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SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

GENERAL MEDIA, INC.

11 Penn Plaza, New York, NY 10001

(212) 702-6000

Securities registered pursuant to Sections 12(b) or 12(g) of the Act: NONE

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

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

The Registrant is unable to provide the aggregate market value of any voting or non-voting common equity held by non-affiliates as of the last business day of the Registrant’s most recently completed second fiscal quarter because there was no public market for the Registrant’s common equity as of such date.

As of April 8, 2003, there were 477,401 shares outstanding of the Registrant’s common stock, par value $.01 per share.

Documents incorporated by reference: None

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GENERAL MEDIA, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
 
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

THE FEDERAL SECURITIES LAWS PROVIDE FOR A SAFE HARBOR FOR CERTAIN FORWARD-LOOKING STATEMENTS. THIS SAFE HARBOR PROTECTS US FROM LIABILITY IN A PRIVATE ACTION ARISING UNDER EITHER THE SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, FOR FORWARD-LOOKING STATEMENTS THAT ARE IDENTIFIED AS SUCH AND ACCOMPANIED BY MEANINGFUL CAUTIONARY STATEMENTS OR ARE IMMATERIAL.

WHEN USED IN THIS FORM 10-K, THE WORDS OR PHRASES “ESTIMATE”, “INTENDS”, “MAY”, “EVALUATING” OR SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY “FORWARD LOOKING STATEMENTS” WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, AS AMENDED. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING BUT NOT LIMITED TO, ABILITY TO MAKE REQUIRED PAYMENTS ON SENIOR SECURED NOTES, NEED FOR ADDITIONAL FINANCING, HISTORY OF LOSSES, THE SUCCESSFUL IDENTIFICATION OF STRATEGIC BUSINESS PARTNERS, THE SUCCESSFUL EXECUTION OF AGREEMENTS WITH STRATEGIC BUSINESS PARTNERS REQUIRED FOR THE IMPLEMENTATION OF BUSINESS PLANS AND THE SUCCESSFUL IDENTIFICATION, ACQUISITION AND INTEGRATION OF ADDITIONAL TARGET BUSINESSES. SUCH FACTORS COULD AFFECT GENERAL MEDIA, INC AND ITS SUBSIDIARIES (GENERAL MEDIA, INC. AND ITS SUBSIDIARIES ARE COLLECTIVELY REFERRED TO AS “GENERAL MEDIA”) FINANCIAL PERFORMANCE AND COULD CAUSE GENERAL MEDIA’S ACTUAL RESULTS FOR FUTURE PERIODS TO DIFFER MATERIALLY FROM ANY OPINION OR STATEMENTS EXPRESSED HEREIN WITH RESPECT TO FUTURE PERIODS. AS A RESULT, GENERAL MEDIA WISHES TO CAUTION READERS NOT TO PLACE UNDUE RELIANCE ON ANY SUCH FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE MADE.

THE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE ON WHICH THEY ARE MADE AND, EXCEPT AS REQUIRED BY LAW, WE UNDERTAKE NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENT TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE ON WHICH THE STATEMENT IS MADE OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. IN ADDITION, WE CANNOT ASSESS THE IMPACT OF EACH FACTOR ON OUR BUSINESS OR THE EXTENT TO WHICH ANY FACTOR OR COMBINATION OF FACTORS MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN ANY FORWARD-LOOKING STATEMENTS.

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PART I

Item 1. Business

General

     Unless context requires otherwise, all references to “we”, “our”, “us”, the “Registrant” or the “Company” are to General Media.

     We are a brand-driven global entertainment company founded in 1965 by Robert C. Guccione. We cater to men’s interests through various trademarked publications, movies, the Internet, location-based live entertainment clubs and consumer product licenses. Our flagship PENTHOUSE brand is widely identified with premium entertainment for adult audiences. Our trademarks are licensed to third parties worldwide in exchange for recurring royalty payments.

     We are also a global leader in the production and distribution of high-quality adult content. We believe that we have one of the widest circulated families of adult publications in the world. Our success was initially driven by our flagship publication, PENTHOUSE Magazine. Today we produce five adult periodicals: PENTHOUSE, Forum, Variations, The Girls of PENTHOUSE, and PENTHOUSE Letters, as well as several special feature publications annually. The distribution network of our publications extends to approximately 150,000 retail points of sale and we sell approximately eleven million copies annually. Our magazines feature in-depth interviews with high profile political, business, entertainment and sports figures, as well as editorials by leading authors. We also feature pictorials of celebrity figures, including personalities like Vanessa Williams, Madonna, Geena Davis and Paula Jones.

     General Media has developed, produced and distributed original adult motion picture entertainment. Bob Guccione began producing films in 1979 with the release of Caligula, starring Sir John Gielgud, one of England’s most celebrated thespians, and other respected, eminent film actors including Peter O’Toole, Malcolm McDowell and Helen Mirren. Caligula is one of the highest selling adult feature films of all time. We continue to receive material royalty payments for Caligula. Our Entertainment division has also produced and released a film library of 94 original motion picture titles. These titles are distributed in multiple formats, including video cassettes, DVDs, and the Internet. We are considering various broadcasting opportunities to distribute our branded content through satellite or cable TV. In addition, we have recently entered into an exclusive agreement to supply PENTHOUSE video content to the cruise ship industry. This agreement provides for royalty payments to the Company as a percentage of revenue from video-on-demand purchases, permitting the Company new revenue from existing library assets as well as a recurring distribution channel for new content.

     Beginning in 1995, we developed our Internet website with the introduction of PENTHOUSEmag.com through which we began digitally distributing our proprietary content. Today we operate through the domain names www.PENTHOUSE.com and www.PENTHOUSEfetish.com where members pay subscription fees for access to our content. We believe we have a loyal customer base, which is retained for unusually long periods based on comparable industry statistics.

     General Media also holds significant intellectual property and other intangible assets. We own various trademarks developed over 37 years, which we believe are commercially valuable, including PENTHOUSE, Forum, Variations, PENTHOUSE Letters, the Three Key Logo, the One Key Logo, Pet of the Year, PENTHOUSE Pet, Mind & Muscle Power, Hot Talk, PENTHOUSE Comix and PENTHOUSE Men’s Adventure Comix. Through the publication of our magazines we have also accumulated a library of approximately one million photographic images. We seek to protect our trademarks through registration and periodic infringement enforcement. We regularly evaluate requests to license our brands, our video library or to participate in other commercial ventures by contributing our trademarks, including events with our PENTHOUSE Pets. Our trademarks and copyrights are critical to the success and potential growth of all of our businesses.

