacier Investment Company, Inc.
for the purpose of acquiring or merging with an established company. In 1990,
the Company changed its domicile to the State of Nevada. In February 1997 the
Company entered into a Letter of Intent with Electric Entertainment Corp.
("EEC") to acquire EEC in exchange for stock of the Company and the Company
subsequently changed its name to Electric Entertainment International, Inc. The
transaction was consummated in June 1997 and was rescinded in November 1997
based upon the Company's belief that financial information furnished by EEC was
false and misleading.  In December 1997 the Company changed its corporate name
to Private Media Group, Inc. and declared a one for five reverse split of its
Common Stock.

     On December 19, 1997 the Company entered into acquisition agreements with
Milcap Media Limited (the "Milcap Acquisition Agreement") and Cinecraft Limited
(the "Cinecraft Acquisition Agreement") to acquire all of their outstanding
capital stock in exchange for 22,500,000 shares of Common Stock, 7,000,000
shares of the $4.00 Series A Preferred Stock, and 2,625,000 Common Stock
purchase warrants.  These acquisitions were completed on June 12, 1998.

     On January 28, 2000, the Company acquired all of the outstanding shares of
Extasy Video B.V. ("Extasy") for total consideration of SEK 27,275,192. The
consideration consisted of 208,464 shares of the Company's common stock and
warrants to purchase 208,464 of the Company's common stock. The warrants are
exercisable during the period January 28, 2001 to January 28, 2004 at an
exercise price of USD 9.63.

     The "Company" is sometimes referred to herein as Private Media Group, Inc.,
Milcap, Private, the Milcap Media Group, or the Private/Milcap Group, and
includes Private Media Group, Inc. and its subsidiaries, incuding: Milcap Media
Limited (Cyprus) ("MML"), Fraserside Holdings Limited (Cyprus) ("FHL"),
Cinecraft Limited (Gibraltar), Private Benelux (formerly known as Extasy B.V.),
Milcap Publishing Group AB (Sweden) ("MPG"), Peach Entertainment Distribution AB
(Sweden) ("PED"), Milcap Media Group S.L. (Spain) ("MMG"), Milcap Publishing
Group Italy Srl (Italy), Symbolic Productions S.L., and Private France S.A.

                                      -3-
<PAGE>

Magazine Publications

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

                                      -4-
<PAGE>

Video and Film Productions

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

     Currently, the Company produces approximately 60 X-rated and 24 R-rated
movies per year and the distribution is through a world-wide network that covers
approximately 60,000 sales points, with the potential to reach more than 155,000
points of sale. The first two monthly video labels released were Private Film
and Private Video Magazine. Both labels quickly received critical acclaim in
leading international magazines as well as numerous prestigious awards from
industry associations and major adult entertainment film festivals, including
AVN, Impulse d'Oro and Golden X. The next three monthly video labels
successfully introduced were Triple X, Private Stories and Private Gold. In May
1997, the Company introduced Gaia, a new label released bi-monthly. During 1999
the Company introduced the labels Pirate Video Deluxe, Private XXX, The Matador
Series and Peep Show Special, which are released monthly, and Private Black
Label, which is released bi-monthly. In 2000, in addition to several
compilations, the Company introduced the label Private & Penthouse Video.

     As of December 31, 2000, the Company owned a total of 376 movie titles, and
by the end of 2001 the total is expected to increase to 459 titles. All titles
are available on videocassette and increasingly available on DVD and sold by
distributors, primarily to retail stores and wholesalers worldwide. Several of
the original motion picture programs have also been re-edited and licensed to
cable television operators.  The Company owns perpetual distribution rights, and
thus far has not sold any third party distribution rights. The Company continues
to expand the marketing of its production into new international markets,
including the United States, generally by entering into national license
agreements with local distributors.

     During fiscal 2001, Management intends to continue to expand its video and
film operations by (i) distributing new videos and films on videocassette and
DVD with an aggressive release schedule, (ii) 100 titles of both new and back-
catalogue productions are planned to be released on DVD  (iii) increasing its
efforts to distribute its library and new titles into cable and satellite
television markets, e-commerce, TV Home Shopping, and other new international
markets, and (iv) actively seeking to acquire distribution rights to additional
titles produced by third parties.

     In 1998 Company started to release its movie titles on DVD. Sales of DVD
titles are expected to add to the already established sales per title.  DVD
releases are currently at the rate of 10 per month and this rate is expected to
continue  in 2001. At December 31, 2000 the Company had 101 DVD movie titles in
its library. All newly produced titles are released on DVD.



                                      -5-
<PAGE>
Internet

     The Company's Internet team has combined the Private quality of its
extensive media library with the newest technology to create what it believes to
be one of the best adult Web sites: www.private.com. The Company sources and
owns worldwide proprietary rights to its library. The burgeoning growth of the
e-commerce market and increased access to the Internet by end-users has created
a unique opportunity for Private to leverage its proprietary assets through
marketing and distribution on the Web.   Since March 1998, Private's WWW Club
members have been able to view every Private magazine published by the Company
since 1965 and over 1,300 clips from over 300 films. In addition, this site
contains new games, chat rooms with models, previews of new releases and more.
The Company's initial Web site contains more than 200,000 Web pages and is
generating traffic of approximately 3,100,000 visitors per month and 207,000,000
requested pages per month.  Private currently maintains a staff of 31 full time
Internet employees and has invested heavily in state-of-the-art computer and
communications infrastructure.

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

TV Home Shopping

     In the November 1998 the Company entered the TV Home Shopping market,
engaging in the sale of proprietary products, including videos, magazines and
proprietary adult pleasure products under the brand "The Private Collection", on
Swedish television  This new area has been well received, and the Company
intends to expand TV Home Shopping to other territories and formats in 2001.

Other Markets

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

THE ADULT ENTERTAINMENT INDUSTRY

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

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

                                      -6-
<PAGE>

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

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

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

                                      -7-
<PAGE>

Video and DVD Sales & Rental

     The Los Angeles Times (November 22, 1997) confirmed that sales and rental
of adult videos have increased 100% in the last five years. It added that
"seventy percent of VCR buyers in the first three years during which the devices
were on the market said that being able to view adult movies at home was a
primary reason they bought a VCR."  The Video Software Dealers Association
(VSDA), the trade association for the entire home video industry, estimated that
more than 60,000 retail outlets in the United States carry home videos and DVDs;
adult videocassettes and DVDs are carried in more than 25,000 of these retail
outlets, including such major chains as The Wherehouse, Tower Video, Palmer
Video, Movies Unlimited, West Coast Video and others. In addition, hundreds of
small boutiques and large mail order companies sell adult tapes directly to
consumers. On the other hand, the 5,000-store Blockbuster Video, which accounts
for 30% of the rental marketplace, like many other large retail chains, has
opted not to carry adult videos and DVDs.

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

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

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

Internet

     On a worldwide basis, it is estimated that 391 million people on the 31st
of March 2001 have access to the Internet; by the year 2003 there are expected
to be over 770 million users of the Internet. The worldwide median user income
for Web surfers is over $41,000 per year according to Global Reach.

     Forrester Research evaluated the Internet adult entertainment business at
$1,5 billion in 1999, up 50% from 1998. By 2003 the market  for online sex is
expected will grow to $3 billion according to Standard & Poors.

     Estimates of the number of sex sites are as diverse as estimates for
traffic and revenue. Current estimates indicate that there may be as many as
60,000 sex sites, half commercial, the other half hobby sites.

     Pay sites have most of the adult content on the Internet, but free sites
abound for obvious reasons: advertising from pay sites supports most of them.
Free sites get a few cents for each viewer who "clicks" on an advertising
banner; the banner transports these viewers to a site that tries to entice them
into surrendering their credit card numbers. Most of the pay-sites offer
commissions rather than flat fees for customer referrals. Though this sounds
like small change, some free sites do very well.

     Media Metrix has estimated that approximately 30% of people online are
looking for sex related material.

                                      -8-
<PAGE>

     The tremendous growth of the Internet, including chat rooms and Web sites
dedicated to adult entertainment, has resulted in millions of potential
customers accessing these sites from the relative privacy of their personal
computers, worldwide.

     Web porn has become a topical issue that interests everyone, from the
religious right to anti-censorship liberals. It sparks debates about free speech
vs. child protection; free enterprise vs. social good; and free markets vs. fair
business practices. Parents, politicians, preachers and providers are all
struggling with how to best protect children while allowing grown-ups to set
their own standards of behavior and taste. The access to most of the Web sites
is far from being regulated. At the user's discretion, the following Web
locations provide information about blocking adult material, mainly for child
protection: RSAC, Net Nanny, Cyberpatrol, Surfwatch, Safe Surf, Cybersitter,
Websense and/or Asacp.

Cable and Satellite TV Broadcasting

    The adult entertainment industry has continued to grow as technological
advances allow easier and more private access to products. Most major hotel
chains, including Sheraton, Marriott, Hyatt, Holiday Inn and Hilton, offer in-
room non-explicit adult programming through video services such as Spectravision
and On Command, which in 1997, according to US News and World Report,
represented over $175 million in sales in the U.S. alone.

    On Command is the largest of the hotel pay-per-view companies and in 1998
was in more than 3,150 hotels comprising 916,000 individual rooms.  This means
that patrons can choose from a selection of as many as 50 general and adult
features, with the requested feature starting upon the guest's request, rather
than waiting for a scheduled start time. Softcore adult is a mainstay of hotel
pay-per-view systems, primarily because companies can buy unlimited rights to
titles for a specified period of time.  Outside the U.S., except for more
restrictive countries such as Japan and the United Kingdom, guests can often
gain access to hard-core pay-per-view as well.

    Cable companies such as Time Warner, TeleCommunications, Inc., and
Cablevision Systems offer softcore services like the Playboy Channel. Other
cable companies like American Cable Entertainment, Comcast Corporation and
Greater Media offer explicit adult programming, such as that available from
Spice and Exxxtasy Networks.

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

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

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

                                      -9-
<PAGE>

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

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

                                      -10-
<PAGE>

The Company's Numbers

    The following table indicates the Company's production for 1999 and 2000 and
estimates for 2001.


                              THE PRIVATE LIBRARY


<TABLE>
<CAPTION>
                           As of         As of
                        December 31,  December 31,             As of
MAGAZINES                  1999          2000          December 31, 2001 (est.)
---------              -------------  ------------   ---------------------------
Labels                 No of Issues   No of Issues   No of Issues   New releases
<S>                    <C>            <C>            <C>            <C>
Private                    156             162            168           +6
Pirate                      58              64             70           +6
Triple-X                    32              38             44           +6
Private Sex                 25              29             35           +6
Special Editions             3               6              7           +1
Book Best of Private        11              12             13           +1

Total                      285             311            337           26
</TABLE>

<TABLE>
<CAPTION>
VIDEOS                        As of         As of
                           December 31,  December 31,            As of
                              1999          2000        December 31, 2001 (est.)
                          -------------  ------------   ------------------------
Labels                    No of Titles   No of Titles   No of Titles
<S>                       <C>            <C>            <C>     <C>
Private Video Magazine         26             26            26  No more in production
Private Film                   28             28            28  No more in production
Triple-X Video                 32             32            32  No more in production
Private Video Stories          27             27            27  No more in production
Private Gold                   39             45            51  +6
Gaia                            6              6             6  No more in production
Pirate Video                   12             12            12  No more in production
Triple-X Files                 12             12            12  No more in production
Casting-X                      19             25            30  +5
Best of Private                 3              6             7  +1
Private Black Label            10             16            22  +6
Pirate Video Deluxe             6             12            16  +4
Private XXX                     6             12            15  +3
Special Compilations           16             22            28  +6
Amanda's Diary                  5              5             5  No more in production
Peep Show Special               6             12            12  No more in production
Horny Housewives                4              9             9  No more in production
The Matador Series              2              8            14  +6
The Story                       2              2             2  No more in production
Private Movie                   1              1             1  No more in production
Private & Penthouse Video       0              5            11  +6
Private Super F******           1              7            12  +5
Soft Versions                  27             46            70  +24
Pirate Fetish Video             0              0             2  +2
The Private Life of             0              0             3  +3
To be announced                 0              0             3  +3
Private Tropical Film           0              0             2  +2
To be announced                 0              0             1  +1

Total                         290            376           459  83 NEW RELEASES
</TABLE>

                                      -11-
<PAGE>

MAGAZINE PUBLICATIONS

The Business

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


<TABLE>
<CAPTION>
Quantities of Magazines   Produced (1999)  Produced (2000)  Estimated (2001)
<S>                       <C>              <C>              <C>
Private                       813,970          697,500          670,800
Pirate                        641,750          515,100          495,600
Triple X                      642,900          518,050          457,500
Private Sex                   530,800          391,840          343,500
Best of Private                58,000           54,000           54,000
Specials                      181,300          200,050          109,000
</TABLE>

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

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

Circulation

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

     Distribution of the magazine to newsstands and other public retail outlets
is accomplished through a network of national distributors, who maintain a local
network of several wholesale distributors and licensors. Copies of the magazine
are shipped in bulk to the wholesalers, who are responsible for local retail
distribution.

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

                                      -12-
<PAGE>

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

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

     For a  few years, the Company has been seeking to expand the use of its
magazines' editorial content and other assets across different media formats, in
order to capitalize on their existing brand names at a lower cost. The process
started in 1995 with the production of CD-Roms, but the main development has
been the re-editing of every Private magazine since 1965, which started to
become available on the Company's Web site in May 1998 and was up to date with
the traditional publishing in 2000.

Production, Distribution and Fulfillment

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

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

     In 2000 the implementation of Computer-To-Plate (CTP) process technology
for printing was almost completed. The adoption of Computer-To-Plate technology
eliminates the need for the production of film/color separations during the pre-
printing process saving time and money with improved quality. In simple terms
CTP allows printers to receive disks containing electronic files (both text and
graphics) and directly output to a plate. The result is a top quality image
which takes minutes instead of hours to produce.

                                      -13-
<PAGE>

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

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

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

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

Licensed Publishing

     In 1999 the Company signed a licensing agreement with K-OS Publications
Limited for the publication and distribution in Britain of two new consumer
titles bearing the Private trademark. "Private Life" magazine was first
published in the UK at the end of 1999, while "Private Style" magazine is set
to launch in 2001.

