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

                                    FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2005
                                       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 or other jurisdiction of                  (I.R.S. Employer
     incorporation or organization)                Identification Number)

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

                                 (312) 751-8000
              (Registrant's telephone number, including area code)

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

      Indicate by check mark whether the registrant is an accelerated  filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |X| No |_|

      At July 31, 2005, there were 4,864,102 shares of Class A common stock, par
value $0.01 per share, and 28,229,950  shares of Class B common stock, par value
$0.01 per share, outstanding.

<PAGE>

                            PLAYBOY ENTERPRISES, INC.
                                    FORM 10-Q
                                TABLE OF CONTENTS

                                     PART I
                              FINANCIAL INFORMATION

                                                                            Page
                                                                            ----
Item 1. Financial Statements

          Condensed Consolidated Statements of Operations and
          Comprehensive Income (Loss) for the Quarters Ended June 30,
          2005 and 2004 (Unaudited)                                           3

          Condensed Consolidated Statements of Operations and
          Comprehensive Loss for the Six Months Ended June 30,
          2005 and 2004 (Unaudited)                                           4

          Condensed Consolidated Balance Sheets at June 30,
          2005 (Unaudited) and December 31, 2004                              5

          Condensed Consolidated Statements of Cash Flows for the
          Six Months Ended June 30, 2005 and 2004 (Unaudited)                 6

          Notes to Condensed Consolidated Financial Statements (Unaudited)    7

Item 2. Management's Discussion and Analysis of Financial
        Condition and Results of Operations                                  13

Item 3. Quantitative and Qualitative Disclosures About Market Risk           20

Item 4. Controls and Procedures                                              20

                                     PART II
                                OTHER INFORMATION

Item 1. Legal Proceedings                                                    20

Item 4. Submission of Matters to a Vote of Security Holders                  22

Item 6. Exhibits                                                             22


                                       2
<PAGE>

                                     PART I
                              FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                   PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                         AND COMPREHENSIVE INCOME (LOSS)
                   for the Quarters Ended June 30 (Unaudited)
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                               2005            2004
-----------------------------------------------------------------------------------
<S>                                                       <C>             <C>
Net revenues                                              $  82,871       $  78,717
-----------------------------------------------------------------------------------
Costs and expenses
   Cost of sales                                            (62,055)        (61,444)
   Selling and administrative expenses                      (13,521)        (14,112)
-----------------------------------------------------------------------------------
      Total costs and expenses                              (75,576)        (75,556)
-----------------------------------------------------------------------------------
Gain on disposal                                                 14               2
-----------------------------------------------------------------------------------
Operating income                                              7,309           3,163
-----------------------------------------------------------------------------------
Nonoperating income (expense)
   Investment income                                            595             133
   Interest expense                                          (1,412)         (3,651)
   Amortization of deferred financing fees                     (133)           (357)
   Minority interest                                           (370)           (351)
   Debt extinguishment expenses                                  --          (5,908)
   Other, net                                                  (324)           (238)
-----------------------------------------------------------------------------------
      Total nonoperating expense                             (1,644)        (10,372)
-----------------------------------------------------------------------------------
Income (loss) before income taxes                             5,665          (7,209)
Income tax expense                                           (1,025)         (1,082)
-----------------------------------------------------------------------------------
Net income (loss)                                             4,640          (8,291)
-----------------------------------------------------------------------------------

Other comprehensive (loss) income
   Unrealized loss on marketable securities                     (46)            (25)
   Unrealized gain on derivatives                                46              65
   Foreign currency translation adjustments                     (84)            112
-----------------------------------------------------------------------------------
      Total other comprehensive (loss) income                   (84)            152
-----------------------------------------------------------------------------------
Comprehensive income (loss)                               $   4,556       $  (8,139)
===================================================================================

Net income (loss)                                         $   4,640       $  (8,291)
Dividend requirements of preferred stock                         --             (93)
-----------------------------------------------------------------------------------
Net income (loss) applicable to common shareholders       $   4,640       $  (8,384)
===================================================================================

Weighted average number of common shares outstanding
    Basic                                                    33,080          32,098
===================================================================================
    Diluted                                                  33,265          32,098
===================================================================================

Basic and diluted earnings (loss) per common share        $    0.14       $   (0.26)
===================================================================================
</TABLE>

