UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

                   For the fiscal year ended December 31, 2007

                                       OR

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

                    For the transition period from ___ to ___

                        Commission file number 001-14790

                            Playboy Enterprises, Inc.
             (Exact name of registrant as specified in its charter)

                Delaware                               36-4249478
       (State of incorporation)          (I.R.S. Employer Identification Number)

680 North Lake Shore Drive, Chicago, IL                   60611
(Address of principal executive offices)                (Zip Code)

       Registrant's telephone number, including area code: (312) 751-8000
- --------------------------------------------------------------------------------
           Securities registered pursuant to Section 12(b) of the Act:



              Title of each class                 Name of each exchange on which registered
- -----------------------------------------------   ------------------------------------------
                                               
Class A Common Stock, par value $0.01 per share              New York Stock Exchange
Class B Common Stock, par value $0.01 per share              New York Stock Exchange


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

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]

Indicate  by  check  mark if the  registrant  is not  required  to file  reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]

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

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

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated filer, a non-accelerated  filer, or a smaller reporting company. See
definition  of "large  accelerated  filer,"  "accelerated  filer"  and  "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

   Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
                          Smaller reporting company [ ]

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

The aggregate market value of Class A Common Stock held by nonaffiliates on June
30, 2007 (based upon the closing sale price on the New York Stock  Exchange) was
$16,360,742.  The  aggregate  market  value  of  Class B  Common  Stock  held by
nonaffiliates  on June 30, 2007  (based  upon the closing  sale price on the New
York Stock Exchange) was $230,115,212.

At February 29, 2008,  there were  4,864,102  shares of Class A Common Stock and
28,407,816 shares of Class B Common Stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

Certain  information  required for Part II. Item 5 and Part III.  Items 10-14 of
this report is incorporated  herein by reference to the Notice of Annual Meeting
of Stockholders and Proxy Statement (to be filed) relating to the Annual Meeting
of Stockholders to be held in May 2008.



FORWARD-LOOKING STATEMENTS

      This Annual  Report on Form 10-K  contains  "forward-looking  statements,"
including  statements  in Part I. Item 1.  "Business,"  Part I.  Item 1A.  "Risk
Factors" and Part II. Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations,"  among other places,  as to  expectations,
beliefs,  plans,  objectives and future financial  performance,  and assumptions
underlying  or concerning  the  foregoing.  We use words such as "may,"  "will,"
"would," "could," "should," "believes,"  "estimates,"  "projects,"  "potential,"
"expects,"  "plans,"  "anticipates,"  "intends,"  "continues"  and other similar
terminology.  These forward-looking  statements involve known and unknown risks,
uncertainties  and  other  factors,   which  could  cause  our  actual  results,
performance or outcomes to differ  materially from those expressed or implied in
the  forward-looking  statements.  We want to  caution  you not to  place  undue
reliance on any  forward-looking  statements.  We  undertake  no  obligation  to
publicly  update  any  forward-looking  statements,  whether  as a result of new
information, future events or otherwise.

      The  following  are some of the  important  factors  that could  cause our
actual  results,  performance  or  outcomes  to  differ  materially  from  those
discussed in the forward-looking statements:

(1)   Foreign,  national,  state and local  government  regulations,  actions or
      initiatives, including:

            (a)   attempts to limit or otherwise regulate the sale, distribution
                  or transmission of adult-oriented materials,  including print,
                  television, video, Internet and wireless materials;

            (b)   limitations on the advertisement of tobacco, alcohol and other
                  products which are important  sources of  advertising  revenue
                  for us; or

            (c)   substantive changes in postal regulations which could increase
                  our postage and distribution costs;

(2)   Risks associated with our foreign operations,  including market acceptance
      and  demand  for  our  products  and the  products  of our  licensees  and
      partners;

(3)   Our  ability to manage the risk  associated  with our  exposure to foreign
      currency exchange rate fluctuations;

(4)   Changes in general economic conditions,  consumer spending habits, viewing
      patterns,  fashion trends or the retail sales  environment  which, in each
      case,  could reduce demand for our programming and products and impact our
      advertising revenues;

(5)   Our ability to protect our trademarks,  copyrights and other  intellectual
      property;

(6)   Risks as a distributor of media content, including our becoming subject to
      claims for defamation, invasion of privacy, negligence,  copyright, patent
      or trademark infringement and other claims based on the nature and content
      of the materials we distribute;

(7)   The risk  our  outstanding  litigation  could  result  in  settlements  or
      judgments which are material to us;

(8)   Dilution from any potential  issuance of common stock or convertible  debt
      in connection with financings or acquisition activities;

(9)   Competition  for  advertisers  from  other  publications,  media or online
      providers or any decrease in spending by advertisers,  either generally or
      with respect to the adult male market;

(10)  Competition in the television,  men's magazine,  Internet,  wireless,  new
      electronic media and product licensing markets;

(11)  Attempts by consumers, distributors,  merchants or private advocacy groups
      to exclude our programming or other products from distribution;

(12)  Our  television,  Internet  and  wireless  businesses'  reliance  on third
      parties  for  technology  and  distribution,   and  any  changes  in  that
      technology and/or  unforeseen delays in implementation  which might affect
      our plans and assumptions;

(13)  Risks  associated with losing access to transponders or technical  failure
      of transponders or other transmitting or playback equipment that is beyond
      our  control  and  competition  for  channel  space on  linear  television
      platforms or video-on-demand platforms;

(14)  Failure to maintain our  agreements  with multiple  system  operators,  or
      MSOs, and direct-to-home, or DTH, operators on favorable terms, as well as
      any decline in our access to, and  acceptance by, DTH and/or cable systems
      and the possible resulting deterioration in the terms, cancellation of fee
      arrangements,  pressure  on splits or adverse  changes in certain  minimum
      revenue amounts with operators of these systems;

(15)  Risks that we may not realize the expected increased sales and profits and
      other benefits from acquisitions;

(16)  Any charges or costs we incur in connection with restructuring measures we
      may take in the future;

(17)  Risks  associated  with the  financial  condition  of Claxson  Interactive
      Group, Inc., our Playboy TV-Latin America, LLC, joint venture partner;

(18)  Increases in paper, printing or postage costs;

(19)  Effects  of  the  national   consolidation  of  the  single-copy  magazine
      distribution  system and risks associated with the financial  stability of
      major magazine wholesalers;

(20)  Effects of the national consolidation of television distribution companies
      (e.g., cable MSOs, satellite

                                        2



      platforms and telecommunications companies); and

(21)  Risks  associated  with  the  viability  of our  subscription,  on-demand,
      e-commerce and ad-supported Internet models.

      For a detailed discussion of these and other factors that might affect our
performance,  see Part I. Item 1A. "Risk  Factors" of this Annual Report on Form
10-K.

                                       3



                            PLAYBOY ENTERPRISES, INC.
                         2007 ANNUAL REPORT ON FORM 10-K

                                TABLE OF CONTENTS

                                                                           Page
                                                                           ----

                                     PART I

Item 1.    Business                                                           5
Item 1A.   Risk Factors                                                      14
Item 1B.   Unresolved Staff Comments                                         21
Item 2.    Properties                                                        22
Item 3.    Legal Proceedings                                                 23
Item 4.    Submission of Matters to a Vote of Security Holders               24

                                     PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder
           Matters and Issuer Purchases of Equity Securities                 25
Item 6.    Selected Financial Data                                           26
Item 7.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations                                         28
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk        41
Item 8.    Financial Statements and Supplementary Data                       41
Item 9.    Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosure                                          68
Item 9A.   Controls and Procedures                                           68
Item 9B.   Other Information                                                 70

                                    PART III

Item 10.   Directors, Executive Officers and Corporate Governance            71
Item 11.   Executive Compensation                                            71
Item 12.   Security Ownership of Certain Beneficial Owners and
           Management and Related Stockholder Matters                        71
Item 13.   Certain Relationships and Related Transactions, and Director
           Independence                                                      71
Item 14.   Principal Accounting Fees and Services                            71

                                     PART IV

Item 15.   Exhibits and Financial Statement Schedules                        72

                                        4



                                     PART I

Item 1. Business
- ----------------

      Playboy   Enterprises,   Inc.,   together   with  its   subsidiaries   and
predecessors, is referred to in this Annual Report on Form 10-K by terms such as
"we," "us," "our,"  "Playboy"  and the  "Company,"  unless the context  requires
otherwise.  We were organized in 1953 to publish Playboy  magazine and are now a
brand-driven,  international multimedia entertainment and lifestyle company. The
Playboy  brand is one of the most widely  recognized  and popular  brands in the
world.  The strength of our brand drives the financial  performance of our media
and merchandising businesses. Our programming and content is available worldwide
on  television  and online via a network of  websites.  Playboy  magazine is the
best-selling  monthly  men's  magazine  in  the  world  based  on  the  combined
circulation  of the U.S. and  international  editions.  Our  licensing  business
leverages  the Playboy  name,  the Rabbit  Head Design and our other  trademarks
globally  on a variety of  consumer  products,  third-party  owned and  operated
Playboy-branded  retail  stores and  multifaceted  location-based  entertainment
venues.

      Our businesses are organized into the following three reportable segments:
Entertainment,  Publishing  and  Licensing.  Net revenues,  income before income
taxes,  depreciation and amortization and identifiable assets of each reportable
segment  are set  forth  in Note  (Q),  Segment  Information,  to the  Notes  to
Consolidated Financial Statements.

      Our  trademarks,  copyrights  and domain names are critical to the success
and  potential  growth  of all of our  businesses.  Our  trademarks,  which  are
renewable  periodically and which can be renewed indefinitely,  include Playboy,
the Rabbit Head Design, Playmate and Spice.

ENTERTAINMENT GROUP

      Our Entertainment Group operations include the production and marketing of
television  programming  for  our  domestic  and  international  TV  businesses,
web-based entertainment experiences, wireless content distribution,  e-commerce,
DVD products and satellite radio under the Playboy, Spice and other brand names.
In 2006, we acquired Club Jenna,  Inc. and related  companies,  or Club Jenna, a
multimedia adult entertainment  business. Club Jenna adds a premier brand to our
businesses with assets that include successful film production,  DVD, online and
mobile businesses as well as a library of content.

Programming

      Our  Entertainment  Group develops,  produces,  acquires and distributes a
wide  range of  high-quality  lifestyle  adult  television  programming  for our
domestic and  international  TV  networks,  pay-per-view,  or PPV,  subscription
pay-per-month, or PPM, video-on-demand, or VOD, subscription video-on-demand, or
SVOD, subscription package, or Tier, and worldwide DVD products. Our proprietary
productions include  magazine-format  shows,  reality-based and dramatic series,
documentaries,  live events and celebrity and Playmate programs. Our programming
is  featured in a variety of formats,  enabling us to leverage  our  programming
costs over multiple distribution  platforms.  We have produced a number of shows
that  air  on the  domestic  and  international  Playboy  TV  networks  and  are
distributed  internationally  in  countries  where  we  do  not  have  networks.
Additionally,  some of our  programming  is  released as DVD titles and some has
been licensed to other networks,  such as HBO and Showtime.  Our original series
programming  includes Naked Happy Girls,  Naughty  Amateur Home Videos,  69 Sexy
Things to Do Before You Die and Around the World in 80 Babes.  Additionally,  we
co-produce shows and series to air on third-party networks,  including The Girls
Next Door on E! Entertainment Television.

      We invest in the creation and acquisition of high-quality,  adult-oriented
programming to support our worldwide entertainment businesses. We invested $34.6
million,  $38.5 million and $33.1 million in entertainment  programming in 2007,
2006 and 2005, respectively.  These amounts, which also include expenditures for
licensed  programming,  resulted in the domestic  production of 276, 207 and 129
hours  of  original   programming  for  Playboy  TV  in  2007,  2006  and  2005,
respectively. At December 31, 2007, our domestic library of primarily exclusive,
Playboy-branded  original  programming  totaled  approximately  3,300 hours.  In
addition to investing  in original  productions,  we also  acquire  high-quality
adult movies in various editing  standards.  A majority of the programming  that
airs on our Spice  Digital  Networks is licensed,  on an exclusive  basis,  from
third parties. We will continue to both produce and acquire original programming
with a heavier  emphasis  on  producing  and  delivering  content  for  multiple
electronic delivery platforms, including both long- and short-form programming.

                                        5



      In  addition  to  utilizing  some of the  programming  we produce  for our
websites and for licensing to wireless providers, we invested $5.6 million, $5.0
million  and $2.2  million in  content  specifically  for  online  and  wireless
initiatives in 2007, 2006 and 2005, respectively.

      Our  programming  is  delivered  to  direct-to-home,  or  DTH,  and  cable
operators through satellite transponders and through outside content processors.
We currently have four transponder  service  agreements  related to our domestic
networks,  the terms of which extend through 2008,  2013, 2013 and 2014. We also
have two international transponder service agreements, the terms of which extend
through 2009. In connection with the potential sale of assets related to our Los
Angeles production facility,  we expect to transfer the four transponder service
agreements  related to our  domestic  networks to the  purchaser  of the assets.
Following such  transfer,  we will lease access to these  transponders  from the
purchaser.  See Note  (T),  Subsequent  Events,  to the  Notes  to  Consolidated
Financial Statements for additional information.

Domestic TV

      We currently  operate several domestic TV networks,  including Playboy TV,
Playboy TV en Espanol and the Spice Digital Networks.

      Our flagship service is Playboy TV, with a programming mix that includes a
variety of originally produced and exclusively licensed content.

      Playboy TV en Espanol is a Spanish language network similar to Playboy TV.
It shares some content with the  domestic  Playboy TV network and also  includes
locally   produced,    proprietary    Spanish-language    and   other   original
Spanish-language content.

      Spice Digital Networks feature adult movies under exclusive  licenses from
leading  adult studios and from our Club Jenna and other  original  productions.
These adult-oriented  networks offer a distinct thematic focus and are available
in a variety of editing standards.

      Our domestic TV content is  distributed  primarily  through  cable,  e.g.,
Comcast and Time Warner Cable;  DTH, e.g.,  DirecTV and EchoStar;  and telephone
companies,  or Telcos,  e.g., Verizon and AT&T, which distribute  television via
phone and/or fiber optic lines. Each of the distributors  controls the packaging
and pricing to consumers.

      The  following  table sets forth our domestic  and  Canadian  networks and
distribution options:



- ---------------------------------------------------------------------------------------
       Network           Domestic DTH   Domestic Cable   Domestic Telcos   Canadian DTH
- ---------------------------------------------------------------------------------------
                                                               
Playboy TV                  PPV/PPM      PPV/PPM/VOD/        PPM/SVOD           PPM
                                             SVOD
- ---------------------------------------------------------------------------------------
Playboy TV en Espanol         Tier       PPV/PPM/Tier          PPM              PPM
- ---------------------------------------------------------------------------------------
Spice Digital Networks        PPV           PPV/VOD            VOD              --
- ---------------------------------------------------------------------------------------


      Our TV networks are  available  either as linear  channels or as part of a
VOD service. Our linear channels, offered on cable, DTH and Telco platforms, are
television  networks with  regularly  scheduled  content  distributed  through a
single  network  feed to all homes at the same  time.  VOD and  SVOD,  which are
available on cable and Telco platforms,  makes content available to the consumer
through a television interface at any time the consumer chooses to view it. This
is done by storing a selection of content on a server at the local cable system,
which consumers may access by using their remote control devices at any time and
for a specified  time.  Consumers  then view the  content in a DVD-like  manner,
i.e., they may pause, fast forward,  rewind,  stop and resume viewing at a later
time.

      In recent  years,  cable  operators  have  shifted  from analog to digital
technology,  moving away from linear PPV to VOD. Digital  technology  allows for
the compression of signals so that several  channels fit into the same bandwidth
previously consumed by a single analog channel.  Accordingly,  digital is a more
efficient  technology for all platforms,  and DVD functionality is only possible
in a digital  environment.  We transmit  exclusively  in  digital,  and the vast
majority of delivery to consumers is via digital technology.

                                       6



      Playboy TV is the only adult television network available on all major DTH
services in both the United States and Canada.

      As VOD supplants  traditional linear networks, we are seeking to establish
a leading  position in this new phase of technology  by leveraging  the power of
our brands, our large library of original programming and our relationships with
leading adult studios,  while at the same time recognizing that we are operating
in a far more fragmented and competitive marketplace with lower costs of entry.

      Our revenues  generally  reflect our contractual  percentage of the retail
price received by the system operators.

      Channel  space  for our  networks  is  determined  at  each  distributor's
corporate level as part of our distributor negotiations; however, in some cases,
we negotiate terms at the corporate level with distribution at the system level.

      Our  agreements  with cable and DTH operators are renewed or  renegotiated
from time to time in the ordinary course of business.  In some cases,  following
the expiration of an agreement, the respective operator and we agree to continue
to operate  under the terms of the expired  agreement  until a new  agreement is
negotiated.  In any event,  our agreements  with  distributors  generally may be
terminated on short notice without penalty.

International TV

      We   currently   own  and   operate  or  license   Playboy-,   Spice-  and
locally-branded TV networks in the United Kingdom, which are further distributed
through DTH and cable throughout greater Europe. Additionally,  we have networks
in Australia,  France,  Germany, Hong Kong, Israel, New Zealand, South Korea and
Turkey.  Also,  through joint  ventures,  we have minority  equity  interests in
networks in Latin America, Iberia and Japan. These international networks, which
are  generally  available  on  both  a PPV  and  PPM  basis,  principally  carry
U.S.-originated  content, which is subtitled or dubbed and complemented by local
content.  We also license  individual  programs  from our  extensive  library to
broadcasters internationally.

      We own a 19.0%  interest in Playboy  TV-Latin  America,  LLC, or PTVLA,  a
joint venture with Claxson  Interactive Group, Inc., or Claxson,  which operates
Playboy TV  networks  in Latin  America  and  Iberia,  as well as a local  adult
service called Venus. In the third quarter of 2007, PTVLA launched Lifestyle TV,
a male targeted, ad-supported basic cable channel with a mix of locally produced
and acquired content with no nudity.  In these markets,  PTVLA has the exclusive
right to use content from the Playboy  library.  In the fourth  quarter of 2007,
PTVLA reached an agreement with Turner Broadcasting System Latin America,  Inc.,
or Turner,  to exclusively  distribute all PTVLA owned and operated services and
to sell  advertising  on Lifestyle TV. Turner  bundles PTVLA channels with their
existing services,  including Cartoon Network,  CNN and TNT. PTVLA pays Turner a
distribution fee.

      In the third quarter of 2007,  PTVLA entered into a new joint venture with
Globomedia  S.A., or GLOBO,  to own and operate adult services in Brazil.  PTVLA
owns a 40% interest in the joint venture and GLOBO owns 60%.  Channels  included
in the joint venture are PTVLA-owned Playboy TV and Venus as well as GLOBO-owned
Sexy Hot. Both  companies have  gay-themed  channels that will be combined using
GLOBO's For Men brand.  In addition,  PTVLA has  contributed  non-branded  adult
content for use in DVD distribution and online and mobile markets in Brazil.

      While  Claxson has  management  control,  we have  significant  management
influence on our joint venture.  We provide both  programming and the use of our
trademarks  directly to PTVLA in return for 17.5% of the  venture's net revenues
with a guaranteed  annual minimum.  The term of the program supply and trademark
agreement for PTVLA  expires in 2022,  unless  terminated  earlier in accordance
with the terms of the  agreement.  PTVLA  provides  the feed for  Playboy  TV en
Espanol  and we pay  PTVLA a 20%  distribution  fee for that  feed  based on the
network's net revenues in the U.S.

      We have an option to purchase up to an  additional  30.9% of PTVLA at fair
market  value  through  December 23,  2022.  In addition,  we have the option to
purchase the remaining  50.1% of PTVLA at fair market value,  exercisable at any
time during the period  beginning  December  23, 2012,  and ending  December 23,
2022, so long as we have previously or concurrently  exercised the initial 49.9%
buy-up option. We have the option to pay the purchase price for the 49.9% buy-up
option  in cash,  shares  of our Class B common  stock,  or Class B stock,  or a
combination of both. However, if we exercise both options concurrently,  we must
use cash to acquire the 80.1% of PTVLA that we do not own.

                                        7



      We also hold a 19.9% ownership  interest in Playboy  Channel Japan,  which
includes Playboy Channel and Channel Ruby, a local adult service.

      We seek the most  appropriate  and profitable  manner in which to build on
the powerful Playboy and Spice brands in each international market. In addition,
we seek to generate  synergies among our networks by combining  operations where
practicable,  through  innovative  programming  and  scheduling,  through  joint
programming  acquisitions and by coordinating and sharing  marketing  activities
and materials efficiently throughout the territories in which our programming is
aired. We also look to develop and establish  relationships  with  international
production companies on a local level in order to create original  international
product for distribution to our various owned and licensed networks.

      We believe we can continue growing our international  television  business
by  expanding  the  distribution  reach  of  existing  networks;  launching  and
operating  additional  networks  in existing  and new  markets;  and  increasing
subscription  penetration  and buy rates  with new  programming  and  scheduling
tactics as well as targeted marketing  activities.  In addition,  we expect that
the roll out of digital  technology  in  addressable  households in our existing
international markets will favor growth.

Online/Mobile

      We operate various subscription-based  websites, or clubs, as well as free
and e-commerce websites under our Playboy and other brands.

      Our largest club, Playboy Cyber Club, offers access to over 100,000 photos
and videos and offers  members the ability to see  Playmates,  an  assortment of
celebrity  content and special "online only" features,  including our franchises
of "Cyber  Girls" and  "Coeds"  and an  extensive  archive  of Playboy  magazine
interviews.  The other  Playboy-branded  clubs include broadband  video-specific
membership clubs,  solely offering  high-quality video, and a thematic pictorial
and video club navigable by niche.

      We offer two online VOD  theaters  under the Playboy and Spice brands that
provide consumers the option to view video content on a pay-per-minute basis, to
download entire movies for viewing on their  computers  and/or to burn movies to
DVD.

      We also  offer  sites  branded  under  the  Spice  and Club  Jenna  names,
including  ClubJenna.com,  as  well  as  niche,  reality-based  sites  produced,
marketed and promoted via our large affiliate  network of websites.  We continue
to add new niche  sites as  changes  in the  market  warrant.  In 2006,  we also
introduced a first-of-its-kind adult SVOD website, Adult.com, which offers users
the ability to pay a recurring  subscription fee to stream,  download or burn to
DVD any video in the entire library.

      Our   Playboy-branded    e-commerce    websites,    PlayboyStore.com   and
ShopTheBunny.com, combined with their respective Playboy and BUNNYshop Catalogs,
offer  customers the ability to purchase  Playboy-branded  fashions,  calendars,
DVDs,  jewelry,  collectibles,  back  issues of  Playboy  magazine  and  special
editions,  as well as select  non-Playboy-branded  products.  In early 2008,  we
entered into a contract to outsource the Playboy and  BUNNYshop  businesses to a
third party. We anticipate that by the second quarter of 2008, we will no longer
be operating these businesses  although we retain significant  creative control.
In late 2006, we also outsourced the operation of our  Spice-branded  e-commerce
website, SpiceTVStore.com, and the Spice Catalog to a third party.

      We launched a  site-wide  redesign of  Playboy.com  in late 2006.  The new
Playboy.com  website offers more original content  leveraging Playboy magazine's
editorial assets and providing more opportunities to increase online advertising
sales.  Additionally,  the free area of the website is  designed  with a goal of
converting visitors to purchasers by directing them to our subscription sites.

      We also  distribute our branded content  internationally  via the Internet
and wireless platforms.  We have significant traffic from international users on
our owned and operated websites, Playboy.com and Playboy.co.uk,  that results in
customers for our other products and services. Additionally, we have websites in
approximately  20 countries,  some of which were created in conjunction with our
international magazine partners, that feature a blend of original, local-edition
Playboy  magazine and U.S. and U.K.  websites'  content.  We also have licensees
that distribute our content on the wireless  platform in many countries.  Demand
for wireless content is increasing as technology and consumer  adoption continue
to grow. Our current offerings include  graphical  images,  video clips,

                                        8



mobile television, ringtones and games. We also create integrated cross-platform
mobile marketing and promotions to leverage opportunities across our businesses.

Other Businesses

      We distribute some of our proprietary content  domestically in DVD format.
We also distribute  non-Playboy-branded  movies and adult DVDs, including titles
under the Club  Jenna  brand,  and  re-package  and  re-market  our  catalog  of
previously  released DVD titles.  These DVDs are sold worldwide via distributors
to video and music stores, other retail outlets, catalogs and e-commerce sites.

      Playboy  Radio is a 24-hour  Playboy-branded  radio  channel  available on
SIRIUS  Satellite  Radio.  The channel  features new and  exclusive  content and
leverages  our  entertainment  assets  by  expanding  the  Playboy  brand on the
satellite radio platform.

      Alta Loma Entertainment  functions as a production  company.  It leverages
our assets, including editorial material and the Playboy brand, as well as icons
such  as  the  Playmates,   the  Playboy   Mansion  and  Hugh  M.  Hefner,   our
Editor-In-Chief  and Chief  Creative  Officer,  or Mr.  Hefner,  to develop  and
co-produce original programming, such as the top-rated The Girls Next Door on E!
Entertainment Television.

Competition

      Competition  among  television  programming  providers is intense for both
channel space and viewer spending.  Our competition  varies in both the type and
quality of  programming  offered,  but consists  primarily of other  premium pay
services,  such as  general-interest  premium channels and other adult movie pay
services.  We compete with the other pay services as we (a) attempt to obtain or
renew carriage with DTH operators and individual cable affiliates, (b) negotiate
fee arrangements with these operators, (c) negotiate for VOD and SVOD rights and
(d) market our programming to consumers  through these operators.  Over the past
several years,  all of the  competitive  factors  described above have adversely
impacted us, as has consolidation in the DTH and cable systems industries, which
has resulted in fewer,  but larger,  operators.  The  availability of, and price
pressure  from,  more explicit  content on the Internet and more pay  television
options,  both  mainstream  and adult,  also present a  significant  competitive
challenge.  We believe  the  impact on our movie  networks  is greater  than the
impact on Playboy TV due to the strong brand recognition of Playboy, the quality
of our original  programming and our ability to appeal to a broad range of adult
audiences.

      As a result of VOD's  lower  cost of entry  for  programmers  compared  to
linear  networks and capacity  constraints  disappearing,  the market has become
significantly  more  competitive  as we have  less  shelf  space.  We  encourage
distributors  to increase  the dollars  they spend  marketing  the full range of
Playboy PPV,  VOD,  SVOD and PPM to consumers  with  particular  emphasis on the
value of PPM. Our strategy  with respect to Spice is to maintain VOD shelf space
while reducing costs.

      We  also  face  competition  in   international   markets  from  both  the
availability  and  prevalence  of  explicit  adult  content on free  television,
specifically  in Europe,  as well as competitive  pay services.  As in the U.S.,
there  are  often  low  costs of  entry,  which  yield  increasing  competition,
especially from companies in Asia and parts of Europe providing local content as
opposed to dubbed U.S. programming.

      The  Internet  is highly  competitive,  and we  continue  to  compete  for
visitors,  subscribers,  shoppers and  advertisers.  We believe that the primary
competitive factors affecting our Internet operations include brand recognition,
the quality of our content and  products,  technology,  including  the number of
broadband homes,  pricing, ease of use, sales and marketing efforts and consumer
demographics.  We have the  advantage of being able to leverage the power of our
Playboy and other brands across multiple media platforms.

PUBLISHING GROUP

      Our  Publishing  Group  operations  include  the  publication  of  Playboy
magazine,  special editions and other domestic publishing businesses,  including
books and  calendars,  and the  licensing of  international  editions of Playboy
magazine.

                                        9



Domestic Magazine

      Founded  by Mr.  Hefner  in  1953,  Playboy  magazine  plays a key role in
driving the continued  popularity and recognition of the Playboy brand.  Playboy
magazine is the  best-selling  monthly men's  magazine in the world based on the
combined circulation of the U.S. and international editions.  Circulation of the
U.S.  edition was  approximately  2.8 million copies monthly in 2007,  while the
combined  average  circulation  of the 24 licensed  international  editions  was
approximately  1.0 million copies  monthly in 2007.  According to fall 2007 data
published by the independent market research firm of Mediamark  Research,  Inc.,
or MRI,  approximately one in every eight men in the United States aged 18 to 34
reads the U.S. edition of Playboy magazine.

      Playboy magazine is a general-interest  magazine,  targeted to men, with a
reputation   for   excellence   founded   on   its   high-quality   photography,
entertainment,  humor,  cartoons and articles on current  issues,  interests and
trends. Playboy magazine consistently includes in-depth,  candid interviews with
high-profile political,  business,  entertainment and sports figures, pictorials
of famous women and content by leading authors, including the following:

              Interviews           Pictorials       Leading Authors
          ------------------   -----------------   -----------------

              Halle Berry       Pamela Anderson      Jimmy Breslin
             Michael Brown       Drew Barrymore       Ethan Coen
            George Clooney       Cindy Crawford      Denis Johnson
              Al Franken         Carmen Electra      Stephen King
              Bill Gates         Rachel Hunter       Norman Mailer
          Arianna Huffington     Kim Kardashian      Jay McInerney
              Derek Jeter       Elle Macpherson      Walter Mosley
             Nicole Kidman       Cindy Margolis    Joyce Carol Oates
            Jack Nicholson       Jenny McCarthy       Jane Smiley
            Bill Richardson     Denise Richards       Scott Turow
             Donald Trump      Anna Nicole Smith      John Updike
              Kanye West         Katarina Witt       Kurt Vonnegut

      Playboy  magazine  has long  been  known  for  publishing  the work of top
photographers,  writers and artists.  Playboy  magazine also features  lifestyle
articles on consumer electronics and other products, fashion and automobiles and
covers the worlds of sports and entertainment.

      According to the independent audit agency Audit Bureau of Circulations, or
ABC, for the six months ended December 31, 2007,  Playboy  magazine was the 15th
highest-ranking U.S. consumer publication in terms of circulation rate base (the
total newsstand and subscription circulation guaranteed to advertisers). Playboy
magazine's  circulation  rate base for the same period was greater  than each of
Maxim,  GQ and  Esquire.  To better  reflect  changes in how and where  media is
consumed and in response to the challenging magazine landscape,  we adjusted our
magazine  circulation  rate base  effective  with the January  2008 issue to 2.6
million from 3.0 million.

      Playboy magazine has historically  generated  approximately  two-thirds of
its revenues from  subscription  and newsstand  circulation,  with the remainder
primarily from advertising.  Subscription copies represent  approximately 92% of
total copies  sold.  Managing  Playboy  magazine's  circulation  to be primarily
subscription driven provides a relatively stable and desirable circulation base,
which we believe is attractive to advertisers.  According to MRI, the median age
of male Playboy magazine readers is 33, with a median annual household income of
approximately  $54,000,  a  demographic  that we believe is also  attractive  to
advertisers.  We also  derive  revenues  from the rental of  Playboy  magazine's
subscriber list.

      We attract new subscribers to Playboy magazine through our own direct mail
advertising campaigns,  subscription agent campaigns and the Internet, including
Playboy.com.  Subscription  copies of the  magazine  are  delivered  through the
United  States Postal  Service as  periodical  mail. We attempt to contain these
costs through presorting and other methods.

      Playboy  magazine  is also  available  as a digital  edition.  Each month,
digital copies are delivered to subscribers via the Internet. Digital copies may
also be purchased on a single-issue basis.

                                       10



      Playboy  magazine is one of the highest  priced  magazines in the U.S. The
basic U.S.  newsstand  cover  price is $5.99  ($6.99 for the  December  2007 and
January 2008 holiday issues). We generally increase the newsstand cover price by
$1.00  when there is a feature  of  special  appeal.  We price test from time to
time; however, no cover price increases are planned for 2008.

      Playboy magazine targets a wide range of advertisers.  The following table
sets forth advertising by category, as a percent of total advertising pages, and
the total number of advertising pages:

                                        Fiscal Year   Fiscal Year   Fiscal Year
                                              Ended         Ended         Ended
Category                                   12/31/07      12/31/06      12/31/05
- -------------------------------------------------------------------------------
Retail/Direct mail                               29%           28%           27%
Beer/Wine/Liquor                                 28            21            22
Tobacco                                          13            13            10
Apparel/Footwear/Accessories                      5             7             1
Electronic games                                  5             1             4
Home electronics                                  4             4             6
Automotive                                        3             4             6
Automotive accessories and equipment              3             4             3
Other                                            10            18            21
- -------------------------------------------------------------------------------
Total                                           100%          100%          100%
- -------------------------------------------------------------------------------
Total advertising pages                         460           429           479
===============================================================================

      We continue  to focus on securing  new  advertisers,  including  expanding
advertising in underserved  categories.  We publish the U.S.  edition of Playboy
magazine in 15 advertising editions: one upper income zip-coded, eight regional,
two  state  and four  metropolitan  editions.  All  contain  the same  editorial
material but provide targeting opportunities for advertisers. We implemented 4%,
5% and 8% cost per thousand  increases in advertising  rates  effective with the
January 2008, 2007 and 2006 issues, respectively.

      Playboy  magazine   subscriptions  are  serviced  by  Communications  Data
Services,  Inc., or CDS. Pursuant to a subscription  fulfillment agreement,  CDS
performs a variety of services, including (a) processing orders or transactions,
(b) receiving,  verifying,  balancing and depositing  payments from subscribers,
(c) printing forms and promotional  materials,  (d) maintaining  master files on
all  subscribers,  (e) issuing  bills and renewal  notices to  subscribers,  (f)
generating  labels,  (g) resolving customer service complaints as directed by us
and (h) furnishing  various reports that enable us to monitor and to account for
all  aspects  of the  subscription  operations.  The  term  of the  subscription
fulfillment  agreement  expires June 30, 2011.  Either party may  terminate  the
agreement  prior to  expiration in the event of material  nonperformance  by, or
insolvency  of, the other party.  We pay CDS specified fees and charges based on
the types and amounts of service  performed  under the  agreement.  The fees and
charges  increase  annually based on the consumer price index to a maximum of 6%
in one year.

      Domestic   distribution  of  Playboy  magazine  and  special  editions  to
newsstands and other retail outlets is accomplished  through  Time/Warner Retail
Sales and Marketing,  or TWRSM.  The copies are shipped in bulk to  wholesalers,
who are responsible for local retail distribution. We receive a substantial cash
advance from TWRSM 30 days after the date each issue goes on sale.  We recognize
revenues  from  newsstand  sales based on estimated  copy sales at the time each
issue  goes on sale and adjust for actual  sales  upon  settlement  with  TWRSM.
Revenue  adjustments  have not been material.  Retailers return unsold copies to
wholesalers, who count and then shred the returned copies and report the returns
by  affidavit.  The number of copies  sold on  newsstands  varies  from month to
month,  depending in part on consumer  interest in the cover, the pictorials and
the editorial features. Our current agreement with TWRSM expires December 2008.

      Playboy magazine and special editions are printed at Quad/Graphics,  Inc.,
or Quad,  at a single site  located in  Wisconsin,  which ships the  products to
subscribers  and  wholesalers.  The print runs vary each month based on expected
sales and are  determined  with input from  TWRSM.  Paper is the  principal  raw
material used in the production of these publications. We use a variety of types
of  high-quality  coated and uncoated papers that are purchased from a number of
suppliers around the world.