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

VIDEO AND FILM PRODUCTIONS

The Business

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

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

                                      -14-
<PAGE>

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

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

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

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

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

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

Distribution

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

     During the last nine years, the Company entered into several
distributorship agreements in approximately 35 countries worldwide. Pursuant to
these distributorship agreements, either Peach Entertainment Distribution or
occasionally Milcap Media Group, provides monthly a minimum number of new titles
during the term of the agreement, and a licensee normally serves as the
exclusive distributor throughout its own country or language territory. Under
the various distributorship agreements, licensees are normally required to
purchase a minimum number of units for each  monthly period during the term of
the agreement.

                                      -15-
<PAGE>

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

     In countries such as the United States, the Netherlands, France and Italy,
the Company established local subsidiaries for the purpose of owning or
controlling the local distribution. In the near future, the Company intends to
renegotiate some of its national distributorship agreements in order to
vertically integrate the Company into its chain of distribution.

     In general, national distribution agreements enable the Company to have an
ongoing branded presence in international markets and generate higher and more
consistent revenues, rather than selling on a direct basis.

                                      -16-
<PAGE>

Video Duplication/Production Techniques

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

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

The Digital Versatile Disc Market ("DVD")

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

     Already the fastest growing consumer electronics product in history, the
DVD (Digital Versatile Disc)  attracted even more followers the world over in
2000. The format gained acceptance in Europe with strong growth in the Benelux
countries, France, United Kingdom and Germany in 2000 and it continued its
expansion in the U.S. During 2000, 8.5 million DVD-Video players shipped in the
U.S. The installed base in the U.S. as of February 28, 2001 was 15.1 million
players according to Consumer Electronics Association and over 10,000 DVD-Video
titles were available. The DVD market has grown from nothing in 1996 to more
than 28 million units expected to ship worldwide in 2001. The market will exceed
60 million units in 2004, according to Cahners In-Stat Group.

     In-Stat anticipates that DVD player sales in the United States will equal
the number of VCRs sold today, in 2004 and that the European market will be
roughly 80% of the U.S. market.

     The growth in DVD software sales in 2000 in the U.S. was 269% over 1999,
with a total DVD year-end 2000 sales of $4.03 billion. The Company's worldwide
DVD sales in 2000 increased 498% compared to 1999.

     Superior to VHS, CD-Rom and laserdisc, DVD's produce almost studio- quality
pictures and the world's movie producers are rapidly supporting the format, with
Warner Home Video currently generating approximately 30% of it revenues from DVD
sales. Especially significant in this context is the fact that 65% of this
revenue comes from back-catalogue titles, a fact that is particularly important
for Private Media Group, which possesses the largest high-quality back-catalogue
in the history of adult entertainment stretching, as it does, back to the
Company's foundation in 1965.

                                      -17-
<PAGE>

     Significantly, the Company already sets the standard for the worldwide DVD
and entertainment industries with each DVD released by the Company possessing
five language options as well as four other subtitled languages. Currently, the
majority of DVD's released in the US and, indeed, worldwide are produced in one
language. This is an enormous competitive advantage for the Company, being
hugely attractive to consumers on a global basis and vastly expanding the
Company's international marketing and sales potential. As a consequence, this
global presence is a significant factor in reducing the Company's overall unit
costs and increasing profit margins where other companies have to either license
country-by-country or manufacture each title in separate languages. In addition,
the manufacturing of each DVD title Master Disc, prior to duplication, costs an
initial $15,000, further restricting competitors' ability to commit to the
format and minimizing their international revenue potential.

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

     The Company's DVD's are also 'Internet Activated', which means that when
one plays the DVD in a personal computer (PC), one also gets a direct link to
Private's websites where one can not only view the massive high-quality content,
but also take out membership to www.private.com and view the huge mail-order
shopping area. The Company can also add 'extras' to each DVD, including
alternative endings to movies, interviews with the stars, biographical data on
the actors, their roles in other in-house productions and publications, and
multiple-angle views for the user.

Broadcasting

     In 2000 the Company signed an exclusive joint venture with International
Film Productions and Distributions, Ltd. (IFPD). IFPD is a European based
television broadcasting company, associated with major content providers,
specializing in the distribution of cable and satellite-TV channels. The
agreement allows for the co-operation of both companies to create two new adult
television channels to be broadcast world-wide.

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

     In 2000 the Company started international broadcasting coverage for its
'Private Blue' Channel as part of its exclusive joint venture agreement with
Zone Vision Enterprises, a UK based television company, and International Film
Productions and Distribution Limited, both operating on both digital and
analogue platforms throughout the European continent. The channel became
available through the BSkyB analogue and digital platforms in the UK from where
the Company receives 35% of net profit generated from broadcasting and
advertising revenues. It also successfully launched in Turkey on the DigiTurk
platform, and in Hungary and Slovakia on the UPC networks. Currently available
to over 5,500,000 addressable subscribers, 'Private Blue' also secured an
international satellite feed on the SIRIUS 2 satellite which means that the
signal is available for further expansion to all territories in Europe from
23.00 to 05.00 CET seven days per week, 52 weeks per year.

     In 2000 the 'Private Gold' television channel, broadcasting under Dutch
license, from which the Company receives 65% of gross profit successfully
launched in Hungary on the HCA Cable Association platform and in Hungary and
Slovakia on the UPC networks. 'Private Gold' also secured an international
satellite feed on the AMOS

                                      -18-
<PAGE>

1 satellite which paves the way for further expansion to all territories in
Europe from 24.00 to 04.00 CET seven days per week, 52 weeks per year. A second
satellite feed, on the ASTRA satellite with Cryptoworks encryption, also became
available in 2000. ASTRA is the leading satellite system for direct-to-home
transmission of TV, radio and multimedia services in Europe. It currently has a
fleet of nine satellites and transmits to 22 European countries, with a
footprint in 77 million households. With its recent investment in AsiaSat,
transmission capabilities now cover three-quarters of the world.

     In the beginning of 2001, an agreement was signed to start distribution of
the 'Private Gold' television channel through Canal Digital in Scandinavia, in
Sweden, Denmark and Finland, as part of its exclusive joint venture agreement
with International Film Productions and Distribution Limited. Canal Digital AS
is jointly owned by the French company Canal+ and the Norwegian company Telenor.
Canal Digital exists in the Nordic countries and is the leading supplier of
digital programs and services in the Nordic region. Canal Digital has more than
1,100,000 card customers and over 700,000 subscriptions to its services in the
Nordic region. The goal is to be the leading supplier of customer and
transaction services on the Nordic multimedia market. Canal Digital offers more
than 60 TV-channels including channels such as: Canal+, CNN, MTV, BBC World,
Eurosport, Discovery and all the major Nordic Networks. In addition 20 music
channels and interactive services are also offered. Canal Digital's interactive
services consist of an electronic programme guide (EPG) and the service KIOSK
(22 PPV-channels where film, sport and concerts can be ordered individually, via
the viewer's remote control). This infrastructure will soon include interactive
advertisement, games and other new exciting services that can be connected to
the existing database.

     In the beginning of 2001, the 'Private Gold' and 'Private Blue' television
channels got contracted for Latin America by Pramer S.C.A. Pramer S.C.A. is the
largest company in Latin America dedicated to producing, distributing and
commercializing content for pay-TV. Pramer will be responsible for the satellite
distribution, advertising and commercialization of the Private Blue and Private
Gold signals in all of Latin America. The channels will be available to all
Latin America's 15 million DTH and cable subscribers.

     In addition to the expansion of the TV-Channels Private Gold and Private
Blue, other agreements concerning broadcasting of the Company's content were
signed in 2000 including agreements with media[netCom], Playboy and CANAL+.

     A new agreement for distribution of Internet driven video-on-demand on
broadband via the media[netCom] AG network was entered into in 2000. The
Company, through its local German distributor VPS-Film Entertainment, and
media[netCom] AG from Germany agreed to start distribution of video-on-demand
from Private's gigantic video library via broadband to media[netCom] AG's
customer base of local networks for further distribution to the end consumer.
The thirty-month agreement calls for Private to provide content for the
entertainment service and media[netCom] AG will market the service to its
customer base of local networks. media[netCom] AG will also encode, store and
stream the entertainment through its network via broadband to local networks.
media[netCom] AG is also extending its existing digital Parental Control feature
to enable subscribers to prevent access to movies according to ratings, or to
block access to the entire content library for any specific period of time.
media[netCom] AG is listed on the Neuer Markt and the agreement is based on a
split system.

     The agreement with Playboy is a two year Motion Picture Output Licensing
Agreement, where Private will supply Playboy Entertainment Group, Inc. with film
content for Playboy's television networks throughout the Americas. According to
the agreement, Playboy will receive the exclusive rights to broadcast Private's
content on their networks while paying an undisclosed amount over the 24-month
period of the agreement.

     The Company also signed agreements with Canal Plus to supply film content
for Canal Plus's television networks throughout Europe. Canal Plus will receive
the exclusive rights to broadcast 75 titles from Private's library on their
networks while paying an undisclosed amount. The territories included are
France, French speaking Belgium, Benelux, Scandinavia, Spain and Italy. CANAL+
is Europe's largest Pay-TV operator with 14 million

                                      -19-
<PAGE>

subscriptions to its different offerings and 4.3 million digital subscribers.
CANAL+ is also Europe's first thematic channel provider with 25 channels and a
presence in 14 countries, the third largest holder of audiovisual rights
worldwide as well as a leading international supplier of digital TV technology.
CANAL+ is part of the Vivendi Universal Company, Vivendi (Paris Bourse: EX.FP),
Canal+ (Paris Bourse: AN.FP) and The Seagram Company Ltd. (NYSE: VO)". Vivendi
is one of Europe's leading media and telecommunications companies, providing a
broad range of communications, entertainment and educational services, including
fixed line and mobile telephony, Internet services, film production and
publishing. The company is also a leading global provider of environmental
management services.

                                      -20-
<PAGE>

INTERNET SERVICES

The Present

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

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

     Private currently maintains staff of 31 full time Internet employees and
has invested heavily in state-of-the-art computer and communications
infrastructure.

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

     Private.com, which represents over 200,000 Web pages, is currently
generating a traffic of approximately 3,100,000 unique visitors per month and
more than 207,000,000 requested pages per month. Currently, the members' area is
yielding up to 150 new members every day paying a yearly fee of $149.95 or
$29.95 for one month and as of April 6, 2001 there were over 14,000 active
members of private.com. In 2000 www.private.com won the "Award du X" at the
                                ---------------
Erotic Trade Fair in Brussels, Belgium. The mailing list of the WWW Club exceeds
800,000 addresses and there are approximately 2000 new addresses per day added
to the list.

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

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

                                      -21-
<PAGE>

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

     The Company's proprietary sites, www.private.com, www.privatelive.com and
www.privatecinema.com, take advantage of the Company's development of a user-
friendly streaming video application which is fully browser compatible and does
not require any plug-in applications.  Offering high quality video-on-demand,
this software gives the Company a distinct competitive advantage. All the sites
are handled by servers connected to a full optic redundant DS3 connection into
the Internet's MaeEast backbone in Washington, D.C. In 2000 the Company
contracted the services of Directrix powered by Akamai Technologies Inc., a
provider of Internet content delivery, streaming media, and itvmedia.com, a
Swiss based provider of encoding and digital media solutions. The services
provide a complete, high-performance approach to delivering streaming content
over the Internet. Using this delivery solution, the Company will be able to
provide an optimal Web experience for its customers.

     Private utilizes direct marketing of all of its products by e-mail, with a
current e-mailing list of 800,000 addresses.  The Company also has direct links
from its DVD and CD-Rom products to its Internet sites, where such products can
quickly be updated.

     The Company utilizes a SecureWebPay (Verisign) application which allows the
processing of credit card transactions whereby the credit card is checked on the
fly while sharing databases with financial institutions. Being socially aware
and sensitive to government restrictions and recommendations, the Company has in
place a well known protection program for minors which can be controlled by
adults to limit access to the Company's Web sites.

Licensees

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

     In December 1997, Milcap Media Limited entered into an Internet license
agreement with Cyber Entertainment Network, Fort Lauderdale, Florida (CEN),
whereby CEN, which is in the business of developing and operating various Web
adult sites, was granted use of the Web site privategold.com. The Company
provides the site with adult images and videos and is entitled to receive a
percentage of the gross revenues from fees collected with the sale of
memberships to the site.  The current revenue stream to Private exceeds $160,000
per month, an increase of 100% over 1999, with the number of unique visitors per
day as of January 2001 estimated at 350,000.

     In addition, 20 other licensed sites, including www.maxs.se, maxs.dk,
clubx.com.au, privateusa.com, private.com.br and private.com.ar, together
receive an estimated 25,000 unique visitors per day.  Further, an additional 400
virtual shops selling the Company's product catalog, including dvdempire.com,
vdworld.co.uk, gatas.com.br, adultcatalog.com, adultzine.com, sextoys.com,
sexmachine.ch, dragon.ca and adultvideos-d.com eroticashop.com, are estimated to
reach hundreds of thousands unique visitors per day.

     More than 10 million unique visitors are browsing Private content on the
world wide web (WWW) on a daily basis.

                                      -22-
<PAGE>

     The Company's Reseller Program, www.privatecash.com www.prvtshops.com,
                                     -------------------
provides the other Web sites with promotional material designed to sell
Private's product range.  The Program has continued its aim of attracting adult
industry and non-adult industry Web site owners and potential Web site owners to
sell Private's products by means of a 25% commission program, which is supported
by fulfillment from the Company's networks of worldwide local distributors.

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

     Internet sales in 2000 increased by 206% to SEK 50.7 million with a net
income of 46% of sales.

The Future

     The Company believes that Internet sales and marketing programs presently
in place, or expected to be implemented in the near future, will allow Private
to continue to increase Internet sales. Private will continue to develop and
implement new product and marketing innovations designed to make Private the
leading purveyor of adult entertainment on the Internet.  Private intends to
continue to capitalize on its extensive library and brand loyalty established
over many years.   In addition, the Company is evaluating strategic alliances
and potential acquisitions of Internet related companies to augment growth.
Because of the privacy of the Internet, it is uniquely suited for the sales and
marketing of Private's adult entertainment products and in view of this Private
anticipates that the Internet market will continue to provide a significant
source of revenue in 2001 and beyond.