     Beginning in the third quarter of 2002, we began to license our trademarks to select luxury gentlemen’s clubs, referred to as Location-based Entertainment, in consideration for a percentage of the gross revenue of the clubs. We have licensed seven clubs as of April 8, 2003, including Dallas, Texas, Austin, Texas, San Antonio, Texas, Cleveland, Ohio, Spartanburg, South Carolina, New York City, New York and Mexico City, Mexico and are operational in four of those markets. Based substantially on the value of our recognized brand, we have been able to negotiate terms that we believe are favorable to us. We have induced third parties to invest substantial capital into the facilities while requiring no capital expenditure from us. Royalty income from this business segment generally maintains favorable net margins.

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     We operate in a highly regulated industry. This requires us to be socially aware and sensitive to government laws and regulations designed to protect minors and to prohibit the distribution of obscene material. We take great care to comply with all applicable laws and regulations where we conduct business. We do not knowingly engage the services of any business or individual that does not adhere to these standards.

     Our principal executive office is located at 11 Penn Plaza, New York, New York 10001, telephone 212.702.6000.

Competitive Strengths

     We believe our competitive strengths, including, but not limited to those listed below, will allow us to capitalize upon the global entertainment market for adult audiences.

Our Brand Recognition

     We believe that the PENTHOUSE brand name is one of the most recognized consumer brand names in the world. We also believe that our target market associates our name with high quality adult entertainment products and services. Our PENTHOUSE brand and affiliated brands are prominently displayed on our magazines, videos, internet sites and other products and services. We continually seek to strengthen our brand by licensing our name to third party providers of quality complimentary products and services outside of our core products and services. The recognition of our brand attracts quality providers, producers, and distributors of adult entertainment and adult lifestyle products that are interested in co-branding with us. We believe our name recognition allows us to negotiate favorable economic terms with these partners.

Barriers to Entry

     We believe that the capital and time cost associated with establishing global brand awareness is prohibitive to new competitors. As a result, we believe we maintain a competitive advantage over other entertainment industry participants. Further, based on the consumer awareness of the PENTHOUSE brand and general demand for diversionary entertainment, we believe that we can extend the brand to other lifestyle and image-conscious activities, such as music, fashion, live entertainment, financial services or retail, emulating other widely recognized consumer brands like the Virgin Group.

Contemporary Entertainment Trends

     We believe that fashion, music, celebrity and sex have become increasingly intertwined in contemporary adult entertainment. For example, in 2003, music rock stars regularly market their own popular clothing lines while fashion designers have become global celebrities. Fashion is a central feature of celebrity awards events, such as the Grammys or MTV music awards, and sexuality is expressed through fashion worn by music sex icons. We believe that our flagship brand, PENTHOUSE, transcends across each of these entertainment segments. As a result, we believe that our brand can be exploited in various entertainment and merchandising businesses. Because our brand is already well known and is generally identified with a quality product experience, we believe we have a competitive advantage over lesser-known consumer brands in generating revenue from other entertainment categories.

Our Distribution Network

     The physical distribution of our publications extends to approximately 150,000 retail points of sale and we sell approximately eleven million copies annually. We believe that the broad distribution of our publications provides us with a unique platform for distributing our entertainment products and services and new PENTHOUSE branded third party products and services in these markets. In addition, we can effectively launch special editions or entirely new magazines through our established distribution channels. This provides a critical advantage over other new publications without similar distribution opportunities. We plan to attempt to leverage our fixed-cost infrastructure by acquiring additional magazine titles. In addition to physical distribution, the availability of our products and services over the Internet provides this global market with access to our products and services in multiple formats.

Our Databases

     PENTHOUSE has been successfully marketing its products to consumers for nearly 40 years. Over time, we have accumulated a significant amount of data in respect to consumer trends, purchasing decisions, demographics and other commercially valuable information. We have compiled a significant list of adult magazine subscribers from decades of magazine customers. We have also compiled an electronic list of email addresses of Internet members which includes

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approximately three hundred thousand unique purchasers of our services. We believe that this proprietary data is valuable in the future promotion and management of our business. As a brand-oriented company, knowledge about consumer behavior and trends is used to design new PENTHOUSE services. We believe that this proprietary data and the associated trade secrets are competitive advantages for our business.

Our Content Library

     Our proprietary library of adult content consists of approximately one million high quality still photographic images and 94 original motion picture titles. This availability of content internally permits us to continuously distribute content in a variety of media formats and commercial channels, thereby commercializing existing intellectual property assets. We also make our library available to our foreign edition licensees who regularly utilize our inventory of images and editorial articles.

Overview of Business Groups

     Historically we are organized into three business groups, (i) Publishing, (ii) Online and (iii) Entertainment. Our financial statements are presented with results from each operating segment. These segments consist primarily of print magazines, our Internet Site at PENTHOUSE.com and Video/DVD movie production and distribution, respectively. We are currently evaluating proposals to further diversify our overall sources of revenue, primarily focusing on expanding the digital distribution of our content through the Internet, expanding the sales channels used for Video/DVD movie distribution and entering into other license agreements for our trademarks, including our recently established Luxury Gentlemen’s Club licenses.

Penthouse Publishing Segment

     Our Publishing Group operations include the publication of PENTHOUSE magazine, other domestic publishing businesses and the licensing of international editions of PENTHOUSE magazine. Historically, we have also published a wide range of magazines, including automotive titles, science through Omni magazine and health-related publications. Publishing comprises 81% of our revenues today and is derived entirely from the publication of male-oriented, adult related publications. PENTHOUSE magazine plays a key role in driving the continued popularity and recognition of the PENTHOUSE brand.

PENTHOUSE Magazine and our Affiliate Publications

     PENTHOUSE magazine was founded by Robert Guccione, who first published the magazine in London in 1965 and in the United States in 1969. PENTHOUSE magazine offers its readers a combination of photography, investigative journalism, fiction, illustration, humor, politics, art and business. Our flagship publication is the cornerstone of our recognized brand and is a critical element in the continuation of our brand licensing activities.

     To capitalize on the name recognition of PENTHOUSE magazine, we have four Affiliate Publications. We have utilized our expertise in building a consumer brand and invested capital to distinctly brand each of our Affiliate Publications. Our Affiliate Publications have become leading niche magazines in their categories. We sell approximately 295,000 copies of our Affiliate Publications per month.

     Forum: A monthly publication in digest form that includes adult information, advice and entertainment provided by authors, journalists and medical and legal experts. The magazine is published domestically and licensed in Europe and Australia. In addition, we publish several special digest issues of Forum each year. Forum is sold at newsstands and through subscriptions.

