MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR

      The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this prospectus. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require us to make certain estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and related liabilities. On a going forward basis, we evaluate our estimates based on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Overview

      We produce and distribute high quality adult movies. During 2003 and the first six months of 2004, we derived our revenues from:

These parties then distribute our movies to consumers. We do not sell our movies directly to consumers or to individuals. We produced 94 “Jill Kelly” movies in 2003 and expect to produce over 100 “Jill Kelly” movies in 2004, of which we have completed 81 as of September 30, 2004. We have a library of over 250 adult movies that we sell to retailers and distributors and presently have approximately 18 new “Jill Kelly” movies in various stages of production.

      We believe that we have been able to grow our business over the last four years because consumers have come to know and expect the high quality of our movies. We believe that this brand acceptance by consumers has aided us in securing larger and more favorable distribution and licensing contracts with the parties that sell our movies to consumers. Because of our success in growing our library of adult movies and establishing a consumer base for our movies, we believe that we are in a position to focus our efforts on further growing our business. In this regard, we plan to pursue acquisitions of adult movie production companies with products that complement the existing products that we offer or have “niche” products that do not compete with our existing product lines. We anticipate that we will acquire at least one such production company over the next twelve months. In addition, we have recently moved into a larger facility that includes a warehouse and additional office space. This move will enable us to perform our own order fulfillment operations, thus increasing our gross profits.

      We plan to purchase new equipment and software, including:

      We currently outsource our editing and post-production activities and rent the cameras, stage equipment and locations used in our productions. By purchasing stage, editing and camera equipment, we

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      The warehouse automation equipment and the DVD writing equipment will help us streamline our operations by reducing the amount of inventory required to be kept on hand and, correspondingly, decreasing the amount of funds tied up in inventory. The customer relationship management software, or CRM, and accounting software will increase our efficiencies in our order entry and customer service. This should result in better management of accounts since our employees will have more tools to better support our customers.

      In order to implement our growth plan, we will need to spend cash. We intend to use cash of approximately $350,000 from operations to finance the required tenant improvements at our new facility to make it more suitable to our needs and to purchase the new equipment described above. We will use cash from our operations to fund a certain amount of the purchase price for acquisitions but anticipate needing to raise additional funds through the sale of our securities in order to fully finance any acquisitions. We are not certain that we will be able to raise these additional funds when needed to complete these acquisitions. Any delay or inability in raising these funds will cause us to delay future acquisitions.

      As part of our growth plan, on May 19, 2004, through our newly formed wholly-owned operating subsidiary JKP Bizarre, LLC, we entered into an exclusive license and distribution agreement with specialty adult entertainment film production company Bizarre Video Unlimited Ltd., Bizarre XXX, Inc. and their principals. Bizarre Video, based in New York, has over 1,000 adult movie titles and had sales in excess of $2.4 million in 2003. Under the terms of our agreement with Bizarre Video, we have the exclusive right to distribute all of Bizarre Video’s movies and produce and distribute new movies under Bizarre Video’s name until January 7, 2005.

      Subject to certain adjustments, we will pay Bizarre Video an aggregate of $1 million for the exclusive license together with a monthly license fee of $31,667 for each month during the term of the license. We may terminate the license at any time upon 15 days notice to Bizarre Video.

      We also have the option to purchase substantially all of the assets of Bizarre Video at any time prior to the expiration of the exclusive license for a purchase price of $4.7 million and the assumption of:

      The $4.7 million purchase price will be reduced by all payments that we make to Bizarre Video for the exclusive license, including the $1 million license fees and the monthly license fees.

      Our agreement with Bizarre Video was negotiated on an arm’s length basis. We structured the transaction as an exclusive license with an option to buy its assets so that we could have the opportunity to fully familiarize ourselves with its business and distribute and produce its products for a period of time before we made the decision as to whether we should spend additional cash to buy its assets. The exclusive license has in effect provided us with an extended due diligence period to determine if Bizarre Video is a desirable acquisition candidate for us. We have not yet determined whether we will exercise our option to purchase Bizarre Video’s assets. If by the end of the license period on January 7, 2005 we decide that Bizarre Video’s products are not consistent with our business plan, we will not exercise our option to purchase its assets. In such event, we will be required to ship all Bizarre Video inventory back to New York and transfer to Bizarre Video the amount of outstanding accounts receivable equal to the amount that we originally received from Bizarre Video less certain deductions. Alternatively, if we decide to buy Bizarre Video’s assets, we will exercise our option and all amounts that we paid in connection with the exclusive license shall be credited towards the purchase price.