     The Company believes that broadband access will increase the demand for its
content. The Company is set to capitalize on the latest developments in high-
speed broadband delivery. A new site is under development, www.privatespeed.com,
and will be publicly launched during the second quarter 2001. In the fourth
quarter of 2000, Excite@Home's worldwide residential broadband subscriber base
grew to 2,956,000, up 157% from 1,148,000 in December 31, 1999. Overall, nearly
12 million home Web users accessed the Internet with a high-speed connection in
December 2000, as compared to 5 million people in December last year. A study by
The Strategis Group, predicts a broadband market of 36 million subscribers in
2005.

OTHER ANCILLARY PRODUCTS AND SERVICES

The Laserdisc Market

                                      -23-
<PAGE>

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

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

The Private Collection

     The Company, together with some of its licensees, are currently working on
the development, marketing and distribution of high-quality branded merchandise.
The Company's licensed product lines include clothing, novelties, accessories,
fragrances, leather goods, eyewear, nutritional supplements, aphrodisiacs and
condoms. These products have been marketed principally through mail-order and
retail outlets, including department and specialty stores.

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

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

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

                                      -24-
<PAGE>

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

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

Nutritional Supplements, Drinks and Other Similar Products

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

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

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

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

                                      -25-
<PAGE>

Private Circle, Inc.

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

     In May 1998 the Company entered into a Letter of Intent with Mr. Danny Cook
and Ms. Quamilla Carlsson, two fashion designers d/b/a Zabata Clothing, Los
Angeles, California. Subject to the terms and conditions of a definitive
agreement, the Company was to grant to the designers, the non-transferable and
exclusive license to use the trademarks in connection with the manufacturing,
distribution and marketing of their collection. At the same time, the Company
was to acquire all of the assets of Zabata Clothing and enter into a joint
venture to form a new entity to pursue a new clothing business.   In March 1999
a definitive agreement was concluded among the parties, which instead provided
for Private Circle, Inc. to be formed as a separate entity financed by the
Company, with the designers maintaining responsibility for its day to day
operations and design and creative issues. The Company thereafter retained an
option to take over 100% of Private Circle, Inc's shares at nominal value, thus
becoming the sole owner of the business.  In April 2001 the Company entered into
an agreement with an unrelated third party to sell its interest in Private
Circle, Inc.

     The Private Circle collection is currently sold nationwide in the US and
Canada and can be found in boutiques such as: Canal Jeans NY, The Rag Factory
LA, Untitled in Chicago, Divine Stores in Canada and Bal Palacia Department
Stores in Mexico. Furthermore, many bands have been seen sporting the Private
Circle Collection including: N'Sync, No Doubt, Massive Attack and Orgy. Private
Circle has recently been featured in the press in: FHM Magazine, The Face UK as
well as The New York Post.

     Los Angeles based Private Circle made its debut at the 1998 Cannes Film
Festival in France in front of an audience of over two thousand people. Working
hard to create a truly unique line that is 'funky' yet wearable, designer
Qamilla Carlsson and partner Danny Cook have created a completely diversified
line where 'funk' and function meet. Private Circle embraces a versatile line
that offers something for everyone. Focusing on men and women between the ages
of 18 - 30, Private Circle designs for confident, independent and creative
individuals who have a flair of their own. The garments are unique, though
simple enough to give the individual wearing them an opportunity to create
his/her own personal style.

                                      -26-
<PAGE>

STRATEGIES

General

     To capitalize on its international name recognition and extensive high
quality media library, the Company continues to increase its international
product marketing activities, specifically targeting growth for its New Media
Division including: DVD, Internet and Broadcasting. The Company's marketing
strategy is to license and/or distribute its high-quality content worldwide on
any profitable media through the expansion of traditional distribution channels,
the formation of strategic alliances and joint-ventures, the setting up of
proprietary local distribution and by aggressively exploiting the Internet
market. The Company is in particular aiming to exploit the broadband technology
for the Internet in order to distribute its high quality content library
directly to the consumers without having to go through the chain of distribution
it traditionally uses for DVD, Videos and Magazines. The Company believes that
the broadband technology will bring exceptional growth to both revenue and
improved margins. Additionally, the Company licenses its trademarks for use on
various consumer products, such as apparel, trendy street-wear and accessories,
cosmetics and beverages. The Company's business and operating strategy is
designed to provide strong revenue growth and increase profitability by
improving the performance of its content, launching and/or acquiring additional
publications and developing other ancillary revenue streams, either proprietary
or under license agreements, in order to better capitalize on its
internationally recognized brands, the extensive high quality media library and
efficient operations.

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

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

Marketing

     By using its core publications as platforms for launching new "spin-off"
publications, the Company has efficiently developed and produced a diverse and
profitable portfolio of highly-specialized adult publications. The Company
believes that it has a competitive advantage as a result of its editorial
staff's ability to identify potential markets for new publications, and the
Company's ability to gain access to newsstand distribution channels has enabled
its new publications to become better established in several new markets. In
relation to the video distribution the strategy is to increase sales by
obtaining a leading position in the DVD market from the start, increase sales of
sell-through cassettes on a worldwide basis and to launch additional labels in
order to increase profits. Furthermore, in relation to video distribution, the
Company is aggressively expanding into the new digital broadcasting market with
its content, see "Broadcasting".

Internet

                                      -27-
<PAGE>

     On an ongoing basis the Company continues to deploy substantial human and
financial resources into developing and augmenting its Internet operations. For
this purpose the Company has hired highly qualified people and set up a separate
division. The prime objective of this division is to offer the most unique
services and best content available on the Web, in particular via broadband
video-on-demand through its new Web-site privatespeed.com. The Internet division
offers the Company's products and services both through its own sites and
through other companies in the Internet marketplace. The Internet division is
already a strong revenue provider and the Internet strategy is to ultimately
compete with home video viewing and publishing, see "Internet Services".

                                      -28-
<PAGE>

Operations

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

                                      -29-
<PAGE>

DISTRIBUTION METHODS, PRICE POLICIES AND PIRACY PROBLEMS

Distribution Methods and Price Policies

a. National Newsstand Networks

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

   Advantages

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

   Disadvantages

   Magazine distributors with a right to return the products can create some
   problems for the Company, but on the other end, returns do not really go
   wasted, as these are purchased by distributors who only handle old issues of
   the product (See: Wholesalers of Back Catalogue). As far as video
   distributors are concerned, a right to return the products is not beneficial
   for the Company, as it is not always easy to sell the returns (custom made,
   per language and layout).

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

b. Wholesalers

   Advantages

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

   Disadvantages

   As far as magazines DVDs and videos are concerned, this method gives the
   Company less control of the distribution within the territories, resulting in
   overflow into other territories; it also gives it a lower margin per copy, in
   comparison with the National Newsstand Networks.

c. Licensees

                                      -30-
<PAGE>

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

   Advantages

   For magazines, this is a very cash-flow efficient way of distributing, as the
   distributors take all the costs for printing, etc. and the Company only
   collects the royalties. Logistics are very simple and uncomplicated. As far
   as videos and DVDs are concerned, licensees know their market well through
   their own sales force that efficiently covers the shops in the territory and
   maximizes sales. Concerning DVDs the wholesaler is charged the industrial
   costs to minimize the Company's cash exposure and thereafter royalties are
   collected at the point of sale. This enables the wholesaler to always keep
   plenty of products in stock to service his customers who order very
   frequently and need delivery within one or two days.

   Disadvantages

   As far as magazines are concerned, a negative effect of this method is that
   the Company has less control over the printing when it comes to volumes and
   quality, as this is controlled by the distributors themselves; it gives the
   Company the lowest margin of all the different distribution methods. For
   videos and DVDs, this method requires the Company to wait longer for
   receiving its margin.

d. Wholesalers of Back Catalogue Magazines

   Advantages

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

   Disadvantages

   As this method is often used in developing countries, it can be labor
   intensive to work with and payments are slow.

e. Internet

   Advantages

                                      -31-
<PAGE>

   This way of distributing increases the total sales points in every area as a
   result of the customer accessing the products easier. It creates an in-house
   customer base, and gives the Company a high price and margin per product
   sold, averaging 60% in 2000. This is the ultimate way of distributing the
   Company's products.. Apart from sales of the products via mail order, there
   is an opportunity to sell parts of the videos for the customer's demand, i.e.
   pay-per-view. The customer gets an option to preview samples of the videos,
   and then purchase the actual video. See "Internet Services". As far as DVD's
   are concerned, this a rapidly growing market, as consumers on the Internet
   are very likely to have DVD playback capabilities.

   Disadvantages

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

f. Mail Order

   Advantages

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

   Disadvantages

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

Piracy Problems

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

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

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

                                      -32-
<PAGE>

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

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

PROPRIETARY RIGHTS

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

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

                                      -33-
<PAGE>

COMPETITION

General Considerations

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

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

Magazines

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

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

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

Video & DVD

     The production and distribution of video, DVD and cable television products
are highly competitive, as each competes with the other as well as with other
forms of entertainment. Furthermore, there is increased competition in the
television industry evidenced by the increasing number and variety of basic
cable, satellite and pay television services now available. Revenues for motion
picture entertainment product depends in part upon general economic conditions,
but the competitive position of a producer or distributor is still greatly
affected by the quality of, and public response to, the entertainment product it
makes available to the marketplace. There is strong competition throughout the
adult video industry, both from adult video producers and from independent
companies distributing amateurish material.

                                      -34-
<PAGE>

     The Company's primary competitors in the video industry area are adult
motion picture studios, with in-house production and post production
capabilities. Other competitors are smaller, but locally or domestically, they
are capable of quickly identifying niche markets that could compete for the
Company's customers. In addition, the Company also competes with other forms of
media, including broadcast and cable television, direct marketing, electronic
media and adult Web sites.

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

Internet

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

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

EMPLOYEES

     As of March 1, 2001, the Company (including its subsidiaries) employed 120
people on a full-time basis.

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

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

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


                                      -35-
<PAGE>

GOVERNMENT REGULATION

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

     Following is a description of some of the laws and regulations in the U.S.
which impact the adult entertainment industry.  It is not an exhaustive
description of all such laws.  Moreover, the regulatory environment is
constantly changing in the geographical areas in which Private conducts
business, and in some instances laws which are enacted are subsequently
determined by the courts to be unconstitutional.

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

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

     The First and Fourteenth Amendments, however, do not protect the
dissemination of obscene material, and several States and communities in which
the Company's products are distributed, have enacted laws regulating the
distribution of obscene material with some offenses designed as misdemeanors and
others as felonies, depending on numerous factors. The consequences for
violating the State statutes are as varied as the number of States enacting
them. Similarly, 18 U.S.C. Sections 1460-1469 contain the Federal prohibitions
with respect to the dissemination of obscene material, and the potential
penalties for individuals (including Directors, Officers and Employees)
violating the Federal obscenity laws include fines, community service,
probation, forfeiture of assets and incarceration. The range of possible
sentences require calculations under the Federal Sentencing Guidelines, and the
amount of the fine and the length of the period of the incarceration under those
guidelines are calculated based upon the retail value of the unprotected
materials. Also taken into account in determining the amount of the fine, length
of incarceration or other possible penalty are whether the person accepts
responsibility for his or her actions, whether the person was a minimal or minor
participant in the criminal activity, whether the person was an organizer,
leader, manager or supervisor, whether multiple counts were involved, whether
the person provided substantial assistance to the government, and whether the
person has a prior criminal history. In addition Federal law provides for the
forfeiture of: (1) any obscene material produced, transported, mailed, shipped
or received in violation of the obscenity laws; (2) any property, real or
personal, constituting or traceable to gross profits or other proceeds obtained
from such offense; and (3) any property, real or personal, used or intended to
be used to commit or to promote the commission of such offense, if the court in
its discretion so determines, taking into consideration the nature, scope and
proportionality of the use of the property in the offense.

                                      -36-
<PAGE>

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

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

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

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

                                      -37-
<PAGE>

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

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

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

Child Pornography

     The content of every single adult tape on the shelves of every video and
adult store in the U.S. involves consenting adults. Roughly 90% of the material
produced and distributed over the past 15 years contains mainstream sexual acts
between consenting adults. The rest could be classified as specialty material
which does not contain explicit sex, but which still involves consenting adults
(i.e. fetish, bondage, etc.). Mainstream sex acts means intercourse, oral sex,
anal sex, group sex, etc. The Company's adult movies do not contain any
depictions, let alone actual performances of rape, sex with coercion, animals,
urination, defecation, violence, incest or child pornography.

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

                                      -38-
<PAGE>

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

SEASONALITY

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

                                      -39-
<PAGE>

ITEM 2. DESCRIPTION OF PROPERTIES

Leases

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

     Since May 27, 1997, Milcap Media Group S.L. is lessee under an initial 5-
year lease representing its operating corporate office. The lease is effective
from the May 27, 1997 (2d floor), November 1st, 1997 (1st floor) and October
3rd, 1997 (roof-surface for Internet satellite antennas) and represents
approximately 1,300 square meters of corporate headquarters space located at
Carrettera de Rubi 22-26, 08190 Sant Cugat del Valles, Barcelona, Spain. Average
monthly base rental expense is approximately $13,400. The rent expense is being
charged to operations on a straight-line basis over the extended term of the
lease. Additionally, the lease requires the Company to pay its proportionate
share of the building's real estate taxes and operating expenses. The majority
of this space is used by all of the Company's operating groups, primarily for
post production.

     Private Benelux (formerly known as Extasy B.V.), is lessee under a lease
which is effective until July 31, 2006 (de Dintel 20) and July 31, 2008 (de
Dintel 18) located in Knegsel, the Netherlands. Average monthly base rental
expense is approximately $2,716. The rent expense is being charged to operations
on a straight-line basis over the extended term of the lease. Additionally, the
lease requires the Company to pay its proportionate share of the building's real
estate taxes and operating expenses. The majority of this space is used for
operating the Company's distribution in the Benelux countries.