     Variations: A monthly publication in digest form that features articles detailing the latest trends in adult entertainment. In addition, we publish several special digest issues of Variations each year. Variations is sold at newsstands and through subscriptions.

     The Girls of PENTHOUSE: A bi-monthly full-sized publication featuring photographs of the most popular models who have appeared in PENTHOUSE magazine. The Girls of PENTHOUSE is only sold at newsstands.

     PENTHOUSE Letters: A monthly full-sized publication featuring letters written by readers describing their erotic experiences and fantasies. PENTHOUSE Letters is sold at newsstands and through subscriptions.

     The net circulation revenues of the U.S. edition of PENTHOUSE magazine for 2001 and 2002 were $34.0 million and $30.0 million, respectively. Net circulation revenues are gross revenues less commissions and provisions for newsstand returns

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and display costs. Circulation revenue comparisons may be materially impacted with respect to newsstand sales in any period based on whether or not there are issues featuring major celebrities.

     PENTHOUSE enjoys superior pricing elasticity and is currently has one of the highest cover prices of any magazine in the adult market. The publication cover prices range from $7.99 to $8.99. Our special edition publications are sold for up to $10.00 per issue.

     PENTHOUSE magazine and the Affiliate Publications are primarily sold through newsstand distribution by convenience stores, bookstores and newsstands. Newsstand sales account for nearly 69% of total sales. Our lack of dependence on subscriptions in favor of retail purchases demonstrates demand for our products from consumers who initiate a purchasing decision at point of sale or specifically seek out our publications in the retail environment. Because we have not focused on subscription based revenue, we have less recurring subscription revenue.

     Approximately 46% of PENTHOUSE’s newsstand sales are derived from convenience stores, 17% are from bookstores and 12% are from newsstand distribution channels.

Other Domestic Publishing

     Our Publishing Group has also created media extensions, including special editions which are primarily sold in newsstand outlets using mostly original photographs. In 2002 we published a special “Best Of PENTHOUSE” edition and four special editions of Girls of Penthouse. In 2001 we published two special editions of Girls of Penthouse.

Foreign Edition Publishing

     Bob Guccione originally published PENTHOUSE in London, UK for the first four years of the Company’s existence. PENTHOUSE is currently published in fifteen countries around the world. We have sought to mitigate the capital investment risks and risks associated with variations in local laws and customs by contracting with licensees in specific jurisdictions. We have sought to expand our readership through foreign edition licensing arrangements pursuant to which we license the PENTHOUSE brand name and trademarks to publishers in foreign countries. Licensees typically use pictorials from our library and provide their own editorial content to create the foreign editions. We, however, oversee the finished product to insure quality control and to maintain the spirit of the domestic edition. Under current licensing arrangements, we generally receive a one-time up-front fee and a royalty based upon a percentage of both circulation and advertising revenues, subject to certain minimum payments.

     We do not own any equity interests in our foreign licensees and only receive royalty fees paid to us for use of our trademarks and proprietary content We do not participate in other revenue opportunities generated by these magazines, such as the sale of goods and services.

     In 2002, we received revenues from licensing agreements with publishers in Australia, Czech Republic, France, Germany, Greece, Holland, Hong Kong, Hungary, Japan, Korea, Romania, Spain, Taiwan, Thailand and the United Kingdom. In addition, in 2003, we are in negotiations for a publication in the Republic of Mexico, with options on other Latin American countries.

     Revenues from licensing of foreign editions were $2.1 million, $2.1 million and $1.7 million for the years ended December 31, 2000, 2001 and 2002, respectively, representing approximately 3% of our net revenues for these periods, respectively.

Production, Printing, Newsstand Distribution and Subscription Fulfillment

     We employ a staff of professionals to oversee the production, printing, distribution and fulfillment of our magazines. We have also successfully employed a business strategy for many years of outsourcing specific functions to third party vendors for fulfillment of specialized functions such as printing, distribution or subscription management. Through the use of state-of-the-art production equipment, economies of scale in printing contracts and efficiencies in subscription solicitation and fulfillment, we are able to efficiently publish and distribute all our publications. Our systems for both graphics and editing are also state-of-the-art, utilizing the services of only ten employees. We believe we have mitigated many potential risks associated with substantial internal operations otherwise required to perform these services and have simultaneously obtained an efficient market price for these services.

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     Up until November 2001, our magazines, with the exception of Forum and Variations, were printed by R. R. Donnelley Corporation (“Donnelley”) pursuant to several agreements (the “Agreements”) which, after giving effect to an extension and amendment dated July 1997, were to expire in December 2003. In October 2001, Donnelley released us from the Agreements when it made the decision to close the printing plants that printed the magazines. Pursuant to an agreement dated October 12, 2001, we began using Quebecor World to print these magazines effective for magazines printed starting in December 2001. In 2000, Forum and Variations were printed by Access Printing and in 2002 and 2001 Forum and Variations were printed by Transcontinental Impression. Should we wish to change printers, we believe that other printers of similar quality could be engaged.

     We sell our magazines through wholesalers and other distributors. The newsstand distribution of our magazines is handled by Curtis Circulation Company (“Curtis Circulation”) pursuant to an agreement that expires in November 2005 or upon prior notice by either General Media or Curtis Circulation. Curtis Circulation distributes our publications through a network of approximately 225 marketing representatives to independent wholesalers, as well as to other channels of distribution. Curtis Circulation also provides us with other services, including management information and promotional and specialty marketing services. We receive a cash advance from Curtis Circulation at the time each issue is released for sale based on the wholesale price per magazine. We recognize revenue from newsstand sales based on our estimate of copy sales at such time as the issue is released for sale and we adjust the estimate periodically based upon actual sales information. Each issue is settled with Curtis Circulation one hundred and eighty days after the off-sale date based upon the number of magazines actually sold, compared to the estimated number of copies sold that Curtis Circulation used to determine its cash advance.

     Our subscription fulfillment is currently provided by Palm Coast Data Service, Inc. (“PCD”). PCD performs the following services: receiving, verifying, balancing and depositing payments from subscribers and agents; maintaining master files on all subscribers and agents by magazine; issuing bills to subscribers and agents and sending renewal notices to subscribers; issuing labels; packaging and mailing magazines as directed by us; and furnishing various reports to monitor all aspects of the subscription operations.

     Subscription copies of the magazines are delivered through the U.S. Postal Service as second class mail. We experienced a general postal rate increase of 9.9% in January 2001, 2.6% in July 2001 and 11.6% in July 2002.

Circulation

     The net circulation revenues of the U.S. edition of PENTHOUSE magazine and Affiliates for 2001 and 2002 were $47.9 million and $43.2 million, respectively. The number of magazine copies sold on newsstands varies monthly, depending on, among other things, the cover, pictorials and editorial content. Approximately 16% of total newsstand copies are sold internationally.