      Magazine  publishing  companies  face  intense  competition  for  readers,
advertisers and retail shelf space. Magazines and Internet sites primarily aimed
at men are Playboy magazine's principal  competitors.  Other types of media that
carry  advertising,  particularly cable and broadcast  television,  also compete
with Playboy magazine for

                                       11



advertising  revenues.  Levels of advertising revenues may be affected by, among
other things,  competition  for and spending by  advertisers,  general  economic
activity and  governmental  regulation of advertising  content,  such as tobacco
products.  However,  since only  approximately  one-third of Playboy  magazine's
revenues  and less  than 10% of our total  revenues  are from  Playboy  magazine
advertising, we are not overly dependent on this source of revenue.

International Magazine

      We  license  the right to  publish 24  international  editions  of Playboy
magazine  to local  partners  in the  following  countries:  Argentina,  Brazil,
Bulgaria,  Colombia,  Croatia,  the Czech Republic,  Estonia,  France,  Georgia,
Germany,  Greece,  Hungary,  Japan,  Mexico, the Netherlands,  Poland,  Romania,
Russia, Serbia, Slovakia, Slovenia, Spain, Ukraine and Venezuela.

      Local publishing  licensees tailor their international  editions by mixing
the work of their  national  writers and artists with  editorial  and  pictorial
content  from the U.S.  edition.  We monitor  the  content of the  international
editions so that they retain the distinctive style, look and quality of the U.S.
edition  while  meeting  the  needs of their  respective  markets.  The  license
agreements vary but, in general,  are for terms of three to five years and carry
a guaranteed minimum royalty as well as a formula for computing earned royalties
in excess of the minimum. Royalty computations are based on both circulation and
advertising   revenues.   The  German  and  Brazilian   editions  accounted  for
approximately  one-half of our total  revenues  from  international  editions in
2007, 2006 and 2005.

Special Editions and Other

      We have created media extensions,  such as special editions and calendars,
which are primarily sold in newsstand outlets.  We published 25 special editions
in each of 2007,  2006 and 2005,  and we expect to  publish  the same  number in
2008.  Effective with the issues on newsstands in July 2007, the U.S.  newsstand
cover price was  increased  to $9.99 from $8.99.  No cover price  increases  are
currently  planned for 2008. We also license  rights to third parties to publish
books for which we receive royalties.

LICENSING GROUP

      Our Licensing Group operations  include the licensing of consumer products
carrying one or more of our  trademarks  and/or  images,  third-party  owned and
operated    Playboy-branded   retail   stores,    multifaceted    location-based
entertainment venues and certain revenue-generating marketing activities.

      We license the  Playboy  name,  the Rabbit  Head Design and other  images,
trademarks and artwork for the worldwide manufacture, sale and distribution of a
multitude of consumer  products.  We work with our licensees to develop,  market
and distribute high-quality  Playboy-branded  merchandise.  Our licensed product
lines include men's and women's apparel,  men's underwear and women's  lingerie,
accessories, collectibles, cigars, watches, jewelry, fragrances, shoes, luggage,
bath and  body  products,  small  leather  goods,  stationery,  music,  eyewear,
barware,  home fashions and slot machines.  We  continually  seek to license our
brand name and images in new markets and retail categories, including the launch
in 2007 of  PlayboyGaming.com,  a Playboy-branded  online casino and poker site.
The  group  also  licenses  art-related  products  based  on our  extensive  art
collection,  most of which was  originally  commissioned  as  illustrations  for
Playboy  magazine.   Occasionally,  we  sell  small  portions  of  our  art  and
memorabilia  collection through auction houses such as Christie's and Sotheby's.
Playboy-branded  merchandise  is  marketed  primarily  through  retail  outlets,
including  department  and  specialty  stores,  as well as through our and other
e-commerce websites and catalogs.

      We also license Playboy  concept  stores,  opening eight in the last three
years,  with locations in Auckland,  Bangkok,  Hong Kong, Kuala Lumpur,  London,
Melbourne  and two in Las Vegas.  We expect  licensees to open three  additional
stores in 2008.

      We  have  expanded  our  licensing   activities  to  include  multifaceted
location-based  entertainment  venues. Our first such venue located at the Palms
Casino  Resort in Las Vegas  opened in the fourth  quarter of 2006.  Our venture
partner  provided the funding for all of the Playboy  elements,  which include a
30-foot  tall Rabbit Head on the  exterior of their new tower,  a  nightclub,  a
boutique  casino and  lounge,  a retail  store and a sky villa hotel  suite.  We
contributed  the Playboy brand and trademarks as well as marketing  support.  In
2007, we announced a joint venture with Macao Studio City for a  Playboy-branded
entertainment   destination   in  Macao,   which  will  include   nightlife  and
entertainment  options,  dining,  specialty retail elements and a Hugh M. Hefner
Villa. This venue is expected to open in late 2009.

                                       12



      While our branded products are unique, the licensing business is intensely
competitive  and is  extremely  sensitive  to  economic  conditions,  shifts  in
consumer buying habits,  fashion and lifestyle  trends and changes in the global
retail sales environment.

      Company-wide   marketing  events,  which  are  operated  at  approximately
break-even,  consist of the Playboy Jazz  Festival and Playmate  Promotions.  We
have produced the Playboy Jazz Festival on an annual basis in Los Angeles at the
Hollywood  Bowl since 1979 and continue  our  sponsorship  of related  community
events.  Playmate Promotions represents the Playmates in advertising  campaigns,
trade shows, endorsements, commercials, motion pictures, television and videos.

PROMOTIONAL AND OTHER ACTIVITIES

      We believe  that our sales of products and services are enhanced by public
recognition  of the  Playboy  brand  as  symbolic  of a  lifestyle.  In order to
establish public recognition, we, among other activities,  purchased in 1971 the
Playboy Mansion in Los Angeles,  California, where Mr. Hefner lives. The Playboy
Mansion  is used for  various  corporate  activities  and  serves as a  valuable
location  for  television  production,  magazine  photography  and  for  online,
advertising,  marketing and sales events. It also enhances our image, as we host
many charitable and civic functions.  The Playboy Mansion generates  substantial
publicity  and  recognition,  which  increases  public  awareness  of us and our
products and services. As indicated in Part II. Item 7. "Management's Discussion
and Analysis of Financial  Condition  and Results of  Operations"  and Part III.
Item 13. "Certain  Relationships and Related  Transactions,"  Mr. Hefner pays us
rent for that portion of the Playboy  Mansion used  exclusively  for his and his
personal  guests'  residence as well as for the per-unit  value of  non-business
meals, beverages and other benefits received by him and his personal guests. The
Playboy Mansion is included in our  Consolidated  Balance Sheets at December 31,
2007 and  December  31,  2006,  at a net book  value  of $1.4  million  and $1.6
million,   respectively,   including  all  improvements  and  after  accumulated
depreciation.  We incur all operating expenses of the Playboy Mansion, including
depreciation and taxes,  which were $2.8 million,  $2.1 million and $3.1 million
for 2007, 2006 and 2005, respectively, net of rent received from Mr. Hefner.

      The Playboy Foundation  provides financial support to many  not-for-profit
organizations  and  projects   throughout  the  country  concerned  with  issues
historically  of  importance  to Playboy  magazine  and its  readers,  including
anti-censorship efforts, civil rights, AIDS education,  prevention and research,
reproductive freedom and social justice.

      Our  trademarks,  copyrights  and online  domain names are critical to the
success and growth  potential of all of our businesses.  We actively protect and
defend them  throughout the world and monitor the  marketplace  for  counterfeit
products, including by initiating legal proceedings,  when warranted, to prevent
their unauthorized use.

EMPLOYEES

      We employed  789 and 782  full-time  employees  at  February  29, 2008 and
February 28, 2007,  respectively.  No employees  are  represented  by collective
bargaining agreements.  We believe we maintain a satisfactory  relationship with
our employees.

AVAILABLE INFORMATION

      We make available  free of charge on our website,  PlayboyEnterprises.com,
our annual,  quarterly and current  reports,  and, if applicable,  amendments to
those  reports,  filed  or  furnished  pursuant  to  Section  13 or 15(d) of the
Securities  Exchange Act of 1934,  as soon as  reasonably  practicable  after we
electronically  file such  material  with,  or furnish it to, the United  States
Securities and Exchange Commission.

      Also  posted on our website are the  charters of the Audit  Committee  and
Compensation  Committee of our Board of Directors,  our Code of Business Conduct
and our Corporate Governance Guidelines. Copies of these documents are available
free of charge by sending a request to Investor Relations,  Playboy Enterprises,
Inc., 680 North Lake Shore Drive, Chicago, Illinois 60611.

      As required  under  Section  302 of the  Sarbanes-Oxley  Act of 2002,  the
certifications  of our Chief Executive  Officer and Chief Financial  Officer are
filed as exhibits to this Annual Report on Form 10-K. In addition,  we submitted
to  the  New  York  Stock  Exchange,  or  the  Exchange,   the  required  annual
certifications  of our Chief Executive Officer relating to compliance by us with
the Exchange's corporate governance listing standards. Copies

                                       13



of these  certifications are available to stockholders free of charge by sending
a request to Investor Relations, Playboy Enterprises, Inc., 680 North Lake Shore
Drive, Chicago, Illinois 60611.

Item 1A. Risk Factors
- ---------------------

      In addition to the other  information  contained in this Annual  Report on
Form  10-K,  the  following  risk  factors  should be  carefully  considered  in
evaluating our business and us.

      We may not be able to protect our intellectual property rights.

      We believe that our trademarks,  particularly  the Playboy name and Rabbit
Head Design,  and other proprietary  rights are critical to our success,  growth
potential and competitive position. Accordingly, we devote substantial resources
to the  establishment  and protection of our  trademarks  and other  proprietary
rights.   Our  actions  to  establish  and  protect  our  trademarks  and  other
proprietary rights, however, may not prevent imitation of our products by others
or prevent others from claiming  violations of their  trademarks and proprietary
rights by us. Any infringement or related claims,  even if not meritorious,  may
be costly and time  consuming to litigate,  may distract  management  from other
tasks of  operating  the  business  and may  result  in the loss of  significant
financial and  managerial  resources,  which could harm our business,  financial
condition or operating  results.  These concerns are particularly  relevant with
regard to those international  markets, such as China, in which it is especially
difficult to enforce intellectual property rights.

      Failure to maintain our  agreements  with multiple  system  operators,  or
MSOs, and DTH operators on favorable terms could adversely  affect our business,
financial condition or results of operations.

      We currently  have  agreements  with all of the largest MSOs in the United
States.  We also have  agreements with the principal DTH operators in the United
States and Canada.  Our  agreements  with these  operators  may be terminated on
short notice without penalty.  If one or more MSOs or DTH operators terminate or
do not renew these  agreements,  or do not renew them on terms as  favorable  as
those of current  agreements,  our business,  financial  condition or results of
operations could be materially adversely affected.

      In addition, competition among television programming providers is intense
for both channel space and viewer spending.  Our competition  varies in both the
type and quality of programming offered, but consists primarily of other premium
pay services,  such as general-interest  premium channels, and other adult movie
pay  services.  We compete  with other pay  services  as we attempt to obtain or
renew carriage with DTH operators and individual cable affiliates, negotiate fee
arrangements with these operators,  negotiate for VOD and SVOD rights and market
our  programming  through these  operators to consumers.  The  competition  with
programming  providers has intensified as a result of  consolidation  in the DTH
and  cable  systems  industries,  which  has  resulted  in  fewer,  but  larger,
operators.  Competition has also  intensified with VOD's lower cost of entry for
programmers   compared  to  linear   networks  and  with  capacity   constraints
disappearing.  The impact of industry  consolidation,  any decline in our access
to, and  acceptance  by, DTH and/or  cable  systems and the  possible  resulting
deterioration  in the terms of agreements,  cancellation of fee  arrangements or
pressure on margin splits with operators of these systems could adversely affect
our business, financial condition or results of operations.

      Limits on our access to satellite  transponders could adversely affect our
business, financial condition or results of operations.

      Our  cable  television  and DTH  operations  require  continued  access to
satellite  transponders  to  transmit  programming  to cable and DTH  operators.
Material  limitations  on our access to these  systems or satellite  transponder
capacity could materially adversely affect our business,  financial condition or
results of  operations.  Our access to  transponders  may also be  restricted or
denied if:

            o     we or the  satellite  transponder  providers  are  indicted or
                  otherwise charged as a defendant in a criminal proceeding;

            o     the  Federal   Communications   Commission   issues  an  order
                  initiating  a  proceeding  to  revoke  the  satellite  owner's
                  authorization to operate the satellite;

            o     the satellite  transponder providers are ordered by a court or
                  governmental authority to deny us access to the transponder;

            o     we are deemed by a governmental authority to have violated any
                  obscenity law; or

            o     the  satellite  transponder  providers  fail  to  provide  the
                  required services.

                                       14



      In  addition  to the above,  the access of Playboy  TV, the Spice  Digital
Networks and our other networks to transponders may be restricted or denied if a
governmental  authority  commences an  investigation or makes an adverse finding
concerning  the  content of their  transmissions.  Technical  failures  may also
affect our  satellite  transponder  providers'  ability to deliver  transmission
services.

      We are subject to risks  resulting from our operations  outside the United
States,  and we face  additional  risks and  challenges as we continue to expand
internationally.

      The  international  scope of our  operations  may  contribute  to volatile
financial results and difficulties in managing our business.  For the year ended
December 31, 2007, we derived  approximately  33% of our  consolidated  revenues
from countries outside the United States. Our international operations expose us
to numerous challenges and risks, including, but not limited to, the following:

            o     adverse  political,   regulatory,   legislative  and  economic
                  conditions in various jurisdictions;

            o     costs of complying with varying governmental regulations;

            o     fluctuations in currency exchange rates;

            o     difficulties in developing, acquiring or licensing programming
                  and  products  that  appeal  to a  variety  of  audiences  and
                  cultures;

            o     scarcity of attractive licensing and joint venture partners;

            o     the  potential  need for  opening  and  managing  distribution
                  centers abroad; and

            o     difficulties  in protecting  intellectual  property  rights in
                  foreign countries.

      In  addition,  important  elements  of our  business  strategy,  including
capitalizing on advances in technology,  expanding  distribution of our products
and content and leveraging  cross-promotional marketing capabilities,  involve a
continued   commitment   to  expanding   our  business   internationally.   This
international  expansion  will require  considerable  management  and  financial
resources.

      We cannot  assure you that one or more of these  factors or the demands on
our  management  and  financial  resources  would not harm any current or future
international operations and our business as a whole.

      Any inability to identify, fund investment in and commercially exploit new
technology  could  have a material  adverse  impact on our  business,  financial
condition or results of operations.

      We  are  engaged  in   businesses   that  have   experienced   significant
technological  changes over the past several years and are continuing to undergo
technological changes. Our ability to implement our business plan and to achieve
the results  projected  by  management  will depend on  management's  ability to
anticipate  technological advances and implement strategies to take advantage of
future technological changes. Any inability to identify,  fund investment in and
commercially  exploit new technology or the commercial failure of any technology
that we pursue,  such as Internet and wireless,  could result in our  businesses
becoming  burdened  by  obsolete  technology  and could have a material  adverse
impact on our business, financial condition or results of operations.

      Our online operations are subject to security risks and systems failures.

      Online security  breaches could materially  adversely affect our business,
financial condition or results of operations.  Any well-publicized compromise of
security  could deter use of the  Internet in general or use of the  Internet to
conduct  transactions  that involve  transmitting  confidential  information  or
downloading  sensitive  materials  in  particular.  In offering  online  payment
services,  we may increasingly rely on technology licensed from third parties to
provide the security and authentication  necessary to effect secure transmission
of confidential  information  such as customer credit card numbers.  Advances in
computer  capabilities,  new  discoveries in the field of  cryptography or other
developments  could  compromise or breach the algorithms  that we use to protect
our  customers'  transaction  data.  If third  parties are able to penetrate our
network security or otherwise misappropriate  confidential information, we could
be  subject  to  liability,  which  could  result in  litigation.  In  addition,
experienced  programmers or "hackers" may attempt to misappropriate  proprietary
information  or cause  interruptions  in our services  that could  require us to
expend  significant  capital and resources to protect against or remediate these
problems.  Increased scrutiny by regulatory agencies,  such as the Federal Trade
Commission and state  agencies,  of the use of customer  information  could also
result in  additional  expenses if we are  obligated  to  reengineer  systems to
comply  with  new  regulations  or  to  defend  investigations  of  our  privacy
practices.

                                       15



      The  uninterrupted  performance of our computer systems is critical to the
operations  of our  websites.  Our  computer  systems  are  located at  external
third-party  sites,  and, as such,  may be  vulnerable  to fire,  loss of power,
telecommunications failures and other similar catastrophes.  In addition, we may
have to restrict  access to our  websites to solve  problems  caused by computer
viruses or other system failures.  Our customers may become  dissatisfied by any
disruption  or failure of our computer  systems that  interrupts  our ability to
provide our content.  Repeated  system failures could  substantially  reduce the
attractiveness  of our websites and/or  interfere with commercial  transactions,
negatively  affecting  our  ability to  generate  revenues.  Our  websites  must
accommodate a high volume of traffic and deliver regularly-updated  content. Our
sites have, on occasion,  experienced slow response times and network  failures.
These types of  occurrences  in the future  could  cause  users to perceive  our
websites  as not  functioning  properly  and  therefore  induce them to frequent
websites other than ours. We are also subject to risks from failures in computer
systems  other than our own because our  customers  depend on their own Internet
service  providers  for access to our sites.  Our revenues  could be  negatively
affected by outages or other difficulties  customers experience in accessing our
websites  due to  Internet  service  providers'  system  disruptions  or similar
failures  unrelated to our systems.  Our insurance  policies may not  adequately
compensate  us for any losses that may occur due to any failures in our Internet
systems or the systems of our customers' Internet service providers.

      Piracy of our  television  networks,  programming  and  photographs  could
materially  reduce our revenues and  adversely  affect our  business,  financial
condition or results of operations.

      The distribution of our subscription programming by MSOs and DTH operators
requires the use of encryption  technology to assure that only those who pay can
receive  programming.  It is  illegal to create,  sell or  otherwise  distribute
mechanisms  or devices to circumvent  that  encryption.  Nevertheless,  theft of
subscription  television  programming  has been  widely  reported.  Theft of our
programming  reduces  future  potential  revenue.  In  addition,  theft  of  our
competitors' programming can also increase our churn rate. Although MSOs and DTH
operators  continually  review and update their conditional  access  technology,
there  can be no  assurance  that  they  will be  successful  in  developing  or
acquiring the  technology  needed to  effectively  restrict or eliminate  signal
theft.

      Additionally,  the  development  of emerging  technologies,  including the
Internet  and  online  services,   poses  the  risk  of  making  piracy  of  our
intellectual  property more prevalent.  Digital formats, such as the ones we use
to distribute our programming through MSOs, DTH and the Internet,  are easier to
copy,  download or intercept.  As a result,  users can  download,  duplicate and
distribute  unauthorized copies of copyrighted  programming and photographs over
the  Internet or other  media,  including  DVDs.  As long as pirated  content is
available,  consumers could choose to download or purchase pirated  intellectual
property rather than pay to subscribe to our services or purchase our products.

      National consolidation of the single-copy magazine distribution system may
adversely  affect our ability to obtain  favorable terms on the  distribution of
Playboy  magazine and special editions and may lead to declines in profitability
and circulation.

      In the past  decade,  the  single-copy  magazine  distribution  system has
undergone  dramatic  consolidation.  According to an economic  study released by
Magazine  Publishers of America in 2001, the number of magazine  wholesalers has
declined from more than 180 independent  distribution  owners to just four large
wholesalers that handle 80% of the single-copy distribution business. Currently,
we rely on a single national distributor, TWRSM, for the distribution of Playboy
magazine  and special  editions to  newsstands  and other retail  outlets.  As a
result of this industry consolidation,  we face increasing pressure to lower the
prices we charge to wholesalers and increase our  sell-through  rates. If we are
forced to lower the prices we charge wholesalers,  we may experience declines in
revenue.  If we are unable to meet  targeted  sell-through  rates,  we may incur
greater expenses in the distribution  process.  The combination of these factors
could negatively impact the profitability and newsstand  circulation for Playboy
magazine and special editions.

      If we are unable to generate  revenues from advertising and  sponsorships,
or if we were to lose our large  advertisers or sponsors,  our business would be
harmed.

      If companies  perceive Playboy  magazine,  Playboy.com or any of our other
free  websites to be limited or  ineffective  advertising  mediums,  they may be
reluctant to advertise in our products or to be our sponsors. Our ability

                                       16



to generate  significant  advertising  and  sponsorship  revenues  depends  upon
several factors, including, among others, the following:

            o     our  ability to maintain a large,  demographically  attractive
                  subscriber  base for Playboy  magazine and Playboy.com and any
                  of our other free websites;

            o     our ability to offer attractive advertising rates;

            o     our ability to attract advertisers and sponsors; and

            o     our  ability to provide  effective  advertising  delivery  and
                  measurement systems.

      Our  advertising  revenues are also  dependent on the level of spending by
advertisers,  which is  impacted  by a number of  factors  beyond  our  control,
including  general  economic  conditions,  changes in  consumer  purchasing  and
viewing  habits and  changes  in the  retail  sales  environment.  Our  existing
competitors,  as well as  potential  new  competitors,  may  have  significantly
greater financial, technical and marketing resources than we do. These companies
may be able to undertake more extensive  marketing  campaigns,  adopt aggressive
advertising  pricing  policies  and  devote   substantially  more  resources  to
attracting advertising customers.

      We rely on third parties to service our Playboy magazine subscriptions and
to print and  distribute  the magazine and special  editions.  We also rely on a
third party to operate our  e-commerce  and catalog  businesses.  If these third
parties fail to perform, our business could be harmed.

      We rely on CDS to service Playboy magazine subscriptions. The magazine and
special  editions  are  printed by Quad at a single site  located in  Wisconsin,
which  ships the product to  subscribers  and  wholesalers.  We rely on a single
national  distributor,  TWRSM,  for the  distribution  of Playboy  magazine  and
special  editions to newsstands and other retail outlets.  In the second quarter
of 2008, we will be outsourcing our e-commerce and catalog businesses to a third
party and will rely on this third  party to operate  these  businesses.  If CDS,
Quad,  TWRSM or our e-commerce and catalog  businesses  operator is unable to or
does not  perform  and we are unable to find  alternative  services  in a timely
fashion, our business could be adversely affected.

      Increases  in paper  prices or postal  rates  could  adversely  affect our
operating performance.

      Paper costs are a substantial  component of the  manufacturing  and direct
marketing  expenses  of our  publishing  business.  The  market  for  paper  has
historically been cyclical, resulting in volatility in paper prices. An increase
in paper prices could  materially  adversely  affect our  operating  performance
unless and until we can pass any increases through to the consumer.

      The cost of postage also affects the profitability of Playboy magazine. An
increase  in postage  rates  could  materially  adversely  affect our  operating
performance unless and until we can pass the increase through to the consumer.

      If we experience a significant  decline in our circulation  rate base, our
results could be adversely affected.

      According  to ABC,  Playboy  magazine  was the 15th  highest-ranking  U.S.
consumer  publication in terms of circulation rate base for the six months ended
December 31,  2007.  Our  circulation  is primarily  subscription  driven,  with
subscription  copies  comprising  approximately  92% of total copies sold. If we
either  experience  a  significant  decline  in  subscriptions  because  we lose
existing  subscribers  or do not attract new  subscribers,  our results could be
adversely affected.

      We may not be able to compete successfully with direct competitors or with
other forms of entertainment.

      We derive a  significant  portion of our  revenues  from  subscriber-based
fees, advertising and licensing,  for which we compete with various other media,
including magazines, newspapers,  television, radio, Internet websites and event
or event  sponsorships that offer customers  information and services similar to
those  that  we  provide.   We  also  compete  with   providers  of  alternative
leisure-time activities and media. Competition could result in price reductions,
reduced  margins  or loss of market  share,  any of which  could have a material
adverse effect on our business, financial condition or results of operations.

                                       17



      We face competition on both country and regional levels. In addition, each
of our businesses  competes with companies that deliver content through the same
platforms.  Many of our  competitors,  including large  entertainment  and media
enterprises,  have greater  financial and human  resources than we do. We cannot
assure you that we can  remain  competitive  with  companies  that have  greater
resources or that offer alternative entertainment and information options.

      Government  regulations  could  adversely  affect our business,  financial
condition or results of operations.

      Our businesses are regulated by governmental  authorities in the countries
in which we operate.  Because of our  international  operations,  we must comply
with  diverse and  evolving  regulations.  Regulation  relates  to,  among other
things,  licensing,  access to satellite  transponders,  commercial advertising,
subscription  rates,  foreign  investment,  Internet gaming, use of confidential
customer  information  and content,  including  standards of  decency/obscenity.
Changes in the  regulation of our  operations or changes in  interpretations  of
existing  regulations  by courts or  regulators  or our inability to comply with
current  or  future  regulations  could  adversely  affect  us by  reducing  our
revenues,  increasing our operating  expenses  and/or exposing us to significant
liabilities.  While we are not able to reliably  predict  particular  regulatory
developments that could affect us adversely,  those regulations related to adult
content, the Internet, privacy and commercial advertising illustrate some of the
potential difficulties we face.

            o     Adult  content.  Regulation  of adult content could prevent us
                  from making our content available in various  jurisdictions or
                  otherwise  have a  material  adverse  effect on our  business,
                  financial condition or results of operations.  The governments
                  of some  countries,  such as China and India,  have  sought to
                  limit the  influence  of other  cultures  by  restricting  the
                  distribution  of  products  deemed  to  represent  foreign  or
                  "immoral"  influences.  Regulation  aimed at limiting  minors'
                  access  to  adult  content  could  also  increase  our cost of
                  operations and introduce technological challenges,  such as by
                  requiring  development and  implementation of age verification
                  systems.

            o     Internet.  Various  governmental  agencies are  considering  a
                  number of legislative  and regulatory  proposals that may lead
                  to laws  or  regulations  concerning  various  aspects  of the
                  Internet,  including  online  content,  intellectual  property
                  rights, user privacy,  taxation, access charges, liability for
                  third-party  activities  and  jurisdiction.  Regulation of the
                  Internet  could  materially  adversely  affect  our  business,
                  financial  condition or results of  operations by reducing the
                  overall  use of the  Internet,  reducing  the  demand  for our
                  services or increasing our cost of doing business.

            o     Regulation of commercial advertising. We receive a significant
                  portion of our  advertising  revenues from  companies  selling
                  alcohol and tobacco products.  For the year ended December 31,
                  2007,  beer/wine/liquor  and tobacco  represented 28% and 13%,
                  respectively,  of  the  total  advertising  pages  in  Playboy
                  magazine.  Significant  limitations  on the  ability  of those
                  companies to advertise in Playboy  magazine or on our websites
                  because  of either  legislative,  regulatory  or court  action
                  could  materially  adversely  affect our  business,  financial
                  condition or results of operations. In 1996, the Food and Drug
                  Administration   announced  regulations  that  prohibited  the
                  publication  of tobacco  advertisements  containing  drawings,
                  colors or pictures.  While those  regulations  were later held
                  unconstitutional  by the Supreme  Court of the United  States,
                  future  attempts  may be made by  other  federal  agencies  to
                  impose similar or other types of advertising limitations.

                                       18



      Our business  involves risks of liability claims for media content,  which
could  adversely  affect  our  business,   financial  condition  or  results  of
operations.

      As a distributor of media content, we may face potential liability for:

            o     defamation;

            o     invasion of privacy;

            o     negligence;

            o     copyright or trademark infringement; and

            o     other claims based on the nature and content of the  materials
                  distributed.

      These types of claims have been brought,  sometimes successfully,  against
broadcasters,  publishers,  online  services  and other  disseminators  of media
content.  We could also be exposed to  liability  in  connection  with  material
available through our websites.  Any imposition of liability that is not covered
by insurance or is in excess of insurance coverage could have a material adverse
effect on us. In  addition,  measures  to reduce our  exposure to  liability  in
connection with material available through our websites could require us to take
steps that would  substantially  limit the attractiveness of our websites and/or
their  availability in various  geographic areas,  which would negatively affect
their ability to generate revenues.

      Private  advocacy  group  actions  targeted at our content could result in
limitations  on our ability to  distribute  our  products  and  programming  and
negatively impact our brand acceptance.

      Our ability to operate  successfully  depends on our ability to obtain and
maintain distribution channels and outlets for our products.  From time to time,
private  advocacy groups have sought to exclude our  programming  from local pay
television   distribution   because  of  the   adult-oriented   content  of  the
programming.  In  addition,  from time to time,  private  advocacy  groups  have
targeted Playboy magazine and its distribution outlets and advertisers,  seeking
to limit the magazine's  availability because of its adult-oriented  content. In
addition to  possibly  limiting  our  ability to  distribute  our  products  and
programming,   negative  publicity   campaigns,   lawsuits  and  boycotts  could
negatively  affect our brand acceptance and cause  additional  financial harm by
requiring that we incur  significant  expenditures  to defend our business or by
discouraging investors from investing in our securities.

      In  pursuing  selective  acquisitions,  we may  incur  various  costs  and
liabilities  and  we  may  never  realize  the   anticipated   benefits  of  the
acquisitions.

      If appropriate  opportunities become available, we may acquire businesses,
products or technologies that we believe are  strategically  advantageous to our
business. Transactions of this sort could involve numerous risks, including:

            o     unforeseen  operating  difficulties and  expenditures  arising
                  from the process of integrating any acquired business, product
                  or technology, including related personnel;

            o     diversion of a significant  amount of  management's  attention
                  from the ongoing  development  of our business;

            o     dilution of existing stockholders' ownership interest in us;

            o     incurrence  of  additional  debt;

            o     exposure  to  additional   operational   risk  and  liability,
                  including  risks  arising  from the  operating  history of any
                  acquired businesses;

            o     entry into markets and geographic  areas where we have limited
                  or no experience;

            o     loss of key employees of any acquired companies;

            o     adverse  effects  on  our  relationships  with  suppliers  and
                  customers; and

            o     adverse effects on the existing  relationships of any acquired
                  companies, including suppliers and customers.

      Furthermore,   we  may  not  be  successful  in  identifying   appropriate
acquisition  candidates  or  consummating  acquisitions  on terms  favorable  or
acceptable to us or at all.

      When we acquire  businesses,  products or technologies,  our due diligence
reviews are subject to inherent  uncertainties  and may not reveal all potential
risks. We may therefore fail to discover or inaccurately  assess  undisclosed or
contingent   liabilities,   including   liabilities   for   which  we  may  have
responsibility  as a  successor  to the

                                       19



seller or the target company. As a successor, we may be responsible for any past
or continuing  violations of law by the seller or the target company,  including
violations of decency laws.  Although we generally  attempt to seek  contractual
protections,  such as representations and warranties and indemnities,  we cannot
be sure that we will obtain such  provisions  in our  acquisitions  or that such
provisions  will  fully  protect  us  from  all  unknown,  contingent  or  other
liabilities or costs. Finally, claims against us relating to any acquisition may
necessitate  our seeking  claims against the seller for which the seller may not
indemnify  us or that may exceed the scope,  duration or amount of the  seller's
indemnification obligations.

      Our  significant  debt  could  adversely  affect our  business,  financial
condition or results of operations.

      We have a  significant  amount of debt. At December 31, 2007, we had total
financing  obligations of $115.0  million,  all of which  consisted of our 3.00%
convertible  senior  subordinated  notes due 2025. In addition,  we have a $50.0
million  revolving  credit  facility.  At  December  31,  2007,  there  were  no
borrowings  and $10.6  million  in  letters  of credit  outstanding  under  this
facility, permitting $39.4 million of available borrowings under this facility.

      The amount of our existing and future debt could adversely  affect us in a
number of ways, including the following:

            o     we may be unable to obtain  additional  financing  for working
                  capital,   capital  expenditures,   acquisitions  and  general
                  corporate purposes;

            o     debt-service  requirements  could reduce the amount of cash we
                  have available for other purposes;

            o     we could be disadvantaged as compared to our competitors, such
                  as in our ability to adjust to changing market conditions; and

            o     we  may  be  restricted  in  our  ability  to  make  strategic
                  acquisitions and to exploit business opportunities.

      Our ability to make payments of principal and interest on our debt depends
upon our future performance, general economic conditions and financial, business
and  other  factors  affecting  our  operations,  many of which are  beyond  our
control.  If we are not able to generate sufficient cash flow from operations in
the future to service our debt, we may be required, among other things:

            o     to seek additional financing in the debt or equity markets;

            o     to  refinance  or  restructure  all or a portion  of our debt;
                  and/or

            o     to sell assets.

      These  measures  might not be sufficient to enable us to service our debt.
In  addition,  any such  financing,  refinancing  or sale of assets might not be
available on economically favorable terms.

      The terms of our existing credit  facility impose  restrictions on us that
may affect our ability to successfully operate our business.

      Our existing  credit facility  contains  covenants that limit our actions.
These covenants could materially and adversely affect our ability to finance our
future  operations  or capital needs or to engage in other  business  activities
that may be in our best  interests.  The  covenants  limit our ability to, among
other things:

            o     incur or guarantee additional indebtedness;

            o     repurchase capital stock;

            o     make loans and investments;

            o     enter into agreements restricting our subsidiaries'  abilities
                  to pay dividends;

            o     create liens;

            o     sell or otherwise dispose of assets;

            o     enter new lines of business;

            o     merge or consolidate with other entities; and

            o     engage in transactions with affiliates.

      The credit  facility also  contains  financial  covenants  requiring us to
maintain specified minimum net worth and interest coverage ratios.

                                       20



      Our  ability  to comply  with  these  covenants  and  requirements  may be
affected by events beyond our control,  such as prevailing  economic  conditions
and changes in regulations,  and if such events occur, we cannot be sure that we
will be able to comply.

      We depend on our key personnel.

      We  believe  that our  ability  to  successfully  implement  our  business
strategy and to operate profitably  depends on the continued  employment of some
of our senior  management  team. If these members of the management  team become
unable or  unwilling  to  continue in their  present  positions,  our  business,
financial  condition  or results of  operations  could be  materially  adversely
affected.

      Ownership of Playboy Enterprises, Inc. is concentrated.

      As of December 31, 2007, Mr. Hefner beneficially owned 69.53% of our Class
A common  stock.  As a result,  given that our Class B stock is  nonvoting,  Mr.
Hefner  possesses  influence on matters  including  the election of directors as
well as  transactions  involving a potential  change of control.  Mr. Hefner may
support, and cause us to pursue, strategies and directions with which holders of
our securities  disagree.  The concentration of our share ownership may delay or
prevent a change in control, impede a merger,  consolidation,  takeover or other
transaction involving us or discourage a potential acquirer from making a tender
offer or otherwise attempting to obtain control of us.

Item 1B. Unresolved Staff Comments
- ----------------------------------

      None.

                                       21



Item 2. Properties
- ------------------

Location                            Primary Use
- --------                            -----------

Office Space Leased:

   Chicago, Illinois          This space  serves as our  corporate  headquarters
                              and is used  by all of our  operating  groups  and
                              executive and administrative personnel.

   Los Angeles, California    This  space  serves as our  Entertainment  Group's
                              headquarters  and is  utilized  by  executive  and
                              administrative personnel.

   New York, New York         This space serves as our  Publishing and Licensing
                              Groups' headquarters,  and the Entertainment Group
                              and executive and  administrative  personnel use a
                              limited amount of space.

   London, England            This  space  is  used  by  our   Playboy  TV  U.K.
                              executive  and  administrative  personnel and as a
                              programming facility.

Operations Facilities Leased:

   Los Angeles, California    This space is used by our Entertainment  Group and
                              third parties as a centralized digital,  technical
                              and programming  facility.  In connection with the
                              potential   sale  of   assets   related   to  this
                              production  facility,  we expect to enter  into an
                              agreement to sublet the entirety of this  facility
                              to  the  buyer  of  the  assets.   See  Note  (T),
                              Subsequent  Events,  to the Notes to  Consolidated
                              Financial Statements.