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


                                       3
<PAGE>

                   PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                             AND COMPREHENSIVE LOSS
                  for the Six Months Ended June 30 (Unaudited)
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                              2005             2004
-----------------------------------------------------------------------------------
<S>                                                     <C>              <C>
Net revenues                                            $  166,322       $  159,587
-----------------------------------------------------------------------------------
Costs and expenses
   Cost of sales                                          (121,331)        (120,428)
   Selling and administrative expenses                     (26,788)         (28,546)
-----------------------------------------------------------------------------------
      Total costs and expenses                            (148,119)        (148,974)
-----------------------------------------------------------------------------------
Gain on disposal                                                14                2
-----------------------------------------------------------------------------------
Operating income                                            18,217           10,615
-----------------------------------------------------------------------------------
Nonoperating income (expense)
   Investment income                                           782              223
   Interest expense                                         (4,060)          (7,809)
   Amortization of deferred financing fees                    (366)            (732)
   Minority interest                                          (740)            (702)
   Debt extinguishment expenses                            (19,280)          (5,908)
   Other, net                                                 (800)            (697)
-----------------------------------------------------------------------------------
      Total nonoperating expense                           (24,464)         (15,625)
-----------------------------------------------------------------------------------
Loss before income taxes                                    (6,247)          (5,010)
Income tax expense                                          (2,232)          (1,393)
-----------------------------------------------------------------------------------
Net loss                                                    (8,479)          (6,403)
-----------------------------------------------------------------------------------

Other comprehensive income (loss)
   Unrealized (loss) gain on marketable securities             (71)             107
   Unrealized gain on derivatives                              257               37
   Foreign currency translation adjustments                    192             (308)
-----------------------------------------------------------------------------------
      Total other comprehensive income (loss)                  378             (164)
-----------------------------------------------------------------------------------
Comprehensive loss                                      $   (8,101)      $   (6,567)
===================================================================================

Net loss                                                $   (8,479)      $   (6,403)
Dividend requirements of preferred stock                        --             (428)
-----------------------------------------------------------------------------------
Net loss applicable to common shareholders              $   (8,479)      $   (6,831)
===================================================================================

Basic and diluted weighted average number
     of common shares outstanding                           33,216           29,788
===================================================================================

Basic and diluted loss per common share                 $    (0.26)      $    (0.23)
===================================================================================
</TABLE>

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


                                       4
<PAGE>

                   PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                        (In thousands, except share data)

<TABLE>
<CAPTION>
                                                                       (Unaudited)
                                                                          June 30,          Dec. 31,
                                                                              2005              2004
----------------------------------------------------------------------------------------------------
<S>                                                                    <C>               <C>
Assets
Cash and cash equivalents                                              $    31,461       $    26,668
Marketable securities and short-term investments                            39,388            24,052
Receivables, net of allowance for doubtful accounts of
   $3,595 and $3,897, respectively                                          39,064            45,084
Receivables from related parties                                             1,857             1,281
Inventories, net                                                            13,118            12,437
Deferred subscription acquisition costs                                     11,527            13,104
Other current assets                                                         9,773             8,596
----------------------------------------------------------------------------------------------------
   Total current assets                                                    146,188           131,222
----------------------------------------------------------------------------------------------------
Property and equipment, net                                                 12,010            11,491
Long-term receivables                                                        2,495             2,755
Programming costs, net                                                      53,390            55,997
Goodwill                                                                   111,893           111,893
Trademarks                                                                  57,706            57,296
Distribution agreements, net of accumulated amortization
   of $2,398 and $1,935, respectively                                       30,743            31,206
Other noncurrent assets                                                     18,600            18,721
----------------------------------------------------------------------------------------------------
Total assets                                                           $   433,025       $   420,581
====================================================================================================

Liabilities
Acquisition liabilities                                                $    11,156       $    10,184
Accounts payable                                                            21,900            21,796
Accrued salaries, wages and employee benefits                                8,159             8,286
Deferred revenues                                                           49,048            51,421
Accrued litigation settlement                                                1,000             1,000
Other liabilities and accrued expenses                                      15,056            18,040
----------------------------------------------------------------------------------------------------
   Total current liabilities                                               106,319           110,727
----------------------------------------------------------------------------------------------------
Financing obligations                                                      115,000            80,000
Acquisition liabilities                                                     13,084            19,085
Net deferred tax liabilities                                                16,253            15,023
Accrued litigation settlement                                                   --             1,000
Other noncurrent liabilities                                                12,873            13,779
----------------------------------------------------------------------------------------------------
   Total liabilities                                                       263,529           239,614
----------------------------------------------------------------------------------------------------
Minority interest                                                           13,257            12,517