     Private France S.A. is lessee under an expired term lease, which is now
currently month-to-month, for approximately 50 square meters of corporate
headquarters space located at 17, rue Charles de Gaulle - 78680 Epone, France.
Subsequent to the term of the lease, the average monthly base rental expense is
approximately $1,001. The rent expense is being charged to operations, on a
monthly basis. Private France S.A. also leases space for its warehousing
facilities at RD S.L., B.P 2 - 28410 Saint-Lubin-de-la-Haye, at a price of $41
per pallet per month (the quantity of pallets varies from month to month).

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

                                      -40-
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

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

     On December 20, 1999, Milcap Media Limited received an official decision
from the Tax Authority with a statement that the Tax Authority has arbitrarily
assessed Milcap Media Limited for the tax years mentioned above for a total
amount of SEK 150,000,000, which is not based upon the actual financial results
of Milcap Media Limited. The effective tax on the arbitrary assessment will
amount to around SEK 42,000,000 plus fines amounting to SEK 16,800,000. In
addition interest is payable on those amounts. However, Milcap Media Limited is
in the process of appealing  the assessment to the Administrative Court in
Stockholm. The final outcome of the appeal is expected to take several years and
the Company has asked for a postponement of payment of the taxes and fees until
the case is settled. No final decision has been given.

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

     The Company is from time to time a defendant in suits for defamation and
violation of rights of privacy, many of which allege substantial or unspecified
damages, which are vigorously defended by the Company.

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

                                      -41-
<PAGE>

ITEM 5.   MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market For the Company's Common Stock

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

<TABLE>
<CAPTION>
                                  High             Low
                                ---------        --------
<S>                             <C>              <C>
Fiscal 2000:
First Quarter                   $13              $5 13/16
Second Quarter                  $12 5/8          $8 3/16
Third Quarter                   $10 1/8          $5 3/8
Fourth Quarter                  $10 15/16        $5 3/4

Fiscal 1999:
First Quarter                   $4 7/8           $3 7/16
Second Quarter                  $8 15/16         $4 1/16
Third Quarter                   $6 13/16         $3 15/16
Fourth Quarter                  $6 1/2           $4 1/2
</TABLE>

                                      -42-
<PAGE>

     On April 6, 2001, the closing price of the Common Stock was $6 13/16 per
share. On April 6, 2001, the Company had approximately 600 holders of record of
its Common Stock.  Record ownership does not reflect the number of beneficial
owners who hold Common Stock through brokers in "street name."

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

Dividend Policy

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

Stock Dividend

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

Stock Repurchase

     During 2000 the Board of Directors authorized the Company to repurchase of
up to 10% of its outstanding Common Stock. The Company anticipates that share
repurchases will be made from time to time in the open market. There is no time
limit placed on the authorization.

Transfer Agent

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

Miscellaneous

     In July, 2000, the Company was added to the Russell 2000 and 3000 Index.

                                      -43-
<PAGE>

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

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

In connection with the preparation of the Company's 2000 annual financial
statements, management of the Company has determined that the previously issued
1996, 1998 and 1999 financial statements required restatement. The previously
issued financial statements have been restated to reflect (i) increases in
previously reported income tax expense in both years related to certain
intercompany contractual arrangements which affect the character and amount of
taxable income reported in certain countries, (ii) increased revenues, operating
expenses and interest expense in both years as a result of the consolidation of
two companies, Private Circle, Inc. and Viladalt S.L., of which the Company may
be deemed to control, (iii) to recognize additional compensation expense in the
1999 year for stock options granted to a part-time officer who is also a
consultant, and (iv) to give effect to additional income tax expense in 1996
related to certain errors in the calculation of deductible allowances recorded
by the Company's Spanish subsidiary in its 1996 income tax return which were
disallowed upon completion of a subsequent examination by Spanish taxing
authorities.

     Accordingly, the consolidated financial statements for the years ended
December 31, 1996, 1998 and 1999 have been restated as described in Note 3 to
the accompanying 2000 Consolidated Financial Statements. All amounts and
percentages in the following discussions reflect the effects of such
restatements.

2000 compared to 1999

  Results of Operations

     Net sales. The Company reported net sales of SEK 258.1 million for the year
ended December 31, 2000, which, compared to net sales of SEK 175.4 million
(restated) for the year ended December 31, 1999, represents an increase of SEK
82.7 million, or 47.1%. The increase was mainly attributable to the Broadcast,
DVD and Internet sales, offset by decreases in CD-Rom, miscellaneous and
magazine sales. The acquisition of Extasy B.V. also added SEK 9.7 million to net
sales for the period. Sales of videos increased slightly during 2000. Broadcast
sales for the year ended December 31, 2000 increased 467% to SEK 17.4 million
and DVD sales for the year ended December 31, 2000 increased 498% to SEK 50.2
million. The Company's 1999 release schedule for DVDs included eighteen titles
and during 2000 the Company released 83 titles including both new and back-
catalogue material. During the year 2001 the Company is planning to release 50
new titles and 50 back-catalogue titles. Internet sales increased 206% to SEK
50.7 million compared to the year ended 1999. The management believes that the
growth in DVD, Internet and Broadcast sales will continue in 2001 and 2002.
During 2000 the total new media division sales, including DVD, Internet and
Broadcast sales, increased SEK 90.3 million, or 322%, to SEK 118.3 million
compared to the year ended 1999.

     Cost of Sales. The Company reported cost of sales of SEK 98.8 million for
the year ended December 31, 2000, which, compared to cost of sales of SEK 84.6
million (restated) for the year ended December 31, 1999, represents an increase
of SEK 14.1 million, or 16.7%. The gross profit for the year ended December 31,
2000 was SEK 159.3 million, or 61.7% of net sales, which compared to gross
profit for the year ended December 31, 1999 of SEK 90.8 million, or 51.8% of net
sales, represents an increase of 9.9% in the gross profit margin. The increase
is the result of product mix with better margins on Broadcast, DVD and Internet
sales.

     Selling, general and administrative expenses. The Company reported selling,
general and administrative expenses of SEK 96.9 million for the year ended
December 31, 2000, which, compared to selling, general and administrative
expenses of SEK 65.7 million (restated) for the year ended December 31, 1999,
represents an increase of SEK 31.2 million, or 47.5%. The increase was primarily
attributable to the Company's investment in Internet related activities and the
start-up of DVD. The investment expenses associated with Internet and DVD

                                      -44-
<PAGE>
activities are expected to continue in 2001.

     Interest expense. The Company reported interest expense of SEK 1.8 million
for the year ended December 31, 2000, which, compared to interest expense of SEK
2.7 million (restated) for the year ended December 31, 1999, represents a
decrease of SEK 0.9 million. The decrease is the result of lower average short-
term borrowings outstanding in 2000 compared to 1999.

     Income taxes. The Company reported income tax expense of SEK 10.7 million
for the year ended December 31, 2000 as compared to an income tax expense of SEK
3.9 million (restated) for the year ended December 31, 1999. The increase of SEK
6.8 million is primarily attributable to more of the Company's profits being
recorded in tax jurisdictions where there is a higher corporate tax than
compared to other tax jurisdictions.

     Net income. The Company reported net income of SEK 53.0 million as compared
to SEK 19.6 million (restated) for the year ended December 31, 1999. The
increase in net income in 2000 of SEK 33.4 million, or 170.9% was primarily
attributable to increased sales and higher margins on the new media division
products.

  Liquidity & Capital Resources

     The Company reported a working capital surplus of SEK 140.5 million for the
year ended December 31, 2000, an increase of SEK 41.7 million compared to the
year ended December 31, 1999. The increase is principally attributable to
increased accounts receivable related to increased sales and increased
inventories and prepaid expenses and other current assets.

     Net cash provided by operating activities was SEK 68.4 million for the year
ended December 31, 2000 and was primarily the result of net income and
adjustments to reconcile net income to net cash flows from operating activities.
The net income of SEK 53.0 million and the adjustments to reconcile net income
to net cash flows from operating activities, representing, stock-based
compensation of SEK 0.2 million, amortization of goodwill of SEK 1.6 million,
amortization of photographs and videos of SEK 31.6 million and depreciation of
SEK 7.9 million offset by deferred taxes of SEK 0.6 million, provided a total of
SEK 93.7 million. The total of SEK 93.7 million was then primarily reduced by
the increases in trade accounts receivable, inventories and prepaid expenses and
other current assets totaling SEK 71.3 million, offset by SEK 46.0 million from
related party receivable, accounts payable trade, income taxes payable and
accrued other liabilities. Net cash provided by operating activities was SEK
24.1 million (restated) for the year ended December 31, 1999. The increase in
cash provided by operating activities in 2000 compared to 1999 is principally
the result of net income and adjustments to reconcile net income to net cash
flows from operating activities.

     Net cash used in investing activities for the year ended December 31, 2000
was SEK 71.1 million. The investing activities was principally investment in
library of photographs and videos of SEK 51.9 million which was carried out in
order to start up DVD sales, increase content quality and maintain the 2000/2001
release schedule. In addition to investment in library of photographs and
videos, SEK 10.9 million was invested in capital expenditures, SEK 0.9 million
in asset held for sale and SEK 6.7 million in investment in other assets. The
increase over the comparable twelve-month 1999 period was principally due to
increased investments in library of photographs and videos, capital expenditure
and investments in other assets.

     Net cash provided by financing activities for the year ended December 31,
2000 was SEK 10.5 million represented by SEK 11.7 million from conversion of
warrants and an increase in short-term borrowings of SEK 0.2 million on the line
of credit offset by repayment on long-term borrowings of SEK 1.4 million. The
decrease over the comparable twelve-month 1999 period was primarily due to
lesser conversions of warrants.

                                      -45-
<PAGE>

1999 compared to 1998 (restated)

  Results of Operations

     Net sales. The Company reported net sales of SEK 175.4 million for the year
ended December 31, 1999, which, compared to net sales of SEK 166.3 million for
the year ended December 31, 1998, represents an increase of SEK 9.1 million, or
5.5%. The increase was mainly attributable to DVD and Internet sales, offset by
a decrease in CD-Rom and video sales. Sales of magazines remained approximately
the same in 1999 as in 1998. DVD sales for the year ended December 31, 1999 was
SEK 8,4 million and should not be compared with the twelve-month 1998 period
since the Company released only a few titles in 1998 and the market was not
ready. The main part of the DVD sales took place during the three months ended
December 31, 1999. The Company's 1999 release schedule for DVDs included
eighteen titles and during 2000 the Company is planning to release 50 new titles
and 50 back-catalogue titles. Internet sales increased 185% to SEK 16.6 million
compared to the year ended 1998. The increase in Internet sales compared to the
year ended 1998 was particularly apparent in the three months ended December 31,
1999, where it increased 249% compared to the the same period in 1998. The
management believes that the growth in DVD and Internet sales will continue in
2000. The net sales reported does not include revenue from the agreements made
and announced during 1999 concerning Penthouse/Private co-production and
distribution and the UK licensing of the magazines Private Life and Private
Style. Net sales arising from the agreements will be reported according to US
GAAP.

     Cost of Sales. The Company reported cost of sales of SEK 84.6 million for
the year ended December 31, 1999, which, compared to cost of sales of SEK 72.9
million for the year ended December 31, 1998, represents an increase of SEK 11.8
million, or 16.2%. The gross profit for the year ended December 31, 1999 was SEK
90.8 million, or 51.8% of net sales, which compared to gross profit for the year
ended December 31, 1998 of SEK 93.5 million, or 56.2% of net sales, represents a
decrease of 4.4% in the gross profit margin. The decrease is the result of lower
margins on sales from Private Circle and video, and increased amortization of
photographs and videos.

     Selling, general and administrative expenses. The Company reported selling,
general and administrative expenses of SEK 65.7 million for the year ended
December 31, 1999, which, compared to selling, general and administrative
expenses of SEK 53.7 million for the year ended December 31, 1998, represents an
increase of SEK 11.9 million, or 22.2%. The increase was primarily attributable
to the Company's investment in Internet related activities and Private Circle,
the start-up of DVD production and the introduction of the Company on Nasdaq
National Market. The investment expenses associated with Internet activities are
expected to continue in 2000. The increase of selling, general and
administrative expenses in 1999 compared to 1998 was considerably less than that
of 1998 compared to 1997 and management believes that the increases seen over
the past years have leveled out and except for the investment expenses
associated with Internet activities, increases for 2000 will be less.

     Interest expense. The Company reported interest expense of SEK 2.7 million
for the year ended December 31, 1999, which, compared to interest expense of SEK
0.7 million for the year ended December 31, 1998, represents an increase of SEK
1.9 million. The increase is the result of higher average short-term borrowings
outstanding in 1999 compared to 1998, partially offset by reduced long-term
borrowings.

     Income taxes. The Company reported income tax expense of SEK 3.9 million
for the year ended December 31, 1999 as compared to an income tax expense of SEK
4.4 million for the year ended December 31, 1998. The decrease of SEK 0.5
million is primarily attributable to less of the Company's profits being
recorded in tax jurisdictions where there is a higher corporate tax than
compared to other tax jurisdictions.

     Net income. The Company reported net income of SEK 19.6 million as compared
to SEK 35.1 million for the year ended December 31, 1998. The decrease in 1999
net income was primarily attributable to increased cost of sales and general and
administrative expenses offset by increased sales.

                                      -46-
<PAGE>

  Liquidity & Capital Resources

     The Company reported a working capital surplus of SEK 98.8 million for the
year ended December 31, 1999, an increase of SEK 33.2 million compared to the
year ended December 31, 1998. The increase is principally attributable to
increased accounts receivable related to increased sales and increased
inventories and prepaid expenses and other current assets.

     Net cash provided by operating activities was SEK 24.1 million for the year
ended December 31, 1999 and was primarily the result of net income and
adjustments to reconcile net income to net cash flows from operating activities.
The net income of SEK 19.6 million and the adjustments to reconcile net income
to net cash flows from operating activities, representing amortization of
photographs and videos of SEK 29.4 million, depreciation of SEK 2.9 million and
deferred taxes of SEK 0.1 million, provided a total of SEK 52.9 million. The
total of SEK 52.9 million was then primarily reduced by the increases in trade
accounts receivable, related party receivable, inventories, prepaid expenses and
other current assets and accrued other liabilities totaling SEK 32.5 million,
offset by SEK 3.7 million from accounts payable trade and income taxes payable.
Net cash provided by operating activities was SEK 35.0 million for the year
ended December 31, 1998. The decrease in cash provided by operating activities
in 1999 compared to 1998 is principally the result of changes in operating
assets and liabilities in 1999.