   Santa Monica, California   This  space is used by our  Publishing  Group as a
                              photography studio and offices.

Property Owned:

   Los Angeles, California    The Playboy Mansion is used for various  corporate
                              activities  and serves as a valuable  location for
                              television  production,  magazine  photography and
                              for online,  advertising and sales events. It also
                              enhances our image as host for many charitable and
                              civic functions.

                                       22



Item 3. Legal Proceedings
- -------------------------

      On February 17, 1998,  Eduardo  Gongora,  or Gongora,  filed suit in state
court in Hidalgo County,  Texas,  against  Editorial  Caballero SA de CV, or EC,
Grupo Siete International,  Inc., or GSI, collectively the Editorial Defendants,
and us. In the complaint, Gongora alleged that he was injured as a result of the
termination of a publishing license agreement, or the License Agreement, between
us and EC for the publication of a Mexican edition of Playboy  magazine,  or the
Mexican  Edition.  We terminated  the License  Agreement on or about January 29,
1998,  due to EC's failure to pay  royalties  and other amounts due us under the
License  Agreement.  On February  18, 1998,  the  Editorial  Defendants  filed a
cross-claim against us. Gongora alleged that in December 1996 he entered into an
oral  agreement  with the Editorial  Defendants to solicit  advertising  for the
Mexican  Edition  to be  distributed  in the United  States.  The basis of GSI's
cross-claim was that it was the assignee of EC's right to distribute the Mexican
Edition in the United States and other Spanish-speaking Latin American countries
outside of Mexico.  On May 31, 2002, a jury returned a verdict against us in the
amount of approximately $4.4 million. Under the verdict,  Gongora was awarded no
damages.  GSI and EC were  awarded $4.1  million in  out-of-pocket  expenses and
approximately $0.3 million for lost profits,  even though the jury found that EC
had failed to comply  with the terms of the  License  Agreement.  On October 24,
2002,  the trial court  signed a judgment  against us for $4.4 million plus pre-
and   post-judgment   interest  and  costs.  On  November  22,  2002,  we  filed
post-judgment  motions  challenging  the judgment in the trial court.  The trial
court overruled those motions and we vigorously pursued an appeal with the State
Appellate  Court  sitting in Corpus  Christi  challenging  the verdict.  We have
posted a bond in the amount of approximately $9.4 million,  which represents the
amount of the judgment,  costs and estimated pre- and post-judgment interest, in
connection with the appeal.  On May 25, 2006, the State Appellate Court reversed
the judgment by the trial court, rendered judgment for us on the majority of the
plaintiffs'  claims and remanded the remaining  claims for a new trial.  On July
14,  2006,   the   plaintiffs   filed  a  motion  for   rehearing  and  en  banc
reconsideration,  which we opposed.  On October 12,  2006,  the State  Appellate
Court denied  plaintiffs'  motion. On December 27, 2006, we filed a petition for
review with the Texas  Supreme  Court.  On January 25, 2008,  the Texas  Supreme
Court denied our petition for review.  On February 8, 2008,  we filed a petition
for rehearing  with the Texas  Supreme  Court.  We, on advice of legal  counsel,
believe  that it is not  probable  that a material  judgment  against us will be
obtained.  In accordance with Statement of Financial Accounting Standards No. 5,
Accounting for Contingencies, or Statement 5, no liability has been accrued.

      On May 17,  2001,  Logix  Development  Corporation,  or  Logix,  D.  Keith
Howington  and Anne  Howington  filed suit in state court in Los Angeles  County
Superior Court in California  against Spice  Entertainment  Companies,  Inc., or
Spice,  Emerald Media,  Inc., or EMI,  Directrix,  Inc., or Directrix,  Colorado
Satellite  Broadcasting,  Inc., New Frontier Media,  Inc., J. Roger Faherty,  or
Faherty,  Donald McDonald,  Jr., and Judy Savar. On February 8, 2002, plaintiffs
amended the complaint and added as a defendant Playboy,  which acquired Spice in
1999.  The  complaint  alleged 11  contract  and tort  causes of action  arising
principally out of a January 18, 1997,  agreement between EMI and Logix in which
EMI agreed to purchase  certain  explicit  television  channels  broadcast  over
C-band  satellite.  The  complaint  further  sought  damages from Spice based on
Spice's  alleged  failure to provide  transponder  and uplink services to Logix.
Playboy  and Spice filed a motion to dismiss the  plaintiffs'  complaint.  After
pre-trial motions, Playboy was dismissed from the case and a number of causes of
action were dismissed  against  Spice. A trial date for the remaining  breach of
contract claims against Spice was set for December 10, 2003, and then continued,
first to February 11, 2004, and then to March 17, 2004. Spice and the plaintiffs
filed  cross-motions  for summary judgment or, in the  alternative,  for summary
adjudication,  on  September 5, 2003.  Those  motions were heard on November 19,
2003,  and were  denied.  In February  2004,  prior to the trial,  Spice and the
plaintiffs  agreed  to a  settlement  in the  amount of $8.5  million,  which we
recorded  as a charge  in 2003.  We paid $1.0  million,  $1.0  million  and $6.5
million  in 2006,  2005 and 2004,  respectively.  In 2004,  we  received  a $5.6
million  insurance  recovery  partially  related  to the prior  year  litigation
settlement with Logix.

      On April 12, 2004,  Faherty filed suit in the United States District Court
for  the  Southern  District  of  New  York  against  Spice,  Playboy,   Playboy
Enterprises International, Inc., or PEII, D. Keith Howington, Anne Howington and
Logix.  The  complaint  alleges  that  Faherty  is  entitled  to  statutory  and
contractual indemnification from Playboy, PEII and Spice with respect to defense
costs and  liabilities  incurred by Faherty in the  litigation  described in the
preceding paragraph, or the Logix litigation. The complaint further alleges that
Playboy, PEII, Spice, D. Keith Howington,  Anne Howington and Logix conspired to
deprive  Faherty of his alleged right to  indemnification  by excluding him from
the  settlement  of the Logix  litigation.  On June 18,  2004,  a jury entered a
special verdict finding Faherty  personally  liable for $22.5 million in damages
to the plaintiffs in the Logix litigation. A judgment was entered on the verdict
on or around  August 2, 2004.  Faherty filed  post-trial  motions for a judgment
notwithstanding  the verdict and a new trial, but these motions were both denied
on or about  September 21, 2004. On October 20, 2004,  Faherty filed a notice of
appeal from the verdict.  As of November 30, 2006, the appeal was fully briefed.
In consideration of this

                                       23



appeal,  Faherty  and  Playboy  have  agreed  to  seek a  temporary  stay of the
indemnification  action  filed  in the  United  States  District  Court  for the
Southern  District  of New York.  In the  event  Faherty's  indemnification  and
conspiracy  claims go forward  against us, we believe they are without merit and
that we have good defenses against them. As such, based on the information known
to us to date,  we do not believe that it is probable  that a material  judgment
against us will result.  In accordance  with  Statement 5, no liability has been
accrued.

      On September 26, 2002,  Directrix filed suit in the U.S.  Bankruptcy Court
in the Southern District of New York against Playboy  Entertainment  Group, Inc.
In the  complaint,  Directrix  alleged  that it was  injured  as a result of the
termination of a Master Services  Agreement under which Directrix was to perform
services relating to the  distribution,  production and  post-production  of our
cable  networks  and a  sublease  agreement  under  which  Directrix  would have
subleased  office,  technical  and studio  space at our Los  Angeles  production
facility.  Directrix  also  alleged  that we breached an  agreement  under which
Directrix  had the right to transmit  and  broadcast  certain  versions of films
through  C-band  satellite,  commonly  known as the  TVRO  market,  and  through
Internet  distribution.  On  November  15,  2002,  we  filed an  answer  denying
Directrix's allegations,  along with counterclaims against Directrix relating to
the Master Services Agreement and seeking damages.  On May 15, 2003, we filed an
amended answer and counterclaims.  On July 30, 2003,  Directrix moved to dismiss
one of the amended  counterclaims,  and on October 20,  2003,  the Court  denied
Directrix's motion. The parties were engaged in discovery.  In January 2007, the
parties  agreed in principle to a settlement  and release of the claims  between
them. Under the settlement,  which was subject to the approval of the Bankruptcy
Court,  we agreed to provide a payment in the amount of $1.8  million,  which we
recorded as a charge in 2006.  The  settlement  was paid in the third quarter of
2007. The settlement is a compromise of disputed  claims and is not an admission
of liability.  We believe we had good defenses against  Directrix's  claims, but
made the reasonable  business decision to settle the litigation to avoid further
management  distraction  and defense  costs,  which we had estimated  would have
approximately equaled the amount of the settlement.

Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------

      None.

                                       24



                                     PART II

Item 5. Market for Registrant's  Common Equity,  Related Stockholder Matters and
- --------------------------------------------------------------------------------
Issuer Purchases of Equity Securities
- -------------------------------------

      Stock  price  information,  as  reported  in the New York  Stock  Exchange
Composite  Listing,  is set forth in Note (S),  Quarterly  Results of Operations
(Unaudited),  to the Notes to Consolidated Financial Statements.  Our securities
are traded on the  exchange  listed on the cover page of this  Annual  Report on
Form 10-K  under the  ticker  symbols  PLA A (Class A voting)  and PLA  (Class B
nonvoting).  At February 29, 2008,  there were 3,305 and 9,492 holders of record
of  Class  A  common  stock  and  Class  B  common  stock,  or  Class  B  stock,
respectively.  There were no cash dividends  declared during 2007, 2006 or 2005.
Information  regarding  the high and low sales  prices for our common  stock for
each full quarterly  period within the two most recent completed fiscal years is
set forth in Note (S), Quarterly Results of Operations (Unaudited), to the Notes
to Consolidated Financial Statements.

      As previously  reported in our Current  Report on Form 8-K, dated March 9,
2005 and filed March 15, 2005,  and our Current  Report on Form 8-K, dated March
28,  2005 and  filed  April 1,  2005 and as more  fully  described  in Note (L),
Financing  Obligations,  to the Notes to Consolidated  Financial Statements,  in
March 2005, we issued and sold in a private  placement $115.0 million  aggregate
principal amount of our 3.00% convertible senior subordinated notes due 2025.

      The following graph sets forth the five-year  cumulative total stockholder
return on our Class B stock with the cumulative total stockholder  return of the
Russell  2000 Stock Index and with our peer group for the period  from  December
31, 2002,  through  December  31,  2007.  The graph  reflects  $100  invested on
December 31, 2002, in stock or index, including  reinvestment of dividends.  Our
peer group is comprised of Time Warner Inc., Meredith  Corporation,  MGM Mirage,
Playboy  Enterprises,  Inc.,  Primedia,  Inc.,  The Walt Disney  Company,  World
Wrestling Entertainment, Inc. and Viacom Inc.

 [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]

- --------------------------------------------------------------------------------
                             12/02    12/03    12/04    12/05    12/06    12/07
- --------------------------------------------------------------------------------

Playboy Enterprises, Inc.   100.00   159.53   121.32   137.12   113.13    90.03
Russell 2000                100.00   147.25   174.24   182.18   215.64   212.26
Peer Group                  100.00   126.49   131.99   118.60   148.88   139.05

      Other  information  required under this Item is contained in our Notice of
Annual Meeting of Stockholders and Proxy Statement (to be filed) relating to the
Annual  Meeting  of  Stockholders  to be held in May 2008,  which  will be filed
within 120 days after the close of our fiscal year ended  December 31, 2007, and
is incorporated herein by reference.

                                       25



Item 6. Selected Financial Data
- -------------------------------

(in thousands, except per share amounts
and number of employees)



                                                            Fiscal Year  Fiscal Year  Fiscal Year  Fiscal Year   Fiscal Year
                                                                  Ended        Ended        Ended        Ended         Ended
                                                               12/31/07     12/31/06     12/31/05     12/31/04      12/31/03
- ----------------------------------------------------------------------------------------------------------------------------
                                                                                                  
Selected financial data (1)
Net revenues                                                  $ 339,840    $ 331,142    $ 338,153    $ 329,376     $ 315,844
Interest expense, net                                            (2,363)      (3,164)      (4,769)     (13,108)      (15,946)
Net income (loss)                                                 4,925        2,285         (735)       9,989        (7,557)
Net income (loss) applicable to common shareholders               4,925        2,285         (735)       9,561        (8,450)
Basic and diluted earnings (loss) per common share                 0.15         0.07        (0.02)        0.30         (0.31)
EBITDA: (2)
   Net income (loss)                                              4,925        2,285         (735)       9,989        (7,557)
   Adjusted for:
      Interest expense                                            4,874        5,611        6,986       13,687        16,309
      Income tax expense                                          1,928        2,496        3,998        3,845         4,967
      Depreciation and amortization                              41,198       42,218       42,540       47,100        49,558
      Amortization of deferred financing fees                       490          535          635        1,266         1,407
      Stock options and restricted stock awards                   1,633        1,859          601          682            45
      Equity (income) loss in operations of investments            (129)          94          383           71            80
                                                              --------------------------------------------------------------
   EBITDA                                                     $  54,919    $  55,098    $  54,408    $  76,640     $  64,809
============================================================================================================================
At period end
Cash and cash equivalents and marketable securities
   and short-term investments                                 $  33,555    $  35,748    $  52,052    $  50,720     $  34,878
Total assets                                                    445,156      435,783      428,969      416,330       413,809
Long-term financing obligations                                 115,000      115,000      115,000       80,000       115,000
Redeemable preferred stock                                           --           --           --           --        16,959
Total shareholders' equity                                    $ 171,317    $ 163,628    $ 157,247    $ 162,158     $ 100,344
Long-term financing obligations as a
   percentage of total capitalization                                40%          41%          42%          33%           53%
Number of common shares outstanding
   Class A voting                                                 4,864        4,864        4,864        4,864         4,864
   Class B nonvoting                                             28,402       28,362       28,261       28,521        22,579
Number of full-time employees                                       801          789          709          645           592
- ----------------------------------------------------------------------------------------------------------------------------
Selected operating data
Cash investments in Company-produced and
   licensed entertainment programming                         $  34,619    $  38,475    $  33,075    $  41,457     $  44,727
Cash investments in online content                                5,620        5,031        2,242        2,317         2,436
                                                              --------------------------------------------------------------
   Total cash investments in programming and content             40,239       43,506       35,317       43,774        47,163
Amortization of investments in Company-produced
   and licensed entertainment programming                        33,935       36,564       37,450       41,695        40,603
Online content expense                                            5,620        5,241        2,626        2,317         2,436
                                                              --------------------------------------------------------------
   Total amortization of programming and content              $  39,555    $  41,805    $  40,076    $  44,012     $  43,039
- ----------------------------------------------------------------------------------------------------------------------------


      For a more  detailed  description  of our financial  position,  results of
operations  and  accounting   policies,   please  refer  to  Part  II.  Item  7.
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" and Part II. Item 8. "Financial Statements and Supplementary Data."

(1)   2007  included  $0.5 million of  restructuring  expense and a $1.5 million
      charge on assets held for sale  related to the  potential  sale of our Los
      Angeles production  facility.  2006 included $2.0 million of restructuring
      expense.  2005  included  $19.3  million  of debt  extinguishment  expense
      related to the redemption of $80.0 million of 11.00% senior secured notes,
      or senior secured notes, issued by our subsidiary PEI Holdings,  Inc. 2004
      included  $5.9  million  of debt  extinguishment  expense  related  to the
      redemption of $35.0 million of the senior secured notes and a $5.6 million
      insurance recovery partially related to a litigation  settlement  recorded
      in the prior year.  2003  included an $8.5 million  charge  related to the
      litigation  settlement  and $3.3  million of debt  extinguishment  expense
      related to prior financing obligations, which were paid upon completion of
      our debt offering.

                                       26



(2)   EBITDA  represents  earnings from  continuing  operations  before interest
      expense,  income tax  expense,  depreciation  of property  and  equipment,
      amortization  of  intangible   assets,   amortization  of  investments  in
      entertainment  programming,   amortization  of  deferred  financing  fees,
      stock-based  compensation  related to stock options and  restricted  stock
      awards and equity income or loss in operations of investments. We evaluate
      our  operating  results based on several  factors,  including  EBITDA.  We
      consider  EBITDA an important  indicator of the  operational  strength and
      performance  of our ongoing  businesses,  including our ability to provide
      cash flows to pay  interest,  service debt and fund capital  expenditures.
      EBITDA  eliminates the uneven effect across  business  segments of noncash
      depreciation  of property and  equipment  and  amortization  of intangible
      assets. Because depreciation and amortization are noncash charges, they do
      not affect  our  ability to  service  debt or make  capital  expenditures.
      EBITDA also  eliminates  the impact of how we fund our  businesses and the
      effect of changes in interest  rates,  which we believe  relate to general
      trends in global capital markets but are not necessarily indicative of our
      operating  performance.  Finally,  EBITDA is used to determine  compliance
      with  some of the  terms of our  credit  facility.  EBITDA  should  not be
      considered an alternative to any measure of performance or liquidity under
      generally accepted accounting principles in the United States.  Similarly,
      EBITDA  should  not be  inferred  as more  meaningful  than  any of  those
      measures.

                                       27



Item 7. Management's  Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------

OVERVIEW

      Since our inception in 1953 as the publisher of Playboy magazine,  we have
evolved  into  a  brand-driven,   international   multimedia  entertainment  and
lifestyle  company.  Today,  our businesses are organized into three  reportable
segments: Entertainment, Publishing and Licensing.

      The  following   discussion  and  analysis   provides   information  which
management  believes is  relevant  to an  assessment  and  understanding  of our
results of operations and financial condition.  The discussion should be read in
conjunction with the financial statements and the accompanying notes.

REVENUES

      Entertainment   Group   revenues  are   principally   from   domestic  and
international TV and online/mobile.  Television revenues are affected by factors
including shelf space,  retail price and marketing,  which are controlled by our
distribution  partners,  by revenue splits negotiated with distribution partners
and by demand for our programming.  Domestic TV revenues are generated primarily
from our Playboy TV- and  Spice-branded  networks.  Internationally,  we own and
operate or license Playboy-,  Spice- and locally-branded  television networks or
blocks  of  programming.   We  have  minority  equity  interests  in  additional
international networks through joint ventures. We currently generate most of our
online/mobile  revenues from the sale of our premium content. These subscription
revenues are derived from  multiple  online  clubs,  which offer unique  content
under various brands,  including Playboy and Spice.  E-commerce revenues include
the sale of our  branded  and  third-party  consumer  products,  both online and
through direct mail. We also generate revenues from online  advertising sales in
conjunction with our magazine  advertising  sales efforts.  Internationally,  we
receive licensing fees from Playboy- and other-branded websites and from content
delivered via wireless  devices to providers  outside of the U.S.  Entertainment
Group  revenues are also generated  from the sale of DVDs,  from  co-productions
aired on third-party  networks and from license fees for Playboy Radio on SIRIUS
Satellite Radio.

      Publishing  Group  revenues  are  primarily  circulation  driven  for  our
domestic  magazine  and special  editions  and  include  both  subscription  and
newsstand  sales.  Additionally,  the group generates  revenues from advertising
sales  in  Playboy  magazine  as well  as  from  royalties  on  circulation  and
advertising sales from our 24 licensed international editions.

      Licensing  Group  revenues are generated  primarily  from royalties on the
wholesale  price  of our  branded  products  around  the  world  as well as from
multifaceted location-based entertainment venues. We also generate revenues from
periodic  auction  or  opportunistic  sales  of  small  portions  of our art and
memorabilia collection and from marketing events such as the annual Playboy Jazz
Festival.

COSTS AND OPERATING EXPENSES

      Entertainment Group expenses include television programming  amortization,
online  content,   network  distribution,   hosting,  sales  and  marketing  and
administrative  expenses.  Programming  amortization  and content  expenses  are
expenditures associated with the creation of Playboy programming,  the licensing
of  third-party  programming  for our adult movie  business  and the creation of
content for our websites and wireless and satellite radio providers.

      Publishing Group expenses include manufacturing, subscription acquisition,
newsstand   promotion,   editorial,   shipping  and   administrative   expenses.
Manufacturing of the magazine represents the largest cost for the group.

      Licensing Group expenses include agency fees,  promotion,  development and
administrative expenses.

      Corporate  Administration and Promotion expenses include general corporate
costs such as technology, legal, security, human resources, finance and investor
relations  and  communications,  as well as  expenses  related  to  company-wide
marketing, promotions and the Playboy Mansion.

                                       28



RESULTS OF OPERATIONS (1)

      The  following  table sets forth our results of  operations  (in millions,
except per share amounts):



                                                                       Fiscal Year   Fiscal Year   Fiscal Year
                                                                             Ended         Ended         Ended
                                                                          12/31/07      12/31/06      12/31/05
- --------------------------------------------------------------------------------------------------------------
                                                                                          
Net revenues
Entertainment
   Domestic TV                                                            $   75.8      $   82.5      $   98.6
   International TV                                                           55.9          49.5          46.9
   Online/mobile                                                              63.3          61.7          53.9
   Other                                                                       8.0           7.3           4.6
- --------------------------------------------------------------------------------------------------------------
   Total Entertainment                                                       203.0         201.0         204.0
- --------------------------------------------------------------------------------------------------------------
Publishing
   Domestic magazine                                                          77.0          80.7          89.4
   International magazine                                                      7.4           6.6           6.6
   Special editions and other                                                  9.4           9.8          10.5
- --------------------------------------------------------------------------------------------------------------
   Total Publishing                                                           93.8          97.1         106.5
- --------------------------------------------------------------------------------------------------------------
Licensing
   Consumer products                                                          34.0          28.2          24.2
   Location-based entertainment                                                3.8           1.2           0.1
   Marketing events                                                            3.2           3.0           3.0
   Other                                                                       2.0           0.6           0.4
- --------------------------------------------------------------------------------------------------------------
   Total Licensing                                                            43.0          33.0          27.7
- --------------------------------------------------------------------------------------------------------------
Total net revenues                                                        $  339.8      $  331.1      $  338.2
==============================================================================================================

Net income (loss)
Entertainment
   Before programming amortization and online content expenses            $   60.9      $   65.1      $   81.2
   Programming amortization and online content expenses                      (39.6)        (41.8)        (40.1)
- --------------------------------------------------------------------------------------------------------------
   Total Entertainment                                                        21.3          23.3          41.1
- --------------------------------------------------------------------------------------------------------------
Publishing                                                                    (7.6)         (5.4)         (6.5)
- --------------------------------------------------------------------------------------------------------------
Licensing                                                                     26.4          18.9          16.0
- --------------------------------------------------------------------------------------------------------------
Corporate Administration and Promotion                                       (28.1)        (25.7)        (19.6)
- --------------------------------------------------------------------------------------------------------------
Segment income                                                                12.0          11.1          31.0
Restructuring expense                                                         (0.5)         (2.0)         (0.1)
Impairment charge on assets held for sale                                     (1.5)           --            --
- --------------------------------------------------------------------------------------------------------------
Operating income                                                              10.0           9.1          30.9
- --------------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
   Investment income                                                           2.5           2.4           2.2
   Interest expense                                                           (4.9)         (5.6)         (7.0)
   Amortization of deferred financing fees                                    (0.5)         (0.5)         (0.6)
   Minority interest expense                                                    --            --          (1.6)
   Debt extinguishment expense                                                  --            --         (19.3)
   Other, net                                                                 (0.3)         (0.6)         (1.3)
- --------------------------------------------------------------------------------------------------------------
Total nonoperating expense                                                    (3.2)         (4.3)        (27.6)
- --------------------------------------------------------------------------------------------------------------
Income before income taxes                                                     6.8           4.8           3.3
Income tax expense                                                            (1.9)         (2.5)         (4.0)
- --------------------------------------------------------------------------------------------------------------
Net income (loss)                                                         $    4.9      $    2.3      $   (0.7)
==============================================================================================================

Basic and diluted earnings (loss) per common share                        $   0.15      $   0.07      $  (0.02)
==============================================================================================================


(1)   Certain  amounts  reported  for prior  periods have been  reclassified  to
      conform to the current year's presentation.

                                       29



2007 COMPARED TO 2006

      Revenues increased $8.7 million,  or 3%, compared to 2006 due to continued
revenue growth in our Licensing  Group,  partially offset by lower revenues from
our  Publishing  Group.  Entertainment  Group revenues were flat compared to the
prior year.

      Segment  income  increased  $0.9 million,  or 8%,  compared to 2006 due to
increased profits from our Licensing Group, largely offset by lower results from
our Publishing and Entertainment Groups and higher Corporate  Administration and
Promotion expenses.

      Operating income of $10.0 million improved $0.9 million,  or 10%, compared
to 2006 as a result of the segment  results  previously  discussed.  The current
year  included a $1.5 million  charge in connection  with the potential  sale of
assets  related  to our  Los  Angeles  production  facility  and a $0.5  million
restructuring charge, compared to a $2.0 million restructuring charge in 2006.

      Net income of $4.9 million  improved  $2.6 million,  or 116%,  compared to
2006  primarily  as a  result  of  the  improved  operating  results  previously
discussed,  combined with decreases of $0.7 million and $0.6 million in interest
and income tax expenses, respectively.

Entertainment Group

      The following  discussion focuses on the revenues and profit  contribution
before  programming  amortization  and online  content  expenses  of each of our
Entertainment Group businesses.

      Revenues from our domestic TV networks decreased $6.7 million,  or 8%, and
profit contribution decreased $4.2 million in 2007. The decrease in revenues was
primarily due to pressure on splits with  operators and a reduction in the total
number of households with access to our linear networks. The profit contribution
decrease was  primarily  due to the lower  revenues,  partially  offset by lower
marketing  expense and the impact of a $1.8 million legal settlement in 2006. We
are  currently  negotiating  the sale of the assets  related to our Los  Angeles
production  facility.   See  Note  (T),  Subsequent  Events,  to  the  Notes  to
Consolidated Financial Statements for additional information.

      International  TV revenues  increased  $6.4  million,  or 13%,  and profit
contribution  increased $4.0 million in 2007 primarily due to growth in our U.K.
and  other  European  networks.  Foreign  currency  exchange  rate  fluctuations
increased  both  revenues  and  expenses,  which  resulted  in an overall  small
favorable impact on profit contribution.

      Online/mobile   revenues  increased  $1.6  million,   or  3%,  and  profit
contribution was flat in 2007.  Online  subscription  revenues were flat for the
year, while profit  contribution  increased  slightly.  E-commerce  revenues and
profit  contribution  increased from the launch in the fourth quarter of 2006 of
the BUNNYshop, a women's fashion e-commerce and catalog business,  combined with
improved sales from our Playboy e-commerce and catalog business.  In early 2008,
we  entered  into  an  agreement  to  outsource  these  e-commerce  and  catalog
businesses.  Licensing our Spice  e-commerce  and catalog  business in the third
quarter of 2006 also favorably  impacted 2007 profit  contribution.  Advertising
revenues  grew  49%  due to the  redesign  of  Playboy.com,  largely  offset  by
increased  related  costs.  Mobile  results  decreased  primarily  due to  lower
royalties from a licensee in Europe.

      Revenues from other  businesses  increased  $0.7  million,  or 9%, in 2007
primarily due to recording  license fees for our production  company,  Alta Loma
Entertainment.  A $0.7 million  decrease in profit  contribution was impacted by
Club Jenna, Inc. and related companies,  or Club Jenna, which we acquired in the
second quarter of 2006, and a legal settlement recorded in 2007.

      The group's  administrative  expenses  increased $3.2 million,  or 17%, in
2007  primarily  in support  of the  acquired  businesses  coupled  with  higher
performance-based compensation expense.

      Programming  amortization  and  online  content  expenses  decreased  $2.2
million, or 5%, in 2007.

      Segment  income  for the  group  decreased  $2.0  million,  or 9%, in 2007
compared to 2006 due to the results previously discussed.

                                       30



Publishing Group

      Domestic  magazine  revenues  decreased  $3.7  million,  or 5%,  in  2007.
Subscription  revenues decreased $3.5 million,  or 8%, primarily due to 7% fewer
copies  served in 2007.  Newsstand  revenues  decreased  $1.0  million,  or 10%,
primarily  due to 10% fewer  copies  sold in 2007.  Print  advertising  revenues
increased  $0.8 million,  or 3%,  primarily due to a 6% increase in  advertising
pages,  partially  offset by a 3% decrease  in average net revenue per page.  To
better reflect changes in how and where media is consumed and in response to the
challenging  magazine landscape,  we adjusted our magazine circulation rate base
(the total  newsstand and  subscription  circulation  guaranteed to advertisers)
effective  with  the  January  2008  issue  to 2.6  million  from  3.0  million.
Advertising sales for the 2008 first quarter magazine issues are closed,  and we
expect to report approximately 30% lower advertising revenues due in part to the
effect of the lower rate base and a 14% decrease in  advertising  pages compared
to the 2007 first quarter.

      We  believe  that  the  complementary  nature  of  our  print  and  online
businesses  will allow us to grow our overall  audience for Playboy  content and
effectively  aggregate that audience for our advertising partners. On a combined
basis, our Playboy print and online advertising revenues increased $2.8 million,
or 10%, for the year,  reflecting  growth in online  advertising,  driven by the
redesign of Playboy.com, which has attracted new advertisers.

      International  magazine revenues  increased $0.8 million,  or 12%, in 2007
due in part to  higher  royalties  as a result of  strong  performance  from our
Brazilian and Russian editions.

      Special  editions and other  revenues  decreased  $0.4 million,  or 4%, in
2007.  Special  editions  revenues  decreased $0.7 million  primarily due to 16%
fewer  newsstand  copies sold,  partially  offset by the impact of a $1.00 cover
price increase effective with the July 2007 issues.

      The group's segment loss increased $2.2 million, or 41%, in 2007 primarily
due to the decrease in revenues  discussed  above combined with higher  expenses
related to celebrity  pictorials,  partially offset by lower manufacturing costs
due to printing fewer copies and fewer  editorial  pages per issue.  The segment
loss included  additional  expense for subscription  collection costs and actual
allocated  post-employment  benefit costs related to senior editorial employees.
Excluding these additional  subscription  collection and post-employment benefit
costs, segment results would have been comparable with those of 2006.

Licensing Group

      Licensing  Group  revenues  increased  $10.0  million,  or  30%,  in  2007
primarily due to higher consumer  products  revenues,  principally  from Western
Europe and Southeast Asia, and a full year of royalties from our  location-based
entertainment venue at the Palms Casino Resort in Las Vegas, which opened in the
fourth  quarter of 2006.  The year also  reflected  an increase of $1.4  million
related to opportunistic sales of original artwork.

      The  group's  segment  income  increased  $7.5  million,  or 40%,  in 2007
primarily due to the increased revenues previously  discussed,  partially offset
by higher growth-related costs and performance-based compensation expense.

Corporate Administration and Promotion

      Corporate Administration and Promotion expenses increased $2.4 million, or
9%, in 2007 in part due to additional expense related to certain trademark costs
that  we  began   expensing   in  the   fourth   quarter   of  2006  and  higher
performance-based  compensation  expense. The previously mentioned allocation of
actual  post-employment  benefit costs to the Publishing  Group partially offset
the unfavorable variance.

Restructuring Expense

      In 2007, we  implemented a plan to outsource our remaining  e-commerce and
catalog businesses, to sell our Los Angeles production facility and to eliminate
office space obtained as part of the Club Jenna acquisition. As a result of this
restructuring  plan,  we  recorded  a charge of $0.4  million  related  to costs
associated  with a  workforce  reduction  of 28  employees.  Additional  expense
related  to this  plan  will be  recorded  in 2008.  During  2007,  we made cash
payments  of  $0.6  million  related  to  prior  years'   restructuring   plans.
Approximately  $12.5 million of the total costs of our  restructuring  plans was
paid  through  December  31, 2007,  with the  remaining  $0.5 million to be paid
during 2008.

                                       31



      In 2006, we recorded a charge of $2.1 million related to reducing overhead
costs and annual programming and editorial expenses.

Impairment Charge on Assets Held for Sale

      We recorded a $1.5 million charge in connection with the potential sale of
assets related to our Los Angeles production facility.  See Note (T), Subsequent
Events,  to the  Notes  to  Consolidated  Financial  Statements  for  additional
information.

Nonoperating Income (Expense)

      Nonoperating expense was $1.1 million, or 26%, lower in 2007 primarily due
to a $0.7 million decrease in interest expense primarily due to payments made on
acquisition  liabilities  and a $0.2  million  increase  in equity  income  from
Playboy TV-Latin America, LLC.

Income Tax Expense

      In 2007, we recognized a tax benefit  associated with the decrease of $2.4
million in the valuation  allowance  related to the  realization of our U.K. net
operating  losses,  or NOLs,  and the effect of the  deferred  tax  treatment of
certain acquired intangibles.  In 2007, our effective tax rate differed from the
U.S.  statutory  rate  primarily  as a result of the NOL  carryforwards  and the
effect of the deferred tax treatment of certain indefinite-lived intangibles.

      In 2006,  we  modified  the  assumptions  related to the  useful  lives of
certain   distribution   agreements   that   previously   were   classified   as
indefinite-lived.  As these distribution agreements are now being amortized, the
deferred tax liability  related to the distribution  agreements that is expected
to be  realized  within the NOL  carryforward  period may be netted  against our
deferred tax asset.  In 2006, we recorded an income tax benefit for $2.6 million
of the $3.9 million deferred tax liability related to the distribution agreement
modification.  In 2007, we  recognized an additional  income tax benefit of $0.5
million related to the  distribution  agreements.  In 2006, our effective income
tax rate differed from the U.S.  statutory rate primarily as a result of foreign
income and  withholding  taxes,  for which no current U.S. income tax benefit is
recognized,   and  the  effect  of  the  deferred   tax   treatment  of  certain
indefinite-lived intangibles.

2006 COMPARED TO 2005

      Our revenues  decreased  $7.1  million,  or 2%,  compared to 2005 due to a
continued  decrease in revenues from our  Publishing  Group  combined with lower
revenues from our Entertainment Group,  partially offset by higher revenues from
our Licensing Group.

      Segment income  decreased $19.9 million,  or 64%,  compared to 2005 due to
significantly  lower results from our  Entertainment  Group combined with higher
Corporate  Administration and Promotion  expenses,  partially offset by improved
results from our Licensing and Publishing Groups.

      Operating  income  of $9.1  million  for 2006  included  $2.0  million  of
restructuring  expense  primarily  related to a cost reduction plan  implemented
during 2006.

      Net income of $2.3  million  improved  $3.0 million over 2005 as the lower
operating   results   previously   discussed  were  more  than  offset  by  debt
extinguishment and minority interest expenses of $19.3 million and $1.6 million,
respectively,  in 2005 and  decreases of $1.5 million and $1.4 million in income
tax and interest expenses, respectively, in 2006.

Entertainment Group

      The following  discussion focuses on the revenues and profit  contribution
before  programming  amortization  and online  content  expenses  of each of our
Entertainment Group businesses.

      Revenues from our domestic TV networks decreased $16.1 million, or 16%, in
2006.

      Playboy  TV network  revenues  decreased  $6.0  million in 2006 with cable
revenues decreasing $3.0 million and direct-to-home, or DTH, revenues decreasing
$1.2 million.  These  decreases  were largely due to the  continued

                                       32



impact of a consumer shift from  pay-per-view,  or PPV, to  video-on-demand,  or
VOD, purchasing.