     Newsstand revenues for PENTHOUSE magazine and the Affiliate Publications were $36.1 million, $31.0 million and $28.1 million for the years ended December 31, 2000, 2001 and 2002, respectively, representing approximately 50%, 49% and 52% of our net revenues for these periods, respectively.

     In recent years, domestic newsstand circulation for men’s magazines has been declining. From 1998 to 2002, PENTHOUSE magazine and the Affiliate Publications domestic average monthly newsstand circulation decreased by approximately 39%. We rely on retail display facings for newsstand circulation and we believe a significant portion of buying decisions are made on impulse at the time the customer sees the magazine on the retail display facing. Management has been aware of a large decrease in rack sales outlets over the last several years. We believe that the loss of several newsstand distribution outlets due to the change in social climate toward men’s magazines, together with certain advances in electronic technology, including the proliferation of retail video outlets and the increased market share of cable television and the internet have largely contributed to the overall decrease in circulation. In addition, ongoing consolidations of companies in the magazine distribution industry have also contributed to the overall decrease in circulation. This decrease is consistent with general trends in the industry.

     The decrease in domestic average monthly circulation for PENTHOUSE magazine and the Affiliate Publications has been partially offset, however, by our ability to maintain consistent cover price increases and the recapture of certain convenience store distribution channels. PENTHOUSE magazine, for example, has steadily increased its cover price from 2000 levels of $6.99 to $7.99 per issue and in 2002 from $7.99 to $10 per issue. We regularly price test our magazines and adjust cover prices accordingly.

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     While newsstand circulation is our principal means of distribution for PENTHOUSE magazine and the Affiliate Publications, we have also sought to increase their subscription circulation. The price of a twelve-month subscription to PENTHOUSE magazine ranged from $29.95 to $46.00 in 2002, depending upon the source of the subscription. We attract new subscribers to our magazines primarily through our own direct mail advertising campaigns, and through subscription agent campaigns. We recognize revenues from our magazine subscriptions over the term of the subscriptions.

     Subscription revenues for PENTHOUSE magazine and the Affiliate Publications were $6.7 million, $7.3 million and $6.9 million for the years ended December 31, 2002, 2001 and 2000, respectively, representing approximately 12%, 12% and 10% of our net revenues for these periods.

Advertising

     PENTHOUSE magazine and the Affiliate Publications are relatively less dependent on advertising revenues than many other magazines, as approximately 63% of their respective revenues are generated from newsstand sales, while approximately 15% are generated from subscription sales and approximately 16% are generated from advertising. Advertising revenues for PENTHOUSE magazine and the Affiliate Publications were $7.3 million, $8.3 million and $8.8 million for the years ended December 31, 2002, 2001 and 2000, representing approximately 14%, 13% and 12% of our net revenues for these periods, respectively.

     In 2002, PENTHOUSE magazine’s advertising pages decreased by 6% and advertising revenues decreased by 16% from 2001. These decreases were primarily due to the declining circulation of PENTHOUSE magazine, which has the effect of decreasing advertising rates and making the magazine less attractive to advertisers. In addition, many advertisers scaled back on advertising in 2002 as a result of continuing weakness in the economy. In 2001, PENTHOUSE magazine’s advertising pages increased by 9% from the prior year, while advertising revenues decreased by 6% from 2000. This decrease was primarily due to the declining circulation of PENTHOUSE magazine and a decrease in the amount of pay-per-call advertising in 2001. In 2000, PENTHOUSE magazine’s advertising pages decreased by 10% and advertising revenues decreased by 0.5% from 1999.

     We also run advertisements in PENTHOUSE magazine for products that are created by General Media including advertising for our pay-per-call telephone lines, Video/DVD’s, internet products and pay-per-view programming.

Penthouse Online Segment

     We operate PENTHOUSE.com as a paid membership service available to customers in any country with Internet access. Customers that visit our website are presented with a free tour of our site including examples of the content that can be accessed by paying members. This content includes a vast library of images and a catalogued inventory of PENTHOUSE Pets that have been in our printed publications over the 1960’s, 70’s’80’s, 90’s and in this decade. Paying members may also access our library of reader submitted erotic stories. New features of our website include multiple Video on Demand features which include access to proprietary PENTHOUSE videos, such as PENTHOUSE Pet Casting Calls and other reality TV-like offerings, as well as a selection of specialty videos in various fetish or special interest categories.

     Our Internet Domain name, Penthouse.com, is critical to or success. We receive a large percentage of our visitors as a result of consumers inputting our name into commonly used Internet search engines or into their Internet browser. In contrast, generally new visitors to competitors’ adult Internet sites are obtained through active marketing technologies such as pop-ups, pop-unders, banners, exit traffic links, and other electronic customer acquisition methods. These marketing strategies require significant capital investment to coordinate, monitor and pay for associated advertising fees. Conversely, PENTHOUSE.com receives nearly all its current visitors as a result of the popularity and awareness of its brand and through the cross promotion in the PENTHOUSE magazines. This cross promotion is accomplished at minimal additional incremental cost to our company.

     We also operate penthousefetish.com on the same pay for service membership business model. We plan to offer additional subscription sites in the future.

     Our sites provide us with multiple revenue streams, including fees for subscription services, e-commerce, advertising and sponsorships. We operate under contract our e-commerce store at http://www.penthousestore.com. Visitors to the store can chose from approximately 35,000 products including our PENTHOUSE films, adult films made by other producers, adult toys and back issues of their favorite PENTHOUSE magazines.

     We were an early adopter of the Internet as a distribution channel for our content. We launched our first pay service, PENTHOUSEmag.com, on the Internet in August of 1995. Today, customers are sold a membership ranging from 3 days to one

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year, at prices ranging from $2.95 to $120.00. Revenues received from the sale of memberships to our Internet Site are recognized over the term of the membership. The membership gives the customer access to adult-oriented photographs, video feeds and chat rooms via a personal identification number that expires according to the membership period selected. Memberships are billed to the customers’ credit card in accordance with the Federal Communications Commission’s safe harbor provision.

     We also host several other third party Internet sites that also provide adult-oriented entertainment. Under these agreements, we provide a banner on our Internet Site as well as hosting and billing services for these third party providers who are responsible for the content and maintenance of their site. In return we receive a portion of the paid membership fees to these sites in accordance with the agreements. In January 2000 we began selling advertising banners on our Internet Site.