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     Collateral Damage XXX and BLU

      Also as part of our growth plan, we plan to expand our product offerings by launching two new movies product lines in the fourth quarter of 2004: our “Collateral Damage XXX” line and our “BLU” line.

      We co-produce our Collateral Damage XXX line with a European-based adult entertainment film production company pursuant to an exclusive production and distribution agreement, dated June 23, 2004. The Collateral Damage XXX line of movies is more sexually explicit and graphic than our “Jill Kelly” line of movies. We hope to produce at least 52 movies per year, of which 13 were in various stages of production as of September 30, 2004. Under the terms of the agreement, we will have the exclusive right to distribute these movies in North America and our production partner will have the right to distribute them throughout the rest of the world. We will share any revenues generated from the broadcasting of these movies equally with our production partner.

      We will distribute our new BLU line of movies produced by Erotic Media, a.g., which is one of the largest publicly traded licensors of adult content in Europe, starting in November 2004. The BLU line of movies will be suitable for adult entertainment television and the “couples” niche market.

      We expect to release a new movie each week pursuant to our agreement with Erotic Media beginning in November 2004. We will have the exclusive right to distribute these movies in North America. Under our agreement with Erotic Media, we will share all revenues made from the sales of these movies equally.

     Production Moratorium

      In April 2004, the adult movie industry faced a voluntary 45 day production shutdown promulgated by the Adult Industry Healthcare Foundation due to the increased incidents of actors and actresses being diagnosed with HIV, the virus that causes AIDS. The shutdown was voluntary in that we were not required by law to suspend our production activities. We, however, honored the shutdown and ceased all of our movie production activities during this 45-day period out of concern for the safety and health of our employees and contractors who perform in our movies. We will honor any future shutdowns or moratoriums to the extent necessary to protect our employees and contractors. This is an industry-wide problem that may have an adverse effect on our operations. While we believe that the extent of our production pipeline will allow us to experience a shutdown lasting as long as six months with no material adverse effect on our operations, there can be no assurance that a shutdown of this duration will not have a material adverse effect on our operations. To the extent that we experience a production shutdown that is longer than six months, our revenues will be adversely affected causing a decrease in our earnings.

      Increased Operations Cost

      The costs to operate our business over the next twelve months will increase. We will need cash to pay:

      We believe that we will be able to pay for these increased costs to operate our business from our operations since we anticipate that our sales will increase by approximately $1.5 million for 2004 over last year.

History

      Jill Kelly Productions, Inc. was incorporated in Delaware in July 2000 by our chairman of the board, Robert A. Friedland, and Adrianne D. Moore, whose stage name is Jill Kelly, to engage in the adult movie production and distribution business.

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      In August 2003, IDC Technologies, Inc., a Nevada corporation, completed a reverse triangular merger via its acquisition subsidiary, IDC Acquisition I Corp. with Jill Kelly Production, Inc. IDC Acquisition I Corp. merged with and into Jill Kelly Productions, Inc., such that as of the closing of the transaction, Jill Kelly Productions, Inc. was the surviving entity. Pursuant to this merger, IDC Technologies, Inc. acquired 100% of the outstanding capital stock of Jill Kelly Productions, Inc. in exchange for 19,000,000 shares of common stock of IDC Technologies, Inc. that was issued to the former stockholders of Jill Kelly Productions, Inc. Jill Kelly Productions, Inc. became a wholly-owned operating subsidiary of IDC Technologies, Inc., and the former stockholders of Jill Kelly Productions, Inc. owned approximately 95% of the outstanding shares of common stock of IDC Technologies, Inc. In August 2003, IDC Technologies, Inc. changed its name to our current name Jill Kelly Productions Holdings, Inc.

      The merger with Jill Kelly Productions, Inc. was accounted for as a reverse acquisition. Although IDC Technologies, Inc. was the legal acquirer in the merger, Jill Kelly Productions, Inc. was the accounting acquirer since its stockholders acquired a majority ownership interest in IDC Technologies, Inc. Consequently, the historical financial information included in the financial statements prior to August 8, 2003 is that of Jill Kelly Productions, Inc. All significant intercompany transactions and balances have been eliminated.