      Movie business  revenues  decreased $12.2 million in 2006 primarily due to
the decline of PPV as a result of less overall carriage of adult linear networks
and less shelf space in VOD  compared to linear PPV. The loss of two channels to
a competitor on the largest  satellite TV provider also contributed to the lower
movie revenues.

      2005 was  favorably  impacted by the  discontinuation  of a  distributor's
high-definition   subscription   service   agreement,   which  resulted  in  the
accelerated recognition of $1.4 million of deferred revenues associated with the
agreement.

      Revenues from VOD increased $0.9 million in 2006.

      Revenues  associated with our Los Angeles  production  facility  increased
$1.2 million in 2006 primarily due to the addition of new third-party networks.

      Profit  contribution from our domestic TV networks decreased $22.4 million
as a result of the lower  revenues  previously  discussed  combined  with a $1.8
million legal  settlement in the fourth  quarter of 2006 and increased  expenses
primarily  related  to  marketing  and  staffing.  See  Part I.  Item 3.  "Legal
Proceedings" for additional information.

      International TV revenues increased $2.6 million, or 6%, in 2006 primarily
due to  increased  DTH and  cable  revenues  from our U.K.  television  business
combined with favorable  foreign  currency  exchange rates,  partially offset by
lower  revenues  from several  third-party  licensees.  International  TV profit
contribution  decreased $0.7 million in 2006 as a result of higher international
distribution and staffing expenses.

      Online/mobile   revenues  increased  $7.8  million,  or  14%,  and  profit
contribution increased $0.9 million in 2006. Online subscriptions and e-commerce
revenues  increased  $5.2 million,  or 11%, in 2006.  Positive  results from our
acquisitions of an affiliate  network of websites late in 2005 and Club Jenna in
2006 were partially  offset by the impacts of a termination  payment received in
2005 related to the  discontinuation of a marketing alliance and the outsourcing
of our Spice e-commerce and catalog business in 2006.  Online  subscriptions and
e-commerce  profit  contribution  decreased $0.2 million,  or 1%, as the revenue
increases  previously  discussed were more than offset by costs  associated with
the acquired  businesses and higher  marketing  expenses.  Advertising  revenues
increased  $1.7 million in 2006 and profit  contribution  increased $0.5 million
due to  advertising  revenues  from the  acquired  businesses.  Mobile  revenues
increased  $0.9 million and profit  contribution  increased  $0.6 million due to
higher  royalties  combined with revenues from our  acquisition of Club Jenna in
2006.

      Revenues from other  businesses  increased $2.7 million,  or 58%, in 2006,
driven by  worldwide  DVD sales and revenues  resulting  from the 2006 launch of
Playboy Radio on SIRIUS  Satellite  Radio.  Profit  contribution  increased $1.0
million,  or 66%, in 2006 due to the  revenue  increases  previously  discussed,
partially offset by higher costs largely related to the acquired businesses.

      The group's  administrative  expenses  decreased $5.0 million,  or 20%, in
2006  due  to  the  elimination  of  our  intra-company  agreements  related  to
trademark,  content and  administrative  fees that had been paid by Playboy.com,
Inc., or  Playboy.com,  to us as a result of our October 2005  repurchase of the
remaining   minority  interest  of  Playboy.com,   partially  offset  by  higher
staffing-related   expenses,   in  large  part   associated  with  the  acquired
businesses.

      Programming  amortization  and  online  content  expenses  increased  $1.7
million,  or 4%, in 2006,  primarily due to new programming costs to support our
acquired  businesses and Playboy Radio,  partially offset by a change in the mix
of television programming.

      Segment  income for the group  decreased  $17.8  million,  or 43%, in 2006
compared to 2005 due to the previously discussed operating results.

Publishing Group

      Domestic  magazine  revenues  decreased  $8.7  million,  or 10%,  in 2006.
Advertising  revenues  decreased $4.0 million due to 10% fewer advertising pages
coupled  with a 4%  decrease  in  average  net  revenue  per page.  Subscription
revenues also decreased $4.0 million  primarily due to lower average revenue per
copy  combined  with

                                       33



fewer copies served.  Newsstand revenues decreased $0.7 million primarily due to
15% fewer  copies sold in 2006.  This  decrease was  partially  mitigated by the
impact of a $1.00 cover price increase effective with the February 2006 issue.

      Revenues from special editions and other decreased $0.7 million, or 7%, in
2006.  Special  editions  revenues  decreased $0.5 million  primarily due to 15%
fewer newsstand  copies sold in 2006,  partially offset by the impact of a $1.00
cover price increase  effective with the November 2005 issues and by a favorable
variance related to prior issues.

      International magazine revenues were flat for 2006.

      The  group's  segment  loss  improved  $1.1  million,  or  17%,  as  lower
subscription  acquisition   amortization,   editorial  content,   manufacturing,
advertising sales,  marketing and administration  expenses were partially offset
by the lower  revenues  previously  discussed and by higher  operating  expenses
related to international publishing in 2006.

Licensing Group

      Licensing Group revenues increased $5.3 million, or 19%, in 2006 primarily
due to higher  international  royalties,  principally from Europe, and royalties
from our  location-based  entertainment  venue at the Palms Casino Resort in Las
Vegas,  which opened in the fourth quarter of 2006.  The group's  segment income
increased  $2.9  million,  or  19%,  due to the  increased  revenues  previously
discussed, partially offset by higher growth-related costs.

Corporate Administration and Promotion

      Corporate Administration and Promotion expenses increased $6.1 million, or
31%, in 2006 primarily due to the  elimination of our  intra-company  agreements
related  to  trademark,  content  and  administrative  fees as a  result  of the
Playboy.com  minority  interest  repurchase   previously  discussed  and  higher
promotional spending.

Restructuring Expense

      In 2006, we  implemented a cost reduction plan to lower overhead costs and
annual programming and editorial expenses. As a result of the 2006 restructuring
plan, we reported a charge of $2.1 million  related to costs  associated  with a
workforce reduction of 15 employees.

Nonoperating Income (Expense)

      Nonoperating  expense  decreased  $23.3  million,  or 84%,  in 2006.  2005
included  $19.3  million  of  debt  extinguishment  expense  related  to a  debt
refinancing  and $1.6  million  of  minority  interest  expense  related  to the
previously   discussed   repurchase  of  the  remaining   minority  interest  in
Playboy.com.  2006  reflected a decrease in  interest  expense of $1.4  million,
which was also a result of our 2005 debt refinancing.

Income Tax Expense

      Our  effective  income  tax rate  differed  from the U.S.  statutory  rate
primarily  as a result of foreign  income and  withholding  taxes,  for which no
current U.S. income tax benefit was  recognized,  and the deferred tax treatment
of certain indefinite-lived intangibles.

      In 2006,  we  modified  the  assumptions  related to the  useful  lives of
certain   distribution   agreements   that   previously   were   classified   as
indefinite-lived.  As these distribution agreements are now being amortized, the
deferred tax liability  related to the distribution  agreements that is expected
to be  realized  within the NOL  carryforward  period may be netted  against our
deferred tax asset.  In 2006, we recorded an income tax benefit for $2.6 million
of the $3.9 million deferred tax liability related to the distribution agreement
modification.  In 2005,  our  effective  income tax rate  differed from the U.S.
statutory rate primarily as a result of the reduction in the valuation allowance
corresponding  to the utilization of our NOL  carryforwards.  The benefit of our
NOL  carryforwards  was partially  offset by foreign income and withholding tax,
for which no current U.S. income tax benefit is recognized, and the deferred tax
treatment of certain indefinite-lived intangibles.

                                       34



LIQUIDITY AND CAPITAL RESOURCES

      At December 31, 2007,  we had $20.6  million in cash and cash  equivalents
compared to $26.7 million in cash and cash  equivalents at December 31, 2006. We
also had $6.0  million  and $3.0  million of auction  rate  securities,  or ARS,
included in marketable  securities  and  short-term  investments at December 31,
2007  and  December  31,  2006,  respectively.   ARS  generally  have  long-term
maturities;   however,   these  investments  have  characteristics   similar  to
short-term  investments because at predetermined  intervals,  typically every 28
days,  there is a new auction process.  Total financing  obligations were $115.0
million at both December 31, 2007 and December 31, 2006.

      At December  31,  2007,  cash  generated  from our  operating  activities,
existing cash and cash  equivalents  and  marketable  securities  and short-term
investments  were  fulfilling  our liquidity  requirements.  We also had a $50.0
million credit  facility,  which can be used for revolving  borrowings,  issuing
letters of credit or a combination of both. At December 31, 2007,  there were no
borrowings  and $10.6  million  in  letters  of credit  outstanding  under  this
facility,  resulting  in  $39.4  million  of  available  borrowings  under  this
facility.

      We believe that cash on hand and operating cash flows, together with funds
available under our credit  facility and potential  access to credit and capital
markets, will be sufficient to meet our operating expenses, capital expenditures
and other contractual obligations as they become due.

DEBT FINANCING

      In March  2005,  we issued and sold  $115.0  million  aggregate  principal
amount  of  our  3.00%  convertible  senior  subordinated  notes  due  2025,  or
convertible notes,  which included $15.0 million due to the initial  purchasers'
exercise of the over-allotment  option. The convertible notes bear interest at a
rate of 3.00% per annum on the principal amount of the notes, payable in arrears
on March 15 and  September 15 of each year,  payment of which began on September
15, 2005.  In addition,  under certain  circumstances  beginning in 2012, if the
trading price of the convertible  notes exceeds a specified  threshold  during a
prescribed   measurement  period  prior  to  any  semi-annual  interest  period,
contingent  interest  will  become  payable  on the  convertible  notes for that
semi-annual interest period at an annual rate of 0.25% per annum.

      The convertible notes are convertible into cash and, if applicable, shares
of our Class B common stock,  or Class B stock,  based on an initial  conversion
rate,  subject to adjustment,  of 58.7648 shares per $1,000  principal amount of
the  convertible  notes  (which  represents  an  initial   conversion  price  of
approximately  $17.02 per share)  only under the  following  circumstances:  (a)
during any fiscal quarter after the fiscal quarter ending March 31, 2005, if the
closing  sale  price of our  Class B stock  for  each of 20 or more  consecutive
trading  days in a period  of 30  consecutive  trading  days  ending on the last
trading day of the  immediately  preceding  fiscal  quarter  exceeds 130% of the
conversion price in effect on that trading day; (b) during the five business day
period  after any five  consecutive  trading  day  period  in which the  average
trading price per $1,000  principal  amount of convertible  notes over that five
consecutive  trading  day  period  was equal to or less than 95% of the  average
conversion  value of the  convertible  notes  during that  period;  (c) upon the
occurrence of specified  corporate  transactions,  as set forth in the indenture
governing the convertible  notes; or (d) if we have called the convertible notes
for  redemption.  Upon  conversion of a convertible  note, a holder will receive
cash in an amount equal to the lesser of the aggregate  conversion  value of the
note  being  converted  and the  aggregate  principal  amount of the note  being
converted.  If the  aggregate  conversion  value of the  convertible  note being
converted  is greater  than the cash amount  received by the holder,  the holder
will  also  receive  an amount  in whole  shares  of Class B stock  equal to the
aggregate conversion value less the cash amount received by the holder. A holder
will receive cash in lieu of any fractional shares of Class B stock. The maximum
conversion rate,  subject to adjustment,  is 76.3942 shares per $1,000 principal
amount of convertible notes.

      The  convertible  notes  mature on March 15,  2025.  On or after March 15,
2010, if the closing  price of our Class B stock exceeds a specified  threshold,
we may redeem any of the convertible  notes at a redemption  price in cash equal
to 100% of the principal  amount of the  convertible  notes plus any accrued and
unpaid interest up to, but excluding, the redemption date. On or after March 15,
2012,  we may at any  time  redeem  any of the  convertible  notes  at the  same
redemption  price. On each of March 15, 2012, March 15, 2015 and March 15, 2020,
or upon the  occurrence of a fundamental  change,  as specified in the indenture
governing  the  convertible  notes,  holders may require us to purchase all or a
portion of their  convertible notes at a purchase price in cash equal to 100% of
the principal  amount of the notes,  plus any accrued and unpaid interest up to,
but excluding, the purchase date.

                                       35



      The convertible  notes are unsecured  senior  subordinated  obligations of
Playboy  Enterprises,  Inc. and rank junior to all of the issuer's  senior debt,
including  its  guarantee of our  subsidiary  PEI  Holdings,  Inc., or Holdings,
borrowings  under our credit  facility;  equally with all of the issuer's future
senior subordinated debt; and, senior to all of the issuer's future subordinated
debt. In addition,  the assets of the issuer's  subsidiaries  are subject to the
prior claims of all creditors, including trade creditors, of those subsidiaries.

CREDIT FACILITY

      We amended our $50.0 million credit facility effective September 28, 2007.
The agreement now provides for revolving borrowings,  the issuance of letters of
credit or a combination of both of up to $50.0 million  outstanding at any time.
The borrowing rates and financial  covenants  contained in the amendment did not
change materially,  but we obtained additional  flexibility in other restrictive
covenants.  Borrowings  under the credit  facility  bear  interest at a variable
rate, equal to a specified LIBOR or base rate plus a specified  borrowing margin
based on our Adjusted EBITDA, as defined in the credit agreement. We pay fees on
the outstanding  amount of letters of credit based on the margin that applies to
borrowings that bear interest at a rate based on LIBOR. All amounts  outstanding
under the credit  facility will mature on September 28, 2010. The obligations of
Holdings as borrower under the credit  facility are guaranteed by us and each of
our other U.S.  subsidiaries.  The obligations of the borrower and nearly all of
the guarantors under the credit facility are secured by a first-priority lien on
substantially all of the borrower's and the guarantors' assets.

CALIFA ACQUISITION

      In 2007,  we made cash payments  totaling $8.0 million in accordance  with
The Califa  Entertainment  Group,  Inc., or Califa,  acquisition  agreement.  At
December 31, 2007, our remaining acquisition payment obligations,  which include
interest,  to Califa were $3.8  million,  which are payable in cash in quarterly
installments  ending in 2011. We have the option of accelerating these remaining
acquisition payments. See the Contractual  Obligations table for the future cash
obligations related to our acquisitions. See Note (B), Acquisition, to the Notes
to Consolidated  Financial Statements for additional information relating to the
Califa acquisition.

CASH FLOWS FROM OPERATING ACTIVITIES

      Net cash provided by operating activities increased $15.2 million to $24.2
million in 2007 compared to 2006 primarily due to the operating and nonoperating
results  previously  discussed  combined with increases in accounts  payable and
accrued salaries, wages and employee benefits from 2006.

CASH FLOWS FROM INVESTING ACTIVITIES

      Net cash used for investing activities was $19.0 million for 2007 compared
to net cash  provided by  investing  activities  of $2.1  million in 2006.  2007
reflected   $10.5  million  of  net  purchases  of  marketable   securities  and
investments and $8.5 million of capital expenditures, which primarily related to
leasehold  improvements  at our  New  York  office  and Los  Angeles  production
facility and  technology-related  items.  2006  reflected  net proceeds of $17.4
million  from the sale of  marketable  securities  and  short-term  investments,
payments for acquisitions of $7.8 million  primarily  related to the acquisition
of Club Jenna and capital  expenditures  of $7.5  million  primarily  related to
technology-related items.

CASH FLOWS FROM FINANCING ACTIVITIES

      Net cash used for financing activities of $11.7 million for 2007 and $11.1
million for 2006 were primarily due to payments in connection  with  acquisition
liabilities.

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

      The positive effects of foreign  currency  exchange rates on cash and cash
equivalents during 2007 and 2006 of $0.3 million and $0.7 million, respectively,
were  due to the  weakening  of the  U.S.  dollar  against  foreign  currencies,
primarily the pound sterling.

                                       36



CONTRACTUAL OBLIGATIONS

      The following  table sets forth a summary of our  contractual  obligations
and  commercial  commitments  at December 31, 2007, as further  discussed in the
Notes to Consolidated Financial Statements (in thousands):



                                         2008        2009       2010        2011       2012  Thereafter       Total
- -------------------------------------------------------------------------------------------------------------------
                                                                                     
Long-term financing obligations (1)  $  3,450     $ 3,450    $ 3,450     $ 3,450    $ 3,450   $ 158,125   $ 175,375
Operating leases                       12,387       9,131      9,222       9,354      9,238      58,502     107,834
Purchasing obligations:
   Licensed programming
     commitments (2)                    5,887       4,510      5,000       3,333         --          --      18,730
Other (3):
   Acquisition liabilities (1), (4)     2,700       3,300      5,300         750         --          --      12,050
   Transponder service agreements    $  7,214     $ 5,408    $ 3,480     $ 3,480    $ 3,480   $   3,915   $  26,977
- -------------------------------------------------------------------------------------------------------------------


(1)   Includes interest and principal commitments.

(2)   Represents  our  non-cancelable  obligations to license  programming  from
      other  studios.  Typically,  the  licensing of the  programming  allows us
      access to specific  titles or in some cases the  studio's  entire  library
      over an extended  period of time.  We broadcast  this  programming  on our
      networks throughout the world, as appropriate.

(3)   We  have  obligations  of  $6.7  million  recorded  in  "Other  noncurrent
      liabilities" on our Consolidated Balance Sheet at December 31, 2007, under
      two  nonqualified   deferred  compensation  plans,  which  permit  certain
      employees  and all  non-employee  directors  to annually  elect to defer a
      portion of their compensation. These amounts have not been included in the
      table, as the dates of payment are not known at the balance sheet date.

(4)   Includes  interest and principal related to the acquisitions of Califa and
      Club Jenna.

      We have excluded from the table above uncertain tax liabilities as defined
in  Financial  Accounting  Standards  Board,  or FASB,  Interpretation  No.  48,
Accounting for Uncertainty in Income Taxes-an  interpretation  of FASB Statement
No. 109, or FIN 48, due to the  uncertainty of the amount and period of payment.
At  December  31,  2007,  our  expected  payment  for  significant   contractual
obligations  includes  approximately  $8.0 million for unrecognized tax benefits
associated  with the  adoption of FIN 48. We cannot make a  reasonably  reliable
estimate as to if or when such amounts may be settled.

CRITICAL ACCOUNTING POLICIES

      Our  financial  statements  are  prepared  in  conformity  with  generally
accepted accounting principles in the United States, which require management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. We believe that of our significant accounting
policies,  the following are the more complex and critical areas. For additional
information about our accounting policies,  see Note (A), Summary of Significant
Accounting Policies, to the Notes to Consolidated Financial Statements.

REVENUE RECOGNITION

Domestic Television

      Our domestic  television revenues were $75.8 million and $82.5 million for
the years ended December 31, 2007 and 2006, respectively. In order to record our
revenues,  we estimate the number of PPV and VOD buys and monthly  subscriptions
using a number of factors including, but not exclusively,  the average number of
buys and  subscriptions  in the prior  three  months  based on  actual  payments
received and historical data by geographic location. Upon recording the revenue,
we also  record the  related  receivable.  We have  reserves  for  uncollectible
receivables  based on our  experience and monitor and adjust these reserves on a
quarterly  basis.  At December 31, 2007 and 2006,  we had  receivables  of $14.8
million and $13.2  million,  respectively,  related to domestic  television.  We
record  adjustments  to revenue on a monthly basis as we obtain actual  payments
from the  providers.  Actual  subscriber  information  and payment are generally
received  within  three  months.  Historically,  our  adjustments  have not been
material.  At any point,  our  exposure to a material  adjustment  to revenue is
mitigated because, generally, only the most recent two to three months would not
have been fully adjusted to actual based on payments received.

                                       37



International Television

      Our international television revenues were $55.9 million and $49.5 million
for the years ended December 31, 2007 and 2006, respectively. In order to record
our  revenues,  we  estimate  the  number  of  PPV  and  VOD  buys  and  monthly
subscriptions  using a number of factors  including,  but not  exclusively,  the
average  number  of  buys  and   subscriptions  in  the  prior  month  based  on
subscription and billing reports provided by platform operators.  Upon recording
the  revenue,  we also  record the  related  receivable.  We have  reserves  for
uncollectible  receivables  based on our experience and monitor and adjust these
reserves on a monthly basis.  At December 31, 2007 and 2006, we had  receivables
of $9.1  million  and  $8.0  million,  respectively,  related  to  international
television.  We record  adjustments  to revenue on a monthly  basis as we obtain
subscription and billing reports from the platform operators.  Actual subscriber
information  is  generally   received  within  one  month.   Historically,   our
adjustments  have not been  material.  At any point,  our exposure to a material
adjustment  to revenue is  mitigated  because,  generally,  only the most recent
month would not have been fully  adjusted to actual  based on the prior  month's
reports.

Domestic Magazine

      Our Playboy magazine revenues were $77.0 million and $80.7 million for the
years ended December 31, 2007 and 2006,  respectively,  of which 11.5% and 12.1%
were derived from newsstand sales in the respective  years. Our print run, which
is  developed  with input  from  Time/Warner  Retail  Sales and  Marketing,  our
national  distributor,  varies each month based on expected sales.  Our expected
sales are based on analyses of historical demand based on a number of variables,
including content,  time of year and the cover price. We record our revenues for
each month's issue utilizing our expected  sales.  Our revenues are recorded net
of a provision for estimated  returns.  Substantially all of the magazines to be
returned are returned within 90 days of the date that the subsequent  issue goes
on sale.  We adjust our  provision  for returns  based on actual  returns of the
magazine.  Historically,  our annual  adjustments to Playboy magazine  newsstand
revenues have not been material and are driven by differences in actual consumer
demand as compared to expected sales.  At any point,  our exposure to a material
adjustment to revenue is mitigated because,  generally, only the most recent two
to three  issues  would not have been fully  adjusted to actual  based on actual
returns received.

DEFERRED REVENUES

      We had deferred  revenues  related to Playboy magazine  subscriptions  and
online  subscriptions  of $32.6  million  and  $4.1  million,  respectively,  at
December 31, 2007 and $34.3 million and $4.0 million,  respectively, at December
31, 2006.  Sales of Playboy  magazine and online  subscriptions,  less estimated
cancellations,  are deferred and recognized as revenues proportionately over the
subscription  periods.  Our estimates of  cancellations  are based on historical
experience and current  marketplace  conditions and are adjusted  monthly on the
basis of actual results. We have not experienced  significant deviations between
estimated and actual results.

STOCK-BASED COMPENSATION

      Our  stock-based  compensation  expense  related to stock options was $1.1
million for the year ended December 31, 2007. On January 1, 2006, we adopted the
provisions  of  Statement  of Financial  Accounting  Standards  No. 123 (revised
2004),  Share-Based  Payment,  or  Statement  123(R),  which  is a  revision  of
Statement of Financial  Accounting Standards No. 123, Accounting for Stock-Based
Compensation,  under the modified  prospective  method. We estimate the value of
stock options on the date of grant using the Lattice  Binomial model, or Lattice
model. The Lattice model requires extensive analysis of actual exercise behavior
data  and  a  number  of  complex  assumptions  including  expected  volatility,
risk-free   interest  rate,   expected   dividends  and  option   cancellations.
Forfeitures  are estimated at the time of grant and revised,  if  necessary,  in
subsequent periods if actual forfeitures differ from those estimates. We measure
stock-based  compensation cost at the grant date based on the value of the award
and  recognize the expense over the vesting  period.  Compensation  expense,  as
recognized under Statement 123(R),  for all stock-based  compensation  awards is
recognized using the straight-line attribution method.

RELATED PARTY TRANSACTIONS

HUGH M. HEFNER

      We own a  29-room  mansion  located  on five  and  one-half  acres  in Los
Angeles,   California.  The  Playboy  Mansion  is  used  for  various  corporate
activities and serves as a valuable location for television production, magazine
photography  and for online,  advertising,  marketing and sales events.  It also
enhances our image as host for many

                                       38



charitable  and civic  functions.  The  Playboy  Mansion  generates  substantial
publicity  and  recognition,  which  increases  public  awareness  of us and our
products and services.  Its  facilities  include a tennis court,  swimming pool,
gymnasium and other  recreational  facilities as well as extensive film,  video,
sound and security systems. The Playboy Mansion also includes accommodations for
guests  and  serves  as  an  office  and  residence  for  Hugh  M.  Hefner,  our
Editor-in-Chief  and Chief Creative  Officer,  or Mr. Hefner. It has a full-time
staff that performs  maintenance,  serves in various capacities at the functions
held at the Playboy Mansion and provides our and Mr. Hefner's guests with meals,
beverages and other services.

      Under a 1979 lease  entered  into with Mr.  Hefner,  the  annual  rent Mr.
Hefner  pays  to us  for  his  use of  the  Playboy  Mansion  is  determined  by
independent experts who appraise the value of Mr. Hefner's basic  accommodations
and access to the Playboy Mansion's facilities, utilities and attendant services
based on comparable hotel accommodations. In addition, Mr. Hefner is required to
pay the sum of the per-unit  value of  non-business  meals,  beverages and other
benefits he and his personal  guests  receive.  These standard food and beverage
per-unit values are determined by independent  expert  appraisals  based on fair
market values.  Valuations for both basic  accommodations  and standard food and
beverage  units are  reappraised  every  three years and are  annually  adjusted
between  appraisals based on appropriate  consumer price indexes.  Mr. Hefner is
also  responsible  for the  cost of all  improvements  in any  Hefner  residence
accommodations,  including  capital  expenditures,  that are in excess of normal
maintenance for those areas.

      Mr.  Hefner's usage of Playboy  Mansion  services and benefits is recorded
through  a system  initially  developed  by the  professional  services  firm of
PricewaterhouseCoopers  LLP,  and  now  administered  by  us,  with  appropriate
modifications approved by the Audit and Compensation  Committees of the Board of
Directors.  The lease dated June 1, 1979, as amended,  between Mr. Hefner and us
renews  automatically  at  December  31st each year and will  continue  to renew
unless  either Mr.  Hefner or we terminate  it. The rent  charged to Mr.  Hefner
during 2007 included the  appraised  rent and the  appraised  per-unit  value of
other benefits,  as described above. Within 120 days after the end of our fiscal
year,  the actual  charge for all benefits for that year is finally  determined.
Mr. Hefner pays or receives credit for any difference between the amount finally
determined  and the amount he paid over the course of the year. We estimated the
sum of the rent and other benefits payable for 2007 to be $0.7 million,  and Mr.
Hefner paid that amount during 2007. The actual rent and other benefits paid for
2006 and 2005 were $0.8 million and $1.1 million, respectively.

      We  purchased  the  Playboy  Mansion in 1971 for $1.1  million  and in the
intervening years have made substantial capital  improvements at a cost of $14.2
million  through  2007  (including  $2.7  million to bring the Hefner  residence
accommodations to a standard similar to the Playboy Mansion's common areas). The
Playboy Mansion is included in our  Consolidated  Balance Sheets at December 31,
2007  and  2006,  at a  net  book  value  of  $1.4  million  and  $1.6  million,
respectively,  including all improvements and after accumulated depreciation. We
incur all operating expenses of the Playboy Mansion,  including depreciation and
taxes, which were $2.8 million, $2.1 million and $3.1 million for 2007, 2006 and
2005, respectively, net of rent received from Mr. Hefner.

      Holly Madison,  Bridget Marquardt and Kendra  Wilkinson,  the stars of The
Girls Next Door on E! Entertainment  Television,  reside in the mansion with Mr.
Hefner. The value of rent, food and beverage and other personal benefits for the
use of the Playboy Mansion by Ms. Madison,  Ms.  Marquardt and Ms.  Wilkinson is
charged to Alta Loma Entertainment, our production company. The aggregate amount
of these charges in 2007 was $0.4 million. In addition, each of Ms. Madison, Ms.
Marquardt  and Ms.  Wilkinson  receives  payments for  services  rendered on our
behalf, including appearance fees.

RECENTLY ISSUED ACCOUNTING STANDARDS

      In  December  2007,  the FASB issued  Statement  of  Financial  Accounting
Standards  No.  160,   Noncontrolling   Interests  in   Consolidated   Financial
Statements an Amendment of ARB No. 51, or Statement 160. Statement 160 clarifies
that a noncontrolling  interest (previously referred to as minority interest) in
a subsidiary is an ownership  interest in a  consolidated  entity that should be
reported as equity in the consolidated  financial  statements.  It also requires
consolidated  net income to include the amounts  attributable to both the parent
and the noncontrolling  interest.  We are required to adopt Statement 160 at the
beginning of 2009. We are currently  evaluating the impact,  if any, of adopting
Statement 160 on our future results of operations and financial condition.

      In  December  2007,  the FASB issued  Statement  of  Financial  Accounting
Standards No. 141 (revised 2007),  Business  Combinations,  or Statement 141(R).
Statement   141(R)  retains  the   fundamental   requirements  of  the  original
pronouncement  requiring  that the  purchase  method  be used  for all  business
combinations. Statement 141(R) defines

                                       39



the acquirer as the entity that obtains control of one or more businesses in the
business  combination,  establishes  the  acquisition  date as the date that the
acquirer  achieves  control and requires  the  acquirer to recognize  the assets
acquired,  liabilities  assumed  and any  noncontrolling  interest at their fair
values as of the acquisition date.  Statement 141(R) also requires,  among other
things,  that  acquisition-related  costs  be  recognized  separately  from  the
acquisition.  We are  required  to  adopt  Statement  141(R)  prospectively  for
business  combinations on or after January 1, 2009.  Assets and liabilities that
arose from  business  combinations  prior to January 1, 2009 are not affected by
the adoption of Statement 141(R).

      In  February  2007,  the FASB issued  Statement  of  Financial  Accounting
Standards  No. 159, The Fair Value  Option for  Financial  Assets and  Financial
Liabilities-Including  an amendment of FASB Statement No. 115, or Statement 159.
Statement 159 allows  entities to  voluntarily  elect to measure many  financial
assets and  financial  liabilities  at fair  value.  The  election is made on an
instrument-by-instrument  basis and is  irrevocable.  We are  required  to adopt
Statement 159 at the beginning of 2008.  The impact of the adoption of Statement
159 will be  dependent  upon the  extent to which we elect to  measure  eligible
items at fair value.  We do not expect the adoption of  Statement  159 to have a
significant impact on our future results of operations or financial condition.

      In September  2006,  the FASB issued  Statement  of  Financial  Accounting
Standards No. 158,  Employers'  Accounting for Defined Benefit Pension and Other
Postretirement  Plans-an  amendment  of FASB  Statements  No. 87, 88,  106,  and
132(R),  or Statement 158.  Statement 158 requires an entity to (a) recognize in
its  statement of  financial  position an asset or an  obligation  for a defined
benefit  postretirement  plan's  funded  status,  (b) measure a defined  benefit
postretirement plan's assets and obligations that determine its funded status as
of the end of the employer's fiscal year and (c) recognize changes in the funded
status of a defined benefit  postretirement plan in comprehensive  income in the
year in which  the  changes  occur.  We  adopted  the  recognition  and  related
disclosure  provisions  of  Statement  158  effective  December  31,  2006.  The
measurement  date provision of Statement 158 is effective at the end of 2008. We
do not expect the measurement date provision of adopting Statement 158 to have a
significant impact on our results of operations or financial condition.

      In September  2006,  the FASB issued  Statement  of  Financial  Accounting
Standards  No. 157, Fair Value  Measurements,  or Statement  157.  Statement 157
provides   enhanced  guidance  for  using  fair  value  to  measure  assets  and
liabilities.  We are required to adopt  Statement 157 effective at the beginning
of 2008;  however,  FASB Staff  Position FAS 157-2 delayed the effective date of
Statement  157  to the  beginning  of  2009  for  all  nonfinancial  assets  and
nonfinancial  liabilities,  except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually).
We do not expect the adoption of Statement 157 to have a  significant  impact on
our future results of operations or financial condition.

                                       40



Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------

      We are  exposed  to certain  market  risks,  including  changes in foreign
currency  exchange  rates.  In order to  manage  the  risk  associated  with our
exposure to such fluctuations, we enter into hedging transactions that have been
authorized  pursuant  to  our  policies  and  procedures.   We  have  derivative
instruments that have been designated and qualify as cash flow hedges, which are
entered  into in order to hedge the  variability  of cash  flows to be  received
related to forecasted  royalty payments  denominated in the yen and the euro. We
hedge these  royalties  with  forward  contracts  for periods not  exceeding  12
months. We formally document all relationships  between hedging  instruments and
hedged items,  as well as our risk  management  objectives  and  strategies  for
undertaking various hedge  transactions.  We link all hedges that are designated
as cash flow hedges to  forecasted  transactions.  We also  assess,  both at the
inception of the hedge and on an ongoing basis,  whether the derivatives used in
hedging  transactions  are effective in offsetting  changes in cash flows of the
hedged items. Any hedge  ineffectiveness is recorded in earnings.  We do not use
financial instruments for trading purposes.

      We prepared sensitivity analyses to determine the impact of a hypothetical
10%  devaluation of the U.S.  dollar  relative to the foreign  currencies of the
countries to which we have exposure,  primarily Japan and Germany.  Based on our
sensitivity  analyses  at December  31, 2007 and 2006,  such a change in foreign
currency exchange rates would affect our annual consolidated  operating results,
financial position and cash flows by approximately $0.5 million in each period.

      At December 31, 2007 and 2006, we did not have any floating  interest rate
exposure.  All of our  outstanding  debt as of those  dates  consisted  of 3.00%
convertible senior  subordinated notes due 2025, or convertible notes, which are
fixed-rate obligations. The fair value of the $115.0 million aggregate principal
amount of the convertible notes will be influenced by changes in market interest
rates, the share price of our Class B stock and our credit quality.  At December
31, 2007, the convertible notes had an implied fair value of $103.9 million.

Item 8. Financial Statements and Supplementary Data
- ---------------------------------------------------

      The following consolidated financial statements and supplementary data are
set forth in this Annual Report on Form 10-K as follows:



                                                                                          Page
                                                                                          ----
                                                                                       
      Consolidated Statements of Operations - Fiscal Years Ended December 31, 2007,
      2006 and 2005                                                                         42

      Consolidated Balance Sheets - December 31, 2007 and 2006                              43

      Consolidated Statements of Shareholders' Equity - Fiscal Years Ended
      December 31, 2007, 2006 and 2005                                                      44

      Consolidated Statements of Cash Flows - Fiscal Years Ended December 31, 2007,
      2006 and 2005                                                                         45

      Notes to Consolidated Financial Statements                                            46

      Report of Independent Registered Public Accounting Firm                               67


      The supplementary  data regarding  quarterly results of operations are set
forth in Note (S), Quarterly Results of Operations (Unaudited),  to the Notes to
Consolidated Financial Statements.

                                       41



PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)



                                                                              Fiscal Year   Fiscal Year   Fiscal Year
                                                                                    Ended         Ended         Ended
                                                                                 12/31/07      12/31/06      12/31/05
- ---------------------------------------------------------------------------------------------------------------------
                                                                                                 
Net revenues                                                                   $  339,840    $  331,142    $  338,153
- ---------------------------------------------------------------------------------------------------------------------
Costs and expenses
   Cost of sales                                                                 (263,871)     (262,242)     (250,319)
   Selling and administrative expenses                                            (63,973)      (57,816)      (56,838)
   Restructuring expense                                                             (445)       (1,998)         (149)
   Impairment charge on assets held for sale                                       (1,508)           --            --
- ---------------------------------------------------------------------------------------------------------------------
Total costs and expenses                                                         (329,797)     (322,056)     (307,306)
- ---------------------------------------------------------------------------------------------------------------------
Gains on disposal                                                                      --            29            14
- ---------------------------------------------------------------------------------------------------------------------
Operating income                                                                   10,043         9,115        30,861
- ---------------------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
   Investment income                                                                2,511         2,447         2,217
   Interest expense                                                                (4,874)       (5,611)       (6,986)
   Amortization of deferred financing fees                                           (490)         (535)         (635)
   Minority interest expense                                                           --            --        (1,557)
   Debt extinguishment expense                                                         --            --       (19,280)
   Other, net                                                                        (337)         (635)       (1,357)
- ---------------------------------------------------------------------------------------------------------------------
Total nonoperating expense                                                         (3,190)       (4,334)      (27,598)
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes                                                          6,853         4,781         3,263
Income tax expense                                                                 (1,928)       (2,496)       (3,998)
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss)                                                              $    4,925    $    2,285    $     (735)
=====================================================================================================================

Weighted average number of common shares outstanding
   Basic                                                                           33,246        33,171        33,163
=====================================================================================================================
   Diluted                                                                         33,281        33,276        33,163
=====================================================================================================================

Basic and diluted earnings (loss) per common share                             $     0.15    $     0.07    $    (0.02)
=====================================================================================================================


The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.