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; 28,609,057
     and 28,521,493 issued, respectively                                       286               285
Capital in excess of par value                                             223,174           222,285
Accumulated deficit                                                        (61,428)          (52,949)
Treasury stock, at cost, 381,971 and 0 shares, respectively                 (5,000)               --
Accumulated other comprehensive loss                                          (842)           (1,220)
----------------------------------------------------------------------------------------------------
   Total shareholders' equity                                              156,239           168,450
----------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity                             $   433,025       $   420,581
====================================================================================================
</TABLE>

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


                                       5
<PAGE>

                   PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                  for the Six Months Ended June 30 (Unaudited)
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                       2005             2004
--------------------------------------------------------------------------------------------
<S>                                                              <C>              <C>
Cash flows from operating activities
Net loss                                                         $   (8,479)      $   (6,403)
Adjustments to reconcile net loss to net cash provided by
  (used for) operating activities:
   Depreciation of property and equipment                             1,542            1,624
   Amortization of intangible assets                                    868            1,264
   Amortization of investments in entertainment programming          18,968           21,504
   Amortization of deferred financing fees                              366              732
   Debt extinguishment expenses                                      19,280            5,908
   Deferred income taxes                                                498               40
   Net change in operating assets and liabilities                      (207)            (412)
   Investments in entertainment programming                         (15,984)         (23,121)
   Litigation settlement                                             (1,875)          (6,500)
   Other, net                                                           437              923
--------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities                 15,414           (4,441)
--------------------------------------------------------------------------------------------
Cash flows from investing activities
Purchases of investments                                            (34,107)              --
Proceeds from sale of  investments                                   18,700               --
Additions to property and equipment                                  (2,164)          (1,450)
Proceeds from disposals                                                  --              150
Other, net                                                               --              201
--------------------------------------------------------------------------------------------
Net cash used for investing activities                              (17,571)          (1,099)
--------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from financing obligations                                 115,000               --
Repayment of financing obligations                                  (80,000)         (35,000)
Proceeds from public equity offering                                     --           51,858
Payment of debt extinguishment expenses                             (15,197)          (3,850)
Payment of acquisition liabilities                                   (4,558)          (7,801)
Purchase of treasury stock                                           (5,000)              --
Payment of deferred financing fees                                   (4,040)              --
Payment of preferred stock dividends                                     --             (651)
Proceeds from stock plans                                               784              385
Other                                                                   (39)              --
--------------------------------------------------------------------------------------------
Net cash provided by financing activities                             6,950            4,941
--------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                  4,793             (599)
Cash and cash equivalents at beginning of period                     26,668           31,332
--------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                       $   31,461       $   30,733
============================================================================================
</TABLE>

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


                                       6
<PAGE>

                   PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

(A)   BASIS OF PREPARATION

      The  financial  information  included  in these  financial  statements  is
unaudited but, in the opinion of management,  reflects all normal  recurring and
other  adjustments  necessary  for a fair  presentation  of the  results for the
interim  periods.  The  interim  results  of  operations  and cash flows are not
necessarily  indicative  of those  results  and cash flows for the entire  year.
These  financial  statements  should be read in  conjunction  with the financial
statements and notes to the financial  statements contained in our Annual Report
on Form 10-K/A for the fiscal year ended  December  31,  2004.  Certain  amounts
reported  for prior  periods  have been  reclassified  to conform to the current
year's presentation.

(B)   RESTRUCTURING EXPENSES

      During the six-month  period ended June 30, 2005, we made cash payments of
$0.6 million  related to our various  restructuring  plans.  Approximately  $9.6
million of the total restructuring  charges was paid by June 30, 2005, with most
of the remainder  related to the  consolidation  of our facilities to be paid in
the current year and some payments continuing through 2007.

      In 2004, we recorded a  restructuring  charge of $0.5 million  relating to
the  realignment  of our  entertainment  and  online  businesses.  In  addition,
primarily  due to excess office space,  we recorded  additional  charges of $0.4
million related to the 2002 restructuring plan and reversed $0.2 million related
to the 2001 restructuring plan as a result of changes in plan assumptions.

      Our 2002  restructuring  initiative to reduce ongoing  operating  expenses
resulted  in a $5.7  million  charge,  of  which  $2.9  million  related  to the
termination of employees and $2.8 million related to consolidation of our office
space in Los Angeles and Chicago. Our 2001 restructuring plan resulted in a $4.6
million  charge,  of which $2.6 million  related to the termination of employees
and $2.0 million related to excess space in our Chicago and New York offices.