      Pursuant to the terms of an exclusive advisory agreement, Jill Kelly Productions, Inc. paid Maximum Ventures Inc. $210,000 and issued Maximum Ventures a warrant to purchase 3,201,213 shares of our common stock at an exercise price of $.001, in consideration of consulting services Maximum Ventures provided to the company in connection with its merger with IDC Acquisition I Corp. We also paid Gottbetter & Associates, LLP $56,544 for legal services it rendered in connection with the merger.

      Since our management team was the management team of Jill Kelly Productions, Inc. prior to the merger with IDC Acquisition I Corp. in August 2003, we have a limited knowledge with respect to the business and operations of IDC Technologies, Inc. prior the merger. The knowledge that we do have is based upon the merger agreement between Jill Kelly Productions, Inc. and IDC Acquisition I Corp. and independent investigations conducted by our management team. Based on this knowledge, we learned that IDC Technologies, Inc. was incorporated in Nevada on November 4, 1998 under the name Carve Industries Inc. and conducted operations as a designer, manufacturer and distributor of consumer products devoted to the extreme sport industry, including surfing, snowboarding and skateboarding. On December 2, 1998, Carve Industries Inc. changed its name to Carve.com Inc. Frank Drechsler is listed as the president of the company and Eden Woodall is listed as the secretary in public filings. On April 21, 1999, Carve.com Inc. changed its name to PacificTradingPost.com, Inc.

      On March 9, 2000, PacificTradingPost.com, Inc. filed a Form 10-SB (File Number: 000-29887) with the Securities and Exchange Commission with respect to its shares of common stock.

      On June 22, 2000, Carve Industries, Inc., a Colorado corporation, merged with and into PacificTradingPost.com, Inc.

      On December 20, 2000, PacificTradingPost.com, Inc. changed its name to San West, Inc. On May 8, 2001, San West, Inc. changed its name to Pacific Trading Post, Inc.

      In February 2002, the then president and principal shareholder of Pacific Trading Post, Inc., Alan Schram, entered into a stock purchase agreement with Turf Holding Inc., Ming Capital Enterprises Inc. and Private Investment Company Ltd., pursuant to which such purchasers collectively paid Alan Schram $125,000 in exchange for an aggregate of 900,000 shares or approximately 91% of the then outstanding shares of common stock. Concurrently with such transaction on February 20, 2002, Pacific Trading Post, Inc. changed its name to IDC Technologies, Inc. and from February 2002 to August 2003 it did not conduct operations.

Subsidiaries

      We produce our “Jill Kelly” line of movies through our wholly-owned operating subsidiary Jill Kelly Productions, Inc. Jill Kelly Productions, Inc. was incorporated in Delaware in July 2000.

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      We produce our “Bizarre” line of movies through our wholly-owned operating subsidiary JKP Bizarre, LLC, a Delaware limited liability company, that was formed in May 2004.

      We distribute our movies through our wholly-owned subsidiary J.K. Distribution, Inc., a Nevada corporation. Prior to February 25, 2004, J.K. Distribution, Inc. was owned and operated independently from us by our management team of Robert A. Friedland, Ronald L. Stone and Adrianne D. Moore. Each of Messrs. Friedland and Stone and Ms. Moore owned 1,000 shares of common stock of J.K. Distribution, Inc. We acquired all of the capital stock of J.K. Distribution, Inc. from our management team on February 25, 2004 for the sum of $1.00. This transaction was accounted for in our consolidated financial statements as a business combination of two entities under common control.

Critical Accounting Policies

      Financial Reporting Release No. 60, released by the Securities and Exchange Commission, requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Note 2 to our consolidated financial statements includes a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. Critical accounting policies are those accounting policies that we believe require subjective and complex judgment that could potentially affect reported results. Presented below are those accounting policies that we believe are critical accounting policies.

      We recognize revenue from DVD and videotape sales when there is persuasive evidence of a sale, when there is an agreement to purchase the product at a fixed or determinable price, and we have assurance of collection within a reasonable period of time. We recognize revenues when all of the preceding conditions are met. Revenues from licensing of films are recorded when material is available to the licensee and when the payment has been received by us. We follow SOP 00-2 and recognize revenue when the following conditions are met:

      If we do not meet any one of the preceding conditions, then we will defer recognizing revenue until all of the conditions are met.