                                       42



PLAYBOY ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)



                                                                        Dec. 31,    Dec. 31,
                                                                            2007        2006
- --------------------------------------------------------------------------------------------
                                                                             
Assets
Cash and cash equivalents                                              $  20,603   $  26,748
Marketable securities and short-term investments                          12,952       9,000
Receivables, net of allowance for doubtful accounts of
   $3,627 and $3,688, respectively                                        51,139      47,728
Receivables from related parties                                           1,704       1,791
Inventories                                                               11,363      12,599
Deferred subscription acquisition costs                                    8,686       9,931
Deferred tax asset                                                         1,320          --
Assets held for sale                                                       4,706          --
Prepaid expenses and other current assets                                 13,402       9,426
- --------------------------------------------------------------------------------------------
   Total current assets                                                  125,875     117,223
- --------------------------------------------------------------------------------------------
Long-term investments                                                      6,556          --
Property and equipment, net                                               14,665      17,407
Long-term receivables                                                      2,795       4,665
Programming costs, net                                                    54,926      55,183
Goodwill                                                                 133,570     132,974
Trademarks                                                                65,437      63,794
Distribution agreements, net of accumulated amortization
   of $4,803 and $3,435, respectively                                     28,337      29,705
Deferred tax asset                                                         1,206          --
Other noncurrent assets                                                   11,789      14,832
- --------------------------------------------------------------------------------------------
Total assets                                                           $ 445,156   $ 435,783
============================================================================================

Liabilities
Acquisition liabilities                                                $   2,134   $  10,773
Accounts payable                                                          37,842      28,846
Accrued salaries, wages and employee benefits                              8,304       4,896
Deferred revenues                                                         43,955      45,050
Accrued litigation settlement                                                 --       1,800
Deferred tax liability                                                     1,490       1,774
Other current liabilities and accrued expenses                            14,269      14,124
- --------------------------------------------------------------------------------------------
   Total current liabilities                                             107,994     107,263
- --------------------------------------------------------------------------------------------
Financing obligations                                                    115,000     115,000
Acquisition liabilities                                                    7,936       9,692
Deferred tax liability                                                    18,604      16,648
Other noncurrent liabilities                                              24,305      23,552
- --------------------------------------------------------------------------------------------
   Total liabilities                                                     273,839     272,155
- --------------------------------------------------------------------------------------------

Shareholders' equity
Common stock, $0.01 par value
   Class A voting - 7,500,000 shares authorized; 4,864,102 issued             49          49
   Class B nonvoting - 75,000,000 shares authorized;
      28,784,079 and 28,743,914 issued, respectively                         288         287
Capital in excess of par value                                           229,833     227,775
Accumulated deficit                                                      (52,766)    (57,691)
Treasury stock, at cost - 381,971 shares                                  (5,000)     (5,000)
Accumulated other comprehensive loss                                      (1,087)     (1,792)
- --------------------------------------------------------------------------------------------
   Total shareholders' equity                                            171,317     163,628
- --------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity                             $ 445,156   $ 435,783
============================================================================================


The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.

                                       43



PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)



                                                                                           Accum.
                                 Class A   Class B   Capital in                             Other
                                  Common    Common    Excess of      Accum.   Treasury      Comp.
                                   Stock     Stock    Par Value     Deficit      Stock       Loss(1)      Total
- ---------------------------------------------------------------------------------------------------------------
                                                                                 
Balance at December 31, 2004        $ 49     $ 285    $ 222,285   $ (59,241)  $     --   $ (1,220)    $ 162,158
Net loss                              --        --           --        (735)        --         --          (735)
Shares issued or vested
   under stock plans, net             --         1        1,219          --         --         --         1,220
Minimum benefit liability
   adjustment                         --        --           --          --         --       (341)         (341)
Other comprehensive loss              --        --           --          --         --        (88)          (88)
Treasury stock purchase               --        --           --          --     (5,000)        --        (5,000)
Other                                 --        --           33          --         --         --            33
- ---------------------------------------------------------------------------------------------------------------
Balance at December 31, 2005          49       286      223,537     (59,976)    (5,000)    (1,649)      157,247
Net income                            --        --           --       2,285         --         --         2,285
Shares issued or vested
   under stock plans, net             --         1        4,238          --         --         --         4,239
Adjustment to initially apply
   FASB Statement 158                 --        --           --          --         --     (1,396)       (1,396)
Other comprehensive income            --        --           --          --         --      1,253         1,253
- ---------------------------------------------------------------------------------------------------------------
Balance at December 31, 2006          49       287      227,775     (57,691)    (5,000)    (1,792)      163,628
Net income                            --        --           --       4,925         --         --         4,925
Shares issued or vested
   under stock plans, net             --         1        2,058          --         --         --         2,059
Other comprehensive income            --        --           --          --         --        705           705
- ---------------------------------------------------------------------------------------------------------------
Balance at December 31, 2007        $ 49     $ 288    $ 229,833   $ (52,766)  $ (5,000)  $ (1,087)    $ 171,317
===============================================================================================================


(1)   Accumulated other comprehensive loss consisted of the following:

                                                            Dec. 31,   Dec. 31,
                                                                2007       2006
- -------------------------------------------------------------------------------
Unrealized gain on marketable securities                    $    197   $    247
Derivative gain (loss)                                           (78)       105
Adjustment to initially apply FASB Statement 158                  --     (1,396)
Actuarial liability adjustment                                  (576)      (155)
Foreign currency translation loss                               (630)      (593)
- -------------------------------------------------------------------------------
Accumulated other comprehensive loss                        $ (1,087)  $ (1,792)
===============================================================================

Comprehensive income (loss) was as follows:



                                                    Fiscal Year     Fiscal Year     Fiscal Year
                                                          Ended           Ended           Ended
                                                       12/31/07        12/31/06        12/31/05
- -----------------------------------------------------------------------------------------------
                                                                           
Net income (loss)                                       $ 4,925         $ 2,285        $   (735)
- -----------------------------------------------------------------------------------------------
Unrealized gain (loss) on marketable securities             (50)            113             (24)
Derivative gain (loss)                                     (183)             98              87
Minimum benefit liability adjustment                         --              --            (341)
Actuarial gain on liability                                 975             186              --
Foreign currency translation gain (loss)                    (37)            856            (151)
- -----------------------------------------------------------------------------------------------
Total other comprehensive income (loss)                     705           1,253            (429)
- -----------------------------------------------------------------------------------------------
Comprehensive income (loss)                             $ 5,630         $ 3,538        $ (1,164)
===============================================================================================


The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.

                                       44



PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)



                                                                     Fiscal Year   Fiscal Year   Fiscal Year
                                                                           Ended         Ended         Ended
                                                                        12/31/07      12/31/06      12/31/05
- ------------------------------------------------------------------------------------------------------------
                                                                                        
Cash flows from operating activities
Net income (loss)                                                      $   4,925     $   2,285     $    (735)
Adjustments to reconcile net income (loss) to net cash
   provided by operating activities:
      Depreciation of property and equipment                               4,963         3,971         3,188
      Amortization of intangible assets                                    2,300         1,683         1,902
      Amortization of investments in entertainment programming            33,935        36,564        37,450
      Stock-based compensation                                             1,856         2,326           155
      Impairment charge on assets held for sale                            1,508            --            --
      Amortization of deferred financing fees                                490           535           635
      Minority interest expense                                               --            --         1,557
      Debt extinguishment expense                                             --            --        19,280
      Equity (income) loss in operations of investments                     (129)           94           383
      Deferred income taxes                                                 (854)          867         2,532
      Changes in current assets and liabilities:
         Receivables                                                      (2,342)         (103)       (1,112)
         Receivables from related parties                                     87           137          (647)
         Inventories                                                       1,236           247          (409)
         Deferred subscription acquisition costs                           1,245           521         2,652
         Prepaid expenses and other current assets                        (3,576)       (1,460)          299
         Accounts payable                                                  8,746         3,771         3,084
         Accrued salaries, wages and employee benefits                     3,443        (3,796)        2,776
         Deferred revenues                                                (1,095)         (937)       (5,434)
         Acquisition liability interest                                    1,274           459           (55)
         Accrued litigation settlements                                   (1,800)          800        (1,875)
         Other current liabilities and accrued expenses                       93        (2,145)         (719)
- ------------------------------------------------------------------------------------------------------------
            Net change in current assets and liabilities                   7,311        (2,506)       (1,440)
- ------------------------------------------------------------------------------------------------------------
      Investments in entertainment programming                           (34,619)      (38,475)      (33,075)
      Increase in trademarks                                              (1,704)       (2,734)       (2,242)
      (Increase) decrease in other noncurrent assets                       3,511           (52)          (69)
      Increase (decrease) in other noncurrent liabilities                  1,234         2,690        (1,244)
      Other, net                                                            (498)        1,747          (499)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                 24,229         8,995        27,778
- ------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Payments for acquisitions                                                   (105)       (7,761)       (8,283)
Purchases of investments                                                 (36,846)         (574)      (53,446)
Proceeds from sales of investments                                        26,377        18,000        51,511
Additions to property and equipment                                       (8,493)       (7,546)       (5,590)
Other, net                                                                    88            --            --
- ------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities                     (18,979)        2,119       (15,808)
- ------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from financing obligations                                           --            --       115,000
Repayment of financing obligations                                            --            --       (80,000)
Payment of debt extinguishment fees                                           --            --       (15,197)
Payment of acquisition liabilities                                       (11,669)      (11,628)       (8,804)
Purchase of treasury stock                                                    --            --        (5,000)
Payment of deferred financing fees                                          (212)           --        (5,077)
Repurchase of minority interest in a controlled subsidiary                    --            --       (14,074)
Proceeds from stock-based compensation                                       163           494         1,066
Other, net                                                                    --            --           (39)
- ------------------------------------------------------------------------------------------------------------
Net cash used for financing activities                                   (11,718)      (11,134)      (12,125)
- ------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents                 323           679          (424)
- ------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                      (6,145)          659          (579)
Cash and cash equivalents at beginning of year                            26,748        26,089        26,668
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                               $  20,603     $  26,748     $  26,089
============================================================================================================


The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.

                                       45



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(A)   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Organization:  Playboy  Enterprises,  Inc., together with its subsidiaries
through which we conduct business, is a brand-driven,  international  multimedia
entertainment  and lifestyle  company with operations in the following  business
segments: Entertainment, Publishing and Licensing.

      Principles of Consolidation: The consolidated financial statements include
our  accounts and all  majority-owned  subsidiaries.  Intercompany  accounts and
transactions have been eliminated in consolidation.

       Use of Estimates:  The preparation of financial  statements in conformity
with  generally  accepted  accounting  principles in the United States  requires
management to make estimates and assumptions that affect the amounts reported in
the financial  statements and accompanying  notes.  Although these estimates are
based on  management's  knowledge of current events and actions it may undertake
in the future, they may ultimately differ from actual results.

      Reclassifications:  Certain  amounts  reported for prior periods have been
reclassified to conform to the current year's presentation.

      New Accounting Pronouncements:  In December 2007, the Financial Accounting
Standards Board, or the FASB, issued Statement of Financial Accounting Standards
No.  160,  Noncontrolling  Interests  in  Consolidated  Financial  Statements-an
Amendment  of ARB No. 51, or  Statement  160.  Statement  160  clarifies  that a
noncontrolling  interest  (previously  referred  to as minority  interest)  in a
subsidiary  is an  ownership  interest in a  consolidated  entity that should be
reported as equity in the consolidated  financial  statements.  It also requires
consolidated  net income to include the amounts  attributable to both the parent
and the noncontrolling  interest.  We are required to adopt Statement 160 at the
beginning of 2009. We are currently  evaluating the impact,  if any, of adopting
Statement 160 on our future results of operations and financial condition.

      In  December  2007,  the FASB issued  Statement  of  Financial  Accounting
Standards No. 141 (revised 2007),  Business  Combinations,  or Statement 141(R).
Statement   141(R)  retains  the   fundamental   requirements  of  the  original
pronouncement  requiring  that the  purchase  method  be used  for all  business
combinations.  Statement  141(R) defines the acquirer as the entity that obtains
control of one or more businesses in the business  combination,  establishes the
acquisition date as the date that the acquirer achieves control and requires the
acquirer  to  recognize  the  assets  acquired,   liabilities  assumed  and  any
noncontrolling  interest  at  their  fair  values  as of the  acquisition  date.
Statement  141(R) also requires,  among other things,  that  acquisition-related
costs be recognized  separately from the  acquisition.  We are required to adopt
Statement 141(R) prospectively for business  combinations on or after January 1,
2009.  Assets and  liabilities  that arose from business  combinations  prior to
January 1, 2009 are not affected by the adoption of Statement 141(R).

      In  February  2007,  the FASB issued  Statement  of  Financial  Accounting
Standards  No. 159, The Fair Value  Option for  Financial  Assets and  Financial
Liabilities-Including  an amendment of FASB Statement No. 115, or Statement 159.
Statement 159 allows  entities to  voluntarily  elect to measure many  financial
assets and  financial  liabilities  at fair  value.  The  election is made on an
instrument-by-instrument  basis and is  irrevocable.  We are  required  to adopt
Statement 159 at the beginning of 2008.  The impact of the adoption of Statement
159 will be  dependent  upon the  extent to which we elect to  measure  eligible
items at fair value.  We do not expect the adoption of  Statement  159 to have a
significant impact on our future results of operations or financial condition.

      In September  2006,  the FASB issued  Statement  of  Financial  Accounting
Standards No. 158,  Employers'  Accounting for Defined Benefit Pension and Other
Postretirement  Plans-an  amendment  of FASB  Statements  No. 87, 88,  106,  and
132(R),  or Statement 158.  Statement 158 requires an entity to (a) recognize in
its  statement of  financial  position an asset or an  obligation  for a defined
benefit  postretirement  plan's  funded  status,  (b) measure a defined  benefit
postretirement plan's assets and obligations that determine its funded status as
of the end of the employer's fiscal year and (c) recognize changes in the funded
status of a defined benefit  postretirement plan in comprehensive  income in the
year in which  the  changes  occur.  We  adopted  the  recognition  and  related
disclosure  provisions  of  Statement  158  effective  December  31,  2006.  The
measurement  date provision of Statement 158 is effective at the end of 2008. We
do not expect the measurement date provision of adopting Statement 158 to have a
significant impact on our results of operations or financial condition.

                                       46



      In September  2006,  the FASB issued  Statement  of  Financial  Accounting
Standards  No. 157, Fair Value  Measurements,  or Statement  157.  Statement 157
provides   enhanced  guidance  for  using  fair  value  to  measure  assets  and
liabilities.  We are required to adopt  Statement 157 effective at the beginning
of 2008;  however,  FASB Staff  Position FAS 157-2 delayed the effective date of
Statement  157  to the  beginning  of  2009  for  all  nonfinancial  assets  and
nonfinancial  liabilities,  except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually).
We do not expect the adoption of Statement 157 to have a  significant  impact on
our future results of operations or financial condition.

      Revenue Recognition: Domestic and international TV direct-to-home, or DTH,
and cable  revenues  are  recognized  based on  estimates  of  pay-per-view  and
video-on-demand  buys and monthly  subscriber  counts reported each month by the
system operators and adjusted to actual.  The net adjustments to actual have not
been  material.  International  TV  third-party  revenues  are  recognized  upon
identification of programming scheduled for networks, delivery of programming to
customers  and/or upon the  commencement of the license term.  Revenues from the
sale of Playboy magazine and online  subscriptions are recognized over the terms
of the  subscriptions.  Revenues from  newsstand  sales of Playboy  magazine and
special  editions  (net of  estimated  returns)  and  revenues  from the sale of
Playboy  magazine  advertisements  are  recorded  when each  issue goes on sale.
Revenues  from  e-commerce,  except for those from  outsourced  operations,  are
recognized  when the items are shipped,  which is when title  passes.  Royalties
from licensing our trademarks in our international  magazine,  product licensing
and  location-based  entertainment  businesses  are  generally  recognized  on a
straight-line basis over the terms of the related agreements.

      Stock-Based Compensation: On January 1, 2006, we adopted the provisions of
Statement of Financial Accounting Standards No. 123 (revised 2004),  Share-Based
Payment,  or  Statement  123(R),  which is a revision of  Statement of Financial
Accounting  Standards  No. 123,  Accounting  for  Stock-Based  Compensation,  or
Statement  123,  under  the  modified   prospective  method.   Statement  123(R)
supersedes  Accounting  Principles  Board Opinion No. 25,  Accounting  for Stock
Issued to  Employees,  or APB 25, and amends  Statement of Financial  Accounting
Standards No. 95,  Statement of Cash Flows.  Statement  123(R) requires that all
stock-based  compensation  to  employees,  including  grants of  employee  stock
options,  be recognized in the income  statement based on its fair value.  Under
the  modified  prospective  method,  results  for  prior  periods  have not been
restated.

      Stock-based compensation expense is based on awards ultimately expected to
vest, reduced for estimated  forfeitures.  Forfeitures are estimated at the time
of grant and revised, if necessary,  in subsequent periods if actual forfeitures
differ from those  estimates.  Forfeitures  were  estimated  based on historical
experience.  In our pro forma  information  required under Statement 123 for the
periods  prior to fiscal 2006, we accounted for  forfeitures  as they  occurred.
Under the fair value  recognition  provisions  of Statement  123(R),  we measure
stock-based  compensation cost at the grant date based on the value of the award
and  recognize the expense over the vesting  period.  Compensation  expense,  as
recognized under Statement 123(R),  for all stock-based  compensation  awards is
recognized using the straight-line attribution method.  Stock-based compensation
expense  is  reflected  in  "Selling   and   administrative   expenses"  on  our
Consolidated  Statements  of  Operations  and  the  proceeds  are  reflected  in
"Proceeds from stock-based  compensation" on our Consolidated Statements of Cash
Flows. See Note (O), Stock-Based Compensation.

      Cash Equivalents:  Cash equivalents are temporary cash investments with an
original maturity of three months or less at the date of purchase and are stated
at cost, which approximates fair value.

      Marketable   Securities:   Marketable   securities   are   classified   as
available-for-sale  securities, stated at fair value and accounted for under the
specific  identification  method.  Net  unrealized  holding gains and losses are
included in "Accumulated other comprehensive loss."

      Accounts Receivable and Allowance for Doubtful Accounts: Trade receivables
are reported at their outstanding unpaid balances less an allowance for doubtful
accounts.  The allowance for doubtful accounts is increased by charges to income
and decreased by chargeoffs  (net of recoveries)  or by reversals to income.  We
perform periodic  evaluations of the adequacy of the allowance based on our past
loss experience and adverse  situations that may affect a customer's  ability to
pay.  A  receivable  balance  is  written  off  when we deem the  balance  to be
uncollectible.

      Inventories:  Inventories  are stated at the lower of cost  (specific cost
and average cost) or fair value.

      Assets Held for Sale:  Assets  held for sale are  reported at the lower of
the carrying  amount or fair value,  less the estimated  costs to sell. See Note
(T), Subsequent Events.

                                       47



      Property and Equipment:  Property and equipment are stated at cost.  Costs
incurred  for  computer  software  developed  or obtained  for  internal use are
capitalized for application  development activities and are immediately expensed
for   preliminary   project   activities  or   post-implementation   activities.
Depreciation  is recorded  using the  straight-line  method  over the  estimated
useful  lives of the assets.  The useful life for  building  improvements  is 10
years;  furniture and equipment ranges from one to 10 years; and software ranges
from  one to five  years.  Leasehold  improvements  are  depreciated  using  the
straight-line  method over the shorter of their  estimated  useful  lives or the
terms of the  related  leases.  Repair and  maintenance  costs are  expensed  as
incurred  and  major  betterments  are  capitalized.  Sales and  retirements  of
property and equipment are recorded by removing the related cost and accumulated
depreciation  from the  accounts,  after which any  related  gains or losses are
recognized.

      Advertising  Costs: We expense  advertising costs as incurred,  except for
direct response  advertising.  Direct response advertising consists primarily of
costs  associated  with  the  promotion  of  Playboy   magazine   subscriptions,
principally  the production of direct mail  solicitation  materials and postage,
and the distribution of direct- and e-commerce  catalog mailings.  In accordance
with the  American  Institute  of  Certified  Public  Accountants'  Statement of
Position 93-7, Reporting on Advertising Costs, these capitalized direct response
advertising costs are amortized over the period during which the future benefits
are expected to be received, generally six to 12 months.

      Programming  Amortization and Online Content Costs:  Original  programming
and  film  acquisition  costs  are  primarily   assigned  to  the  domestic  and
international   networks  and  are  capitalized  and  amortized   utilizing  the
straight-line  method,  generally over three years. Online content  expenditures
are  generally  expensed as incurred.  We believe that these  methods  provide a
reasonable  matching of expenses with total estimated  revenues over the periods
that revenues associated with films, programs and online content are expected to
be realized.  Film and program costs are stated at the lower of unamortized cost
or estimated net  realizable  value as  determined on a specific  identification
basis and are  classified  on our  Consolidated  Balance  Sheets  as  noncurrent
assets. See Note (K), Programming Costs, Net.

      Intangible  Assets:  In accordance with Statement of Financial  Accounting
Standards  No. 142,  Goodwill and Other  Intangible  Assets,  we do not amortize
goodwill  and  trademarks  with  indefinite  lives,  but subject  them to annual
impairment   tests.   Noncompete   agreements  are  being  amortized  using  the
straight-line method over the lives of the agreements,  either five or 10 years.
Distribution  agreements are being amortized using the straight-line method over
the lives of the agreements,  which were determined to be 27 and one-half years.
Capitalized  trademark  costs include  costs  associated  with the  acquisition,
registration and/or renewal of our trademarks. In the fourth quarter of 2006, we
began expensing certain costs associated with the defense of such trademarks.  A
program supply  agreement is amortized using the  straight-line  method over the
10-year life of the agreement.  Copyright  costs are being  amortized  using the
straight-line  method  over 15 years.  Other  intangible  assets  continue to be
amortized  over their useful lives.  The noncompete  agreements,  program supply
agreement and copyright costs are all included in "Other  noncurrent  assets" on
our Consolidated Balance Sheets.

      In 2006,  we  modified  the  assumptions  related to the  useful  lives of
certain   distribution   agreements   that   previously   were   classified   as
indefinite-lived.  As these distribution agreements are now being amortized, the
deferred tax liability  related to the distribution  agreements that is expected
to be realized within the net operating loss, or NOL, carryforward period may be
netted  against our deferred tax asset.  In 2007 and 2006, we recorded an income
tax benefit for $0.5 million and $2.6 million, respectively, of the $3.9 million
deferred  tax  liability  related  to the  modification  to the  lives  of these
distribution agreements.

      As  a  result  of  the  restructuring  of  the  ownership  of  Playboy  TV
International,  LLC, or PTVI,  in 2002, we acquired  distribution  agreements of
$3.4 million  with a weighted  average  life of  approximately  four years and a
program supply  agreement of $3.2 million with a life of 10 years.  The weighted
average life of the aggregate of the  definite-lived  intangible assets acquired
was approximately seven years. We also acquired distribution  agreements of $9.0
million,  which were previously  determined to be indefinite-lived.  In 2006, we
modified the lives to 27 and one-half years, which did not materially impact our
results of operations.

                                       48



      The  following  table sets  forth our  amortizable  intangible  assets (in
thousands):



                                        December 31, 2007                   December 31, 2006
                               ----------------------------------   ----------------------------------
                                  Gross                       Net      Gross                       Net
                               Carrying    Accumulated   Carrying   Carrying    Accumulated   Carrying
                                 Amount   Amortization     Amount     Amount   Amortization     Amount
- ------------------------------------------------------------------------------------------------------
                                                                            
Noncompete agreements          $ 14,000       $ 13,545   $    455   $ 14,000       $ 13,415   $    585
Distribution agreements          33,140          4,803     28,337     33,140          3,435     29,705
Program supply agreement          3,226          1,613      1,613      3,226          1,290      1,936
Trademark license
   agreement                      2,530            542      1,988      2,880            262      2,618
Copyrights                        2,064          1,281        783      1,983          1,143        840
Other                               420            409         11        420            348         72
- ------------------------------------------------------------------------------------------------------
Total amortizable
   intangible assets           $ 55,380       $ 22,193   $ 33,187   $ 55,649       $ 19,893   $ 35,756
======================================================================================================


      At December 31, 2007 and 2006, our indefinite-lived  intangible assets not
subject to amortization  included goodwill of $133.6 million and $133.0 million,
respectively, and trademarks of $65.4 million and $63.7 million, respectively.

      At December 31, 2007 and 2006, goodwill by reportable  segment,  reflected
entirely in the  Entertainment  Group,  was $133.6  million and $133.0  million,
respectively.  For the years ended  December  31, 2007 and 2006,  the  aggregate
amount of goodwill acquired was $0.6 million and $10.6 million, respectively.

      The aggregate  amortization  expense for  intangible  assets with definite
lives for 2007,  2006 and 2005 was $2.3 million,  $1.7 million and $1.9 million,
respectively.  The aggregate  amortization  expense for  intangible  assets with
definite lives is expected to total  approximately  $2.2 million,  $2.2 million,
$2.2 million, $2.1 million and $2.1 million for 2008, 2009, 2010, 2011 and 2012,
respectively.

      We conduct our annual impairment testing of goodwill and  indefinite-lived
intangible  assets as of every October 1st. If the carrying  amount of the asset
is not recoverable  based on a  forecasted-discounted  cash flow analysis,  such
asset  would be reduced by the  estimated  shortfall  of fair value to  recorded
value. We must make assumptions  regarding  forecasted-discounted  cash flows to
determine a reporting unit's estimated fair value. If these estimates or related
assumptions  change in the future,  we may be  required to record an  impairment
charge.  Based upon our impairment testing, we determined that no impairments of
intangible assets existed as of October 1, 2007.

      In accordance  with Statement of Financial  Accounting  Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived  Assets, we evaluate the
potential   impairment  of   finite-lived   acquired   intangible   assets  when
appropriate.  If the carrying amount of the asset is not recoverable  based on a
forecasted-undiscounted  cash flow analysis,  such asset would be reduced by the
estimated shortfall of fair value to recorded value.

      Derivative Financial Instruments: We account for derivative instruments in
accordance with Statement of Financial  Accounting Standards No. 133, Accounting
for Derivative  Instruments and Hedging  Activities,  as amended by Statement of
Financial  Accounting  Standards  No. 138,  Accounting  for  Certain  Derivative
Instruments  and Certain  Hedging  Activities,  which  requires  all  derivative
instruments  to be  recognized as either  assets or  liabilities  in the balance
sheet at fair  value  regardless  of the  purpose  or  intent  for  holding  the
derivative  instrument.  The  accounting  for  changes  in the  fair  value of a
derivative instrument depends on whether it has been designated as and qualifies
as part of a hedging relationship and, further, on the type of relationship.

      We formally  document all  relationships  between hedging  instruments and
hedged items,  as well as our risk  management  objectives  and  strategies  for
undertaking various hedge transactions.  At December 31, 2007, we had derivative
instruments that have been designated as and qualify as cash flow hedges,  which
are entered into in order to hedge the  variability of cash flows to be received
related to forecasted  royalty payments  denominated in the yen and the euro. We
hedge these  royalties  with  forward  contracts  for periods not  exceeding  12
months.  The fair value and  carrying  value of our  forward  contracts  are not
material.  Since these derivative instruments are designated and qualify as cash
flow  hedges,  the  effective  portion  of the  gain or  loss on the  derivative
instruments is being deferred and reported as a component of "Accumulated  other
comprehensive  loss" and is  reclassified  into  earnings  in the same line item
where the royalty revenue is recognized.

                                       49



      We had net unrealized  losses of $0.1 million and net unrealized  gains of
$0.1  million in 2007 and 2006,  respectively,  included in  "Accumulated  other
comprehensive  loss," which represents the effective  portion of changes in fair
value of the cash flow  hedges.  We do not expect any  significant  losses to be
reclassified from "Accumulated other  comprehensive loss" to earnings within the
next 12 months.

      Earnings  per Common  Share:  We compute  basic and diluted  earnings  per
share,  or EPS, in accordance with Statement of Financial  Accounting  Standards
No. 128, Earnings per Share. Basic EPS is computed by dividing net income (loss)
applicable  to common  shareholders  by the  weighted  average  number of common
shares  outstanding  during the period.  Diluted  EPS adjusts  basic EPS for the
dilutive  effects of stock  options  and other  potentially  dilutive  financial
instruments. See Note (E), Earnings per Common Share.

      Equity  Investments:  The equity  method is used to account  for our 19.0%
investment in Playboy TV-Latin America, LLC, or PTVLA, since we have the ability
to exercise influence over PTVLA.

      Minority  Interest:  In  2001,  our  subsidiary   Playboy.com,   Inc.,  or
Playboy.com, issued $15.3 million of its Series A Preferred Stock, of which $5.0
million was purchased by Mr. Hefner. In connection with the restructuring of our
international TV joint ventures,  we received the Playboy.com Series A Preferred
Stock that was owned by an  affiliate of Claxson  Interactive  Group,  Inc.,  or
Claxson. In 2005, we repurchased the remaining outstanding  Playboy.com Series A
Preferred  Stock that was held by Mr.  Hefner and an  unrelated  third party for
$14.1  million.  Included in this amount was $3.9 million of accrued  dividends.
Pursuant to its terms,  the  Playboy.com  Series A Preferred Stock was canceled,
retired  and  ceased  to  be  outstanding  as  a  result  of  the   repurchases.
Subsequently, Playboy.com became a wholly owned subsidiary of ours.

      Foreign Currency Translation: Assets and liabilities in foreign currencies
related to our  international  TV foreign  operations  were translated into U.S.
dollars at the  exchange  rate  existing  at the  balance  sheet  date.  The net
exchange  differences   resulting  from  these  translations  were  included  in
"Accumulated  other  comprehensive  loss"  on  our  Consolidated  Statements  of
Shareholders' Equity. Revenues and expenses were translated at average rates for
the period.

      Transaction  gains and  losses  that  arise  from  foreign  exchange  rate
fluctuations on transactions  denominated in a currency other than U.S. dollars,
except those transactions that operate as a hedge  transaction,  are included in
"Other,  net" on our  Consolidated  Statements of Operations.  Foreign  currency
transaction  gains  were  $0.3  million  and  $0.1  million  in 2007  and  2006,
respectively,  and the foreign  currency  transaction  loss was $0.3  million in
2005.

(B)   ACQUISITION

      In July 2001,  we  acquired  The Hot  Network  and The Hot Zone  networks,
together with the related television assets of Califa Entertainment Group, Inc.,
or  Califa.  In  addition,  we  acquired  the Vivid TV network  and the  related
television  assets of V.O.D.,  Inc.,  or VODI,  a separate  entity  owned by the
sellers.  We  collectively  refer to Califa and VODI as the Califa  acquisition.
These networks now operate as the Spice Digital Networks.  The addition of these
networks into our movie networks portfolio enabled us to offer consumers a wider
range of adult programming.  We accounted for the acquisition under the purchase
method of  accounting.  Accordingly,  the  results of these  networks  since the
acquisition  date  have  been  included  in  our   Consolidated   Statements  of
Operations.  In connection with the acquisition and purchase price  allocations,
the Entertainment Group recorded goodwill of $27.4 million,  which is deductible
over 15 years for income tax purposes. Future obligations were recorded at their
net present  value and are  reported  on our  Consolidated  Balance  Sheets as a
component of current and noncurrent "Acquisition liabilities."

      We recorded  $30.8  million of  intangible  assets  separate from goodwill
consisting of $28.5  million for  distribution  agreements  and $2.3 million for
noncompete agreements. All of the noncompete agreements are being amortized over
approximately  eight  years,  which  are the  weighted  average  lives  of these
agreements.   Distribution  agreements  of  $7.5  million  were  amortized  over
approximately  two  years,  which  were  the  weighted  average  lives  of these
agreements.  Distribution  agreements of $21.0  million,  which were  previously
determined to be  indefinite-lived,  are now being amortized over their modified
useful lives of 27 and one-half years.

      The total  consideration  for the  acquisition  was $70.0  million  and is
required to be paid in  installments  over a 10-year  period ending in 2011. The
nominal consideration for Califa's assets was $28.3 million. We also assumed the
obligations of Califa related to a note payable and  noncompete  liability.  The
nominal  consideration for VODI's assets was $41.7 million. We were obligated to
pay up to an additional $12.0 million in  consideration  upon the achievement of
specified  financial  performance  targets,  $5.0  million  of  which we paid on
February 28, 2003 and

                                       50



$7.0 million of which we paid on March 1, 2004. The amounts were recorded at the
acquisition date as part of acquisition liabilities.

      We may  accelerate  all or any portion of the  remaining  unpaid  purchase
price,  but only by making the accelerated  payments in cash, at a discount rate
to be mutually agreed upon by the parties in good-faith  negotiations.  However,
if the parties  are unable to agree on the  discount  rate,  we may, at our sole
discretion, elect to accelerate the payment at a 12% discount rate.

      The Califa acquisition  agreement gave us the option of paying up to $71.0
million of the scheduled  payments in cash or our Class B common stock, or Class
B stock. The number of shares,  if any, we issue in connection with a particular
payment or  particular  payments is based on the  trading  prices of the Class B
stock surrounding the applicable  payment dates. Prior to each scheduled payment
of consideration, we must provide the sellers with written notice specifying the
portion  of the  purchase  price  payment  that we intend to pay in cash and the
portion in Class B stock.  In each of 2007,  2006 and 2005,  we paid the sellers
$8.0 million in cash. All remaining payments must also be made in cash.

      The   following   table  sets   forth  the   remaining   installments   of
consideration, including interest (in thousands):

2008                                                                     $ 1,000
2009                                                                       1,000
2010                                                                       1,000
2011                                                                         750
- --------------------------------------------------------------------------------
Total future payments                                                    $ 3,750
================================================================================

      See Note (N), Commitments and Contingencies, for additional information on
other future acquisition payments.

(C)   RESTRUCTURING EXPENSE

      In 2007, we  implemented a plan to outsource our remaining  e-commerce and
catalog businesses, to sell our Los Angeles production facility and to eliminate
office space obtained as part of the Club Jenna acquisition. As a result of this
restructuring  plan,  we  recorded  a charge of $0.4  million  related  to costs
associated with a workforce reduction of 28 employees. During 2007, we made cash
payments  of  $0.6  million  related  to  prior  years'   restructuring   plans.
Approximately  $12.5 million of the total costs of our  restructuring  plans was
paid  through  December  31, 2007,  with the  remaining  $0.5 million to be paid
during 2008.

      In 2006, we recorded a charge of $2.1 million related to reducing overhead
costs and annual programming and editorial expenses.