     Net cash used in investing activities for the year ended December 31, 1999
was SEK 39.7 million. The investing activities was principally investment in
library of photographs and videos of SEK 33.7 million which was carried out in
order to maintain the 1999/2000 release schedule. In addition to investment in
library of photographs and videos, SEK 5.3 million was invested in capital
expenditures and SEK 2.7 million in other assets offset by SEK 2.0 million from
asset held for sale. The increase over the comparable twelve-month 1998 period
was principally due to increased investments in other assets.

     Net cash provided by financing activities for the year ended December 31,
1999 was SEK 18.9 million represented by SEK 21.8 million from conversion of
warrants, offset by a decrease in short-term borrowings of SEK 1.3 million on
the line of credit and repayments on long-term loans of SEK 1.6 million. The
increase over the comparable twelve-month 1998 period was primarily due to the
conversion of warrants.

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

                                      -47-
<PAGE>

                                    PART III

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

Identification of Directors, Executive Officers and Key Employees

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

<TABLE>
<CAPTION>

                                               Position With the
                                               -----------------
Name                            Age          Company or Subsidiary
----                            ---          ---------------------
<S>                             <C>  <C>
Directors
---------
  Berth H. Milton............   45   Chief Executive Officer, President and
                                      Director

  Bo Rodebrant...............   47   Director

  Robert L. Tremont..........   56   Director


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

  Claes Henrik Marten Kull...   35   Chief Marketing Officer, Private Media
                                      Group, Inc.; Marketing Manager, MMG

  Javier Sanchez.............   39   Chief Operating Officer, Private Media
                                     Group, Inc.; General Manager, MMG

  Johan Gillborg.............   38   Secretary and Chief Financial Officer,
                                     Private Media Group, Inc.; Chairman,
                                     Private France S.A.; Chairman, Private
                                     Benelux; Chief Financial Officer and
                                     Administrator, MMG

  Ad Heesbeen................   46   Managing Director of Private Benelux
                                     B.V.

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

     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 the Company:

Berth H. Milton was appointed to the Board of Directors in February 1998 in
conjunction with the beginning of

                                      -48-
<PAGE>
the final phase of due diligence process related to the acquisition of the
Milcap Group by the Company in June 1998, and was the Corporate Secretary from
June 1998 until February 1999. In February 1999 Mr. Milton was appointed
Chairman of the Board and Chief Executive Officer of Private. Mr. Milton is one
of the most well known and reputable figures in the industry, has been
Administrator of MMG since its inception 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 the Company in August 1998.  Mr.
Rodebrant has operated his own accountancy and management consulting services,
R&S Ekonomiservice, since 1986. Prior thereto he co-founded an ice cream
business, Hemglass, which was the largest of its kind in Stockholm, Sweden. The
business was sold by Mr. Rodebrant in 1986. Mr. Rodebrant holds a degree in
construction engineering which he received in 1974.

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

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

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

Johan Gillborg was appointed as Chief Financial Officer of Private Media Group,
Inc. in August 1998 and has been the Chairman and Managing Director of Milcap
Publishing Group AB from 1994 until January 2000. During the year 2000 he became
Chairman of Private Benelux and Private France. Mr. Gillborg joined the group in
1992 as Marketing Consultant. From 1991 to 1992 he operated his own business
which acted as sub-contracting sales force for Securitas Direct of Sweden
(together with Mr. Kull).  From 1988 to 1990, Mr. Gillborg served as 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.

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

Jean-Pierre Michel has been the Managing Director of Private France S.A. since
1994, when he started the

                                      -49-
<PAGE>

distribution business which was purchased by MMG in 1997. Prior to joining the
Milcap Group, Mr. Michel was the COO of Polygram France and was mainly active in
the marketing division. Prior thereto he was active in the video and magazine
industry and was sales manager for Antares, Sevres, France and Echo S.A.,
Boulogne, France.

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

Section 16(a) Beneficial Ownership Reporting Compliance

     Based solely upon a review of Forms 3 and 5 furnished to the Company
covering its 2000 fiscal year filed under Section 16(a) of the Securities
Exchange Act of 1934, each of the Company's directors other than Bo Rodebrant,
officers and beneficial owners of more than 10% of the Company's Common Stock
who are identified in the table appearing in Item 11 of this Report did not file
Form 5 on a timely basis.

                                      -50-
<PAGE>

ITEM 10.  EXECUTIVE COMPENSATION

     The following table summarizes all compensation paid to the Company's Chief
Executive Officer and to the Company's other most highly compensated executive
officers other than the Chief Executive Officer whose total annual salary and
bonus exceeded $100,000 (the "Named Executive Officers"), for services rendered
in all capacities to the Company during the fiscal years ended December 31,
2000, 1999 and 1998. No other executive officer of the Company earned
compensation in excess of $100,000 in each of these periods.

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                                    Long Term
                                                  Compensation
                                                     Awards
                                                  ------------
      Name and                         Annual      Securities
Principal Position During   Fiscal  Compensation   Underlying       All Other
     Fiscal 2000             Year    Salary($)     Options (#)   Compensation($)
-------------------------   ------  ------------   -----------   ---------------
<S>                         <C>     <C>            <C>           <C>

Berth H. Milton...........   2000     151,000          ---             ---
President and CEO (1)        1999     151,000       180,000            ---
                             1998     144,000          ---             ---

Javier Sanchez............   2000     150,262          ---             ---
Chief Operating Officer,     1999     150,262       180,000            ---
Private Media Group, Inc.,   1998     143,274          ---             ---
General Manager, MMG.
</TABLE>
----------
(1)  Mr. Milton was appointed as the Company's CEO in February 1999.

     In June 1998 Mr. Milton received 525,000 Warrants to acquire Private Common
Stock at $1.33 per share in connection with the Company's acquisition of Milcap
Media Limited and Cinecraft Limited.  See "Business-History".

                                      -51-
<PAGE>

Option Grants in the Last Fiscal Year

    The following table sets forth certain information at December 31, 2000, and
for the year then ended,  with respect to stock options granted to the
individuals named in the Summary  Compensation Table above. No options have been
granted at an option price below the fair market value of the Common Stock on
the date of grant.


                     OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
                                 % of Total
                 Number of        Options/
                 Securities         SARs
                 Underlying      Granted to
                Options/SARs     Employees      Exercise or Base
     Name        Granted(#)    In Fiscal Year     Price($/Sh)       Expiration Date
     ----       ------------   --------------   ----------------    ---------------
<S>             <C>            <C>              <C>                 <C>
Berth H. Milton      -               -                  -                  -
Javier Sanchez       -               -                  -                  -
</TABLE>


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


                AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                       AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
                                                            Number of Securities                  Value of
                                                                 Underlying                      Unexercised
                                                                 Unexercised                     In-the-Money
                                                                 Options/SARs                    Options/SARs
                                                              At Fiscal Year End            At Fiscal Year End($)*
                  Shares Acquired                        -------------------------       ---------------------------
        Name       On Exercise(#)  Value Realized ($)    Exercisable/Unexercisable       Exercisable/Unexercisable**
        ----      ---------------  ------------------    -------------------------       ---------------------------
<S>               <C>              <C>                   <C>              <C>            <C>               <C>
Berth H. Milton          -                  -              135,000        45,000           394,387         131,462
Javier Sanchez           -                  -              135,000        45,000           394,387         131,462
</TABLE>


*Based on the closing price of the Company's Common Stock on the last trading
day of the fiscal year ended December 31, 2000.

**Weighted average exercise price for vested options only has been used.
Unvested options vest quarterly, and the exercise price of the unvested
(unexercisable) options is the fair market value of the Common Stock on each
vesting date.

                                      -52-
<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table presents certain information as of January 29, 2001,
regarding the beneficial ownership of Common Stock by (i) each of the directors
and Named Executive Officers of the Company  individually, (ii) all persons
known by the Company to be beneficial owners of five percent or more of the
Common Stock, and (iii) all directors and executive officers of the Company as a
group. Unless otherwise noted, the persons listed below have sole voting and
investment power and beneficial ownership with respect to such shares.

<TABLE>
<CAPTION>
                                                                                  Percent
                                                     Number of Shares          Beneficially
Name and Address (1)                              Beneficially Owned (1)           Owned
-----------------------------------------------   ----------------------      -------------
<S>                                               <C>                         <C>
Berth H. Milton (2)                                     23,653,583                 48.3%

Senate Limited (3)                                       5,025,000                 18.1%
3 Bell Lane, Gibraltar

Chiss Limited (4)                                        4,200,000                 15.1%
3 Bell Lane, Gibraltar

Bajari Properties Limited (5)                            1,875,000                  6.8%
7 Myrtle Street, Douglas, Isle of Man

Pressmore Licensing Limited                              1,875,000                  6.8%
P.O. Box N-341, Nassau, Bahamas

Perrystone Trading Limited                               1,875,000                  6.8%
P.O. Box 171, Providenciales, Turks & Caicos

Solidmark (Gibraltar) Ltd.                               1,875,000                  6.8%
3 Bell Lane, Gibraltar

Churchbury Limited                                       1,776,000                  6.4%
3 Bell Lane, Gibralter (6)

Kingston Finance Ltd.                                    1,875,000                  6.8%
Wickhams Cay, Road Town, Tortola, BVI

Marten Kull (7)                                            352,500                  1.3%

Johan Gillborg (8)                                         232,500                    *

Javier Sanchez (9)                                         165,000                    *

Robert L. Tremont (10)                                       9,000                    *

Bo Rodebrant (11)                                            3,500                    *

All Executive Officers and Directors                    24,470,083                 49.5%
as a group (12)
</TABLE>
-------------------
* Denotes less than 1%

                                      -53-
<PAGE>

 (1) Beneficial ownership is determined in accordance with rules of the
     Securities and Exchange Commission, and includes generally voting power
     and/or investment power with respect to securities. Shares of Common Stock
     which may be acquired upon exercise or conversion of warrants, options or
     Preferred Stock which are currently exercisable or exercisable within 60
     days of January 29, 2001, are deemed outstanding for computing the
     beneficial ownership percentage of the person holding such securities but
     are not deemed outstanding for computing the beneficial ownership
     percentage of any other person. Except as indicated by footnote, to the
     knowledge of the Company, the persons named in the table above have the
     sole voting and investment power with respect to all shares of Common Stock
     shown as beneficially owned by them.

 (2) Includes 21,000,000 shares of Common Stock issuable upon conversion of
     7,000,000 of the Company's $4.00 Series A Convertible Preferred Stock and
     102,858 shares of Common Stock which have accrued as dividends on the
     Preferred Stock.  Mr. Milton is indirectly the beneficial owner of the
     7,000,000 $4.00 Series A Convertible Preferred Stock and 519,725 shares of
     Common Stock owned of record by Slingsby Enterprises Limited.  The amount
     also includes (i) 1,875,000 shares of Common Stock owned by Bajari
     Properties Limited, of which Mr. Milton is the sole shareholder, (ii)
     135,000 shares issuable upon exercise of Options issued under the Employee
     Stock Option Plan.  His address is c/o the Company, Carretera de Rubi 22-
     26, 08190 Sant Cugat del Valles, Barcelona, Spain.

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

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

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

 (6) Jacqueline Baker is the sole shareholder of Churchbury Limited and,
     therefore, may be deemed to be the beneficial owner of these shares.

 (7) Includes 127,500 shares issuable upon exercise of Options issued under the
     Employee Stock Option Plan.  Mr. Kull's address is c/o the Company,
     Carretera de Rubi 22-26, 08190 Sant Cugat del Valles, Barcelona, Spain.

 (8) Includes 127,500 shares issuable upon exercise of Options issued under the
     Employee Stock Option Plan.  Mr. Gillborg's address is c/o the Company,
     Carretera de Rubi 22-26, 08190 Sant Cugat del Valles, Barcelona, Spain.

 (9) Includes 135,000 shares issuable upon exercise of Options issued under the
     Employee Stock Option Plan.  Mr. Sanchez address is c/o the Company,
     Carretera de Rubi 22-26, 08190 Sant Cugat del Valles, Barcelona, Spain.

(10) Includes 9,000 shares of Common Stock issuable upon exercise of Warrants
     owned by Mr. Tremont.  His address is c/o the Company, Carretera de Rubi
     22-26, 08190 Sant Cugat del Valles, Barcelona, Spain.

(11) Includes 54,000 shares issuable upon exercise of Options issued under the
     Employee Stock Option Plan.  Mr. Rodebrant's address is c/o the Company,
     Carretera de Rubi 22-26, 08190 Sant Cugat del Valles,  Barcelona, Spain.

(12) Includes 21,000,000 shares of Common Stock issuable upon conversion of the
     outstanding 7,000,000 Series A Preferred Stock, 102,858 shares of Common
     Stock which have accrued as dividends on the Preferred

                                      -54-
<PAGE>

     Stock, 208,464 shares of Common Stock issuable upon exercise of outstanding
     Warrants and 590,250 shares issuable upon exercise of outstanding Options
     under the Employee Stock Option Plan.

                                      -55-
<PAGE>

ITEM 12.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Certain Relationships

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

Related Transactions

     The Company has a short-term loan to an entity controlled by Mr. Milton in
the amount of SEK 6,821,000 and SEK 4,515,000 at December 31, 1999 and 2000,
respectively.  The loan bears interest at the rate of 10% per annum and has no
maturity date.

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

     Peach Entertainment Distribution AB, a wholly owned subsidiary of the
Company, is a party to an exclusive Distribution Agreement with Sundance
Associates, Inc. ("Sundance") which has been in effect since 1995. Robert
Tremont, a Director of the Company, is the sole shareholder of Sundance. Under
the terms of the Distribution Agreement PED granted to Sundance the exclusive
rights to distribute in the United States and Mexico specified products,
including magazines, videos, DVDs, CD-ROM's and laser discs. Royalties are paid
by Sundance to PED in accordance with an agreed royalty schedule. The
Distribution Agreement automatically renews for successive one year terms and is
cancelable by either party prior to the end of each one year term. During the 12
month periods ended December 31, 1999 and December 31, 2000 Sundance paid
royalties to Milcap of $2,123,564 and $ 2,833,382 respectively.