      Costs of making motion picture films that are produced for sale to third parties are stated at the lower of cost, less accumulated amortization, or fair value. In accordance with SOP 00-2, we expense film production costs based on the ratio of the current period gross revenues to estimated total gross revenues from all sources on an individual production basis.

      Film production costs are expensed based on the ratio of the current period’s gross revenues to estimated remaining total gross revenues from all sources on an individual production basis. Estimated remaining gross revenue from all sources for film productions includes revenue that will be earned within ten years of the date of the initial release for film productions. Our estimation of the gross earnings is based on the historical data that we have regarding the likely projected revenue. The basis for these projections is our estimates of total DVD and videotape sales, total licensing fees earned, and total projected revenue from the compilations that are associated with the movies. The risk associated with these estimates are that the projected revenue is overstated, thus resulting in expensing the production

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      Capitalized film production costs at June 30, 2004 are $6,341,734 net of accumulated amortization of $4,681,073. Amortization expense for the six-month period ending June 30, 2004 and 2003 was $605,834 and $885,738, respectively. Amortization expense for the years ending December 31, 2003 and 2002 was $1,736,596 and $1,359,851, respectively.

      Financial Accounting Statement No. 123, Accounting for Stock Based Compensation, encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. We have chosen to continue to account for stock-based compensation using the intrinsic method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of our common stock at the date of the grant over the amount an employee must pay to acquire the stock. We have adopted the “disclosure only” alternative described in SFAS 123 and SFAS 148, which require pro forma disclosures of net income and earnings per share as if the fair value method of accounting had been applied.

Results of Operations

      Results of operations for the six month period ended June 30, 2004 compared to results of operations for the six month period ended June 30, 2003 are as follows:

      The following table sets forth certain consolidated statements of operations data as a percentage of net revenues for the six month period ended June 30, 2004 compared to the six month period ended June 30, 2003.

Net Loss

      In the first six months of 2004, we recognized interest expense of $300,838 due to the issuance of warrants to settle various outstanding debts. We also incurred a charge of $1,354,685 on deemed and accrued preferred stock dividends. These two transactions resulted in a significant change from a net income of $404,352 for the first six months of 2003 to a net loss of $1,914,958 for the first six months of 2004.

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      We do not expect to issue warrants or capital stock for services or debt that will result in a significant net loss for the remainder of 2004. We will continue to issue stock as payment of fees for services at a valuation equal to the market price of our common stock on the date of issuance.

Revenues

      Revenues from DVD and videotape sales of our movies decreased by $317,817 or 17% from first six months of 2003 to 2004. This decrease was due to a decrease in the number of new movies that we distributed for sale during the period, including a decrease in the number of movies that we distributed for third parties. In the first six months of 2003, we distributed 77 new movies and in the first six months of 2004 we distributed 52 new movies. Of the 77 new movies that we distributed in the first six months of 2003, 34 were movies that we did not produce. Of the 52 new movies that we distributed in the first six months of 2004, six were movies that we did not produce.

      The decrease in revenues from DVD and videotape sales has reversed in the third quarter of 2004 due in part from our licensing of the Bizarre Video line of movies. We hope to continue this trend of increasing our sales by introducing two additional product lines in November 2004, namely the “Collateral Damage XXX” movie line and the “BLU” movie line.

      In 2003, our capacity for movie production was limited. Accordingly, we entered into agreements with other producers to sell their movies in order to increase our sales. Over the last twelve months, we have increased our production capabilities in order to increase our profitability. By producing our own movies, we retain 100% of the revenue and have the ability to make compilations, which are movies made by taking scenes from previously produced and released movies that are compiled, repackaged and sold as new movies. When we distribute other companies’ movies, we retain only a portion of the sales revenue and cannot increase the profitability through compilations. We have also been able to negotiate better margins since 2003 with respect to the movies that we distribute for other companies.