      The  following   table  sets  forth  the  activity  and  balances  of  our
restructuring  reserves,  which are included in "Other current  liabilities  and
accrued  expenses"  on our  Consolidated  Balance  Sheets,  for the years  ended
December 31, 2007 and 2006 (in thousands):

                                                       Consolidation
                                          Workforce    of Facilities
                                          Reduction   and Operations      Total
- -------------------------------------------------------------------------------
Balance at December 31, 2005               $     --          $ 1,210   $  1,210
Reserve recorded                              2,103               --      2,103
Adjustments to previous estimates                --             (105)      (105)
Other                                            --             (574)      (574)
Cash payments                                (1,673)            (263)    (1,936)
- -------------------------------------------------------------------------------
Balance at December 31, 2006                    430              268        698
Reserve recorded                                429               --        429
Adjustments to previous estimates                43              (27)        16
Cash payments                                  (473)            (127)      (600)
- -------------------------------------------------------------------------------
Balance at December 31, 2007               $    429          $   114   $    543
===============================================================================

                                       51



(D)   INCOME TAXES

      The following table sets forth the income  tax  provision  (in thousands):



                                                                Fiscal Year   Fiscal Year   Fiscal Year
                                                                      Ended         Ended         Ended
                                                                   12/31/07      12/31/06      12/31/05
- -------------------------------------------------------------------------------------------------------
                                                                                   
Current:
   Federal                                                          $  (153)      $    --       $    --
   State                                                                 90           120           105
   Foreign                                                            2,845         1,509         1,361
- -------------------------------------------------------------------------------------------------------
     Total current                                                    2,782         1,629         1,466
- -------------------------------------------------------------------------------------------------------
Deferred:
   Federal                                                            1,463           160         2,302
   State                                                                209           707           230
   Foreign                                                           (2,526)           --            --
- -------------------------------------------------------------------------------------------------------
     Total deferred                                                    (854)          867         2,532
- -------------------------------------------------------------------------------------------------------
Total income tax provision                                          $ 1,928       $ 2,496       $ 3,998
=======================================================================================================


      The U.S.  statutory tax rate  applicable to us for each of 2007,  2006 and
2005 was 35%. The following  table sets forth the  reconciliation  of the income
tax  provision  to the  provision  computed at the U.S.  statutory  tax rate (in
thousands):



                                                                Fiscal Year   Fiscal Year   Fiscal Year
                                                                      Ended         Ended         Ended
                                                                   12/31/07      12/31/06      12/31/05
- -------------------------------------------------------------------------------------------------------
                                                                                   
Statutory rate tax provision                                        $ 2,399       $ 1,673       $ 1,142
Increase (decrease) in taxes resulting from:
   Foreign income and withholding tax on licensing income             2,845         1,509         1,629
   State income taxes                                                   194           158           335
   Nondeductible expenses                                               218           175           295
   Increase (decrease) in valuation allowance                        (2,075)        1,327         2,632
   Tax benefit of foreign taxes paid or accrued                      (2,541)       (2,503)       (1,843)
   (Increase) decrease in state/foreign NOLs                          1,749          (181)         (188)
   Expiration of NOL/capital loss carryforwards                       1,217            --            --
   Refund from amended federal return                                (2,150)           --            --
   Tax audit adjustment                                                  --           281            --
   Other                                                                 72            57            (4)
- -------------------------------------------------------------------------------------------------------
Total income tax provision                                          $ 1,928       $ 2,496       $ 3,998
=======================================================================================================


      Deferred tax assets and liabilities are recognized for the expected future
tax consequences attributable to differences between the financial statement and
tax bases of assets and liabilities using enacted tax rates expected to apply in
the years in which the temporary differences are expected to reverse.

      In 2006,  we  modified  the  assumptions  related to the  useful  lives of
certain   distribution   agreements   that   previously   were   classified   as
indefinite-lived.  As these distribution agreements are now being amortized, the
deferred tax liability  related to the distribution  agreements that is expected
to be  realized  within the NOL  carryforward  period may be netted  against our
deferred tax asset.  In 2006, we recorded an income tax benefit for $2.6 million
of the $3.9 million deferred tax liability related to the distribution agreement
modification.  In 2007, we  recognized an additional  income tax benefit of $0.5
million related to the distribution agreements.

      In 2007, the valuation  allowance decreased by $2.4 million as a result of
the realization of our U.K. NOLs and the effect of the deferred tax treatment of
certain acquired intangibles. In 2006, the valuation allowance increased by $1.9
million  related to the  realization of the deferred tax benefit of our NOLs and
foreign tax  credits and the effect of the  deferred  tax  treatment  of certain
acquired intangibles.  In 2005, the valuation allowance, as adjusted,  increased
by $2.6 million  related to the  realization  of the deferred tax benefit of our
NOLs  and  the  effect  of  the  deferred  tax  treatment  of  certain  acquired
intangibles.

                                       52



      The following table sets forth the significant  components of our deferred
tax assets and deferred tax liabilities (in thousands):

                                                           Dec. 31,    Dec. 31,
                                                               2007        2006
- -------------------------------------------------------------------------------
Deferred tax assets:
   NOL carryforwards                                      $  48,513   $  47,476
   Capital loss carryforwards                                    --       1,629
   Tax credit carryforwards                                  16,046      13,505
   Temporary difference related to PTVI                       5,720       6,651
   Other deductible temporary differences                    36,931      32,580
- -------------------------------------------------------------------------------
     Total deferred tax assets                              107,210     101,841
     Valuation allowance                                    (74,818)    (77,180)
- -------------------------------------------------------------------------------
       Deferred tax assets                                   32,392      24,661
- -------------------------------------------------------------------------------
Deferred tax liabilities:
   Deferred subscription acquisition costs                   (4,620)     (4,808)
   Intangible assets                                        (31,004)    (27,587)
   Other taxable temporary differences                      (14,336)    (10,688)
- -------------------------------------------------------------------------------
       Deferred tax liabilities                             (49,960)    (43,083)
- -------------------------------------------------------------------------------
Deferred tax liabilities, net                             $ (17,568)  $ (18,422)
===============================================================================

      At December 31, 2007, we had federal NOLs of $110.7 million  expiring from
2008 through  2027,  state and local NOLs of $91.0  million  expiring  from 2008
through 2027 and foreign NOLs of $9.0 million that have no  expiration  date. In
addition,  foreign  tax credit  carryforwards  of $15.0  million and minimum tax
credit carryforwards of $1.1 million are available to reduce future U.S. federal
income taxes. The foreign tax credit  carryforwards  expire in 2014 through 2017
and the minimum tax credit carryforwards have no expiration date.

      On January 1, 2007, we adopted the provisions of FASB  Interpretation  No.
48,  Accounting  for  Uncertainty  in  Income  Taxes-an  interpretation  of FASB
Statement  No. 109, or FIN 48. As a result of the  implementation  of FIN 48, we
recognized no material  adjustment in the liability for unrecognized  income tax
benefits.

      Our continuing  practice is to recognize interest and penalties related to
income tax matters in income tax expense.

       The  following  table sets forth a  reconciliation  of the  beginning and
ending amount of  unrecognized  tax benefits (in  thousands):

Unrecognized tax benefits at January 1, 2007                           $  7,978
Gross increases for tax positions of prior years                             --
Gross decreases for tax positions of prior years                             --
Settlements                                                                  --
- -------------------------------------------------------------------------------
Unrecognized tax benefits at December 31, 2007                         $  7,978
===============================================================================

      At December 31, 2007, we had unrecognized tax benefits of $8.0 million; we
do not  expect  this  amount to change  significantly  over the next 12  months.
Because of the impact of deferred income tax accounting,  the disallowance would
not affect the effective  income tax rate nor would it accelerate the payment of
cash to the taxing authority to an earlier period.

      The statute of limitations for tax years 2004 through 2007 remains open to
examination by the major U.S. taxing  jurisdictions to which we are subject.  In
addition, for all tax years prior to 2004 generating an NOL, tax authorities can
adjust the amount of NOL. In our international tax  jurisdictions,  numerous tax
years remain subject to examination  by tax  authorities,  including tax returns
for at least 2002 and  subsequent  years in all of our major  international  tax
jurisdictions.

                                       53



(E)   EARNINGS PER COMMON SHARE

      The following  table sets forth the  computation  of basic and diluted EPS
(in thousands, except per share amounts):



                                                 Fiscal Year   Fiscal Year   Fiscal Year
                                                       Ended         Ended         Ended
                                                    12/31/07      12/31/06      12/31/05
- ----------------------------------------------------------------------------------------
                                                                    
Numerator:
For basic and diluted EPS - net income (loss)       $  4,925      $  2,285      $   (735)
========================================================================================

Denominator:
For basic EPS - weighted average shares               33,246        33,171        33,163
   Effect of dilutive potential common shares:
     Employee stock options and other                     35           105            --
- ----------------------------------------------------------------------------------------
       Dilutive potential common shares                   35           105            --
- ----------------------------------------------------------------------------------------
For diluted EPS - weighted average shares             33,281        33,276        33,163
========================================================================================

Basic and diluted EPS                               $   0.15      $   0.07      $  (0.02)
========================================================================================


      The following table sets forth the number of shares related to outstanding
options to purchase our Class B stock and the potential  shares of Class B stock
contingently  issuable under our 3.00% convertible senior subordinated notes due
2025, or convertible  notes.  These shares were not included in the computations
of  diluted  EPS for the years  presented,  as their  inclusion  would have been
antidilutive (in thousands):



                                                 Fiscal Year   Fiscal Year   Fiscal Year
                                                       Ended         Ended         Ended
                                                    12/31/07      12/31/06      12/31/05
- ----------------------------------------------------------------------------------------
                                                                    
Stock options                                          3,133         3,387         2,371
Convertible notes                                      6,758         6,758         6,758
- ----------------------------------------------------------------------------------------
Total                                                  9,891        10,145         9,129
========================================================================================


(F)   FINANCIAL INSTRUMENTS

      Fair Value: The fair value of a financial instrument represents the amount
at which the  instrument  could be  exchanged in a current  transaction  between
willing parties,  other than in a forced sale or liquidation.  For cash and cash
equivalents,  receivables and certain other current assets, the amounts reported
approximated  fair value due to their  short-term  nature.  As described in Note
(L),  Financing  Obligations,  in March  2005,  we issued  and sold in a private
placement $115.0 million aggregate principal amount of our convertible notes. As
of  December  31,  2007 and 2006,  the fair value of the  convertible  notes was
determined to be $103.9 million and $110.2  million,  respectively.  For foreign
currency  forward  contracts,  the fair value was estimated  using quoted market
prices established by financial institutions for comparable  instruments,  which
approximated the contracts' values.

      Concentrations  of Credit Risk:  Concentration of credit risk with respect
to accounts  receivable  is limited due to the wide variety of customers to whom
and segments from which our products are sold and/or licensed.

                                       54



(G)   MARKETABLE SECURITIES AND INVESTMENTS

      The following table sets forth  marketable  securities and investments (in
thousands):

                                                             Dec. 31,  Dec. 31,
                                                                 2007      2006
- -------------------------------------------------------------------------------
Marketable securities and short-term investments:
   Cost of marketable securities                             $  6,927   $ 5,753
   Cost of short-term investments                               6,000     3,000
   Gross unrealized holding gains                                  25       341
   Gross unrealized holding losses                                 --       (94)
- -------------------------------------------------------------------------------
     Fair value of marketable securities
       and short-term investments                              12,952     9,000
- -------------------------------------------------------------------------------
Long-term investments:
   Cost of long-term investments                                6,384        --
   Gross unrealized holding gains                                 290        --
   Gross unrealized holding losses                               (118)       --
- -------------------------------------------------------------------------------
     Fair value of long-term investments                        6,556        --
- -------------------------------------------------------------------------------
Total marketable securities and investments                  $ 19,508   $ 9,000
===============================================================================

       We had  realized  gains  totaling  $0.2  million,  $31  thousand and $0.1
million in 2007, 2006 and 2005, respectively.  Included in "Comprehensive income
(loss)" were a net  unrealized  holding loss of $0.1 million,  a net  unrealized
holding gain of $0.1 million and a net  unrealized  holding loss of $24 thousand
for 2007,  2006 and 2005,  respectively.  We recognized  interest income of $2.5
million, $2.4 million and $2.2 million during 2007, 2006 and 2005, respectively.

      In December 2007, we purchased an investment in an enhanced cash portfolio
as a marketable  security for $7.7 million. At December 31, 2007, due to adverse
market  conditions,  we determined  that the market value of this investment was
other-than-temporarily  impaired,  and we  recorded a charge of $0.1  million in
"Other, net" on our Consolidated Statements of Operations.

(H)   INVENTORIES

      The following table sets forth inventories,  which are stated at the lower
of cost (specific cost and average cost) or fair value (in thousands):

                                                            Dec. 31,   Dec. 31,
                                                                2007       2006
- -------------------------------------------------------------------------------
Paper                                                       $  2,948   $  2,917
Editorial and other prepublication costs                       5,518      7,425
Merchandise finished goods                                     2,897      2,257
- -------------------------------------------------------------------------------
Total inventories                                           $ 11,363   $ 12,599
===============================================================================

(I)   ADVERTISING COSTS

      At December 31, 2007 and 2006,  advertising costs of $7.2 million and $7.3
million,  respectively,  were  deferred and  included in "Deferred  subscription
acquisition  costs"  and  "Prepaid  expenses  and other  current  assets" on our
Consolidated  Balance Sheets.  For 2007, 2006 and 2005, our advertising  expense
was $28.0 million, $27.7 million and $25.8 million, respectively.

                                       55



(J)   PROPERTY AND EQUIPMENT, NET

      The following table sets forth property and equipment, net (in thousands):

                                                            Dec. 31,   Dec. 31,
                                                                2007       2006
- -------------------------------------------------------------------------------
Land                                                       $     292   $    292
Buildings and improvements                                     8,775      8,773
Furniture and equipment                                       22,019     24,288
Leasehold improvements                                        13,002     13,670
Software                                                      12,895     11,623
- -------------------------------------------------------------------------------
Total property and equipment                                  56,983     58,646
Accumulated depreciation                                     (42,318)   (41,239)
- -------------------------------------------------------------------------------
Total property and equipment, net                          $  14,665   $ 17,407
===============================================================================

(K)   PROGRAMMING COSTS, NET

      The following table sets forth programming costs, net (in thousands):

                                                            Dec. 31,   Dec. 31,
                                                                2007       2006
- -------------------------------------------------------------------------------
Released, less amortization                                 $ 31,531   $ 43,228
Completed, not yet released                                    8,149      4,207
In-process                                                    15,246      7,748
- -------------------------------------------------------------------------------
Total programming costs, net                                $ 54,926   $ 55,183
===============================================================================

      Based on management's  estimate of future total gross revenues at December
31, 2007,  approximately  56% of the  completed  original  programming  costs is
expected to be amortized during 2008. We expect to amortize virtually all of the
released original programming costs during the next three years. At December 31,
2007,  we had $13.0  million  of film  acquisition  costs,  which are  typically
amortized using the  straight-line  method,  generally over three years or less,
which is our  estimate  of the length of time  during  which we plan to re-air a
film or program on our television networks.

(L)   FINANCING OBLIGATIONS

      The following  table  sets  forth  financing  obligations  (in thousands):

                                                           Dec. 31,    Dec. 31,
                                                               2007        2006
- -------------------------------------------------------------------------------
Convertible senior subordinated notes, interest of 3.00%  $ 115,000   $ 115,000
- -------------------------------------------------------------------------------
Total financing obligations                               $ 115,000   $ 115,000
===============================================================================

Debt Financing

      In March  2005,  we issued and sold  $115.0  million  aggregate  principal
amount of our convertible notes, which included $15.0 million due to the initial
purchasers'  exercise  of  the  over-allotment   option.  The  net  proceeds  of
approximately  $110.3  million  from the  issuance  and sale of the  convertible
notes, after deducting the initial  purchasers'  discount and offering expenses,
were used,  together  with  available  cash,  (a) to complete a tender offer and
consent  solicitation  for, and to purchase and retire all of the $80.0  million
outstanding  principal  amount of the 11.00%  senior  secured  notes,  or senior
secured notes, issued by our subsidiary PEI Holdings,  Inc., or Holdings,  for a
total of  approximately  $95.2  million,  including the bond tender  premium and
consent fee of $14.9 million and other expenses of $0.3 million, (b) to purchase
381,971  shares  of our Class B stock for an  aggregate  purchase  price of $5.0
million  concurrently with the sale of the convertible notes and (c) for working
capital and general corporate purposes.

      The  convertible  notes bear  interest at a rate of 3.00% per annum on the
principal  amount of the notes,  payable in arrears on March 15th and  September
15th of each year,  payment of which began on September  15, 2005.  In addition,
under  certain  circumstances  beginning  in 2012,  if the trading  price of the
convertible notes exceeds a

                                       56



specified  threshold  during  a  prescribed  measurement  period  prior  to  any
semi-annual  interest  period,  contingent  interest will become  payable on the
convertible  notes for that  semi-annual  interest  period at an annual  rate of
0.25% per annum.

      The convertible notes are convertible into cash and, if applicable, shares
of our Class B stock based on an initial conversion rate, subject to adjustment,
of 58.7648 shares per $1,000  principal  amount of the convertible  notes (which
represents an initial  conversion price of approximately  $17.02 per share) only
under the  following  circumstances:  (a) during any  fiscal  quarter  after the
fiscal  quarter  ending March 31, 2005, if the closing sale price of our Class B
stock  for  each of 20 or  more  consecutive  trading  days  in a  period  of 30
consecutive  trading  days  ending on the last  trading  day of the  immediately
preceding  fiscal quarter exceeds 130% of the conversion price in effect on that
trading day; (b) during the five business day period after any five  consecutive
trading  day period in which the  average  trading  price per  $1,000  principal
amount of convertible  notes over that five  consecutive  trading day period was
equal to or less than 95% of the  average  conversion  value of the  convertible
notes  during  that  period;  (c) upon the  occurrence  of  specified  corporate
transactions,  as set forth in the indenture governing the convertible notes; or
(d) if we have called the convertible notes for redemption. Upon conversion of a
convertible note, a holder will receive cash in an amount equal to the lesser of
the  aggregate  conversion  value of the note being  converted and the aggregate
principal amount of the note being converted.  If the aggregate conversion value
of the convertible note being converted is greater than the cash amount received
by the holder, the holder will also receive an amount in whole shares of Class B
stock equal to the aggregate  conversion  value less the cash amount received by
the holder. A holder will receive cash in lieu of any fractional shares of Class
B stock. The maximum conversion rate,  subject to adjustment,  is 76.3942 shares
per $1,000 principal amount of the convertible notes.

      The  convertible  notes  mature on March 15,  2025.  On or after March 15,
2010, if the closing  price of our Class B stock exceeds a specified  threshold,
we may redeem any of the convertible  notes at a redemption  price in cash equal
to 100% of the principal amount of the convertible  notes,  plus any accrued and
unpaid interest up to, but excluding, the redemption date. On or after March 15,
2012,  we may at any  time  redeem  any of the  convertible  notes  at the  same
redemption  price. On each of March 15, 2012, March 15, 2015 and March 15, 2020,
or upon the  occurrence of a fundamental  change,  as specified in the indenture
governing  the  convertible  notes,  holders may require us to purchase all or a
portion of their  convertible notes at a purchase price in cash equal to 100% of
the principal  amount of the notes,  plus any accrued and unpaid interest up to,
but excluding, the purchase date.

      The convertible  notes are unsecured  senior  subordinated  obligations of
Playboy  Enterprises,  Inc. and rank junior to all of the issuer's  senior debt,
including  its  guarantee of  Holdings'  borrowings  under our credit  facility;
equally with all of the issuer's future senior subordinated debt; and, senior to
all of the issuer's  future  subordinated  debt. In addition,  the assets of the
issuer's  subsidiaries  are  subject  to the  prior  claims  of  all  creditors,
including trade creditors, of those subsidiaries.

Credit Facility

      We amended our $50.0 million credit facility effective September 28, 2007.
The  agreement  provides for  revolving  borrowings,  the issuance of letters of
credit or a combination of both of up to $50.0 million  outstanding at any time.
The borrowing rates and financial  covenants  contained in the amendment did not
change materially,  but we obtained additional  flexibility in other restrictive
covenants.  Borrowings  under the credit  facility  bear  interest at a variable
rate, equal to a specified LIBOR or base rate plus a specified  borrowing margin
based on our Adjusted EBITDA, as defined in the credit agreement. We pay fees on
the outstanding  amount of letters of credit based on the margin that applies to
borrowings that bear interest at a rate based on LIBOR. All amounts  outstanding
under the credit  facility will mature on September 28, 2010. The obligations of
Holdings as borrower under the credit  facility are guaranteed by us and each of
our other U.S.  subsidiaries.  The obligations of the borrower and nearly all of
the guarantors under the credit facility are secured by a first-priority lien on
substantially all of the borrower's and the guarantors'  assets. At December 31,
2007,  there  were  no  borrowings  and  $10.6  million  in  letters  of  credit
outstanding  under  this  facility,  resulting  in $39.4  million  of  available
borrowings under this facility.

(M)   BENEFIT PLANS

      Our  Employees  Investment  Savings  Plan is a defined  contribution  plan
consisting  of two  components:  a profit  sharing plan and a 401(k)  plan.  The
profit sharing plan covers all employees who have completed 12 months of service
of at least 1,000 hours.  Our  discretionary  contribution to the profit sharing
plan is  distributed to each eligible  employee's  account in an amount equal to
the ratio of each eligible employee's compensation, subject to Internal

                                       57



Revenue  Service  limitations,  to the  total  compensation  paid  to  all  such
employees. Total contributions for 2007, 2006 and 2005 related to this plan were
$0.5 million, $0.3 million and $1.5 million, respectively.

      Eligible  employees may  participate in our 401(k) plan upon their date of
hire.  Our 401(k)  plan  offers  several  mutual fund  investment  options.  The
purchase of our stock is not an option.  We make matching  contributions  to our
401(k) plan based on each  participating  employee's  contributions and eligible
compensation.  Our matching contribution expense for 2007, 2006 and 2005 related
to this plan were $1.4 million, $1.4 million and $1.3 million, respectively.

      We have two nonqualified deferred compensation plans, which permit certain
employees and all nonemployee  directors to annually elect to defer a portion of
their  compensation.  A match is provided to employees  who  participate  in the
deferred  compensation  plan, at a certain  specified  minimum level,  and whose
annual eligible  earnings exceed the salary  limitation  contained in the 401(k)
plan.  All  amounts  contributed  and  earnings  credited  under these plans are
general unsecured  obligations.  Such obligations  totaled $6.7 million and $6.2
million at December  31,  2007 and  December  31,  2006,  respectively,  and are
included in "Other noncurrent liabilities" on our Consolidated Balance Sheets.

      We currently  maintain a practice of paying a separation  allowance  under
our  salary  continuation  policy  to  employees  with at  least  five  years of
continuous service who voluntarily  terminate  employment with us and are at age
60 or  thereafter,  which is not funded.  Payments in 2007,  2006 and 2005 under
this policy were  approximately  $0.6  million,  $0.3 million and $0.2  million,
respectively.  In 2007, 2006 and 2005 we recorded  expenses,  based on actuarial
estimates, of $0.5 million, $0.6 million and $0.5 million, respectively.

      We adopted the recognition and related disclosure  provisions of Statement
158 effective December 31, 2006, with the projected benefit obligation reflected
in "Other  current  liabilities  and  accrued  expenses"  and "Other  noncurrent
liabilities" on our Consolidated  Balance Sheets. At December 31, 2007 and 2006,
the  accumulated   benefit   obligation  was  $3.0  million  and  $3.7  million,
respectively.  At December 31, 2007 and 2006, the projected  benefit  obligation
was $4.0 million and $5.1 million,  respectively.  Our estimated  future benefit
payments are $0.6  million,  $0.6 million,  $0.7 million,  $0.7 million and $0.7
million for 2008, 2009, 2010, 2011 and 2012, respectively,  and $3.7 million for
the  five-year  period  ending  December 31, 2017.  The  assumptions  we used to
compute the 2007 projected benefit obligation  included a discount rate of 6.25%
and a rate of compensation increase of 4.00%.

(N)   COMMITMENTS AND CONTINGENCIES

      Our  principal  lease   commitments  are  for  office  space,   operations
facilities and furniture and equipment.  Some of these leases contain renewal or
end-of-lease purchase options.

      Rent expense was $15.1  million,  $15.4 million and $14.7 million in 2007,
2006 and 2005,  respectively.  There was no sublease  income or contingent  rent
expense in 2007, 2006 and 2005.

      The following table sets forth the minimum future  commitments at December
31, 2007, under operating leases with initial or remaining  noncancelable  terms
in excess of one year (in thousands):

2008                                                                  $  12,387
2009                                                                      9,131
2010                                                                      9,222
2011                                                                      9,354
2012                                                                      9,238
Later years                                                              58,502
- -------------------------------------------------------------------------------
Minimum lease commitments                                             $ 107,834
===============================================================================

      Our  entertainment  programming  is delivered  to DTH and cable  operators
through communications satellite transponders. At December 31, 2007, we had four
transponder  service agreements  related to our domestic networks,  the terms of
which extend through 2008, 2013, 2013 and 2014. See Note (T), Subsequent Events.
We also had two international transponder service agreements, the terms of which
extend through 2009. At December 31, 2007, future  commitments  related to these
six agreements were $7.2 million,  $5.4 million,  $3.5 million, $3.5 million and
$3.5 million for 2008, 2009, 2010, 2011 and 2012, respectively, and $3.9 million
thereafter.

                                       58



      In 2006,  we recorded a charge of $1.8  million,  based on an agreement in
principle, for the settlement of litigation with Directrix,  Inc., or Directrix.
The settlement  amount was paid in the third quarter of 2007. The settlement was
a  compromise  of disputed  claims and was not an  admission  of  liability.  We
believe  that we had good  defenses  against  Directrix's  claims,  but made the
reasonable   business  decision  to  settle  the  litigation  to  avoid  further
management  distraction  and defense  costs,  which we had estimated  would have
approximately equaled the amount of the settlement.

      In 2006, we acquired Club Jenna, Inc. and related companies,  a multimedia
adult entertainment business, to complement our existing television,  online and
DVD  businesses.  We paid $7.7  million at closing and $1.6 million in 2007 with
additional payments,  which include interest,  of $1.7 million, $2.3 million and
$4.3  million  required in 2008,  2009 and 2010,  respectively.  Pursuant to the
acquisition  agreement,  we are also obligated to make future contingent earnout
payments based primarily on sales of existing  content of the acquired  business
over a 10-year period and on content  produced by the acquired  business  during
the  five-year  period  after the closing of the  acquisition.  If the  required
performance  benchmarks are achieved,  any contingent  earnout  payments will be
recorded as additional  purchase  price.  In 2007 and 2006, no earnout  payments
were earned.

      In 2005, we acquired an affiliate  network of websites to  complement  our
existing  online  business.  We paid $8.0 million at closing and $2.0 million in
each of 2006 and 2007.  Pursuant to the asset  purchase  agreement,  we are also
obligated to make future  contingent  earnout payments over the five-year period
commencing January 1, 2005, based primarily on the financial  performance of the
acquired  business.  If the required  performance  benchmarks are achieved,  any
contingent earnout payments will be recorded as additional purchase price and/or
compensation  expense.  During 2007 and 2006,  earnout  payments of $0.1 million
were made each year and recorded as additional purchase price.

      In 2002,  a $4.4 million  verdict was entered  against us by a state trial
court in Texas in a lawsuit with a former publishing licensee. We terminated the
license in 1998 due to the licensee's failure to pay royalties and other amounts
due us under the license  agreement.  We appealed and the State  Appellate Court
reversed  the  judgment  by the trial  court,  rendered  judgment  for us on the
majority of  plaintiffs'  claims and  remanded  the  remaining  claims for a new
trial.  We filed a petition for review with the Texas Supreme Court.  On January
25, 2008, the Texas Supreme Court denied our petition for review. On February 8,
2008, we filed a petition for rehearing with the Texas Supreme Court.  We posted
a bond in the amount of approximately $9.4 million, which represented the amount
of the judgment,  costs and estimated pre- and  post-judgment  interest.  We, on
advice  of  legal  counsel,  believe  that it is not  probable  that a  material
judgment  against us will be obtained and have not recorded a liability for this
case in  accordance  with  Statement of Financial  Accounting  Standards  No. 5,
Accounting for Contingencies.

(O)   STOCK-BASED COMPENSATION

      We have stock plans for key employees  and  nonemployee  directors,  which
provide for the grant of nonqualified  and incentive stock options and/or shares
of restricted stock units, deferred stock and other equity awards in our Class B
stock. The Compensation  Committee of the Board of Directors,  which is composed
entirely of independent nonemployee directors,  administers all the plans. These
plans are designed to further our growth,  development and financial  success by
providing key employees with strong additional  incentives to maximize long-term
stockholder  value. The Compensation  Committee believes that this objective can
be best achieved through  assisting key employees to become owners of our stock,
which aligns their interests with our interests. As stockholders,  key employees
will benefit directly from our growth,  development and financial success. These
plans also enable us to attract and retain the services of those executives whom
we consider  essential to our long-range  success by providing these  executives
with a competitive  compensation  package and an opportunity to become owners of
our stock.  At December 31, 2007, we had  3,103,484  shares of our Class B stock
available for grant under these plans.

      Stock options, exercisable for shares of our Class B stock, generally vest
ratably  over a three- to  four-year  period  from the grant  date and expire 10
years from the grant date.

      The 2005  and 2006  grants  of  restricted  stock  units  provide  for the
issuance of our Class B stock if three-year  cumulative  operating income target
thresholds  are met.  The 2007  restricted  stock unit  grants  provide  for the
issuance of our Class B stock if two-year  cumulative  operating  income  target
thresholds are met;  grants are also subject to an additional  one-year  service
requirement  for the units to vest. If the operating  income  minimum  threshold
established for each grant is not achieved,  the restricted stock units for that
grant are forfeited.

                                       59



      One of our stock plans pertaining to nonemployee directors also allows for
the  issuance  or  deferral  of our Class B stock as  awards  and  payments  for
retainer, committee and meeting fees.

      We also have an Employee  Stock  Purchase  Plan,  or ESPP,  that  provides
substantially  all regular  full- and  part-time  employees  an  opportunity  to
purchase shares of our Class B stock through payroll  deductions.  The funds are
withheld and then used to acquire stock on the last trading day of each quarter,
based on that day's closing price less a 15% discount. ESPP expense is reflected
in "Selling and  administrative  expenses"  on our  Consolidated  Statements  of
Operations  and  the  proceeds  are  reflected  in  "Proceeds  from  stock-based
compensation"  on our  Consolidated  Statements  of Cash Flows.  At December 31,
2007,  we had 71,275 shares of our Class B stock  available  for purchase  under
this plan.

Valuation Information

      Upon adoption of Statement  123(R), we began estimating the value of stock
options on the date of grant using the Lattice Binomial model, or Lattice model.
Prior to the  adoption of Statement  123(R),  the value of each  employee  stock
option was estimated on the date of grant using the Black-Scholes  model for the
purpose of pro forma  financial  information  in accordance  with Statement 123.
This  change was made in order to provide a better  estimate of fair value since
the Lattice model is a more flexible  method for valuing  employee stock options
than the Black-Scholes  model. The Lattice model requires  extensive analysis of
actual  exercise  behavior  data and a number of complex  assumptions  including
expected  volatility,  risk-free  interest rate,  expected  dividends and option
cancellations.

      The following table sets forth the assumptions  used for the Lattice model
in 2007 and 2006 and the Black-Scholes model in 2005:

                                  Fiscal Year      Fiscal Year       Fiscal Year
                                        Ended            Ended             Ended
                                     12/31/07         12/31/06          12/31/05
- --------------------------------------------------------------------------------
Expected volatility                 25% - 41%        29% - 43%               46%
Weighted average volatility               34%              38%               46%
Risk-free interest rate         4.67% - 5.04%    4.32% - 5.16%     3.80% - 4.18%
Expected dividends                        --               --                --
- --------------------------------------------------------------------------------

      The expected life of stock options  represents the weighted average period
the stock options are expected to remain  outstanding and is a derived output of
the Lattice model.  The expected life of stock options is impacted by all of the
underlying  assumptions and calibration of the Lattice model.  The Lattice model
assumes  that  exercise  behavior  is  a  function  of  the  option's  remaining
contractual  life and the extent to which the option's fair market value exceeds
the exercise price. The Lattice model estimates the probability of exercise as a
function of these two variables  based upon the entire  history of exercises and
vested cancellations on all past option grants.

      The weighted  average  expected life for options  granted  during 2007 and
2006 using the Lattice model was 6.3 years and 5.9 years, respectively,  and the
weighted  average  expected  life for  options  granted  during  2005  using the
Black-Scholes model was 6.0 years. The weighted average fair value per share for
stock options granted during 2007 and 2006 using the Lattice model was $4.64 and
$6.03,  respectively,  and the  weighted  average fair value per share for stock
options granted during 2005 using the Black-Scholes model was $5.85.

Stock Option Activity

      The  following  table sets forth stock option  activity for the year ended
December 31, 2007:

                                                                       Weighted
                                                                        Average
                                                          Number of    Exercise
                                                             Shares       Price
- -------------------------------------------------------------------------------
Outstanding at December 31, 2006                          3,682,416     $ 15.68
Granted                                                     160,000       10.61
Canceled                                                   (296,166)      13.96
- -------------------------------------------------------------------
Outstanding at December 31, 2007                          3,546,250     $ 15.60
===============================================================================

                                       60


      During  2007,  there were no  exercises of stock  options.  The  aggregate
intrinsic  value  for  options  exercised  during  2006  was $0.1  million.  The
aggregate intrinsic value for options exercised during 2005 was $0.5 million.

      At December 31, 2007, the weighted average remaining  contractual lives of
options  outstanding  and  options  exercisable  were 4.8 years  and 3.9  years,
respectively.  At  December  31,  2007,  the number of options  exercisable  was
2,838,417  and  the  weighted  average  exercise  price  per  share  of  options
exercisable was $16.36.

      There were no aggregate  intrinsic  values related to options  outstanding
and options exercisable at December 31, 2007.

      The  following  table sets forth the  activity  and  balances of our stock
options not yet vested for the year ended December 31, 2007:



                                                                            Weighted
                                                                             Average
                                                              Number of   Grant-Date
                                                                 Shares   Fair Value
- ------------------------------------------------------------------------------------
                                                                    
Outstanding at December 31, 2006                              1,068,666       $ 6.14
Granted                                                         160,000         4.64
Vested                                                         (422,333)        6.40
Canceled                                                        (98,500)        6.35
- -----------------------------------------------------------------------
Outstanding at December 31, 2007                                707,833       $ 5.61
====================================================================================


      The total fair value of options  vested in 2007,  2006,  and 2005 was $2.7
million, $3.0 million and $2.8 million, respectively.

      The following table sets forth stock-based compensation expense related to
stock  options and to our ESPP for 2007 and 2006 and pro forma  amounts for 2005
(in thousands, except per share amounts):



                                             Fiscal Year    Fiscal Year   Fiscal Year
                                                   Ended          Ended         Ended
                                                12/31/07       12/31/06      12/31/05
- -------------------------------------------------------------------------------------
                                                                 
Stock options                                    $ 1,131        $ 3,141      $  2,950
ESPP                                                  29             29            16
- -------------------------------------------------------------------------------------
   Total                                         $ 1,160        $ 3,170      $  2,966
=====================================================================================

Net income (loss)
   As reported                                   $ 4,925        $ 2,285      $   (735)
   Fair value of stock-based compensation
     excluded from net loss, gross                                             (2,966)
                                                                             --------
   Pro forma                                                                 $ (3,701)
                                                                             ========
Basic and diluted EPS
   As reported                                   $  0.15        $  0.07      $  (0.02)
   Pro forma                                                                 $  (0.11)
- -------------------------------------------------------------------------------------


      At December 31, 2007,  there was $2.1 million of unrecognized  stock-based
compensation  expense  related  to  non-vested  stock  options,  which  will  be
recognized over a weighted average period of 1.5 years.