     We are attempting to expand our international presence by exploring the possibility of entering into joint ventures and/or licensing arrangements in foreign countries to provide compelling content specifically tailored to those individual foreign audiences. The various international websites will mirror the multiple revenue stream model of our domestic online business

     The Internet industry is highly competitive. We compete for visitors, buyers and advertisers. We believe that the primary competitive factors include brand recognition, the quality of content and products, technology, pricing, ease of use, sales and marketing efforts and user demographics. We believe that we compete favorably with respect to each of these factors. Additionally, we have the advantage of leveraging the power of the PENTHOUSE brands, our libraries, marketing and promotions and loyal audiences.

     Revenue from the Online Segment has been decreasing over the past few years primarily as a result of the need for more aggressive credit card validation methods to comply with Visa’s requirements and decreases in the average price of memberships sold. We have recently increased the price of memberships, redesigned the internet site to add more features and content, and we are exploring the possibility of establishing relationships with other companies in order to reach a wider audience on the internet in an effort to reverse this trend.

Penthouse Entertainment Segment

     Our Entertainment Segment produces and distributes adult-oriented entertainment products, including video/DVD movies, pay-per-view programming, which are advertised in our magazines and sold under an exclusive distribution agreement with Image Entertainment to video and music stores and other retail outlets, and online through the Penthousestore.com internet site. We also offer pay-per-call telephone lines under contract with a third party provider.

     Revenues of the entertainment segment were $1.6 million, $2.9 million and $3.3 million for the years ended December 31, 2002, 2001 and 2000, respectively, representing 3%, 5% and 5% of our net revenues for these periods, respectively. We believe our market share in regards to such entertainment is an insignificant portion of the total market. We have recently undertaken measures to improve the results of this division, including entering into a cruise ship on demand pay per view license agreement, and we believe we can improve our results during the current fiscal period

Video and DVD Sales & Rental

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

     Although DVDs will not replace videocassettes completely in the near term because of the ability of users to record on videocassettes as well as their current high level of market penetration, rentals and sales of DVDs are likely to increase significantly as more DVD players are sold. We believe that the number of household with DVD players in the United States will increase in the future. Similar growth is expected in Western Europe.

     The provision of in-room entertainment services by major hotel chains throughout the world also serves as a distribution channel for adult media content. In addition to a selection of mainstream titles, hotel guests are often given a choice of adult movies on a pay-per-view basis. Hotels in the United States have in the past had a tendency to offer more softcore titles than hardcore, however in recent years the number of hardcore titles being offered has been increasing. In the United States, these services are provided by companies such as On Command and Lodgenet. Outside of the United States, excluding more restrictive countries such as the United Kingdom, hotel guests also have access to hardcore material on a pay-per-view basis.

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Our Entertainment Operations

     We develop, produce and distribute products for the domestic and international home video/DVD markets. Since 1990, we produced 94 movies, which were released for domestic distribution through Warner Home Video, a subsidiary of Time Warner, Inc. up to June 1999. In June 1999, we entered into an agreement with Image Entertainment, whereby we licensed the domestic distribution of our catalog titles on DVD for a non-recoupable up-front license fee of $0.9 million and a royalty fee based on the number of units sold. We are amortizing the up-front licensing fee over the term of the contract. In June 1999 we also entered into an agreement with Image Entertainment, whereby we licensed the domestic distribution of our full length feature film, Caligula, on DVD for a recoupable up-front license fee of $0.1 million against a royalty fee based on the number of units sold thereafter. The upfront license fee under this agreement was fully recouped during the year 2000 and we are continuing to earn royalties over and above the up-front license fee.

     In July 2000 we entered into an agreement with Image Entertainment whereby we licensed the foreign distribution of our video cassettes and DVD’s for a recoupable up-front license fee of $0.5 million against a royalty fee based on the number of units sold thereafter. The up-front license fee under this agreement was fully recouped during 2001 and we received a second recoupable up-front license fee of $0.1 million in June 2002 against which royalty fees are being applied based on the number of units sold since the first advance was fully recouped.

     The video cassettes and DVD’s are also offered for sale through the PENTHOUSE store on our internet site and are advertised in our magazines. These videos are generally approximately 60 minutes in length, have a level of explicitness greater than “R” and feature PENTHOUSE centerfold models. Many of our videos are also sold internationally through licensing arrangements.

     We also provide adult-oriented entertainment through pay-per-call telephone lines which feature both recorded audio programs and live operators on 900 and 800 number telephone lines. Our recorded audio programs are created and broadcast by independent service bureaus. The operators on the live telephone lines are employed by the service bureaus and are not our employees.

     Our 900 number telephone lines are romantic in nature and feature programs where users can listen to computerized conversations, speak with live operators and participate in live one-on-one talk, dating and chat lines. The 900 number telephone calls are billed directly to the caller’s telephone number and typically cost $3.95 and $4.95 per minute. Our 800 number telephone lines are explicit and uncensored in nature and include certain live PENTHOUSE party lines and live one-on-one talk, dating and chat lines and typically cost $4.95 per minute. The 800 number telephone calls are billed to credit cards in accordance with the Federal Communications Commission safe harbor provisions, which require that such telephone calls be billed to credit cards to insure that calls are not made by minors.

Other Licensing Businesses

     We license many of our brands to third-parties with specialized skills, thereby extending each licensed brand’s market presence. Our Licensing Businesses combines certain brand-related businesses, such as the licensing of consumer products carrying one or more of our trademarks and artwork, as well as PENTHOUSE branded Luxury Gentlemen’s Club opportunities, referred to as Location-based Entertainment.

     We license the PENTHOUSE name, the Three Key Design and other images, trademarks and artwork we own for the worldwide manufacture, sale and distribution of a variety of consumer products. We work with licensees to develop, market and distribute high-quality PENTHOUSE branded merchandise. We are exploring the possibility of extending our licenses to include men’s and women’s apparel, men’s underwear and women’s lingerie, accessories, collectibles, slot machines, interactive video games, cigars, watches, jewelry, fragrances, small leather goods, stationery, music, eyewear, barware and home fashions.

     We have also initiated exploitation of the PENTHOUSE brand equity in the location-based entertainment market by entering into agreements with companies where we contribute our brand name and marketing expertise in return for licensing fees. We are also exploring the possibility of either earning or purchasing equity in certain of these ventures in the future.

     Company-wide marketing activities consist of various PENTHOUSE hosted events in cities across the United States and on college campuses. In March 2003, we hosted a promotional event at the Winter Music Conference in Miami, Florida . We also use Mr. Guccione’s personal residence in New York City for various events. The home is a 21,000 square foot historic townhome and is one of the largest residences in Manhattan. Our intention is to make more effective use of it in our branding efforts by establishing the “Penthouse Mansion” in Manhattan with the intended promotional value akin to the Playboy Mansion

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in Los Angeles. We believe we have good relations with other recognized media companies, exemplified by our January 2003 Clear Channel Communications hosted party at the Penthouse townhome attended by a number of celebrities. Clear Channel is a large media company with 1,184 radio stations and 34 TV stations.