      Revenues from licensing our movies to Internet webpage operators increased by $56,177 or 68%. Under these licensing agreements, we license our movies to Internet operators for sale to consumers over their web pages. These agreements are normally on a revenue sharing basis and presently result in approximately $20,000 to us in net revenue per month. We are paid monthly by the Internet operators under these agreements. We believe that our revenues from licensing our movies to Internet webpage operators have increased due to the increase in the number of our movies available for sale via the “Video on Demand (VOD)” feature utilized by such operators to distribute our movies to consumers and our entering into licensing agreements with a greater number of Internet webpage operators. The VOD technology allows a consumer to download and watch one of our movies from a webpage that licenses our movies whenever the consumer desires. We anticipate that this revenue stream will continue to grow as more companies offer VOD downloads and the number of homes with broadband capabilities increases. Also, as the technologies of the computers and television combine, we anticipate that the VOD market will continue to grow.

      Set forth below is a chart that shows the number of our movies that we licensed for sale over the Internet over the last four years:

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      Revenue from licensing distribution rights to our movies to foreign distributors increased by $73,399 or 130%. We license our movies to foreign distributors when the costs of mailing make it impractical for us to sell our movies directly to such distributors. These agreements are either by long-term basis or on a title-by-title basis. We project revenue of approximately $40,000 per month from these agreements. In all cases, we receive payment in full in advance before the license becomes effective. As our movie library has expanded and our company brand becomes more established, we have increased our efforts to license our movies to foreign markets. We currently license our movies to distributors in Europe, Asia, Australia, North America and South America.

      In addition to expanding our foreign licensing business, we are also expanding our direct sales of DVD and videotapes to foreign retailers and distributors. By shipping in bulk to new foreign distributors and retailers that we have entered into agreements with, we have determined that we can make a higher margin than licensing our movies.

      We believe that the foreign market will be a major area of expansion of our business because we are presently being approached by a number of foreign companies requesting to buy or license our movies. In 2002, we had one contact in Canada and one broker with respect to foreign licensing. We now have direct licensing agreements with five companies in five different geographic areas and have a number of agreements pending.

      In first six months of 2004, we had $10,097 in revenue from our licensing agreement for the sale of adult toys, which represented 0.5% of our total revenues for the period. We have licensed our name to an adult toy line and receive royalties based on the sale of the licensed products. The average income from this agreement is $3,000 per month. We are paid quarterly under this agreement. We had no similar revenue in the first six months of 2003. We anticipate that as our brand awareness increases our opportunities to expand this segment of our business will also increase.

      During the first six months of 2004, we had revenues of $3,152 from licensing our movies to cable, satellite, television station and hotel/motel operators. The revenue for the first six months of 2003 was $23,515. We had more revenue from this segment of our business during the first six months of 2003 because we received the final payments during that period under our now expired agreement with Colorado Satellite Broadcasting. We expect to increase our revenue from cable, satellite, television and hotel/motel chain licensing over the next twelve months by identifying and contacting potential licensees for our movies. For example, we entered into a licensing agreement with S.C. Folitexx Video on June 16, 2004 by which they have agreed to license 60 of our movies over the next 12 months for broadcast over Romanian television. We anticipate generating up to $80,000 in revenue a year under this agreement.

Costs of Revenues

      Costs of revenues are costs associated directly with the creation of revenue and include inventory and film cost amortization. Most costs of revenue items remained consistent from the first six months of 2003 to the first six months of 2004 with the exception of film amortization. As discussed in “Critical Accounting Policies” above, the Financial Accounting Standards Board (FASB) has determined that film production costs of a movie should be amortized over the period during which we predict that the movie will earn income. We increased the amortization period for our movies in 2004 because they have been generating income for a longer period than we had initially anticipated. The reason for this increase is because of our expanded historical data. We can now support a longer amortization period which results in reducing our yearly amortization costs. The increase in the amortization period resulted in a decrease of $280,902 or 32%, in amortization expenses in the first six months of 2004 compared to the first six months of 2003.

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Operating Expenses

      The increase in our operating expenses is mostly the result of increased professional fees that we incurred in connection with the merger of IDC Acquisition I Corp. with and into Jill Kelly Productions, Inc. and the sale of our Series A Preferred Stock and Series B Preferred Stock and additional overhead expenses that we incurred to create the corporate infrastructure necessary to accommodate our anticipated growth including expenses associated with hiring additional office personnel, renting additional office space and related expenses.