Restricted Stock Unit Activity

      At December 31, 2007, we had 433,875  restricted stock units  outstanding,
none of which  were  vested,  and all of  which  were  performance-based  awards
contingent upon meeting certain performance goals.

                                       61



      The following table sets forth the activity and balances of our restricted
stock units for the years ended December 31, 2007, 2006 and 2005:

                                                                       Weighted
                                                                        Average
                                                        Number of    Grant-Date
                                                           Shares    Fair Value
- -------------------------------------------------------------------------------
Outstanding at December 31, 2004                          164,000       $ 13.96
Granted                                                   182,000         11.90
Canceled                                                  (27,000)        12.42
- -----------------------------------------------------------------
Outstanding at December 31, 2005                          319,000         12.91
Granted                                                   233,500         13.51
Forfeited                                                (112,000)        14.23
Canceled                                                 (107,500)        13.34
- -----------------------------------------------------------------
Outstanding at December 31, 2006                          333,000         12.75
Granted                                                   250,625         10.61
Forfeited                                                (121,000)        11.86
Canceled                                                  (28,750)        13.25
- -----------------------------------------------------------------
Outstanding at December 31, 2007                          433,875       $ 11.73
===============================================================================

      In 2007, we issued 250,625 shares of restricted  stock units at a weighted
average fair value per share of $10.61,  and 1,250 of these shares were canceled
during the year.  We have  estimated  that it is probable  that the  performance
criteria  for  this  grant  will  be  met,  and  we  recorded  $0.5  million  of
compensation expense in 2007 related to this grant. Also, we determined that the
minimum  threshold  associated  with the 2005 grants was not  achieved and those
grants  were  forfeited.  As of December  31,  2007,  there was $1.6  million of
unrecognized  stock-based  compensation expense related to non-vested restricted
stock units to be recognized in future periods.

      In 2006, we determined that the minimum threshold associated with the 2004
grants was not  achieved  and those  grants  were  forfeited.  Also in 2006,  we
determined that it was unlikely that the minimum  threshold  associated with the
2005 and 2006 grants would be met.  Therefore,  in 2006 we reversed $1.9 million
of  stock-based  compensation  expense,  which  included  $0.6  million and $0.7
million  that was recorded in 2005 and 2004,  respectively,  related to the 2004
and 2005  restricted  stock unit grants.  As of December 31, 2006,  there was no
unrecognized  stock-based  compensation expense related to non-vested restricted
stock units to be recognized in future periods.

Other Equity Awards

      We issued  17,806 shares of our Class B stock during 2007 related to other
equity awards.  Stock-based  compensation expense related to other equity awards
was $0.2  million,  $0.6  million  and $0.2  million  for  2007,  2006 and 2005,
respectively.

Employee Stock Purchase Plan

      Stock-based  compensation expense related to our ESPP was $29 thousand for
each of 2007 and 2006 and $16 thousand for 2005.

Income Taxes

      On  November  10,  2005,  the FASB issued  Staff  Position  No.  123(R)-3,
Transition Election Related to Accounting for Tax Effects of Share-Based Payment
Awards,  or Staff Position  123(R)-3.  We have elected to adopt the  alternative
transition  method  provided in Staff Position  123(R)-3 for calculating the tax
effects  of  stock-based   compensation   pursuant  to  Statement  123(R).   The
alternative  transition  method  simplifies  the  calculation  of the  beginning
balance of the additional paid-in capital pool, or APIC pool, related to the tax
effect of employee  stock-based  compensation.  This method also has  subsequent
impact on the APIC pool and  Consolidated  Statements of Cash Flows  relating to
the tax effects of employee stock-based compensation awards that are outstanding
upon adoption of Statement 123(R).

                                       62



      Under Statement 123(R), the income tax effects of share-based payments are
recognized for financial  reporting purposes only if such awards would result in
deductions on our income tax returns.  The settlement of share-based payments to
date that would have resulted in an excess tax benefit would have  increased our
existing  NOL  carryforward.  Under  Statement  123(R),  no excess tax  benefits
resulting  from the  settlement  of a  share-based  payment  can result in a tax
deduction before realization of the tax benefit; i.e., the recognition of excess
tax benefits  cannot be recorded until the excess benefit reduces current income
taxes  payable.  Additionally,  as a result  of our  existing  NOL  carryforward
position,  no excess tax benefits  relating to  share-based  payments  have been
recorded for the years ended December 31, 2007 and 2006.

(P)   CONSOLIDATED STATEMENTS OF CASH FLOWS

      The following table sets forth cash paid for interest and income taxes (in
thousands):

                                         Fiscal Year   Fiscal Year   Fiscal Year
                                               Ended         Ended         Ended
                                            12/31/07      12/31/06      12/31/05
- --------------------------------------------------------------------------------
Interest                                     $ 5,042       $ 5,308       $ 8,615
Income taxes                                 $ 2,166       $ 1,976       $ 2,416
- --------------------------------------------------------------------------------

(Q)   SEGMENT INFORMATION

      Our businesses are currently organized into the following three reportable
segments:   Entertainment,   Publishing  and  Licensing.   Entertainment   Group
operations  include the production and marketing of television  programming  for
our  domestic  and   international   TV  businesses,   web-based   entertainment
experiences,  wireless  content  distribution,   e-commerce,  DVD  products  and
satellite radio under the Playboy, Spice and other brand names. Publishing Group
operations  include the publication of Playboy  magazine,  special  editions and
other domestic  publishing  businesses,  including books and calendars,  and the
licensing  of  international  editions  of  Playboy  magazine.  Licensing  Group
operations  include the licensing of consumer  products  carrying one or more of
our trademarks  and/or images,  third-party  owned and operated  Playboy-branded
retail  stores,  multifaceted  location-based  entertainment  venues and certain
revenue-generating marketing activities.

      These reportable segments are based on the nature of the products offered.
Our chief operating decision maker evaluates performance and allocates resources
based on several  factors,  of which the  primary  financial  measure is segment
operating results.  The accounting  policies of the reportable  segments are the
same as those described in Note (A), Summary of Significant Accounting Policies.

                                       63



       The  following  table  sets forth  financial  information  by  reportable
segment (in thousands):



                                                      Fiscal Year   Fiscal Year   Fiscal Year
                                                            Ended         Ended         Ended
                                                         12/31/07      12/31/06      12/31/05
- ---------------------------------------------------------------------------------------------
                                                                         
Net revenues (1)
Entertainment                                           $ 203,065     $ 201,068     $ 203,994
Publishing                                                 93,774        97,078       106,513
Licensing                                                  43,001        32,996        27,646
- ---------------------------------------------------------------------------------------------
Total                                                   $ 339,840     $ 331,142     $ 338,153
=============================================================================================
Income before income taxes (2)
Entertainment                                           $  21,291     $  23,299     $  41,130
Publishing                                                 (7,568)       (5,374)       (6,471)
Licensing                                                  26,432        18,927        15,969
Corporate Administration and Promotion                    (28,159)      (25,768)      (19,632)
Restructuring expense                                        (445)       (1,998)         (149)
Impairment charge on assets held for sale                  (1,508)           --            --
Gains on disposal                                              --            29            14
Nonoperating expenses                                      (3,190)       (4,334)      (27,598)
- ---------------------------------------------------------------------------------------------
Total                                                   $   6,853     $   4,781     $   3,263
=============================================================================================
Depreciation and amortization (3), (4)
Entertainment                                           $  39,453     $  41,056     $  41,603
Publishing                                                    297           190           159
Licensing                                                      94            28            13
Corporate Administration and Promotion                      1,354           944           765
- ---------------------------------------------------------------------------------------------
Total                                                   $  41,198     $  42,218     $  42,540
=============================================================================================


                                                         Dec. 31,      Dec. 31,
                                                             2007          2006
- -------------------------------------------------------------------------------
Identifiable assets (3), (5)
Entertainment                                           $ 287,940     $ 288,540
Publishing                                                 35,320        38,146
Licensing                                                  11,560         9,386
Corporate Administration and Promotion                    110,336        99,711
- -------------------------------------------------------------------------------
Total                                                   $ 445,156     $ 435,783
===============================================================================

(1)   Net  revenues  include  revenues  attributable  to  foreign  countries  of
      approximately  $113,139,  $96,238  and  $89,731  in 2007,  2006 and  2005,
      respectively.  Revenues from the U.K. were $39,066, $39,330 and $34,451 in
      2007, 2006 and 2005,  respectively.  No other individual foreign country's
      revenue was material. Revenues are generally attributed to countries based
      on the  location  of  customers,  except  licensing  royalties  for  which
      revenues are attributed based upon the location of licensees.

(2)   Income  before  income  taxes  includes  income  attributable  to  foreign
      countries of  approximately  $6,617,  $3,664 and $1,453 in 2007,  2006 and
      2005, respectively.

(3)   The majority of our property and  equipment and capital  expenditures  are
      reflected  in  Corporate   Administration  and  Promotion;   depreciation,
      however, is partially allocated to the reportable segments.

(4)   Amounts include  depreciation  of property and equipment,  amortization of
      intangible   assets  and  amortization  of  investments  in  entertainment
      programming.

(5)   Our long-lived assets located in foreign countries were not material.

(R)   RELATED PARTY TRANSACTIONS

      In 1971,  we purchased  the Playboy  Mansion in Los  Angeles,  California,
where Mr.  Hefner  lives.  The  Playboy  Mansion is used for  various  corporate
activities and serves as a valuable location for television production, magazine
photography and for online,  advertising and sales events.  It also enhances our
image,  as we host many  charitable  and civic  functions.  The Playboy  Mansion
generates substantial publicity and recognition, which increase public awareness
of us and our products and services. Mr. Hefner pays us rent for that portion of
the Playboy Mansion used exclusively for his and his personal guests'  residence
as well as the  per-unit  value  of  non-business  meals,  beverages  and  other
benefits  received  by him and his  personal  guests.  The  Playboy  Mansion  is
included in

                                       64



our  Consolidated  Balance  Sheets at  December  31, 2007 and 2006 at a net book
value,  including all improvements and after accumulated  depreciation,  of $1.4
million and $1.6 million,  respectively.  The operating  expenses of the Playboy
Mansion,  including  depreciation and taxes, were $2.8 million, $2.1 million and
$3.1 million for 2007,  2006 and 2005,  respectively,  net of rent received from
Mr. Hefner. We estimated the sum of the rent and other benefits payable for 2007
to be $0.7 million, and Mr. Hefner paid that amount during 2007. The actual rent
and other  benefits  paid for 2006 and 2005 were $0.8 million and $1.1  million,
respectively.

      Holly Madison,  Bridget Marquardt and Kendra  Wilkinson,  the stars of The
Girls Next Door on E! Entertainment  Television,  reside in the mansion with Mr.
Hefner. The value of rent, food and beverage and other personal benefits for the
use of the Playboy Mansion by Ms. Madison,  Ms.  Marquardt and Ms.  Wilkinson is
charged to Alta Loma Entertainment, our production company. The aggregate amount
of these charges in 2007 was $0.4 million. In addition, each of Ms. Madison, Ms.
Marquardt  and Ms.  Wilkinson  receives  payments for  services  rendered on our
behalf, including appearance fees.

      In 2005, we repurchased  the remaining  outstanding  Playboy.com  Series A
Preferred Stock that was held by Mr. Hefner and an unrelated third party.  These
shares were part of $15.3 million issued by our subsidiary  Playboy.com in 2001,
of which $5.0 million was  purchased  by Mr.  Hefner.  See Note (A),  Summary of
Significant Accounting Policies.

(S)   QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

      The  following  table  sets  forth a summary  of the  unaudited  quarterly
results of operations for 2007 and 2006 (in thousands, except share amounts):



                                                                        Quarters Ended
                                                         -----------------------------------------
2007                                                      Mar. 31    June 30   Sept. 30    Dec. 31
- --------------------------------------------------------------------------------------------------
                                                                              
Net revenues                                             $ 85,415   $ 85,652   $ 82,858   $ 85,915
Operating income (loss)                                     3,885      3,853      4,137     (1,832)
Net income (loss)                                           1,474      1,911      2,595     (1,055)
Basic and diluted earnings (loss) per common share (1)       0.04       0.06       0.08      (0.03)
Common stock price:
   Class A high                                             12.30      12.10      11.91      11.93
   Class A low                                               9.80       9.46       8.92       8.33
   Class B high                                             11.79      11.69      11.94      12.00
   Class B low                                           $   9.90   $   9.72   $  10.15   $   8.87
- --------------------------------------------------------------------------------------------------




                                                                        Quarters Ended
                                                         -----------------------------------------
2006                                                      Mar. 31    June 30   Sept. 30    Dec. 31
- --------------------------------------------------------------------------------------------------
                                                                              
Net revenues                                             $ 82,120   $ 80,477   $ 82,297   $ 86,248
Operating income (loss)                                     3,531     (1,224)     3,716      3,092
Net income (loss)                                             789     (3,307)     1,137      3,666
Basic and diluted earnings (loss) per common share (1)       0.02      (0.10)      0.03       0.11
Common stock price:
   Class A high                                             13.40      13.03       9.85      12.29
   Class A low                                              12.20       8.30       8.71       9.35
   Class B high                                             15.50      14.50      10.20      12.65
   Class B low                                           $  12.85   $   8.90   $   9.02   $   9.16
- --------------------------------------------------------------------------------------------------


(1)   Quarterly  and  year-to-date  computations  of per share  amounts are made
      independently;  therefore,  the sum of per share  amounts for the quarters
      may not equal per share amounts for the year.

      Operating income (loss) for the quarters ended June 30, 2007, December 31,
2007 and June 30, 2006  included  restructuring  expense of $0.1  million,  $0.4
million and $1.9 million, respectively. See Note (C), Restructuring Expense. The
quarter ended December 31, 2007 also included a $1.5 million  impairment  charge
on assets held for sale. See Note (T), Subsequent Events.

                                       65



(T)   SUBSEQUENT EVENTS

      On January 15, 2008,  we signed an agreement to outsource  our Playboy and
BUNNYshop  e-commerce  and catalog  businesses to eFashions  Solutions,  LLC, or
eFashions.  The  agreement  grants  eFashions  a license to market,  promote and
distribute certain branded,  unbranded and co-branded goods through catalogs and
the Internet.  Under the terms of the agreement,  we will receive royalties from
eFashions  based on our  contractual  share of sales  and  advertising  revenues
generated by the e-commerce and catalog businesses. We will rely on eFashions to
operate these  businesses.  We anticipate that by the second quarter of 2008, we
will no longer be  operating  these  businesses  although we retain  significant
creative  control.  The foregoing  description  of the terms of the  outsourcing
agreement is a summary and by its nature is incomplete.  For further information
regarding the terms and  conditions of the  agreement,  reference is made to the
text of the agreement, which will be filed as an exhibit to our quarterly report
on Form 10-Q for the quarter ended March 31, 2008.

      We are  currently  negotiating  the sale of the assets  related to our Los
Angeles  production  facility.  Our  need  for the  facility  has  significantly
decreased since its inception,  and we forecast that the need for linear network
transmission  capacity will continue to decrease over the next several years. We
recorded a $1.5 million  charge on assets held for sale in 2007.  In  connection
with the sale of such assets, we expect to enter into an agreement to sublet the
entirety of the leased  operating  facility in Los  Angeles,  California  to the
buyer of the assets related to our Los Angeles production facility assets.

      Also in connection with the sale of such assets, we expect to enter into a
services  agreement  under  which the  buyer of the  assets  related  to our Los
Angeles production facility will provide us with certain satellite  transmission
services  and other  related  services  (including  compression,  uplinking  and
downlinking)  for our  standard  definition  cable  channels.  If we launch high
definition cable channels during the term of the agreement,  we expect the buyer
will also provide such services for our high definition channels.

      We expect the sale of the assets to close during March or April of 2008 on
substantially the terms described above. The foregoing  description of the terms
of  the  transaction  is  a  summary  and  by  its  nature  is  incomplete.  The
transactions  will be  subject  to other  terms  and  conditions  which  will be
contained in the definitive agreements to be signed by the parties.

                                       66



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Playboy Enterprises, Inc.

      We have audited the  accompanying  Consolidated  Balance Sheets of Playboy
Enterprises,  Inc. and subsidiaries, or the Company, as of December 31, 2007 and
2006,  and the  related  Consolidated  Statements  of  Operations,  Consolidated
Statements of Shareholders'  Equity,  and Consolidated  Statements of Cash Flows
for each of the three years in the period ended  December  31, 2007.  Our audits
also included the financial  statement  schedule listed in the index of Part IV,
Item 15. These financial  statements and schedule are the  responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements and schedule based on our audits.

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

      In our opinion, the financial statements referred to above present fairly,
in all material respects,  the consolidated financial position of the Company at
December 31, 2007 and 2006, and the  consolidated  results of its operations and
its cash flows for each of the three  years in the  period  ended  December  31,
2007, in conformity with U.S. generally accepted accounting principles. Also, in
our opinion,  the related  financial  statement  schedule,  when  considered  in
relation to the basic financial statements taken as a whole,  presents fairly in
all material respects the information set forth therein.

      As  described  in  Note  (D)  to  the  Notes  to  Consolidated   Financial
Statements,   the  Company   adopted   Financial   Accounting   Standards  Board
Interpretation   No.  48,   Accounting  for   Uncertainty  in  Income   Taxes-an
interpretation  of FASB  Statement  No. 109  effective  January 1, 2007,  and as
described in Note (A) to the Notes to  Consolidated  Financial  Statements,  the
Company  adopted  Statement  of  Financial   Accounting  Standards  No.  123(R),
Share-Based  Payments  effective  January 1, 2006,  and  certain  provisions  of
Statement of Financial Accounting  Standards No. 158, Employers'  Accounting for
Defined  Benefit  Pension and Other  Postretirement  Plans-an  amendment of FASB
Statements No. 87, 88, 106 and 132(R) as of December 31, 2006.

      We also have  audited,  in  accordance  with the  standards  of the Public
Company  Accounting  Oversight  Board (United  States),  the Company's  internal
control over  financial  reporting  as of December  31, 2007,  based on criteria
established in Internal Control-Integrated Framework, issued by the Committee of
Sponsoring Organizations of the Treadway Commission,  and our report dated March
11, 2008, expressed an unqualified opinion thereon.

                                                           /s/ Ernst & Young LLP

Chicago, Illinois
March 11, 2008

                                       67



Item  9.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
- --------------------------------------------------------------------------------
Financial Disclosure
- --------------------

      None.

Item 9A. Controls and Procedures
- --------------------------------

(a)   Evaluation of Disclosure Controls and Procedures

      Our management,  under the supervision and with the  participation  of our
Chief  Executive  Officer  and  Chief  Financial  Officer,   has  evaluated  the
effectiveness of our disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(f)  under the Securities  Exchange Act of 1934, as
amended, or the Exchange Act) as of December 31, 2007. Based on that evaluation,
our Chief Executive  Officer and Chief Financial Officer have concluded that, as
of December 31, 2007, our disclosure controls and procedures are effective.

(b)   Management's Annual Report on Internal Control Over Financial Reporting

      Our management is responsible for  establishing  and maintaining  adequate
internal control over financial  reporting,  as such term is defined in Exchange
Act Rules 13a-15(f) and 15d-15(f).  Our internal  control system was designed to
provide reasonable  assurance  regarding the reliability of financial  reporting
and the  preparation  of the  consolidated  financial  statements  for  external
purposes in accordance with generally accepted accounting principles.

      Under the  supervision of and with the  participation  of our  management,
including our Chief Executive Officer and Chief Financial Officer,  we conducted
an  evaluation  of the  effectiveness  of our internal  control  over  financial
reporting as of December 31, 2007. In making this  evaluation,  management  used
the criteria set forth in Internal  Control-Integrated  Framework, issued by the
Committee of Sponsoring  Organizations of the Treadway Commission.  Based on our
evaluation,  our  management  believes that our internal  control over financial
reporting is effective as of December 31, 2007.

      Ernst & Young LLP, an independent  registered  public accounting firm, who
audited and reported on the consolidated  financial  statements included in this
Annual  Report  on  Form  10-K,  has  issued  an   attestation   report  on  the
effectiveness  of the Company's  internal  control over  financial  reporting as
stated in their report which is included herein.

                                       68



(c)   Report  of  Independent  Registered  Public  Accounting  Firm on  Internal
Control Over Financial Reporting

To the Board of Directors and Shareholders of Playboy Enterprises, Inc.

      We  have  audited  Playboy  Enterprises,   Inc.'s  internal  control  over
financial  reporting as of December 31, 2007,  based on criteria  established in
Internal  Control-Integrated  Framework  issued by the  Committee of  Sponsoring
Organizations   of  the  Treadway   Commission  (the  COSO  criteria).   Playboy
Enterprises, Inc.'s management is responsible for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in Management's Annual Report
on Internal Control over Financial  Reporting.  Our responsibility is to express
an opinion on the company's  internal control over financial  reporting based on
our audit.

      We  conducted  our audit in  accordance  with the  standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and  perform  the audit to obtain  reasonable  assurance  about  whether
effective  internal  control over  financial  reporting  was  maintained  in all
material  respects.  Our audit included  obtaining an  understanding of internal
control over financial  reporting,  assessing the risk that a material  weakness
exists,  testing  and  evaluating  the design  and  operating  effectiveness  of
internal  control  based  on  the  assessed  risk,  and  performing  such  other
procedures as we considered necessary in the circumstances.  We believe that our
audit provides a reasonable basis for our opinion.

      A  company's  internal  control  over  financial  reporting  is a  process
designed to provide reasonable  assurance regarding the reliability of financial
reporting and the preparation of financial  statements for external  purposes in
accordance with generally accepted accounting  principles.  A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the  transactions  and dispositions of the assets of the company;
(2) provide reasonable  assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and that receipts and  expenditures  of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of  unauthorized  acquisition,  use, or  disposition  of the company's
assets that could have a material effect on the financial statements.

      Because of its  inherent  limitations,  internal  control  over  financial
reporting  may not prevent or detect  misstatements.  Also,  projections  of any
evaluation  of  effectiveness  to future  periods  are  subject to the risk that
controls may become  inadequate  because of changes in  conditions,  or that the
degree of compliance with the policies or procedures may deteriorate.

      In our opinion,  Playboy  Enterprises,  Inc.  maintained,  in all material
respects, effective internal control over financial reporting as of December 31,
2007, based on the COSO criteria.

      We also have  audited,  in  accordance  with the  standards  of the Public
Company  Accounting  Oversight Board (United States),  the Consolidated  Balance
Sheets of Playboy  Enterprises,  Inc. as of December 31, 2007 and 2006,  and the
related  Consolidated  Statements  of  Operations,  Consolidated  Statements  of
Shareholders' Equity, and Consolidated  Statements of Cash Flows for each of the
three years in the period ended December 31, 2007 of Playboy  Enterprises,  Inc.
and our report dated March 11, 2008 expressed an unqualified opinion thereon.

                                                           /s/ Ernst & Young LLP

Chicago, Illinois
March 11, 2008

                                       69



(d)   Change in Internal Control Over Financial Reporting

      There have not been any changes in our  internal  control  over  financial
reporting  during  the  fiscal  quarter  ended  December  31,  2007,  that  have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.

Item 9B. Other Information
- --------------------------

      None.

                                       70



                                    PART III

Item 10. Directors, Executive Officers and Corporate Governance
- ---------------------------------------------------------------

      The information required by Item 10 is included in our Proxy Statement (to
be filed) relating to the Annual Meeting of Stockholders to be held in May 2008,
which will be filed  within  120 days  after the close of our fiscal  year ended
December 31, 2007, and is incorporated herein by reference,  pursuant to General
Instruction G(3).

      We have  adopted  a code of ethics  that  applies  to our Chief  Executive
Officer, Chief Financial Officer and Corporate Controller.  That code is part of
our Code of Business  Conduct,  which is  available  free of charge  through our
website,  PlayboyEnterprises.com,  and is available in print to any  shareholder
who  sends  a  request  for  a  paper  copy  to:  Investor  Relations,   Playboy
Enterprises,  Inc.,  680 North Lake Shore Drive,  Chicago,  Illinois  60611.  We
intend to include on our website any  amendment  to, or waiver from, a provision
of the Code of Business  Conduct  that applies to our Chief  Executive  Officer,
Chief Financial Officer and Corporate  Controller that relates to any element of
the code of ethics definition enumerated in Item 406(b) of Regulation S-K.

Item 11. Executive Compensation
- -------------------------------

      The information required by Item 11 is included in our Proxy Statement (to
be filed) relating to the Annual Meeting of Stockholders to be held in May 2008,
which will be filed  within  120 days  after the close of our fiscal  year ended
December 31, 2007, and is incorporated herein by reference (excluding the Report
of the Compensation  Committee and the Performance  Graph),  pursuant to General
Instruction G(3).

Item 12.  Security  Ownership of Certain  Beneficial  Owners and  Management and
- --------------------------------------------------------------------------------
Related Stockholder Matters
- ---------------------------

      The following table sets forth information  regarding  outstanding options
and shares reserved for future issuance as of December 31, 2007:



                                                                   Class B Common Stock
                                                 -------------------------------------------------------
                                                                             Weighted
                                                                     Average Exercise   Number of Shares
                                                 Number of Options   Price of Options      Remaining for
                                                       Outstanding        Outstanding    Future Issuance
- --------------------------------------------------------------------------------------------------------
                                                                               
Total equity compensation plans approved by
   security holders                                      3,546,250             $15.60          3,103,484
========================================================================================================


      The  other  information  required  by Item  12 is  included  in our  Proxy
Statement (to be filed)  relating to the Annual  Meeting of  Stockholders  to be
held in May 2008,  which  will be filed  within  120 days after the close of our
fiscal year ended  December 31, 2007, and is  incorporated  herein by reference,
pursuant to General Instruction G(3).

Item  13.  Certain   Relationships  and  Related   Transactions,   and  Director
- --------------------------------------------------------------------------------
Independence
- ------------

      The information required by Item 13 is included in our Proxy Statement (to
be filed) relating to the Annual Meeting of Stockholders to be held in May 2008,
which will be filed  within  120 days  after the close of our fiscal  year ended
December 31, 2007, and is incorporated herein by reference,  pursuant to General
Instruction G(3).

Item 14. Principal Accounting Fees and Services
- -----------------------------------------------

      The information required by Item 14 is included in our Proxy Statement (to
be filed) relating to the Annual Meeting of Stockholders to be held in May 2008,
which will be filed  within  120 days  after the close of our fiscal  year ended
December 31, 2007, and is incorporated herein by reference,  pursuant to General
Instruction G(3).

                                       71



                                     PART IV

Item 15. Exhibits and Financial Statement Schedules
- ---------------------------------------------------

FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS

                                                                            Page
                                                                            ----
(1)   Financial Statements

      Our Financial  Statements and Supplementary Data following are as set
      forth under Part II. Item 8. of this Annual Report on Form 10-K:

      Consolidated Statements of Operations - Fiscal Years Ended
      December 31, 2007, 2006 and 2005                                       42

      Consolidated Balance Sheets - December 31, 2007 and 2006               43

      Consolidated Statements of Shareholders' Equity - Fiscal Years
      Ended December 31, 2007, 2006 and 2005                                 44

      Consolidated Statements of Cash Flows - Fiscal Years Ended
      December 31, 2007, 2006 and 2005                                       45

      Notes to Consolidated Financial Statements                             46

      Report of Independent Registered Public Accounting Firm                67

(2)   Financial Statement Schedules

      Schedule II - Valuation and Qualifying Accounts                        73

      All other  schedules have been omitted  because they are not required
      or  applicable  or because the required  information  is shown in the
      Consolidated Financial Statements or notes thereto.

(3)   Exhibits

      See Exhibit  Index,  which  appears at the end of this  document  and
      which is incorporated herein by reference.

                                       72



PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)



===================================================================================================================================
                 COLUMN A                      COLUMN B                   COLUMN C                    COLUMN D           COLUMN E
- -----------------------------------------------------------------------------------------------------------------------------------
                                                                         Additions
                                                             ---------------------------------
                                              Balance at       Charged to         Charged to                            Balance at
                                               Beginning        Costs and            Other                                 End
               Description                     of Period        Expenses           Accounts          Deductions         of Period
- -----------------------------------------   --------------   --------------     --------------     --------------     -------------
                                                                                              
Allowance deducted in the balance sheet
   from the asset to which it applies:

Fiscal Year Ended December 31, 2007:

   Allowance for doubtful accounts             $  3,688         $ 1,465            $    823(1)        $  2,349(2)        $  3,627
                                               ========         =======            ========           ========           ========

   Allowance for returns                       $ 24,652         $    --            $ 35,167(3)        $ 37,921(4)        $ 21,898
                                               ========         =======            ========           ========           ========

   Deferred tax asset valuation allowance      $ 77,180         $    --            $     --           $  2,362(5)        $ 74,818
                                               ========         =======            ========           ========           ========

Fiscal Year Ended December 31, 2006:

   Allowance for doubtful accounts             $  3,883         $   592            $    144(1)        $    931(2)        $  3,688
                                               ========         =======            ========           ========           ========

   Allowance for returns                       $ 27,777         $   242            $ 41,322(3)        $ 44,689(4)        $ 24,652
                                               ========         =======            ========           ========           ========

   Deferred tax asset valuation allowance      $ 75,295         $ 1,327(6)         $    558(7)        $     --           $ 77,180
                                               ========         =======            ========           ========           ========

Fiscal Year Ended December 31, 2005:

   Allowance for doubtful accounts             $  3,897         $   890            $    706(1)        $  1,610(2)        $  3,883
                                               ========         =======            ========           ========           ========

   Allowance for returns                       $ 28,284         $   260            $ 44,960(3)        $ 45,727(4)        $ 27,777
                                               ========         =======            ========           ========           ========

   Deferred tax asset valuation allowance      $ 72,663         $ 2,632(6)         $     --           $     --           $ 75,295
                                               ========         =======            ========           ========           ========


Notes:

(1)   Primarily represents  provisions for unpaid  subscriptions  charged to net
      revenues.

(2)   Primarily represents uncollectible accounts written off less recoveries.

(3)   Represents  provisions  charged to net revenues for  estimated  returns of
      Playboy  magazine,  other  domestic  publishing  products and domestic DVD
      products.

(4)   Represents settlements on provisions previously recorded.

(5)   Primarily  represents  noncash  foreign  income  tax  benefit  related  to
      decreasing the valuation allowance.

(6)   Represents  noncash  federal income tax expense  related to increasing the
      valuation allowance.

(7)   Represents  noncash  federal  tax  adjustment  related to the  adoption of
      Statement of Financial Accounting Standards No. 158, Employers' Accounting
      for Defined Benefit Pension and Other Postretirement Plans-an amendment of
      FASB Statements No. 87, 88, 106, and 132(R).

                                       73



                                  EXHIBIT INDEX
                                  -------------

      All agreements  listed below may have additional  exhibits,  which are not
attached. All such exhibits are available upon request,  provided the requesting
party shall pay a fee for copies of such exhibits, which fee shall be limited to
our reasonable expenses incurred in furnishing these documents.

Exhibit
Number     Description
- --------   -----------

    #2.1   Asset  Purchase  Agreement,  dated as of June 29, 2001,  by and among
           Playboy Enterprises,  Inc., Califa Entertainment Group, Inc., V.O.D.,
           Inc.,  Steven Hirsch,  Dewi James and William Asher  (incorporated by
           reference  to Exhibit 2.1 from the  Current  Report on Form 8-K dated
           July 6, 2001)

     3.1   Certificate   of   Incorporation   of   Playboy   Enterprises,   Inc.
           (incorporated  by reference to Exhibit 3 from our quarterly report on
           Form 10-Q dated March 31, 2003)

     3.2   Amended   and   Restated   Bylaws  of   Playboy   Enterprises,   Inc.
           (incorporated  by reference to Exhibit 3.4 from the Current Report on
           Form 8-K dated March 15, 1999)

     3.3   Certificate  of Amendment of the Amended and Restated  Certificate of
           Incorporation of Playboy Enterprises, Inc. (incorporated by reference
           to Exhibit 3.2 from our quarterly  report on Form 10-Q dated June 30,
           2004, or the June 30, 2004 Form 10-Q)

     4.1   Indenture,  dated March 15, 2005, between Playboy  Enterprises,  Inc.
           and LaSalle Bank National  Association,  as Trustee  (incorporated by
           reference  to Exhibit 4.1 from the  Current  Report on Form 8-K dated
           March 9, 2005, or the March 9, 2005 Form 8-K)

     4.2   Form  of  3.00%  Convertible  Senior   Subordinated  Notes  due  2025
           (included in Exhibit 4.1)

     4.3   Registration  Rights  Agreement,  dated March 15, 2005, among Playboy
           Enterprises,   Inc.  and  the  Initial   Purchasers   named   therein
           (incorporated by reference to Exhibit 4.2 from the March 9, 2005 Form
           8-K)

    10.1   Playboy Magazine Printing and Binding Agreement

          #a     October 22, 1997 Agreement  between Playboy  Enterprises,  Inc.
                 and Quad/Graphics,  Inc.  (incorporated by reference to Exhibit
                 10.4 from our transition period report on Form 10-K for the six
                 months ended December 31, 1997, or the  Transition  Period Form
                 10-K)

          #b     Amendment  to October 22, 1997  Agreement  dated as of March 3,
                 2000  (incorporated  by  reference  to  Exhibit  10.1  from our
                 quarterly  report on Form 10-Q for the quarter  ended March 31,
                 2000)

           c     Second  Amendment  to October  22, 1997  Agreement  dated as of
                 March 2, 2004  (incorporated  by reference to Exhibit 10.1 from
                 our annual report on Form 10-K for the year ended  December 31,
                 2003)

           d     Third  Amendment to October 22, 1997 Agreement dated as of July
                 30, 2007  (incorporated  by  reference to Exhibit 10.2 from our
                 quarterly  report on Form 10-Q for the quarter ended  September
                 30, 2007, or the September 30, 2007 Form 10-Q)

    10.2   Playboy Magazine Distribution Agreement

          #a     May 4, 2004 Agreement between Warner Publisher  Services,  Inc.
                 and Playboy  Enterprises,  Inc.  (incorporated  by reference to
                 Exhibit 10.1 from the June 30, 2004 Form 10-Q)

           b     Amendment  to May 4, 2004  Agreement  dated as of December  12,
                 2005

           c     Amendment to May 4, 2004 Agreement dated as of January 13, 2006

           (items (b) and (c)  incorporated by reference to Exhibits 10.2(c) and
           10.2(d),  respectively,  from our annual  report on Form 10-K for the
           year ended December 31, 2005, or the 2005 Form 10-K)

    10.3   Playboy Magazine Subscription Fulfillment Agreement

           a     July 1, 1987 Agreement  between  Communications  Data Services,
                 Inc. and Playboy Enterprises,  Inc.  (incorporated by reference
                 to Exhibit 10.12(a) from our annual report on Form 10-K for the
                 year ended June 30, 1992, or the 1992 Form 10-K)

                                       74



           b     Amendment  dated  as  of  June  1,  1988  to  said  Fulfillment
                 Agreement  (incorporated  by reference to Exhibit 10.12(b) from
                 our  annual  report  on Form 10-K for the year  ended  June 30,
                 1993, or the 1993 Form 10-K)

           c     Amendment  dated  as  of  July  1,  1990  to  said  Fulfillment
                 Agreement  (incorporated  by reference to Exhibit 10.12(c) from
                 our  annual  report  on Form 10-K for the year  ended  June 30,
                 1991, or the 1991 Form 10-K)

           d     Amendment  dated  as  of  July  1,  1996  to  said  Fulfillment
                 Agreement  (incorporated  by reference to Exhibit  10.5(d) from
                 our  annual  report  on Form 10-K for the year  ended  June 30,
                 1996, or the 1996 Form 10-K)

          #e     Amendment  dated  as  of  July  7,  1997  to  said  Fulfillment
                 Agreement  (incorporated  by reference to Exhibit  10.6(e) from
                 the Transition Period Form 10-K)

          #f     Amendment  dated  as  of  July  1,  2001  to  said  Fulfillment
                 Agreement  (incorporated  by reference to Exhibit 10.1 from our
                 quarterly  report on Form 10-Q for the quarter ended  September
                 30, 2001, or the September 30, 2001 Form 10-Q)

          #g     Seventh   Amendment   (related  to   Subscription   Fulfillment
                 Agreement,  dated July 1, 1987,  as  amended),  dated  March 9,
                 2006, by and between  Communications  Data  Services,  Inc. and
                 Playboy  Enterprises   International,   Inc.  (incorporated  by
                 reference  to Exhibit  10.9 from our  quarterly  report on Form
                 10-Q for the  quarter  ended March 31,  2006,  or the March 31,
                 2006 Form 10-Q)

    10.4   Transponder Service Agreements

           a     SKYNET  Transponder  Service  Agreement  dated  March  1,  2001
                 between  Playboy  Entertainment  Group,  Inc.  and Loral Skynet
                 (incorporated  by reference to Exhibit 10.1 from our  quarterly
                 report on Form 10-Q for the quarter ended March 31, 2001)

           b     SKYNET Transponder  Service Agreement dated February 8, 1999 by
                 and between Califa Entertainment Group, Inc. and Loral Skynet

           c     Transfer of Service  Agreement  dated February 22, 2002 between
                 Califa  Entertainment  Group,  Inc., Loral Skynet and Spice Hot
                 Entertainment, Inc.

           d     Amendment  One to the  Transponder  Service  Agreement  between
                 Spice Hot  Entertainment,  Inc. and Loral Skynet dated February
                 28, 2002

           (items  (b),  (c) and  (d)  incorporated  by  reference  to  Exhibits
           10.4(b),  (c) and (d),  respectively,  from our annual report on Form
           10-K for the year ended December 31, 2001, or the 2001 Form 10-K)

           e     Transponder  Service  Agreement  dated  August 12, 1999 between
                 British Sky  Broadcasting  Limited  and The Home Video  Channel
                 Limited  (incorporated by reference to Exhibit 10.4(e) from our
                 annual  report on Form  10-K for the year  ended  December  31,
                 2002, or the 2002 Form 10-K)

           f     First  Amendment  dated as of May 7, 2004  between  Playboy and
                 Loral Skynet  extending its current term  expiration of January
                 31, 2010 to January 31, 2013

           g     Intelsat LLC acquired  assets of Loral Skynet  effective  March
                 17, 2004

           (items (f) and (g)  incorporated by reference to Exhibits 10.4(f) and
           (g),  respectively,  from our annual report on Form 10-K for the year
           ended December 31, 2004, or the 2004 Form 10-K)

           h     Transfer  of Service  Agreement  (related  to  Contract  Number
                 T79903021),  dated as of  October  25,  2004,  among  Spice Hot
                 Entertainment, Inc., Andrita Studios, Inc., and Loral Skynet

          #i     Transfer  of Service  Agreement  (related  to  Contract  Number
                 T70102100), dated February 4, 2004, among Playboy Entertainment
                 Group, Inc., Andrita Studios, Inc. and Loral Skynet

           j     Amendment No. 1 to Contract Number T70102100 (IA7-C15) dated as
                 of May 7, 2004,  between  Intelsat USA Sales Corp.  and Andrita
                 Studios, Inc.