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

                                      -56-
<PAGE>

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

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

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

     See Consolidated Financial Statements.

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

     See Consolidated Financial Statements.

3.   Exhibits
     --------

     See Exhibit Index.

(b)  Reports on Form 8-K:

     There were no reports on Form 8-K filed by the Registrant in the last
quarter of Fiscal 2000.

                                      -57-
<PAGE>

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

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

  *3.1  Articles of Incorporation

  *3.2  Amended and Restated Bylaws

  *4.1  Specimen Common Stock Certificate

  *4.3  Certificate of Designation re Preferred Stock

 *10.1  Milcap Acquisition Agreement dated December 19, 1997

 *10.2  Cinecraft Acquisition Agreement dated December 19, 1997

 *10.3  Distribution Agreement between Sundance Associates and the Registrant

 *10.4  License Agreement between PCI, Inc. and Milcap Media Ltd.

 *10.5  Letter of Intent dated May 5, 1998, by and between Max's Film AB and
        Milcap Media Limited as amended on August 20, 1998, and October 12, 1998

 *10.7  Agreement dated March 31, 1998, by and between Milcap Media Ltd. and
        certain shareholders of Viladalt, S.L.

 *10.8  Agreement dated March 31, 1998, by and between Zebra Forvaltnings, AB
        and certain shareholders of Viladalt, S.L.

 *10.9  Agreement dated March 31, 1998, by and between Milcap Media Ltd. and
        certain shareholders of Viladalt, S.L.

 *10.10 Agreement dated March 31, 1998, by and between Milcap Media Ltd. and
        certain shareholders of Viladalt, S.L.

**10.11 1999 Employee Stock Option Plan.

**10.12 Production Agreement dated as of March 29, 1999, by and between Milcap
        Media Ltd. And Pierre Woodman.

**10.13 Final Agreement dated as of March 22, 1999, by and among Private Media
        Group, Inc., Danny Cook and Qamilla Carlsson.

  21    Subsidiaries of the Registrant

  23.1  Consent of Ernst & Young AB
--------------------
* Incorporated by reference from the registrant's Registration Statement on
  Form SB-2 (SEC File No. 333-62075).

                                      -58-
<PAGE>

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

                                      -59-
<PAGE>

                                   SIGNATURES

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


Dated:  April 15, 2001                PRIVATE MEDIA GROUP, INC.


                                      By: /s/ Berth H. Milton
                                         ----------------------------------
                                              Berth H. Milton, Chief Executive
                                              Officer

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

         Name                              Title                       Date
         ----                              -----                       ----

/s/ Berth H. Milton             Chairman of the Board, Chief     April 15, 2001
------------------------------  Executive Officer and Director
    Berth H. Milton

/s/ Johan Gillborg              Secretary, Chief Financial       April 15, 2001
------------------------------  Officer, Chief Accounting
    Johan Gillborg              Officer

/s/ Bo Rodebrant                Director                         April 15, 2001
------------------------------
    Bo Rodebrant

/s/ Robert L. Tremont           Director                         April 15, 2001
------------------------------
    Robert L. Tremont

                                      -60-
<PAGE>
                        REPORT OF INDEPENDENT AUDITORS

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

We have audited the accompanying consolidated balance sheet of Private Media
Group, Inc, and its subsidiaries as of December 31, 2000 and the related
consolidated statements of income and comprehensive income, shareholders' equity
and cash flows for each of the two years in the period ended December 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Private
Media Group, Inc, and its subsidiaries at December 31, 2000 and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended December 31, 2000, in conformity with generally accepted accounting
principles in the United States of America.


Stockholm, Sweden
April 10, 2001


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


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

                                      F-1
<PAGE>
                           PRIVATE MEDIA GROUP, INC.,
                          CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                        December 31,
                                                              -----------------------------
                                                                  2000             2000
                                                              ------------     ------------
                                                                   SEK              USD
                                                                      (in thousands)
<S>                                                           <C>              <C>
ASSETS
Cash and cash equivalents.................................          14,381            1,507
Trade accounts receivable - net (Note 5)..................         116,555           12,218
Related party receivable (Note 15)........................           4,515              473
Inventories - net  (Note 6)...............................          56,677            5,941
Prepaid expenses and other current assets (Note 7)........          29,340            3,075
                                                              ------------     ------------
TOTAL CURRENT ASSETS......................................         221,468           23,214

Library of photographs and videos - net (Note 9)..........         104,183           10,921
Property, plant and equipment - net (Note 10).............          18,150            1,902
Goodwill (Note 4).........................................          15,843            1,661
Asset held for sale (Note 8)..............................          20,976            2,199
Other assets..............................................           7,443              780
                                                              ------------     ------------
TOTAL ASSETS..............................................         388,063           40,677
                                                              ============     ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings (Note 11)...........................             674               71
Accounts payable trade....................................          49,022            5,139
Income taxes payable......................................          21,403            2,244
Deferred income taxes (Note 13)...........................             130               14
Accrued other liabilities (Note 12).......................           9,729            1,020
                                                              ------------     ------------
TOTAL CURRENT LIABILITIES.................................          80,958            8,488

Long-term borrowing (Note 14).............................           4,682              490

SHAREHOLDERS' EQUITY (Note 16)
$4.00 Series A Convertible Preferred Stock.
 Shares authorized -- 10,000,000;
 Shares issued and outstanding -- 7,000,000                           --                --
Common Stock, $.001 par value;                                       8,310              871
 Shares authorized -- 100,000,000;
 Shares issued and outstanding -- 27,750,920
Additional paid-in capital................................          88,127            9,237
Stock dividends to be distributed.........................           6,728              705
Retained earnings.........................................         199,838           20,947
Accumulated other comprehensive income....................            (580)             (61)
                                                              ------------     ------------
TOTAL SHAREHOLDERS' EQUITY................................         302,423           31,699
                                                              ------------     ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................         388,063           40,677
                                                              ============     ============
</TABLE>
                See notes to consolidated financial statements

                                      F-2
<PAGE>
                           PRIVATE MEDIA GROUP, INC.
           CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME


<TABLE>
<CAPTION>
                                                                 Years ended December 31,
                                                       ------------------------------------------
                                                            1999            2000          2000
                                                          Restated
                                                       -------------    -----------    ----------
                                                             SEK             SEK           USD
                                                                      (in thousands)
<S>                                                      <C>              <C>            <C>
Net sales...........................................         175,426        258,084        27,053
Cost of sales.......................................          84,624         98,770        10,353
                                                       -------------    -----------    ----------
Gross profit........................................          90,802        159,314        16,700
Selling, general and administrative expenses........          65,661         96,878        10,155
                                                       -------------    -----------    ----------
Operating income....................................          25,141         62,436         6,545
Interest expense....................................           2,674          1,799           189
Interest income.....................................             975          3,077           323
                                                       -------------    -----------    ----------
Income before income taxes..........................          23,442         63,714         6,679
Income taxes........................................           3,875         10,705         1,122
Net income..........................................          19,567         53,009         5,557
                                                       -------------    -----------    ----------
Other comprehensive income:
   Foreign currency translation adjustments.........             (98)          (818)          (86)
                                                       -------------    -----------    ----------
Comprehensive income................................          19,469         52,191         5,471
                                                       =============    ===========    ==========

   Net income per share:
Basic...............................................            0.77           1.96          0.20
                                                       =============    ===========    ==========
Diluted.............................................            0.41           1.09          0.11
                                                       =============    ===========    ==========
</TABLE>

                See notes to consolidated financial statements

                                      F-3
<PAGE>
                           PRIVATE MEDIA GROUP, INC.
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>

                                                                                                          Accumu-
                                                                                                          lated
                                                                     Addi-       Stock                     other       Total
                        Common stock        Preferred stock         tional     Dividends                  compre-     Share-
                    ---------------------   -------------------     Paid-in      to be      Retained      hensive     holders'
                      Shares     Amounts      Shares   Amounts      capital   distributed   Earnings      income      equity
                    ----------- ---------   --------- ---------    --------  ------------  ----------   ----------  ----------
                                   SEK                   SEK          SEK         SEK          SEK          SEK         SEK
<S>                  <C>         <C>        <C>        <C>         <C>       <C>           <C>          <C>         <C>
Balance at
January 1, 1999      24,395,007     8,281   7,000,000         -       2,060         5,642     152,384          336     168,703
Restated
Translation
Adjustment                    -         -           -         -           -             -           -          (98)        (98)
Conversion of
 warrants             1,950,000        16           -         -      21,826             -           -            -      21,842
Stock-based
 compensation                 -         -           -         -       1,000             -           -            -       1,000
Stock dividends         256,859         2           -         -       8,546        (5,642)          -            -       2,906
Stock dividends to
 be distributed               -         -           -         -           -         9,368     (12,275)           -      (2,906)
Net income                    -         -           -         -           -             -      19,567            -      19,567
                    -----------  --------   --------- ---------    --------  ------------  ----------   ----------  ----------
Balance at
 December 31,
 1999                26,601,866     8,299   7,000,000         -      33,432         9,368     159,675          238     211,013
Restated
Shares and
 warrants
 issued in
 acquisition            208,464         2           -         -      27,275             -           -            -      27,277
Translation
Adjustment                    -         -           -         -           -             -           -         (818)       (818)
Conversion of
 warrants and
 options                677,722         6           -         -      11,735             -           -            -      11,741
Stock-based
 compensation                 -         -           -         -         200             -           -            -         200
Stock dividends         262,868         2           -         -      15,485        (9,368)          -            -       6,119
Stock dividends to
 be distributed               -         -           -         -           -         6,728     (12,847)           -      (6,119)
Net income                    -         -           -         -           -             -      53,009            -      53,009
                    -----------  --------   --------- ---------    --------  ------------  ----------   ----------  ----------
Balance at
 December 31,
 2000                27,750,920     8,310   7,000,000         -      88,127         6,728     199,838         (580)    302,423
                    ===========  ========   ========= =========    ========  ============  ==========   ==========  ==========
</TABLE>
                See notes to consolidated financial statements

                                      F-4
<PAGE>

                           PRIVATE MEDIA GROUP, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                    Years ended
                                                                                    December 31,
                                                                  ---------------------------------------------
                                                                       1999             2000           2000
                                                                     Restated
                                                                  -------------    -------------    -----------
                                                                        SEK              SEK             USD
                                                                                  (in thousands)
<S>                                                                 <C>              <C>              <C>
Cash flows from operating activities:
Net income.....................................................          19,567           53,009          5,557
Adjustment to reconcile net income to net cash
 flows provided by operating activities:
   Deferred income taxes.......................................             125             (625)           (66)
   Stock-based compensation....................................           1,000              200             21
   Depreciation................................................           2,879            7,876            826
   Amortization of goodwill....................................               -            1,599            168
   Amortization of photographs and videos......................          29,362           31,627          3,315
Changes in operating assets and liabilities:
   Trade accounts receivable...................................         (12,342)         (46,139)        (4,836)
   Related party receivable....................................          (1,643)           2,306            242
   Inventories.................................................          (9,320)         (12,862)        (1,348)
   Prepaid expenses and other current assets...................          (6,877)         (12,336)        (1,293)
   Accounts payable trade......................................             788           28,353          2,972
   Income taxes payable........................................           2,890           11,507          1,206
   Accrued other liabilities...................................          (2,302)           3,876            406
                                                                  -------------    -------------    -----------
Net cash provided by operating activities......................          24,128           68,391          7,169

Cash flows used in investing activities:
Investment in library of photographs and videos................          33,683           51,925          5,443
Capital expenditures...........................................           5,306           10,911          1,144
Investments in asset held for sale.............................          (2,020)             907             95
Investment in other assets.....................................           2,741            6,682            700
Cash acquired in acquisition...................................               -              673             71
                                                                  -------------    -------------    -----------
Net cash used in investing activities..........................          39,710           71,098          7,453

Cash flow provided by financing activities:
Conversion of warrants.........................................          21,831           11,735          1,230
Repayments on long-term loan...................................          (1,619)          (1,398)          (147)
Short-term borrowings, net.....................................          (1,327)             199             21
                                                                  -------------    -------------    -----------
Net cash provided by financing activities......................          18,885           10,536          1,104
Foreign currency translation adjustment........................             (98)            (818)           (86)
                                                                  -------------    -------------    -----------
Net increase in cash and cash equivalents  ....................           3,205            7,011            735
Cash and cash equivalents at beginning of the year.............           4,165            7,370            773
                                                                  -------------    -------------    -----------
Cash and cash equivalents at end of the year...................           7,370           14,381          1,507
                                                                  =============    =============    ===========

Cash paid for interest.........................................           1,017              413             43
                                                                  =============    =============    ===========

Cash paid for taxes............................................             646            1,638            172
                                                                  =============    =============    ===========

Supplemental disclosure of non-cash investing activities:
Acquisition of business through issuance of common stock and
 warrants, net of cash acquired                                               -           27,275          2,859
                                                                  =============    =============    ===========
</TABLE>
                See notes to consolidated financial statements

                                      F-5
<PAGE>

                           PRIVATE MEDIA GROUP, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  The Company and Basis of Presentation

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

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

   Solely for the convenience of the reader, the accompanying consolidated
financial statements as of December 31, 2000 and for the twelve months then
ended have been translated into United States dollars ("USD") at the rate of SEK
9.54 per USD 1.00 the exchange rate of the Swedish Riksbank on December 31,
2000. The translations should not be construed as a representation that the
amounts shown could have been, our could be, converted into US dollars at that
or any other rate.

2.  Summary of significant accounting policies

Principles of Consolidation

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

                                      F-6
<PAGE>

                           PRIVATE MEDIA GROUP, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

balances have been eliminated in consolidation. Investments in associated
companies, defined as entities where the Company has an equity ownership
representing between 20% and 50%, are accounted for under the equity method.