      Our advertising expenses increased by $44,235, or 66%, from the first six months of 2003 to 2004. This increase occurred due to our increasing the number of pages of advertisement that we purchased.

      Our consulting fees expenses increased by $141,121, or 147%, from the first six months of 2003 to 2004. We increased our use of consultants to help with equity and debt financing as well as with investor relations.

      Our legal expenses increased by $70,378, or 107%, from the first six months of 2003 to 2004. This increase occurred due to our agreement with Bizarre Video, investment and sale of our Maximum Media Ventures, LLC interest and legal expenses incurred in connection with the filing of this prospectus.

      Our office expenses decreased by $4,178, or 29%, from the first six months of 2003 to 2004. This decrease occurred due to our efforts to reduce inventories of office supplies prior to our move in mid July 2004.

      Our rent expenses increased by $1,968, or 6%, from the first six months of 2003 to 2004. This increase occurred due to a slight increase in our rent when we moved in May 2003. We began paying rent under the lease for our new facility on October 1, 2004.

      Our sales commission increased by $33,194, or 613%, from the first six months of 2003 to 2004. This increase occurred due to paying outside sales people commissions for sales that they created.

      Our telephone and utilities expenses decreased by $357, or 2%, from the first six months of 2003 to 2004. This decrease occurred due to our contracting more competitive cell phone agreements.

      Our other operating expenses increased by $373,933, or 278%, from the first six months of 2003 to 2004. Our “other operating expenses” include expenses related to the additional personnel, additional accounting expenses required for our initial audit, additional show expenses due to our increased presence at trade shows and increased Internet connectivity charges.

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      The following table sets forth certain consolidated statements of operations data as a percentage of net revenues for Year Ended December 31, 2003 compared to Year Ended December 31, 2002.

Net Loss

      We recognized interest expense of $5,754,494 due to the issuance of warrants to settle various outstanding debts. We also recognized $3,181,920 of stock based compensation for shares of capital stock issued to consultants as payment for fees for services. These grants were valued at the market price of our common stock at the date of issuance. Lastly, we incurred a charge of $274,157 on deemed and accrued preferred stock dividends. These three transactions resulted in the significant decline in net income from $229,223 for the year ended December 31, 2002 to a net loss applicable to common stockholders of $9,235,883 for the year ended December 31, 2003.

Revenues

      The increase in our revenues was the result of a number of factors, including:

      We increased revenues from DVD and videotape sales of our movies from 2002 to 2003 by $316,350, or 10%. This increase was due to an increase in the number of movies that we had available for sale. Total movies available for sale in 2002 were 87, of which 42 were produced by third parties. Total movies available for sale in 2003 were 115, of which 22 were produced by third parties. The increase in the number of movies that we had available for sale was primarily due to an increase in the number of compilations that we released. Compilations are movies made by taking scenes from previously produced and released movies that are compiled, repackaged and sold as new movies. In 2002, we released one compilation and in 2003 we released 34 compilations. Included in the above increase is a decrease in the amount of sales discount by $72,984 because of a prepayment arrangement with one of our largest customers. International Video Distributors, one of our largest customers, advanced us $300,000 for future purchases on December 12, 2002. Because it paid in advance, we credited International Video Distributors an additional $60,000 as a sales discount. The additional $12,984 in sales discount is consistent with the prior year.

      We increased revenues from licensing our movies to Internet webpage operators from 2002 to 2003 by $53,801, or 48%. We believe that our revenues from licensing our movies to Internet webpage operators have increased mostly because of the increase in the Video on Demand format utilized by such operators to distribute our movies to consumers and our entering into additional license agreements.

      In 2003, we increased our revenue from licensing distribution rights to our movies to foreign distributors by $160,060, or 149% over 2002. Although we intend to continue licensing foreign distribution rights to our movies, this segment of our business may be reduced if we determine that we can make higher margins through direct sales of our movies on DVDs and videotapes to foreign distributors and retailers.

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      In 2003, we had $21,120 in revenue from our licensing agreement for the sale of adult toys, which represented 0.5% of our total revenues for the year. This was the first year that we licensed such products.