          #k     Agreement  Concerning  Skynet Space Segment  Service  (Contract
                 Number  T70309257),  dated as of  November  20,  2003,  between
                 Andrita Studios, Inc. and Loral Skynet

          #l     Amendment No. 1 to Contract Number T70309257  (IA7-C9) dated as
                 of May 7, 2004,  between  Intelsat USA Sales Corp.  and Andrita
                 Studios, Inc.

          #m     Digital Channel Platform Agreement (Contract Number GSS0210100)
                 dated as of February 4, 2003,  between Loral Skynet and Playboy
                 Entertainment Group, Inc.

          #n     Amendment No. 1 to Contract Number GSS0210100  (Digital Channel
                 Platform) dated as of May 7, 2004,  between  Intelsat USA Sales
                 Corp. and Playboy Entertainment Group, Inc.

           (items (h) through (n)  incorporated  by reference  to Exhibits  10.1
           through 10.4.2, respectively, from the March 31, 2006 Form 10-Q)

                                       75



   #10.5   Omnibus Amendment to Agreements between Playboy  Entertainment Group,
           Inc., Andrita Studios, Inc. and Intelsat USA Sales Corp., dated as of
           December 22, 2005 (incorporated by reference to Exhibit 10.5 from the
           March 31, 2006 Form 10-Q)

    10.6   Playboy TV UK Limited and UK/BENELUX Limited

          #a     Contract for a Combined  Compressed  Uplink and Eurobird  Space
                 Segment  Service,  dated as of May 12,  2003,  between  British
                 Telecommunications plc and Playboy TV UK Limited

           b     Contract  Amendment  Agreement  (Number  1) dated as of May 12,
                 2003, between British  Telecommunications plc and Playboy TV UK
                 Limited

          #c     Contract for a Combined  Compressed  Uplink and Eurobird  Space
                 Segment  Service,  dated as of May 12,  2004,  between  British
                 Telecommunications plc and Playboy TV UK/BENELUX Limited

          #d     Contract  Amendment  Agreement  (Number 1) dated as of November
                 30, 2004, between British Telecommunications plc and Playboy TV
                 UK/BENELUX Limited

           (items (a) through (d)  incorporated  by reference to Exhibits 10.6.1
           through 10.7.2, respectively, from the March 31, 2006 Form 10-Q)

   #10.7   Playboy TV-Latin America, LLC Agreements

           a     Third  Amended and  Restated  Operating  Agreement  for Playboy
                 TV-Latin  America,  LLC,  effective as of November 10, 2006, by
                 and  between  Playboy  Entertainment  Group,  Inc.  and Lifford
                 International Co. Ltd. (BVI)

           b     Amended  and  Restated  Program  Supply and  Trademark  License
                 Agreement,  dated as of  November  10,  2006,  between  Playboy
                 Entertainment Group, Inc. and Playboy TV-Latin America, LLC

           (items (a) and (b)  incorporated by reference to Exhibits 10.7(c) and
           (d),  respectively,  from our annual report on Form 10-K for the year
           ended December 31, 2006)

   #10.8   Agreement  dated as of January 1, 2006,  between  Time/Warner  Retail
           Sales & Marketing Inc. (f/k/a Warner  Publisher  Services,  Inc.) and
           Playboy Enterprises, Inc. (incorporated by reference to Exhibit 10.10
           from the March 31, 2006 Form 10-Q)

   #10.9   Satellite  Capacity Lease,  dated as of August 21, 2006, by and among
           Playboy Entertainment Group, Inc., Spice Hot Entertainment,  Inc. and
           Transponder   Encryption   Services   Corporation   (incorporated  by
           reference to Exhibit 10.3 from our quarterly  report on Form 10-Q for
           the quarter ended  September 30, 2006, or the September 30, 2006 Form
           10-Q)

   10.10   Transfer  Agreement,  dated as of  December  23,  2002,  by and among
           Playboy Enterprises, Inc., Playboy Entertainment Group, Inc., Playboy
           Enterprises  International,  Inc.,  Claxson  Interactive  Group Inc.,
           Carlyle  Investments  LLC (in its own  right  and as a  successor  in
           interest to Victoria Springs  Investments Ltd.),  Carlton Investments
           LLC (in its own right and as a  successor  in  interest  to  Victoria
           Springs Investments Ltd.),  Lifford  International Co. Ltd. (BVI) and
           Playboy TV  International,  LLC (incorporated by reference to Exhibit
           2.1 from the  December  23, 2002 Form 8-K,  and filed with the SEC on
           January 7, 2003)

  #10.11   Amended and Restated  Affiliation and License Agreement dated May 17,
           2002 between DirecTV,  Inc. and Playboy  Entertainment  Group,  Inc.,
           Spice  Entertainment,  Inc., Spice Hot Entertainment,  Inc. and Spice
           Platinum  Entertainment,  Inc. regarding DBS Satellite  Exhibition of
           Programming  (incorporated  by  reference  to  Exhibit  10.1 from our
           quarterly  report on Form 10-Q dated June 30,  2002,  or the June 30,
           2002 Form 10-Q)

  #10.12   Affiliation   Agreement   dated   July  8,   2004   between   Playboy
           Entertainment  Group,  Inc.,  Spice  Entertainment,  Inc.,  Spice Hot
           Entertainment,  Inc.,  and Time Warner  Cable Inc.  (incorporated  by
           reference  to  Exhibit  10.1 from our  quarterly  report on Form 10-Q
           dated September 30, 2004, or the September 30, 2004 Form 10-Q)

   10.13   Affiliation  Agreement between Spice,  Inc., and Satellite  Services,
           Inc.

           a     Affiliation  Agreement,  dated November 1, 1992, between Spice,
                 Inc., and Satellite Services, Inc.

           b     Amendment  No. 1, dated  September  29,  1994,  to  Affiliation
                 Agreement,  dated November 1, 1992,  between  Spice,  Inc., and
                 Satellite Services, Inc.

                                     76



           c     Letter Agreement, dated July 18, 1997, amending the Affiliation
                 Agreement,  dated November 1, 1992,  between  Spice,  Inc., and
                 Satellite Services, Inc.

           d     Letter  Agreement,   dated  December  18,  1997,  amending  the
                 Affiliation  Agreement,  dated November 1, 1992, between Spice,
                 Inc., and Satellite Services, Inc.

           e     Amendment,   effective   September  26,  2005,  to  Affiliation
                 Agreement,  dated November 1, 1992,  between  Spice,  Inc., and
                 Satellite Services, Inc.

           (items (a) through (e)  incorporated  by reference to Exhibits 10.1.1
           through 10.1.5, respectively,  from our quarterly report on Form 10-Q
           dated September 30, 2005, or the September 30, 2005 Form 10-Q)

   10.14   Affiliation Agreement between Playboy  Entertainment Group, Inc., and
           Satellite Services, Inc.

           a     Affiliation Agreement, dated February 10, 1993, between Playboy
                 Entertainment Group, Inc., and Satellite Services, Inc.

           b     Amendment,   effective   September  26,  2005,  to  Affiliation
                 Agreement,   dated   February   10,   1993,   between   Playboy
                 Entertainment Group, Inc., and Satellite Services, Inc.

           (items (a) and (b)  incorporated  by reference to Exhibits 10.2.1 and
           10.2.2, respectively, from the September 30, 2005 Form 10-Q)

  #10.15   Amended and Restated Agreement,  dated August 1, 2007, by and between
           Playboy Entertainment Group, Inc. and Spice Hot Entertainment,  Inc.,
           and DirecTV, Inc. (incorporated by reference to Exhibit 10.3 from the
           September 30, 2007 Form 10-Q)

  #10.16   Agreement  dated  October  4,  2004,   between  Playboy   Enterprises
           International,  Inc., Fiesta Palms LLC, N-M Ventures II, LLC and Nine
           Group  LLC  (incorporated  by  reference  to  Exhibit  10.1  from our
           quarterly  report on Form 10-Q dated June 30,  2007,  or the June 30,
           2007 Form 10-Q)

   10.17   Amended and Restated  Credit  Agreement,  effective April 1, 2005, or
           the Credit Agreement, among PEI Holdings, Inc., as borrower, and Bank
           of America,  N.A.,  as Agent and the other  lenders from time to time
           party thereto

           a     Credit Agreement  (incorporated by reference to Exhibit 10.1 to
                 our quarterly report on Form 10-Q dated March 31, 2005)

           b     First  Amendment to the Credit  Agreement  dated March 10, 2006
                 among PEI Holding, Inc., as borrower, Bank of America, N.A., as
                 Agent,  and the other Lenders Party  thereto  (incorporated  by
                 reference to Exhibit 10.15(b) from the 2005 Form 10-K)

           c     Master Corporate Guaranty, dated March 11, 2003

           d     Security  Agreement,  dated as of March 11,  2003,  between PEI
                 Holdings,  Inc. and Bank of America,  N.A.,  as Agent under the
                 Credit Agreement

           e     Security  Agreement,  dated as of March 11, 2003, among Playboy
                 Enterprises,  Inc. and each of the domestic subsidiaries of PEI
                 Holdings,  Inc. set forth on the  signature  pages  thereto and
                 Bank of America, N.A., as Agent under the Credit Agreement

           f     Pledge  Agreement,  dated as of March  11,  2003,  between  PEI
                 Holdings,  Inc.  and Bank of  America,  N.A.,  as agent for the
                 various financial institutions from time to time parties to the
                 Credit Agreement

           g     Pledge  Agreement,  dated as of March 11, 2003,  among  Chelsea
                 Court Holdings LLC, as the limited  partner in 1945/1947  Cedar
                 River C.V.,  Candlelight Management LLC, as the general partner
                 in 1945/1947  Cedar River C.V.,  and Bank of America,  N.A., as
                 agent for the various financial  institutions from time to time
                 parties to the Credit Agreement

           h     Pledge Agreement,  dated as of March 11, 2003, between Claridge
                 Organization  LLC and Bank of America,  N.A.,  as agent for the
                 various financial institutions from time to time parties to the
                 Credit Agreement

           i     Pledge Agreement,  dated as of March 11, 2003,  between Playboy
                 Clubs International,  Inc. and Bank of America,  N.A., as agent
                 for  the  various  financial  institutions  from  time  to time
                 parties to the Credit Agreement

           j     Pledge  Agreement,  dated as of March  11,  2003,  between  CPV
                 Productions,  Inc. and Bank of America,  N.A., as agent for the
                 various financial institutions from time to time parties to the
                 Credit Agreement

           k     Pledge Agreement,  dated as of March 11, 2003,  between Playboy
                 Entertainment  Group, Inc. and Bank of America,  N.A., as agent
                 for  the  various  financial  institutions  from  time  to time
                 parties to the Credit Agreement

                                       77



           l     Pledge Agreement,  dated as of March 11, 2003,  between Playboy
                 Gaming International,  Ltd. and Bank of America, N.A., as agent
                 for  the  various  financial  institutions  from  time  to time
                 parties to the Credit Agreement

           m     Pledge Agreement,  dated as of March 11, 2003,  between Playboy
                 Entertainment  Group, Inc. and Bank of America,  N.A., as agent
                 for  the  various  financial  institutions  from  time  to time
                 parties to the Credit Agreement

           n     Pledge Agreement,  dated as of March 11, 2003,  between Playboy
                 Enterprises,  Inc. and Bank of America,  N.A., as agent for the
                 various financial institutions from time to time parties to the
                 Credit Agreement

           o     Pledge Agreement,  dated as of March 11, 2003,  between Playboy
                 Enterprises  International,  Inc. and Bank of America, N.A., as
                 agent for the various financial  institutions from time to time
                 parties to the Credit Agreement

           p     Pledge  Agreement,  dated as of March 11, 2003,  between Planet
                 Playboy,  Inc.  and Bank of  America,  N.A.,  as agent  for the
                 various financial institutions from time to time parties to the
                 Credit Agreement

           q     Pledge  Agreement,  dated as of March 11, 2003,  between  Spice
                 Entertainment, Inc. and Bank of America, N.A., as agent for the
                 various financial institutions from time to time parties to the
                 Credit Agreement

           r     Pledge Agreement,  dated as of March 11, 2003,  between Playboy
                 TV International,  LLC and Bank of America,  N.A., as agent for
                 the various financial institutions from time to time parties to
                 the Credit Agreement

           s     Pledge Agreement,  dated as of March 11, 2003,  between Playboy
                 TV International,  LLC and Bank of America,  N.A., as agent for
                 the various financial institutions from time to time parties to
                 the Credit Agreement

           t     Trademark  Security  Agreement,  dated as of March 11, 2003, by
                 AdulTVision  Communications,  Inc.,  Alta  Loma  Entertainment,
                 Inc.,  Lifestyle Brands,  Ltd.,  Playboy  Entertainment  Group,
                 Inc.,   Spice   Entertainment,    Inc.,   Playboy   Enterprises
                 International,  Inc. and Spice Hot Entertainment, Inc. in favor
                 of Bank of America, N.A., as Agent under the Credit Agreement

           u     Copyright  Security  Agreement,  dated March 11, 2003, by After
                 Dark  Video,  Inc.,  Alta Loma  Distribution,  Inc.,  Alta Loma
                 Entertainment,   Inc.,   Impulse   Productions,   Inc.,  Indigo
                 Entertainment,  Inc., MH Pictures,  Inc., Mystique Films, Inc.,
                 Playboy  Entertainment  Group,  Inc.,  Precious Films, Inc. and
                 Women Productions,  Inc. in favor of Bank of America,  N.A., as
                 Agent under the Credit Agreement

           v     Lease Subordination  Agreement,  dated as of March 11, 2003, by
                 and among Hugh M. Hefner,  Playboy  Enterprises  International,
                 Inc. and Bank of America, N.A., as Agent for various lenders

           w     Deed of Trust with Assignment of Rents,  Security Agreement and
                 Fixture  Filing,  dated as of March 11, 2003, made and executed
                 by Playboy Enterprises International, Inc. in favor of Fidelity
                 National  Title  Insurance  Company  for the benefit of Bank of
                 America, N.A., as Agent for Lenders under the Credit Agreement

           (items (c) through (w)  incorporated by reference to Exhibits 10.9(b)
           through (u), respectively, from the 2002 Form 10-K)

           x     Pledge  Amendment,   dated  July  22,  2003,   between  Playboy
                 Entertainment  Group, Inc. and Bank of America,  N.A., as agent
                 for  the  various  financial  institutions  from  time  to time
                 parties to the Credit  Agreement  (incorporated by reference to
                 Exhibit 10.9(i)-1 from our May 19, 2003 Form S-4)

           y     First  Amendment,  dated  September  15, 2004, to Deed of Trust
                 With  Assignment  of  Rents,  Security  Agreement  and  Fixture
                 Filing,  dated as of March 11, 2003, made and executed  between
                 Playboy  Enterprises  International,  Inc. and Bank of America,
                 N.A., as Agent  (incorporated by reference to Exhibit 10.4 from
                 the September 30, 2004 Form 10-Q)

           z     Second  Amendment,  dated as of April 27,  2006,  to the Credit
                 Agreement, or the Second Amendment

          aa     Reaffirmation  of Guaranty,  dated as of April 27, 2006, to the
                 Credit  Agreement,  by each of the Guarantors,  pursuant to the
                 Second Amendment

          bb     Third  Amendment,  dated  as of May  15,  2006,  to the  Credit
                 Agreement

          cc     Pledge  Amendment,  dated  as of May  15,  2006,  from  Playboy
                 Enterprises International, Inc.

          dd     Pledge  Amendment,  dated  as of May  15,  2006,  from  Playboy
                 Entertainment Group, Inc.

                                       78



          ee     Joinder to the Master Corporate  Guaranty,  dated as of May 15,
                 2006, by Playboy.com,  Inc., Playboy.com Internet Gaming, Inc.,
                 Playboy.com Racing, Inc., SpiceTV.com,  Inc., and CJI Holdings,
                 Inc.,  and  accepted  by Bank of  America,  N.A.,  as agent for
                 Lenders

          ff     Joinder to Security  Agreement,  dated as of May 15,  2006,  by
                 Playboy.com,   Inc.,   Playboy.com   Internet   Gaming,   Inc.,
                 Playboy.com Racing, Inc.,  SpiceTV.com,  Inc. and CJI Holdings,
                 Inc.,  and accepted by Bank of America,  N.A., as agent for the
                 Lenders

          gg     Pledge   Agreement,   dated  as  of  May  15,   2006,   between
                 Playboy.com,  Inc. and Bank of America,  N.A., as agent for the
                 Lenders

          hh     Pledge Agreement, dated as of May 15, 2006, between Playboy.com
                 Internet  Gaming Inc. and Bank of America,  N.A.,  as agent for
                 the Lenders

          ii     Trademark  Security  Agreement,  dated as of May 15,  2006,  by
                 Playboy.com,  Inc. in favor of Bank of America,  N.A., as agent
                 for the Lenders

          jj     Copyright  Security  Agreement,  dated as of May 15,  2006,  by
                 Playboy.com,  Inc. in favor of Bank of America,  N.A., as agent
                 for the Lenders

           (items (z) through (jj)  incorporated by reference to Exhibits 10.1.1
           through 10.2.9, respectively,  from our quarterly report on Form 10-Q
           for the quarter ended June 30, 2006)

          kk     Fourth  Amendment,  dated as of July 21,  2006,  to the  Credit
                 Agreement, or the Fourth Amendment

          ll     Reaffirmation  of Guaranty,  dated as of July 21, 2006, by each
                 of the Guarantors, pursuant to the Fourth Amendment

          mm     Fifth Amendment,  dated as of September 28, 2006, to the Credit
                 Agreement, or the Fifth Amendment

          nn     Reaffirmation  of Guaranty,  dated as of September 28, 2006, by
                 each of the Guarantors, pursuant to the Fifth Amendment

          oo     Joinder and Amendment No. 1 to Master Corporate Guaranty, dated
                 as of September 28, 2006, by Playboy Enterprises, Inc., Playboy
                 Enterprises International,  Inc., Spice Hot Entertainment, Inc.
                 and Spice Platinum Entertainment, Inc., and accepted by Bank of
                 America, N.A., as agent for the Lenders

           (items (kk) through (oo) incorporated by reference to Exhibits 10.1.1
           through 10.2.3, respectively, from the September 30, 2006 Form 10-Q)

         #pp     Sixth Amendment,  dated as of September 28, 2007, to the Credit
                 Agreement, or the Sixth Amendment (incorporated by reference to
                 Exhibit 10.1 to the September 30, 2007 Form 10-Q)

   10.18   Exchange Agreement, dated as of March 11, 2003, among Hugh M. Hefner,
           Playboy.com,  Inc., PEI Holdings, Inc. and Playboy Enterprises,  Inc.
           (incorporated by reference to Exhibit 4.2 from the 2002 Form 10-K)

   10.19   Playboy  Mansion West Lease  Agreement,  as amended,  between Playboy
           Enterprises, Inc. and Hugh M. Hefner

           a     Letter of Interpretation of Lease

           b     Agreement of Lease

           (items (a) and (b)  incorporated by reference to Exhibits 10.3(a) and
           (b), respectively, from the 1991 Form 10-K)

           c     Amendment  to Lease  Agreement  dated as of  January  12,  1998
                 (incorporated  by reference to Exhibit 10.2 from our  quarterly
                 report on Form 10-Q for the quarter  ended March 31,  1998,  or
                 the March 31, 1998 Form 10-Q)

           d     Lease Subordination  Agreement,  dated as of March 11, 2003, by
                 and among Hugh M. Hefner,  Playboy  Enterprises  International,
                 Inc. and Bank of America,  N.A.,  as Agent for various  lenders
                 (see Exhibit  10.22(v))  (incorporated  by reference to Exhibit
                 10.9(t) from the 2002 Form 10-K)

   10.20   Los Angeles Office Lease Documents

           a     Agreement  of Lease dated  April 23,  2002  between Los Angeles
                 Media  Tech   Center,   LLC  and  Playboy   Enterprises,   Inc.
                 (incorporated  by  reference  to Exhibit 10.4 from the June 30,
                 2002 Form 10-Q)

           b     First  Amendment  to April 23,  2002 Lease  dated June 28, 2002
                 (incorporated  by reference to Exhibit 10.4 from our  quarterly
                 report on Form 10-Q for the quarter  ended  September 30, 2002,
                 or the September 30, 2002 Form 10-Q)

                                     79



           c     Second  Amendment to April 23, 2002 Lease dated  September  23,
                 2004  (incorporated  by  reference  to  Exhibit  10.2  from the
                 September 30, 2004 Form 10-Q)

   10.21   Chicago Office Lease Documents

           a     Office  Lease  dated  April  7,  1988  by and  between  Playboy
                 Enterprises,  Inc. and LaSalle  National  Bank as Trustee under
                 Trust No. 112912  (incorporated by reference to Exhibit 10.7(a)
                 from the 1993 Form 10-K)

           b     First  Amendment to April 7, 1988 Lease dated  October 26, 1989
                 (incorporated  by reference to Exhibit 10.15(b) from our annual
                 report on Form 10-K for the year  ended June 30,  1995,  or the
                 1995 Form 10-K)

           c     Second  Amendment  to April 7, 1988  Lease  dated  June 1, 1992
                 (incorporated  by reference to Exhibit 10.1 from our  quarterly
                 report on Form 10-Q for the quarter ended December 31, 1992)

           d     Third  Amendment  to April 7, 1988 Lease dated  August 30, 1993
                 (incorporated  by reference to Exhibit  10.15(d)  from the 1995
                 Form 10-K)

           e     Fourth  Amendment  to April 7, 1988 Lease dated  August 6, 1996
                 (incorporated  by reference to Exhibit  10.20(e)  from the 1996
                 Form 10-K)

           f     Fifth  Amendment  to April 7, 1988 Lease  dated  March 19, 1998
                 (incorporated  by  reference to Exhibit 10.3 from the March 31,
                 1998 Form 10-Q)

           g     Sixth  Amendment to April 7, 1988 Lease  effective  May 1, 2006
                 (incorporated by reference to Exhibit 10.9.1 from the September
                 30, 2006 Form 10-Q)

   10.22   New York Office Lease Documents

           a     Agreement  of Lease  dated  August  11,  1992  between  Playboy
                 Enterprises,  Inc. and Lexington Building Co.  (incorporated by
                 reference to Exhibit 10.9(b) from the 1992 Form 10-K)

           b     Second  Amendment  to August 11, 1992 Lease dated June 28, 2004
                 (incorporated  by  reference  to Exhibit 10.4 from the June 30,
                 2004 Form 10-Q)

   10.23   Los Angeles Studio Facility Lease Documents

           a     Agreement of Lease dated  September  20, 2001 between  Kingston
                 Andrita LLC and Playboy Entertainment Group, Inc. (incorporated
                 by reference to Exhibit  10.3(a)  from the  September  30, 2001
                 Form 10-Q)

           b     First  Amendment to September 20, 2001 Lease dated May 15, 2002
                 (incorporated  by  reference  to Exhibit 10.3 from the June 30,
                 2002 Form 10-Q)

           c     Second  Amendment  to  September  20, 2001 Lease dated July 23,
                 2002  (incorporated  by  reference  to  Exhibit  10.6  from the
                 September 30, 2002 Form 10-Q)

           d     Third  Amendment to September  20, 2001 Lease dated October 31,
                 2002

           e     Fourth  Amendment to September 20, 2001 Lease dated December 2,
                 2002

           f     Fifth  Amendment to September 20, 2001 Lease dated December 31,
                 2002

           g     Sixth  Amendment to September  20, 2001 Lease dated January 31,
                 2003

           (items (d) through (g) incorporated by reference to Exhibits 10.17(d)
           through (g), respectively, from the 2002 Form 10-K)

           h     Guaranty  dated  September  20,  2001 by Playboy  Entertainment
                 Group,  Inc. in favor of Kingston Andrita LLC  (incorporated by
                 reference to Exhibit  10.3(c) from the  September 30, 2001 Form
                 10-Q)

           i     Seventh  Amendment to  September  20, 2001 Lease dated July 23,
                 2003  (incorporated  by  reference  to  Exhibit  10.1  from our
                 quarterly report on Form 10-Q dated September 30, 2003)

  *10.24   Selected Company Remunerative Plans

           a     Executive  Protection Program dated March 1, 1990 (incorporated
                 by reference to Exhibit 10.18(c) from the 1995 Form 10-K)

           b     Amended and Restated  Deferred  Compensation Plan for Employees
                 effective January 1, 1998

           c     Amended and Restated  Deferred  Compensation Plan for Board of
                 Directors effective January 1, 1998

           (items (b) and (c)  incorporated by reference to Exhibits 10.2(a) and
           (b),  respectively,  from our  quarterly  report on Form 10-Q for the
           quarter ended June 30, 1998)

           d     Amended  and  Restated  Playboy  Enterprises,   Inc.  Board  of
                 Directors'  Deferred  Compensation  Plan,  effective January 1,
                 2005

           e     Amended  and  Restated  Playboy   Enterprises,   Inc.  Deferred
                 Compensation Plan, effective January 1, 2005

                                       80



           f     Fourth  Amendment,  dated as of August 30, 2006, to the Playboy
                 Enterprises,  Inc. Employee Investment Savings Plan (as amended
                 and restated January 1, 1997)

           (items (d) through (f)  incorporated  by reference  to Exhibits  10.4
           through 10.6, respectively, from the September 30, 2006 Form 10-Q)

          @g     Fifth Amendment,  dated as of November 29, 2007, to the Playboy
                 Enterprises,  Inc. Employee Investment Savings Plan (as amended
                 and restated January 1, 1997)

          @h     Sixth Amendment,  dated as of November 29, 2007, to the Playboy
                 Enterprises,  Inc. Employee Investment Savings Plan (as amended
                 and restated January 1, 1997)

  *10.25   1991 Directors' Plan

           a     Playboy Enterprises,  Inc. 1991 Non-Qualified Stock Option Plan
                 for  Non-Employee   Directors,   as  amended  (incorporated  by
                 reference to Exhibit 10.23(c) from the 2004 Form 10-K)

           b     Playboy  Enterprises,  Inc.  1991  Non-Qualified  Stock Option
                 Agreement  for   Non-Employee   Directors   (incorporated   by
                 reference to Exhibit 10.4(nn) from the 1991 Form 10-K)

  *10.26   1995 Stock Incentive Plan

           a     Third Amended and Restated Playboy Enterprises, Inc. 1995 Stock
                 Incentive Plan  (incorporated by reference to Exhibit 10.2 from
                 the June 30, 2007 Form 10-Q)

           b     Form of Non-Qualified  Stock Option Agreement for Non-Qualified
                 Stock Options which may be granted under the Plan

           c     Form of Incentive  Stock Option  Agreement for Incentive  Stock
                 Options which may be granted under the Plan

           d     Form of Restricted  Stock Agreement for Restricted Stock issued
                 under the Plan

           (items (b), (c) and (d)  incorporated  by reference to Exhibits  4.3,
           4.4 and  4.5,  respectively,  from  our  Registration  Statement  No.
           33-58145 on Form S-8 dated March 20, 1995)

           e     Form of Section 162(m)  Restricted  Stock Agreement for Section
                 162(m) Restricted Stock issued under the Plan  (incorporated by
                 reference  to Exhibit  10.1(e)  from our annual  report on Form
                 10-K for the year ended June 30, 1997)

  *10.27   1997 Directors' Plan

           a     Second  Amended and Restated 1997 Equity Plan for  Non-Employee
                 Directors  of  Playboy  Enterprises,   Inc.   (incorporated  by
                 reference to Exhibit 10.3 from the June 30, 2007 Form 10-Q)

           b     Form of Restricted  Stock Agreement for Restricted Stock issued
                 under the Plan  (incorporated  by reference to Exhibit  10.1(b)
                 from our  quarterly  report on Form 10-Q for the quarter  ended
                 September 30, 1997)

  *10.28   Form of Nonqualified  Option Agreement  between Playboy  Enterprises,
           Inc.   and  each  of  Dennis  S.   Bookshester   and  Sol   Rosenthal
           (incorporated  by  reference  to  Exhibit  4.4 from our  Registration
           Statement No. 333-30185 on Form S-8 dated June 27, 1997)

  *10.29   Playboy  Enterprises,  Inc.  Employee Stock Purchase Plan, as amended
           and restated (incorporated by reference to Exhibit 10.4 from the June
           30, 2007 Form 10-Q)

  *10.30   Selected Employment, Termination and Other Agreements

           a     Form of Severance Agreement by and between Playboy Enterprises,
                 Inc.  and  each  of  Linda  Havard,   Christie  Hefner,  Martha
                 Lindeman,  Richard Rosenzweig,  Howard Shapiro and Alex Vaickus
                 (incorporated  by reference to Exhibit  10.23(a)  from the 2001
                 Form 10-K)

           b     Memorandum dated May 21, 2002 regarding severance agreement for
                 Linda  Havard  (incorporated  by reference to Exhibit 10.6 from
                 the June 30, 2002 Form 10-Q)

           c     Employment  Agreement  dated as of September 15, 2006,  between
                 Playboy Enterprises, Inc. and Robert Meyers

           d     Severance  Agreement  dated as of September  18, 2006,  between
                 Playboy Enterprises, Inc. and Robert Meyers

           (items (c) and (d) are  incorporated  by reference to Exhibits 10.8.1
           and 10.8.2, respectively, from the September 30, 2006 Form 10-Q)

          @e     Memorandum   dated  December  21,  2007   regarding   severance
                 agreement for Alex Vaickus

     @21   Subsidiaries

                                       81



     @23   Consent of Ernst & Young LLP

   @31.1   Certification of Chief Executive  Officer pursuant to Section 302 of
           the Sarbanes-Oxley Act of 2002

   @31.2   Certification of Chief Financial  Officer pursuant to Section 302 of
           the Sarbanes-Oxley Act of 2002

     @32   Certification  pursuant  to  18  U.S.C.  Section  1350,  as  adopted
           pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

- ----------
*     Indicates management compensation plan

#     Certain  information  omitted  pursuant  to  a  request  for  confidential
      treatment filed separately with and granted by the SEC

@     Filed herewith

                                       82



                                   SIGNATURES

      Pursuant  to the  requirements  of Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                            PLAYBOY ENTERPRISES, INC.

March 14, 2008                                 By /s/Linda Havard
                                                  --------------------------
                                               Linda G. Havard
                                               Executive Vice President,
                                               Finance and Operations,
                                               and Chief Financial Officer
                                               (Authorized Officer)

      Pursuant to the requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.

/s/Christie Hefner                          March 14, 2008
- --------------------------------------
Christie Hefner
Chairman of the Board,
Chief Executive Officer and Director
(Principal Executive Officer)

/s/Richard S. Rosenzweig                    March 14, 2008
- --------------------------------------
Richard S. Rosenzweig
Executive Vice President and Director

/s/Dennis S. Bookshester                    March 14, 2008
- --------------------------------------
Dennis S. Bookshester
Director

/s/David I. Chemerow                        March 14, 2008
- --------------------------------------
David I. Chemerow
Director

/s/Charles Hirschhorn                       March 14, 2008
- --------------------------------------
Charles Hirschhorn
Director

/s/Jerome H. Kern                           March 14, 2008
- --------------------------------------
Jerome H. Kern
Director

/s/Russell I. Pillar                        March 14, 2008
- --------------------------------------
Russell I. Pillar
Director

/s/Sol Rosenthal                            March 14, 2008
- --------------------------------------
Sol Rosenthal
Director

/s/Linda Havard                             March 14, 2008
- --------------------------------------
Linda G. Havard
Executive Vice President,
Finance and Operations,
and Chief Financial Officer
(Principal Financial and
Accounting Officer)

                                       83