Foreign Currency

   The financial statements of the Company's operations based outside of Sweden
have been translated into Swedish Kronor in accordance with FASB Statement No.
52, "Foreign Currency Translation." 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 Swedish Kronor, 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 Swedish Kronor
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.

Recognition of Revenue

   The Company's revenue recognition policies are in accordance with Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." Revenues from the sale of magazines, videocassettes, DVD's and
other related products where distributors are not granted rights-of-return are
recognized upon transfer of title, which generally occurs upon delivery.
Revenues from the sale of magazines under agreements that grant distributors
rights-of-return are recognized upon transfer of title, which generally occurs
on delivery, net of an allowance for returned magazines. Revenues from the sale
of videocassette and DVD products under consignment agreements with distributors
are recognized based upon reported sales by the Company's distributors. Revenues
from the sale of subscriptions to the Company's internet website are deferred
and recognized ratably over the subscription period.

Use of Estimates

   The preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

                                      F-7
<PAGE>

                           PRIVATE MEDIA GROUP, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Inventories

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

Library of Photographs & Videos

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

Property, Plant and Equipment

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

   In March 2000 the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board reached a consensus on Issue 00-2, "Accounting for
Web Site Development Costs" ("EITF 00-2"). In accordance with the transition
provisions of EITF 00-2, the Company has elected to apply this standard to
website development costs incurred from January 1, 2000 forward. Capitalized
website development costs including graphics and related software are being
amortized on a straight-line basis over 5 years and are included in property,
plant and equipment in the accompanying balance sheet (see Note 10).

Goodwill

   Goodwill represents the excess of the purchase price paid over the fair value
of the net assets of the business acquired (see Note 4). Amortization expense is
calculated on a straight-line basis over 10 years. Accumulated amortization
totaled SEK 1,599 thousand at December 31, 2000.

                                      F-8
<PAGE>

                           PRIVATE MEDIA GROUP, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Impairment of Long-Lived Assets including Goodwill

   The Company periodically evaluates the carrying value of long-lived assets
including goodwill 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.

Advertising Costs

   Advertising costs are charged to income as incurred.  The total advertising
costs were SEK 2,559 thousand and SEK 4,059 thousand for the years ended
December 31, 1999 and 2000, respectively.

Income Taxes

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

Cash Equivalents

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

Concentration of Credit Risk

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

   Cash and cash equivalents are maintained principally with major financial
institutions in Spain and Sweden that have high credit standings and the
Company's policy is to limit exposure to any one institution. Credit risk on
trade receivables is minimized as a result of the use of bank guarantees and
credit controls.

                                      F-9
<PAGE>

                           PRIVATE MEDIA GROUP, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   A significant portion of the Company's business is transacted with four
customers. These customers accounted for 32% and 26% of consolidated revenues
for the years ended December 31, 1999 and 2000, respectively.  One customer
accounted for 10% and 11% of consolidated revenues for the years ended December
31, 1999 and 2000, respectively.

Basic and Diluted Earnings Per Share

   Basic and diluted earnings per share is calculated in accordance with
Financial Accounting Standards Board Statement No. 128, "Earnings per Share"
(Note 17).

Fair Value of Financial Instruments.

   Statement of Financial Accounting Standard No. 107, Disclosures about "Fair
Value of Financial Instruments" ("SFAS 107") requires disclosure of fair value
information about financial instruments whether or not recognized in the balance
sheet.

   The Company in estimating the fair value disclosures for financial
instruments used the following methods:

   Cash and cash equivalents, trade receivables, trade payables, short-term debt
and accrued expenses the carrying amounts reported in the balance sheet
approximate fair value because of the short-term maturity of these instruments.

Stock-Based Compensation

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

Reclassification

   Certain reclassifications of prior year balances have been made in the
accompanying consolidated financial statements to conform to the 2000
presentation.

                                      F-10
<PAGE>

                           PRIVATE MEDIA GROUP, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.  Restatement

   In connection with the preparation of the Company's 2000 annual financial
statements, management of the Company has determined that the previously issued
1996, 1998 and 1999 financial statements required restatement. The previously
issued financial statements have been restated for the following items:

   (i)   To give effect to certain intercompany contractual arrangements which
         affect the character and amount of taxable income reported in certain
         countries. The previously reported provision for income taxes and
         income taxes payable have been increased to provide for the estimated
         amount of taxes due, along with related penalties and interest which
         may become due as a result of correcting this accounting. The Company
         intends to amend certain of its previously filed tax returns as soon as
         it is practicable.

   (ii)  To consolidate the accounts and results of operations of the companies,
         Private Circle, Inc and Viladalt S.L., the activities of which the
         Company may be deemed to control. In April 2001, Private Circle, Inc.,
         and a subsidiary of the Company entered into an agreement to sell the
         subsidiary's interest in Private Circle, Inc. (Note 22).

   (iii) To recognize additional compensation expense in the 1999 year for stock
         options granted to a part-time officer who is also a consultant.

   (iv)  To give effect to additional income tax expense in 1996 related to
         certain errors in the calculation of deductible allowances recorded by
         the Company's Spanish subsidiary in its 1996 income tax return which
         were disallowed upon completion of an examination by Spanish taxing
         authorities during 2000.

   The previously reported total and per share amounts and the effects of
adjustments (i), (ii) and (iii) noted on the previously reported results of
operations for 1999, and the restated amounts are as follows:


<TABLE>
<CAPTION>
                                                                 Per Share
                                                  Net        ------------------
                                                 Income      Basic      Diluted
                                                 -------     -----      -------
                                                   SEK        SEK         SEK
                                              (in thousands)
<S>                                           <C>         <C>        <C>
Amount previously reported...................     31,757      1.26       0.67
Adjustments:
(i)   Accrual of income taxes................     (2,943)    (0.12)     (0.06)
(ii)  Consolidation of controlled companies..     (8,247)    (0.33)     (0.18)
(iii) Stock-based compensation...............     (1,000)    (0.04)     (0.02)
                                                 -------     -----      -----
Total adjustments............................    (12,190)    (0.49)     (0.26)
                                                 -------     -----      -----
Restated amount..............................     19,567      0.77       0.41
                                                 =======     =====      =====
</TABLE>

   The accompanying financial statements also reflect adjustments to the
January 1, 1999 balance of retained earnings for effects, as of that date, of
changes in the previously reported 1996 and 1998 financial statements as
follows:

                                      F-11
<PAGE>
                           PRIVATE MEDIA GROUP, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                       Retained
                                                       earnings
                                                    --------------
                                                         SEK
                                                    (in thousands)
<S>                                                 <C>
Amount previously reported...................          161,177
Adjustments:
(i)  Accrual of income taxes.................           (2,959)
(ii) Consolidation of controlled companies...           (1,987)
(iv) Accrual of Spanish income taxes.........           (3,847)
                                                       -------
Total adjustments............................           (8,793)
                                                       -------
Restated amount..............................          152,384
                                                       =======
</TABLE>

   The effect on the 1998 operating results was to decrease previously reported
net income and basic and diluted per share amounts by SEK 4,946 thousand, 0.21
and 0.11, respectively.

   The effect on the 1996 operating results was to decrease previously reported
net income and basic and diluted per share amounts by SEK 3,847 thousand, 0.17
and 0.09, respectively.

4.  Business acquisition

   On January 28, 2000, the Company acquired all of the outstanding shares of
Extasy Video B.V. ("Extasy") for total consideration of SEK 27,275,192. The
consideration consisted of 208,464 shares of the Company's common stock and
warrants to purchase 208,464 of the Company's common stock. The warrants are
exercisable during the period January 28, 2001 to January 28, 2004 at an
exercise price of USD 9.63. The excess of the purchase price over the fair
market value of the net assets acquired has resulted in goodwill of SEK
17,441,970.

   The allocation of the purchase price to the net assets acquired is as
follows:

<TABLE>
<CAPTION>
                                                          SEK
                                                    --------------
<S>                                                 <C>
Current assets...............................          8,614,530
Fixed assets.................................          3,141,461
Current liabilities..........................         (1,922,768)
Goodwill.....................................         17,441,970
                                                      ----------
                                                      27,275,193
                                                      ==========
</TABLE>

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

                                      F-12
<PAGE>
                           PRIVATE MEDIA GROUP, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   The following unaudited pro forma information for the years ended December
31, 1999 and 2000 assumes the acquisition occurred on January 1, 1999.

   The amounts are expressed in thousands except net income per share.

<TABLE>
<CAPTION>
                                                  Years ended
                                                  December 31,
                                                  (unaudited)
                                            ------------------------
                                              1999            2000
                                            --------        --------
                                               SEK             SEK
<S>                                         <C>             <C>
Revenues..................................   186,882         259,639
Net income................................    19,650          52,823

Net income per share:
Basic.....................................      0.78            1.96
                                             =======         =======
Diluted...................................      0.41            1.08
                                             =======         =======
</TABLE>

5.    Trade accounts receivable

      Trade accounts receivable consist of the following:

<TABLE>
<CAPTION>
                                                           December 31,
                                                              2000
                                                          -------------
                                                               SEK
                                                         (in thousands)
<S>                                                      <C>
Trade accounts receivable...........................         119,176
Allowance for doubtful accounts.....................          (2,621)
                                                             -------
 Total trade accounts receivable, net...............         116,555
                                                             =======
</TABLE>

6.    Inventories

      Inventories consist of the following:
<TABLE>
<CAPTION>
                                                       December 31,
                                                           2000
                                                     ---------------
                                                           SEK
                                                     (in thousands)
<S>                                                  <C>
Magazines for sale and resale......................       23,585
Video cassettes....................................       20,516
DVDs...............................................        8,210
Other..............................................        4,366
                                                          ------
                                                          56,677
                                                          ======
</TABLE>

                                      F-13
<PAGE>

                           PRIVATE MEDIA GROUP, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.  Prepaid expenses and other current assets

    Included in prepaid expenses and other current assets at December 31, 2000,
is an amount of SEK 16,683 thousand representing VAT receivable from the Spanish
Tax Authority.

8.  Asset held for sale

    The Company has invested SEK 20,976 thousand in certain residential
property located in Barcelona, Spain that the Company currently has listed for
sale.  Management of the Company believes that the carrying value will be
recovered from the proceeds from the ultimate sale of this property.

9.  Library of photographs & videos

    Library of photographs & videos consist of the following:

<TABLE>
<CAPTION>
                                                                        December 31,
                                                                            2000
                                                                      --------------
                                                                            SEK
                                                                      (in thousands)
<S>                                                                   <C>
Gross:
Photographs...................................................               34,994
Videos........................................................              165,422
Digital Manipulation for DVD Masters..........................                9,203
Translations, Sound Dubbing, & Sub-Titles for Video Library...               40,092
                                                                         ----------
                                                                            249,711
                                                                         ==========
Less accumulated depreciation:
Photographs...................................................               26,950
Videos........................................................               93,786
Digital Manipulation for DVD Masters..........................                1,170
Translations, Sound Dubbing, & Sub-Titles for Video Library...               23,622
                                                                         ----------
                                                                            145,528
                                                                         ==========
Net:
Photographs...................................................                8,044
Videos........................................................               71,636
Digital Manipulation for DVD Masters..........................                8,033
Translations, Sound Dubbing, & Sub-Titles for Video Library...               16,470
                                                                         ----------
                                                                            104,183
                                                                         ==========
</TABLE>

                                      F-14
<PAGE>

                           PRIVATE MEDIA GROUP, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10.  Property, Plant and Equipment

   Property, plant and equipment consist of the following:

<TABLE>
<CAPTION>
                                                December 31,
                                                    2000
                                               --------------
                                                     SEK
                                               (in thousands)
<S>                                            <C>
Equipment & Furniture......................        28,932
Website Development........................         5,715
Accumulated Depreciation...................       (16,497)
                                                  -------
Total Property, Plant and Equipment, net...        18,150
                                                  =======
</TABLE>

   In March 2000 the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board reached a consensus on Issue 00-2, "Accounting for
Web Site Development Costs" ("EITF 00-2"). EITF 00-2 requires that all costs
incurred in the website planning stage should be expensed as incurred.

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

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

   In accordance with the transition provisions of EITF 00-2, the Company has
elected to apply this standard to website development costs incurred from
January 1, 2000 forward and accordingly in the year ended December 31, 2000 the
Company has capitalized SEK 5,715 thousand of costs related to the development
of its website including graphics and related software.

                                      F-15
<PAGE>

                           PRIVATE MEDIA GROUP, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11.  Short-term Borrowings

   The Company's Swedish subsidiary has a line of credit amounting to SEK 1,000
thousand. Use of the credit facility is charged at 10.00%, which is equal to the
Swedish banks' current official interest rate, and which was the rate of
interest on outstanding borrowings at December 31, 2000. The renewal date of the
facility is every calendar quarter. The line of credit is guaranteed by the
Company's principal shareholder. The Company pays an annual facility fee of
2.00% on the line of credit amount. At December 31, 2000, borrowings under the
line of credit totaled SEK 354 thousand.

   The Company's Spanish subsidiary has a line of credit amounting to ESP 10
million or SEK 532 thousand. Use of the credit facility is charged at 6.00%,
which was equal to the Spanish banks' current official interest rate at December
31, 2000.  At December 31, 2000 there were no borrowings outstanding under this
agreement. The Company's Spanish subsidiary also has a SEK 320 thousand short-
term loan. Interest on the loan is 9.00% and principal and interest is payable
monthly.