The  following  table  displays the  activity and balances of the  restructuring
reserve for the year ended  December  31, 2004 and the six months ended June 30,
2005 (in thousands):

                                                     Consolidation
                                     Workforce   of Facilities and
                                     Reduction          Operations        Total
-------------------------------------------------------------------------------
Balance at December 31, 2003         $     630           $   2,563    $   3,193
Additional reserve recorded                466                  --          466
Adjustment to previous estimate              -                 278          278
Cash payments                             (917)             (1,014)      (1,931)
-------------------------------------------------------------------------------
Balance at December 31, 2004               179               1,827        2,006
Cash payments                             (179)               (380)        (559)
-------------------------------------------------------------------------------
Balance at June 30, 2005             $      --           $   1,447    $   1,447
===============================================================================


                                       7
<PAGE>

(C)   EARNINGS (LOSS) PER COMMON SHARE

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

<TABLE>
<CAPTION>
                                                                      (Unaudited)
                                                                    Quarters Ended
                                                                       June 30,
                                                               -----------------------
                                                                    2005          2004
--------------------------------------------------------------------------------------
<S>                                                            <C>          <C>
Numerator:
For basic EPS - net income (loss)                              $   4,640    $   (8,384)
   Preferred stock dividends                                          --            93
--------------------------------------------------------------------------------------
For diluted EPS - net income (loss)                            $   4,640    $   (8,291)
=====================================================================================

Denominator:
For basic EPS - weighted-average shares                           33,080        32,098
  Effect of dilutive potential common shares:
    Employee stock options and other                                 185            --
--------------------------------------------------------------------------------------
      Dilutive potential common shares                               185            --
--------------------------------------------------------------------------------------
For diluted EPS - weighted-average shares                         33,265        32,098
======================================================================================

Basic and diluted earnings (loss) per common share             $    0.14    $    (0.26)
======================================================================================
</TABLE>

      The  reconciliations  of basic and diluted EPS for the  six-month  periods
ending June 30, 2005 and 2004 were  excluded as both  periods were in a net loss
position, and therefore, potential common shares would have been antidilutive.

The following table represents the approximate number of shares related to
options to purchase our Class B common stock, or Class B stock, that were
outstanding which were not included in the computation of diluted EPS as the
inclusion of these shares would have been antidilutive (in thousands):

<TABLE>
<CAPTION>
                                           Quarters Ended            Six Months Ended
                                              June 30,                   June 30,
                                         ------------------        -------------------
                                          2005         2004         2005          2004
--------------------------------------------------------------------------------------
<S>                                      <C>          <C>          <C>           <C>
Stock options                            1,982        3,324        2,864         2,323
--------------------------------------------------------------------------------------
Total                                    1,982        3,324        2,864         2,323
======================================================================================
</TABLE>

      In addition,  in accordance  with  Emerging  Issues Task Force Issue 04-8,
"The Effect of Contingently Convertible Debt on Diluted Earnings per Share", the
shares used in the calculation of diluted EPS also exclude the potential  shares
of Class B stock  contingently  issuable  under  our  3.00%  convertible  senior
secured notes because they are antidilutive. See Footnote (I), Debt Refinancing,
for additional information.

      On April 26, 2004, we completed a public  offering of 6,021,340  shares of
our Class B stock at $12.69 per share, before underwriting  discounts.  Included
in this offering were  4,385,392  shares sold by Playboy  Enterprises,  Inc., or
Playboy,   1,485,948   shares   sold  by  Hugh  M.   Hefner,   our  Founder  and
Editor-in-Chief,  and 150,000 shares sold by Christie  Hefner,  our Chairman and
Chief Executive Officer. Playboy's shares included 3,600,000 initial shares, and
an  additional  785,392  shares  due  to the  underwriters'  exercise  of  their
over-allotment option. The shares sold by Mr. Hefner consisted of all the shares
of Class B stock he received upon  conversion,  at the time of the offering,  of
all of the outstanding  shares of Playboy  Preferred  Stock.  Mr. Hefner and Ms.
Hefner paid for expenses related to this transaction proportionate to the number
of shares each sold to the total number of shares sold in the offering.