     Current television and film productions either recently produced, in development or under consideration, to be produced and funded by outside parties, include The Making of a PENTHOUSE Pet. We have previously produced a variety of PENTHOUSE titles including PENTHOUSE Pet Casting Call, International Amateurs, Swimsuit Video, Showgirls of PENTHOUSE and On Campus. We are currently evaluating additional proposals for expanded reality-based titles which we believe are enjoying wide market success as evidenced by products offerings of competitors like Girls Gone Wild or Playboy Party at the Mansion series produced by Mandalay Entertainment.

Marketing

     We sell magazine subscriptions principally through direct mail solicitations to households on our customer lists, as well as to customer lists rented or purchased from third parties. For many years, we have been active in the direct mail industry.

Information Technology And Customer Database Enhancement

     The size and quality of our computerized customer database of current and prospective customers in each country where we operate contributes significantly to our business. We are constantly striving to improve our customer databases.

     We will continue to capture proprietary data about our customers and plan to make significant investments in our database management and related information technology to improve our operating efficiencies, to increase the level of service we provide to our customer base and to facilitate globalization of our operations.

     Some international jurisdictions, particularly in Europe, have data protection laws or regulations prohibiting or limiting the exchange of information of the type that we maintain. Some jurisdictions also prohibit the retention of information, other than certain basic facts, about non-current customers. Although these regulations may hinder our ability to collect, retain and use customer information, we believe that current laws and regulations do not prevent us from engaging in activities necessary to operate our current businesses.

     We are also evaluating future investments in other information technology systems to complete the digitalization of our entire movie and photograph library in order to prepare our library for distribution in new electronic media. We have developed an extensive library of motion pictures and other pictorial content. This library is archived on a master print, which would allow duplication in traditional media. New forms of electronic distribution provide us with an opportunity to use this content by distributing it on new forms of media, such as DVD, Internet and broadband. To facilitate electronic distribution of our products, we are planning the conversion of our entire archive of print images and motion pictures into a digital format.

Our Strategy

     Licensing. Our business plan anticipates expanding the products and services that are available to consumers through specialty licensees. We are evaluating proposals to expand many categories of merchandising. Our plan is to emulate other successful merchandising companies like Hard Rock Café. Hard Rock Café generates a substantial amount of its revenue base from merchandising sales such as hats, T-shirts, sweatshirts, despite being a location-based provider of food and beverage. We intend to leverage our trademarks to expand our merchandising family of products. We intend to make these products more readily available to consumers. Like Hard Rock Cafe, we intend to sell such merchandise to patrons of our new clubs.

     Technology. The use of the Internet for viewing adult media content is expected to increase significantly as home Internet access increases and broadband services become more widely available. We believe that adult pictorial content is one of the clear leaders in commercializing the Internet. As the number of users globally continues to grow, we believe we have an advantage in accessing this audience through the worldwide recognition of our brands.

     We are in negotiations to license through a third party provider database management software used to automate our Internet operations and to derive new sources of e-commerce revenue. The software is used to store, categorize, manipulate and publish pictorial and film content on the Internet. We believe that these and other technologies can be used to enhance our Internet member’s experience and thereby retain the customer longer so as to increase revenue per customer.

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     Internet. In our PENTHOUSE Online Segment, we are implementing a synergistic strategy by coordinating our online operations with our publishing activities. The incremental cost to drive new Internet customer acquisition through the distribution of our magazine is nominal. To date, we have not exploited this advantage fully and little coordination has been developed. As a result, Penthouse has not benefited from the same rapid growth of its online content revenues as enjoyed by lesser-known online competitors. We believe we now have coordinated our cross promotion strategy. We are also in negotiations with one of the largest Internet traffic generating companies in the US to monetize our web traffic and receive visitor referrals from them, commonly referred to as exit traffic. We believe we can increase our paid membership base with such business relationships in place.

     Location-based Entertainment. We see the development of PENTHOUSE branded adult entertainment clubs as a key growth element of our entertainment division. Currently, we have licensed seven clubs. Clubs in Dallas, Texas, Austin, Texas, Cleveland, Ohio and Spartanburg, South Carolina are operating and locations are to open in San Antonio, Texas, New York City, New York and Mexico City, Mexico in 2003. These clubs have been financed completely with funding provided by the licensing partners. We anticipate opening an additional twelve locations globally between now and 2005.

     Video. We believe that there continues to be significant potential in the worldwide video and DVD market. Compounding this, we have not historically benefited from the rapid adoption worldwide of DVD sales. We plan to attempt to expand the sales of video and DVD by licensing the Penthouse name to international producers for foreign distribution. We are negotiating non-exclusive terms presently with prospective business partners

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

Ownership, Capitalization and Financing

     General Media is a Delaware corporation formed in November 1993 in connection with a private debt offering (the “Offering”). As part of the Offering, the Company issued an aggregate principal amount of $85.0 million in Series A 10 5/8% Senior Secured Notes due 2000 (the “Series A Notes”). The Series A Notes were issued under an Indenture dated December 21, 1993, as supplemented (the “Indenture”) with IBJ Whitehall Bank & Trust Company (now HSBC as successor Trustee), as trustee. Following the Offering, and pursuant to certain registration rights of the Series A Noteholders, the Company exchanged the Series A Notes for Series B 10 5/8% Senior Secured Notes Due 2000 (the “Series B Notes”), which the Company had registered under the Securities Act of 1933, as amended (the “Securities Act”). The Series B Notes were substantially identical to the Series A Notes (including principal amount, interest rate and maturity), except that the Series B Notes were freely transferable.

     In the Offering, General Media also issued an aggregate of 187,506 warrants (the “Warrants”) to purchase an aggregate of 25,000 shares of General Media common stock (approximately 5% of the outstanding common stock). Of the Warrants, 5,000 were repurchased by General Media in July 1995, 18,009 Warrants were exercised (at an exercise price of $.01 per share of common stock) for 2,401 shares of common stock on December 22, 2000, and 104,076 expired without exercise in accordance with the Warrant agreement. The due date of the remaining 60,421 Warrants was extended in connection with negotiations over the refinancing of the Notes, discussed below.