      In 2003, we decreased our revenue from licensing our movies to cable, satellite, television station and hotel/motel chain operators by $262,448, or 86%. The reason for this decrease is primarily due to the expiration in June 2002 of a licensing agreement that we had with Colorado Satellite Broadcasting. This decrease is also the result of a decrease in sales by our sales agent that licenses our movies to hotel and motel chains.

Costs of Revenues

      Most cost of revenues items remained consistent from 2002 to 2003 with the exception of film amortization. We increased production from 45 movies in 2002 to 93 movies in 2003. This increase of 50 movies in 2003 resulted in an increase of film amortization expenses by $376,745, or 28% in 2003 over 2002.

      Our increase in cost of revenues also resulted in part from our decision to increase the production and post-production cycles for our movies from two months to four months. This caused us to incur increased production costs with no corresponding increase in revenues. We believe that this change will result in our movies having a better production value. Also, we believe that this increase will result in us being able to more readily meet our shipping deadlines and more effectively market our movies. The increase in cost of revenues resulted in lower gross profits. By increasing the time for production and post production, we are able to create a better product while still delivering the movies to our distributors and retailers on schedule. The increase in our production costs was a one time event as the costs of production do not cost more but we have additional movies in production during the increase in the cycle time.

Operating Expenses

      Our operating expenses increased in 2003 due to the following:

      Stock based compensation of $3,181,920 resulted in significantly increased costs to operations.

      Our general and administrative expenses increased by $288,608, or 123% over 2002. This increase is mostly the result of increased professional fees that occurred due to the merger that we consummated on August 8, 2003 and the private placement offering of our Series A Preferred Stock.

      Our advertising expenses decreased by $28,479, or 11%, from the year of 2002 to 2003. This decrease occurred due to focusing our advertising using mainly magazine advertising and greatly reducing the printing and graphics expense of individual movie flyers.

      Our consulting fees expenses increased by $3,144,420, or 1,283%, from the year of 2002 to 2003. We increased our use of consultants to help with equity and debt financing as well as with investor relations. This increase is primarily due to the valuation of the stock compensation issued to consultants as fees.

      Our legal expenses increased by $117,151, or 261%, from the year of 2002 to 2003. This increase occurred due to the merger of IDC Acquisition I Corp. with and into Jill Kelly Productions, Inc. and our Series A Preferred Stock private placement.

      Our office expenses increased by $19,333, or 192%, from the year of 2002 to 2003. This increase occurred due to our acquisition of small office equipment, non-depreciable, and additional office supplies to support the increase from three to eight workers.

      Our rent expenses increased by $11,344, or 17%, from the year of 2002 to 2003. This increase occurred due to an increase in our rent when we moved in May 2003. Although the rent payments are consistent with our prior location, the tenant pass through expenses resulted in a increase.

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      Our sales commission increased by $28,318, or 10,808%, from the year of 2002 to 2003. This increase occurred due to paying outside sales people commissions for sales that they created. Prior to 2003, we had negligible outside sales commissions.

      Our telephone and utilities expenses increased by $5,440, or 21%, from the year of 2002 to 2003. This increase occurred due to our expanding our production and office staff and the telephone usage that they incurred.

      Our other operating expenses increased by $34,177, or 14% over 2002. This increase was the result of additional overhead expenses that we incurred to create an infrastructure necessary to accommodate our anticipated growth including expenses associated with hiring, training and supporting additional staff.

      Our bad debt expense decreased by $202,544, or 88%. This decrease was due to a large write-off in 2002 and better collection efforts instituted in 2003. The reason for this large write-off was because we were carrying a large balance in our accounts receivable that we deemed uncollectible at the time. Upon review by our auditors, we decided not to carry any accounts receivable on our books for more than 120 days unless there is a reasonable likelihood of collection. When we made this determination, it resulted in a large write off. Our current policy is to review our delinquent accounts receivable on a quarterly basis to determine if we believe that they are collectible.

      We had a significant royalty expense under our distribution agreements in 2003 that was not present in 2002. Royalty expenses are expenses payable to third party producers of films that we distribute. We collect all revenues from the sales of these films then remit the portion due to the third party producer based on their agreement with us. On a number of our distribution agreements with other producers, we recoup all expenses prior to repaying the producer. A number of these movies had very insignificant royalties in 2002, but significant royalties in 2003. In 2003, we incurred $273,986 in royalty expenses and in 2002 we incurred $131,952.