12.  Accrued other liabilities

   Accrued other liabilities are comprised of the following:

<TABLE>
<CAPTION>
                                                  December 31,
                                                      2000
                                                 --------------
                                                       SEK
                                                 (in thousands)
<S>                                              <C>
Accrued expenses..........................            2,563
Deferred income...........................            3,153
Taxes and social security.................            1,956
Deposits..................................              263
Salary expense............................              151
Other.....................................            1,643
                                                      -----
                                                      9,729
                                                      =====
</TABLE>

                                      F-16
<PAGE>

                           PRIVATE MEDIA GROUP, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.  Income taxes

   Pretax income (loss) for the years ended December 31, 1999 and 2000 was the
following amounts in the following jurisdictions:


<TABLE>
<CAPTION>
                                                       Years ended
                                                       December 31,
                                         -------------------------------------
                                              Restated
                                                1999                 2000
                                         ----------------     ----------------
                                                   (SEK in thousands)
<S>                                      <C>                  <C>
USA..................................             (13,484)             (13,615)
Gibraltar............................               7,201               13,001
Cyprus...............................              27,531               52,284
Sweden...............................               2,011                2,235
Spain................................                 207                9,064
France...............................                  68                  266
Benelux..............................                   -                  579
Other................................                 (92)                (100)
                                         ----------------     ----------------
                                                   23,442               63,714
                                         ================     ================
</TABLE>

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

<TABLE>
<CAPTION>
                                                                     Years ended
                                                                     December 31,
                                                           ------------------------------
                                                            Restated
                                                              1999                2000
                                                           ----------          ----------
                                                                 (SEK in thousands)
<S>                                                        <C>                 <C>
Current
   USA..............................................             1802               3,268
   Cyprus...........................................            1,227               2,992
   Sweden...........................................              481                 554
   Spain............................................              221               3,150
   France...........................................               19                 116
   Benelux..........................................                -                 495

Deferred
   Sweden...........................................              125                 130
                                                           ----------          ----------
                                                                3,875              10,705
                                                           ==========          ==========
</TABLE>

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

                                      F-17
<PAGE>

                           PRIVATE MEDIA GROUP, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                          Years ended
                                                          December 31,
                                                      --------------------
                                                      Restated
                                                        1999       2000
                                                     ----------- ---------
                                                      (SEK in thousands)
<S>                                                  <C>         <C>
Income tax expense at statutory rate................     6,564     17,840
Income in Gibraltar not subject to tax..............    (2,016)    (3,640)
Foreign tax rate differential.......................    (3,465)    (5,574)
Losses of subsidiaries for which....................
no tax benefit is recorded                               2,590      2,704
Other, net..........................................       202       (625)
                                                        ------     ------
Income tax expenses at effective rate...............     3,875     10,705
                                                        ======     ======
</TABLE>

14.    Long-term borrowings

   The Company has a long-term loan payable of SEK 4,682 thousand at December
31, 2000. Interest on the loan is 9.00% and principal and interest is payable
monthly through 2003. The loan is related to an investment in certain land and
building and the loan is secured by the property.

15.  Related Party Transactions

   The Company has short-term loans receivable of SEK 3,933 thousand at December
31, 2000. The loans bear interest at a rate of 10% payable annually and are due
from entities controlled by the Company's principal shareholder. The current
balance including accrued interest amounts to SEK 4,515 thousand at December 31,
2000.

   Peach Entertainment Distribution AB ("PED"), a wholly owned subsidiary of the
Company, is a party to an exclusive Distribution Agreement with Sundance
Associates, Inc. ("Sundance"). A member of the Company's board of directors is
the sole shareholder of Sundance. Under the terms of the Distribution Agreement,
PED granted to Sundance the exclusive rights to distribute specified products of
the Company in the United States. Royalties are paid by Sundance to PED in
accordance with an agreed royalty schedule. The Distribution Agreement
automatically renews for successive one year terms and is cancelable by either
party prior to the end of each one year term. During the 12 month periods ended
December 31, 1999 and December 31, 2000 Sundance paid royalties to PED of
$2,123,564 and $ 2,833,382, respectively.

                                      F-18
<PAGE>

                           PRIVATE MEDIA GROUP, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

16.  Shareholders' Equity

Retained earnings

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

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.

Stock Dividend

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

Preferred stock

   The Company is authorized to issue 10,000,000 shares of preferred stock with
relative rights, preferences and limitations determined at the time of issuance.
The Company has issued 7,000,000 shares of $4.00 Series A convertible Preferred
stock. The Series A stock is non-voting and provides for a 5% annual stock

                                      F-19
<PAGE>

                           PRIVATE MEDIA GROUP, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

dividend beginning in 1998 to be paid quarterly in common stock at the average
closing price of the Company's common stock for the twenty consecutive days
prior to the quarterly record date. Each preferred share is convertible at any
time into common shares on a one-for-three basis (post-split). Additionally, at
any time the common stock of the Company has a closing price of less than $1.33
per share for twenty consecutive days the preferred stock may be converted at
the option of the holder thereof into common stock at a 20% discount to the five
day average closing price prior to the date of conversion. In accordance with
the terms of the Series A Preferred Stock agreement, 102,858 shares of common
stock will be distributed in 2001 with respect to dividends on preferred shares.
This amount is shown in the accompanying Statement of Shareholders' Equity under
stock dividend to be distributed.

Common stock warrants

   The Company has issued 2,625,000 common stock warrants which are exercisable
at any time by the holder thereof until December 31, 2000 at an exercise price
of $1.33 per share. The total number of warrants exercised as of December 31,
1999 was 2,100,000 and during the year 2000 a total of 517,500 were exercised
and warrants for 7,500 shares expired.

                                      F-20
<PAGE>

                           PRIVATE MEDIA GROUP, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17.    Earnings per share

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

<TABLE>
<CAPTION>
                                                                Years ended
                                                                December 31,
                                                    ----------------------------------
                                                          1999               2000
                                                        Restated
                                                    ---------------   ----------------
<S>                                                 <C>               <C>
Numerator:

Net income (SEK in thousands)                                19,567             53,009
                                                    ===============   ================

Denominator:

Denominator for basic earnings per share -               25,269,792         27,002,220
 Weighted average shares outstanding

Effect of dilutive securities:
   Preferred stock                                       21,000,000         21,000,000
   Common stock warrants and options                        625,812            640,818
   Stock dividends to be distributed                        194,619            102,858
                                                    ---------------   ----------------

Denominator for diluted earnings per share -
 weighted average shares and assumed
 conversions                                             47,909,223         48,745,896
                                                    ===============   ================

Earnings per share (SEK)
Basic                                                          0.77               1.96
                                                    ===============   ================
Diluted                                                        0.41               1.09
                                                    ===============   ================
</TABLE>

18.    Commitments and contingent liabilities

   The Company leases certain property and equipment under operating leases. The
rental payments under these leases are charged to operations as incurred. Rental
expense for the years ended December 31, 1999 and 2000 amounted to SEK 3,321
thousand and SEK 4,341 thousand, respectively. Future minimum payments under
non-cancelable leases as of December 31, 2000 are as follows:

<TABLE>
<CAPTION>
    Year                SEK
                    (in thousands)
------------        --------------
<S>                 <C>
    2001                     2,909
    2002                     2,507
    2003                     2,201
    2004                     1,795
    2005                     1,406
    2006                       434
Thereafter                       -
                    --------------
                            11,252
                    ==============
</TABLE>

                                      F-21
<PAGE>

                           PRIVATE MEDIA GROUP, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   The Company's Spanish subsidiary, Milcap Media Group S.L. ("Milcap") has
issued a guarantee of indebtedness to Viosland  Trade S.L. ("Viosland") a
company controlled by the Company's principal shareholder.  The guarantee
relates to the financing of the construction of a new office and manufacturing
facility located in Barcelona, Spain.  This guarantee would require Milcap to
pay the general contractor for costs of construction if not paid by Viosland.
Management of the Company does not believe that Milcap will be required to pay
any significant amounts related to this guarantee.

   In December 1999 the Company received final notification from the Swedish Tax
Authority assessing its subsidiary in Cyprus for the tax years 1995-1998 for a
total amount of SEK 42,000,000 plus fines amounting to SEK 16,800,000 plus
interest. The Company believes the assessment is without merit and is in the
process of appealing the assessment to the Administrative Court in Stockholm.
The final outcome of the appeal is expected to take several years and the
Company has asked for a postponement of payment of the taxes and fees until the
case is settled. No final decision has been given.

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

   A reorganization in Sweden in 2000 has resulted in a transfer of the business
formerly conducted by Milcap Publishing Group AB to Peach Entertainment AB. The
transfer was made in accordance with Swedish reorganization rules and should
qualify as a tax-exempt reorganization in Sweden.

                                      F-22
<PAGE>

                           PRIVATE MEDIA GROUP, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19.  Operations by geographical area

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

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

<TABLE>
<CAPTION>
                                                      Years ended
                                                      December 31,
                                        -------------------------------------
                                             Restated
                                               1999                 2000
                                        ----------------     ----------------
                                                 (SEK in thousands)
<S>                                     <C>                  <C>
Net Sales
   USA..............................               4,332                9,292
   Gibraltar........................               6,639               11,922
   Cyprus...........................              66,391              119,220
   Sweden...........................             113,325              163,252
   Spain............................             137,918              176,913
   France...........................               9,035                9,144
   Benelux..........................                   -               19,541
   Eliminations.....................            (162,214)            (251,200)
                                        ----------------     ----------------
Total...............................             175,426              258,084
                                        ================     ================
</TABLE>

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

<TABLE>
<CAPTION>
                                                    Years ended
                                                    December 31,
                                      -------------------------------------
                                           Restated
                                             1999                 2000
                                      ----------------     ----------------
                                                (SEK in thousands)
<S>                                   <C>                  <C>
Operating profit
USA...............................             (12,953)             (13,596)
Gibraltar.........................               6,579               11,830
Cyprus............................              28,732               51,985
Sweden............................                 456               (1,544)
Spain.............................               2,267               12,976
France............................                 152                  313
Benelux...........................                   -                  572
Other.............................                 (92)                (100)
                                      ----------------     ----------------
Total.............................              25,141               62,436
Interest income (expense), net....              (1,699)               1,278
                                      ----------------     ----------------
Income before income taxes........              23,442               63,714
                                      ================     ================
</TABLE>

                                      F-23
<PAGE>
                           PRIVATE MEDIA GROUP, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                       Years ended
                                                       December 31,
                                          ------------------------------------
                                               Restated
                                                 1999                2000
                                          ----------------    ----------------
                                                    (SEK in thousands)
<S>                                       <C>                 <C>
Long-lived assets
USA...................................                   -              15,843
Cyprus................................              89,004             104,098
Sweden................................              17,309              31,289
Spain.................................              11,044              12,426
Benelux...............................                   -               2,728
Other.................................                 932                 211
                                          ----------------    ----------------
Total.................................             118,289             166,595
                                          ================    ================
</TABLE>

   Export sales from Sweden to unaffiliated customers amounted to SEK 109.6
million and SEK 149.0 million for the years ended December 31, 1999 and 2000,
respectively. Export sales from Spain to unaffiliated customers amounted to SEK
17.6 million and SEK 17.8 million for the years ended December 31, 1999 and
2000, respectively. Export sales from Cyprus to unaffiliated customers amounted
to SEK 14.9 million and SEK 56.5 million for the years ended December 31, 1999
and 2000, respectively. Export sales from other geographic areas are
insignificant.

20.  Stock-based compensation

   On March 1, 1999 the Company adopted the 1999 Employee Stock Option Plan
("the Plan"). The Plan provides for the issuance of up to 3,600,000 shares of
the Company's common stock to employees, consultants and advisors of the
company. From the inception of the Plan through December 31, 2000, stock options
to purchase an aggregate of 3,136,500 shares of the Company's common stock were
granted under the Plan. At December 31, 2000, a total of 2,590,985 options were
outstanding. Stock options for 930,200 shares vested on March 1, 1999 and are
exercisable at $4.17 per share, the market price of the Company's common stock
at that date. The remaining 1,660,785 stock options vest in 19 equal quarterly
installments commencing June 30, 1999. The exercise price of each installment of
options which vests after March 1, 1999 is equal to the fair market value of the
Company's common stock on the date each installment vests. The options are
exercisable on the date they vest. The stock options expire 10 years after the
date of grant.

                                      F-24
<PAGE>
                           PRIVATE MEDIA GROUP, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   A summary of stock option activity for the year ended December 31, 2000 is a
follows:

<TABLE>
<CAPTION>
                                                           Weighted
                                                            average
                                     Number of           exercise price
                                       shares            in US dollars
                                 ----------------    ------------------
<S>                                <C>                 <C>
Outstanding                             2,971,500               4.46 (1)
December 31, 1999............

Granted......................             156,750               7.30 (1)

Exercised....................             160,222               4.30 (1)

Forfeited....................             377,043               6.18 (1)
                                 ----------------

Outstanding
December 31, 2000............           2,590,985               5.38 (1)
                                 ================
</TABLE>

(1)  Weighted average information relates only to options vested and priced
     through December 31, 2000. The remaining options will be priced based upon
     the market price of the Company's stock when such options vest in the
     future.

   At December 31, 2000 options as to 1,501,985 shares were exercisable with
exercise prices ranging from $4.17 to $11.71.

   The Company applies APB 25, and related interpretations in accounting for its
stock based compensation to employees. Accordingly, no compensation expense has
been recognized for stock based compensation issued to employees. Had
compensation cost for the Company's stock based compensation issued to employees
been determined based upon the fair value at the grant date consistent with the
methodology prescribed under SFAS 123, the Company's proforma net income for
2000 would have been SEK 30,586 thousand. Proforma basic income per share would
have been SEK 1.13 for 2000 and diluted income per share would have been SEK
0.63.

   The weighted average fair value of options granted during 2000 was estimated
at $7.10 per share, based upon the Black-Scholes option-price model with the
following weighted average assumptions: 0% dividend yield, expected volatility
of 67-111%, risk-free interest rate of 5.1-6.0% and expected life of 9.5-10
years.

                                      F-25
<PAGE>

                           PRIVATE MEDIA GROUP, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

21.  Recent Accounting Pronouncements

   In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 Accounting for Derivative Instruments and Hedging Activities ("SFAS 133").
This statement establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments embedded
in other contracts) be recorded in the balance sheet as either an asset or
liabilities measured at its fair value. SFAS 133 is effective for fiscal years
beginning after June 15, 2000.  As the Company does not enter into foreign
currency forwards, swaps or other derivative financial instruments management
believes that the impact of this new standard on the Company's consolidated
balance sheets or results of operations will not be significant.

22. Subsequent event

   On April 8, 2001, the Company's Swedish subsidiary Peach Entertainment
Distribution AB entered into an agreement to sell its interest in Private
Circle, Inc. a company, the activities of which, the Company may be deemed to
control for cash of SEK 21.4 million.  Under the terms of this agreement, the
transaction is scheduled to close on or before April 16, 2001.

                                      F-26