     On March 29, 2001, General Media completed the refinancing of the Series B Notes and the Warrants (the “Refinancing”). Under the refinancing agreement, pursuant to the exemption from registration contained in Section 3(a)(9) of the Securities Act, General Media exchanged $51.5 million of principal amount of Series B Notes and any Warrants held by exchanging noteholders for new notes (the “Series C Notes”) and preferred stock meeting certain specified terms and conditions. The remaining $0.5 million of principal amount of senior debt securities that were not exchanged were retired by payments made to the holders on March 29, 2001. Any remaining warrants were exercised or expired.

     The Series C Notes will mature on March 29, 2004, bear interest at a rate of 15% per annum and require amortization payments of $6.5 million on or before December 31, 2003. In addition, further amortization equal to 50% of excess cash flow is

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required, as well as any proceeds from the sale of certain real property owned by General Media International, Inc. (“GMI”), an affiliate of General Media (after payment of existing debt obligations thereon) and any proceeds to General Media from certain insurance policies on the life of the principal shareholder. General Media has pledged substantially all of its assets as collateral for the Series C Notes. The Indenture was amended to reflect the above mentioned payments and to reflect the March 29, 2004 maturity of the Series C Notes.

     The 9,905 shares of preferred stock issued in the Refinancing carried an initial liquidation preference of $10 million, provides for “paid-in-kind” dividends at a 13% per annum rate and is convertible (a) until March 29, 2004, into 10% of General Media’s common stock on a fully diluted basis, (b) from March 29, 2004 to March 29, 2005, into 12.5% of General Media’s common stock on a fully diluted basis, and (c) from March 29, 2005 to March 29, 2006, into 15% of such common stock on a fully diluted basis. The preferred stock may be optionally redeemed by General Media (subject to the aforementioned conversion rights) at the end of the year ending March 29, 2006. The preferred stock may be optionally redeemed by General Media at increasing premiums during the years ended March 29, 2004, 2005 and 2006, provided that the Series C Notes are paid in full at or before the time of any redemption.

     Until November 2002, 99.5% of the common stock of General Media was owned by GMI, the common stock of which is owned by Robert C. Guccione and Robert C. Guccione Family Trust No. 1. On November 8, 2002, GMI sold all its common stock holdings in General Media to Penthouse International, Inc. (“PII”). The sale transaction took place on November 8, 2002, pursuant to a Stock Exchange Agreement dated November 4, 2002 between PII and GMI (the “Stock Exchange Agreement”). Pursuant to the Stock Exchange Agreement, and in consideration for the common stock of General Media, PII issued to GMI 42.5 million shares of its common stock (comprising 85% of such class) and 5,000 shares of PII’s Series A Preferred Stock (comprising 100% of such series).

     PII is a Florida corporation formerly known as American Pulp Exchange, Inc. and incorporated in December 2001. The common stock of PII is traded on the Over-the-Counter Bulletin Board under the symbol “PHSL”. All of PII’s Series A Preferred Stock and 85% of PII’s common stock is owned by GMI. All of the capital stock of GMI is owned by Robert C. Guccione and Robert C. Guccione Family Trust No. 1. Mr. Guccione is a director and officer of General Media, PII and GMI.

Sources and Availability of Raw Materials

     Paper is the primary raw material used in the production of our magazines. We use a variety of high quality coated and uncoated paper that is purchased from a number of suppliers. We believe that there are several alternative suppliers in the event of our inability to purchase from our present suppliers.

Trademarks

     Our trademarks are essential to our current business operations and future expansion. The trademarks, which are renewable indefinitely, include PENTHOUSE, Forum, Variations, PENTHOUSE Letters, Girls of PENTHOUSE,the Three Key Logo, the One Key Logo, Pet of the Year, PENTHOUSE Pet, Mind & Muscle Power, Hot Talk, PENTHOUSE Comix and PENTHOUSE Men’s Adventure Comix. Our trademarks and copyrights are critical to the success and potential growth of all of our businesses. We actively protect and defend our trademarks and copyrights throughout the world and monitor the marketplace for counterfeit products. Consequently, we initiate legal proceedings from time to time to prevent their unauthorized use.

Seasonality

     Our business is generally not seasonal in nature. Issues of PENTHOUSE magazine with female celebrity covers or pictorials, however, have historically resulted in higher newsstand sales than non-celebrity issues. Sales of our video/DVD products may vary based upon the timing of the release of new movies.

Promotional and Other Activities

     We believe that our sales of products and services are enhanced by the public recognition of the PENTHOUSE name as symbolizing a lifestyle. In order to establish public recognition, we, among other activities, have entered into an expense sharing agreement with our affiliate GMI, which is owned by Robert C. Guccione. The Townhouse is used for various activities related to General Media, including business meetings, client entertainment, charitable functions, magazine photography sessions and promotional and marketing events. Expenses of maintaining the Townhouse, as well as any applicable debt service

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requirements, are the responsibilities of GMI. See Item 13. Certain Relationships and Related Transactions and “Compensation Committee Interlock and Insider Participation in Compensation Decisions.”

Dependence on Customers

     No single customer accounted for more than ten percent of our net revenues in 2000, 2001 or 2002, and no part of the business is dependent upon a single customer or a few customers, the loss of any one or more of which would have a material adverse effect on us. However, one advertising agency placed $2.3 million, $2.0 million and $1.8 million in advertising revenues in PENTHOUSE magazine and the Affiliate Publications in 2000, 2001 and 2002, respectively. These revenues represent 3% of our net revenues in 2000, 2001 and 2002, respectively.

Competitors

     Magazine publishers face intense competition for both circulation and advertising revenues. The main competitors of PENTHOUSE magazine and the Affiliate Publications are magazines that primarily target a male audience. Other types of media that carry advertising also compete for advertising with our magazines.

     Competition in the internet business comes from many different competitors. Our advantage in this area is the PENTHOUSE trademark and the low cost of advertising our Internet service in our own magazines.

     Competition in the pay-per-call business is generally limited to a few major competitors. Our advantage in this area is the low cost of advertisement for such pay-per-call service in our own magazines.

Employees

     As of April 9, 2003, we employed 104 full-time employees, none of whom are members of a union, and 3 part-time employees.

Item 2. Properties

     Our principal corporate offices for the publishing, online and entertainment segments are located in New York City at 11 Penn Plaza, as set forth below.

     We have a ten-year and seven-month lease for our principal corporate offices that commenced on August 11, 1998 and requires annual lease payments of $1.9 million until the expiration of lease. We believe that our principal corporate offices are suitable and adequate for our current business operations and that, upon expiration of the lease, we will be able to obtain similarly suitable and adequate office space in Manhattan at a competitive price.

     We also use a 17,000 square foot townhouse located in New York City, owned by GMI and Robert C. Guccione, for business related activities, including business meetings and promotional and marketing events. Pursuant to a Properties and Salary Allocation Agreement among General Media, GMI and a GMI subsidiary, we reimbursed GMI approximately $0.6 million, $0.6 million and $0.5 million in 2002, 2001 and 2000 respectively for the use of such property.

Item 3. Legal Proceedings

     On December 3, 2001, Network Telephone Services (“NTS”) filed in Los Angeles Superior Court (the “Court”) a complaint against Robert C. Guccione, GMI and General Media (collectively the “Defendants”) asserting breach of promissory note, breach of written guarantee, and a declaration of rights and injunctive relief arising out of a promissory note and several other agreements between NTS and the Defendants. Pursuant to a settlement agreement, the Court subsequently dismissed the case on November 12, 2002.

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     On May 8, 2002, an action was filed in United States District Court for the Central District of California (the “California Court”), alleging, among other things, that General Media published photographs (the “Photographs”) of a woman topless in the June 2002 issue of Penthouse Magazine (the “Magazine”), falsely representing them to be pictures of the plaintiff when they were in reality photographs of someone else. The action also alleges that General Media advertised its intention to make the Photographs and a video of the woman available on its internet site on May 10, 2002. On May 7, 2002, General Media issued a press release stating that it had made an unintentional error when it said the Photographs were of the plaintiff and it apologized to the plaintiff and the actual woman in the Photographs for the error. General Media also published the apology on its internet site.

     The plaintiff seeks a permanent injunction barring General Media from any similar acts concerning her, barring it from any further distribution of the Photographs and the June 2002 edition of the Magazine, barring it from any references to the plaintiff on its internet site, barring it from representing that any pictures or photographs on the internet site are depictions of the plaintiff, ordering it to deliver or destroy all materials that have the alleged false representations, ordering the disgorgement and paying over of all profits it earned and any other unjust enrichment that it received from the alleged false depiction of the plaintiff, awarding damages in an unspecified amount not less than $10,000,000, trebling of these unspecified damages, awarding punitive damages in an unspecified amount and reimbursement for the plaintiff’s costs and attorneys’ fees in prosecuting the action. General Media has filed a motion to dismiss portions of the complaint and the plaintiff has filed a cross-motion to freeze $15,000,000 of General Media’s assets for purposes of insuring the payment of a possible judgment. The California Court denied both of these motions in August 2002. The plaintiff filed an appeal to the Ninth US Court of Appeals, which ruled against the plaintiff in November 2002. General Media and the plaintiff have exchanged discovery requests and are in the process of exchanging information. General Media intends to vigorously defend itself in this action. It is still too early to determine the possible outcome of the proceedings. Therefore management cannot give an opinion as to the effect this action will have on General Media’s financial condition or results of operations. There can be no assurance, however, that the ultimate liability from these proceedings will not have a material adverse effect on its financial condition and results of operations.

     On August 26, 2002, two individuals on behalf of themselves and all others similarly situated (the “Class Action Plaintiffs”) filed in the Circuit Court of Cook County, Illinois, an action alleging that General Media committed a breach of contract, a breach of express warranty and consumer fraud when it published the Photographs, falsely representing them to be pictures of the aforementioned plaintiff when they were in reality photographs of someone else. The Class Action Plaintiffs have filed a request that the action be certified as a class action with the two plaintiffs as class representatives and their lawyer as class counsel. General Media has filed a motion to dismiss the action. General Media intends to vigorously defend itself in this action. It is still too early to determine the possible outcome of the proceedings. Therefore management cannot give an opinion as to the effect this action will have on General Media’s financial condition or results of operations. There can be no assurance, however, that the ultimate liability from these proceedings will not have a material adverse effect on its financial condition and results of operations.

     On July 13, 2001, an employee filed a charge of discrimination (the “Charge”) against General Media with the U.S. Equal Employment Opportunity Commission (“EEOC”). On April 11, 2003, the District Director of the EEOC ruled that there was reasonable cause to find that the employee had been subjected to discrimination on the basis of disability and age, and that she had been constructively discharged. General Media is waiting for the EEOC to schedule a conciliation meeting with the employee to determine what actions need to be taken to resolve the Charge. General Media intends to vigorously defend itself in this action. It is still too early to determine the possible outcome of the proceedings. Therefore management cannot give an opinion as to the effect this action will have on General Media’s financial condition or results of operations. There can be no assurance, however, that the ultimate liability from these proceedings will not have a material adverse effect on its financial condition or results of operations.

     On March 28, 2003, a former employee of General Media who was terminated for what General Media believes to be reasonable cause, filed a claim in the Supreme Court of The State of New York seeking damages of $75,000 plus an accounting of their incentive compensation. General Media believes it has no liability to this individual and is vigorously defending itself against this claim.

     In December 2002, General Media received correspondence from a third party informing General Media that transmission of video content on the Internet is a violation of patents that the third party claims to own. The third party has demanded that General Media execute a royalty agreement in favor of the third party with respect to revenue from any videos that it has displayed on its Internet Site. To General Media’s knowledge no action has been instituted against it by the third party. General Media believes that it does not owe any royalties to this third party and intends to vigorously defend itself in any action brought against it by the third party.

     There are various lawsuits claiming amounts against General Media. While the outcome of these matters is currently not determinable, it is the opinion of General Media’s management that the ultimate liabilities, if any, in the outcome of these cases will not have a material effect on General Media’s financial condition or results of operations.

Item 4. Submission Of Matters To A Vote Of Security Holders

None.

PART II

Item 5. Market For Registrant’s Common Equity And Related Stockholder Matters

     As of March 28, 2003, a total of 477,401 shares of General Media’s common stock, par value $.01 per share (the “Common Stock”) were issued and outstanding, all of which are believed to be held by three shareholders. 475,000 shares, or approximately 99.5% of the outstanding Common Stock, were held by PII and the remaining 2,401 shares, or approximately 0.5% of the outstanding Common Stock, were owned by persons acquiring such shares, directly or indirectly, upon exercise of Warrants issued in the Offering. There is no established public trading market for the Common Stock.

     Holders of shares of Common Stock are entitled to receive dividends out of funds legally available for payment thereof in such amounts per share as may be declared by General Media’s Board of Directors, subject to the restrictions contained in the Indenture. Pursuant to the Indenture, General Media may not declare a dividend on the Common Stock, subject to certain exceptions, unless it meets certain financial covenants set forth therein. General Media’s subsidiaries, however, are permitted to

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make inter-company dividends on their shares of common stock. General Media did not declare any dividend for the fiscal years ended December 31, 2000, 2001 or 2002.

Item 6. Selected Financial Data (a).