                                       8
<PAGE>

(D)   INVENTORIES, NET

Inventories, net of reserves, which are stated at the lower of cost (specific
cost and average cost) or fair value, consisted of the following (in thousands):

                                                       (Unaudited)
                                                          June 30,      Dec. 31,
                                                              2005          2004
--------------------------------------------------------------------------------
Paper                                                     $  3,849     $   2,573
Editorial and other prepublication costs                     6,835         7,814
Merchandise finished goods                                   2,434         2,050
--------------------------------------------------------------------------------
Total inventories, net                                    $ 13,118     $  12,437
================================================================================

(E)   INCOME TAXES

      Our income tax  provision  consists  of foreign  income tax related to our
international  networks and withholding tax on licensing  income for which we do
not receive a current U.S.  income tax benefit.  The tax provision also includes
deferred  federal and state income tax related to the  amortization  of goodwill
and other indefinite-lived intangibles,  which cannot be offset against deferred
tax  assets  due  to  the  indefinite   reversal  period  of  the  deferred  tax
liabilities.

(F)   CONTINGENCIES

      In the fourth  quarter of 2003,  we recorded  $8.5 million  related to the
settlement  of the Logix  litigation,  which related to events prior to our 1999
acquisition of Spice Entertainment Companies,  Inc., or Spice. We made a payment
of $6.5  million in February  2004 and a payment of $1.0 million in January 2005
and will make the remaining payment of $1.0 million in 2006.

      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 to us under the  license  agreement.  We have posted a bond in the amount of
$8.5 million,  which represents 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 sustained and have
not  recorded  a  liability  for  this  case in  accordance  with  Statement  5,
Accounting for Contingencies. We are currently pursuing an appeal.

(G)   STOCK-BASED COMPENSATION

      We account for stock options as prescribed by Accounting  Principles Board
Opinion, or APB, No. 25, Accounting for Stock Issued to Employees,  and disclose
pro forma information as provided by Statement 123, as amended by Statement 148,
Accounting  for Stock  Based  Compensation.  In  December  2004,  the  Financial
Accounting  Standards  Board (the "FASB") issued  Statement 123 (revised  2004),
Share-Based  Payment  ("Statement  123(R)"),  which  supersedes  APB No. 25, and
amends  Statement  No.  95,  Statement  of Cash  Flows.  The  implementation  of
Statement  123(R) has since been  delayed  and will be  effective  for the first
fiscal  year  beginning  after  December  15,  2005.  We are  required  to adopt
Statement  123(R) on January 1, 2006 and will utilize the  modified  prospective
method.  We are currently  conducting an analysis of the impact on our financial
statements.


                                       9
<PAGE>

      Pro forma net  income  (loss) and net  income  (loss)  per  common  share,
presented below (in thousands,  except per share amounts), were determined as if
we had  accounted for our stock options under the fair value method of Statement
123. The fair value of these options was estimated at the date of grant using an
option  pricing  model.  Such  models  require  the input of  highly  subjective
assumptions, including the expected volatility of the stock price. For pro forma
disclosures,  the options' estimated fair value was amortized over their vesting
period. No stock-based  employee  compensation expense is recognized because all
options granted under those plans had an exercise price equal to or in excess of
the  market  value of the  underlying  common  stock at the  grant  date.  If we
accounted  for our employee  stock  options under  Statement  123,  compensation
expense  related to stock  options would have been $0.7 million and $1.4 million
for  each of the  quarters  and  six  months  ended  June  30,  2005  and  2004,
respectively.

<TABLE>
<CAPTION>
                                                     (Unaudited)                     (Unaudited)
                                                   Quarters Ended                 Six Months Ended
                                                      June 30,                        June 30,
                                             -------------------------       -------------------------
                                                  2005            2004            2005            2004
------------------------------------------------------------------------------------------------------
<S>                                          <C>             <C>             <C>             <C>
Net income (loss)
   As reported                               $   4,640       $  (8,291)      $  (8,479)      $  (6,403)
   Pro forma                                     3,922          (8,944)         (9,901)         (7,805)

Basic EPS
   As reported                               $    0.14       $   (0.26)      $   (0.26)      $   (0.23)
   Pro forma                                      0.12           (0.28)          (0.30)          (0.28)

Diluted EPS
   As reported                               $    0.14       $   (0.26)      $   (0.26)      $   (0.23)
   Pro forma                                      0.12           (0.28)          (0.30)          (0.28)
------------------------------------------------------------------------------------------------------
</TABLE>

      Our  restricted  stock unit  expense was $0.4 million and $0.1 million for
the  quarters  ended June 30,  2005 and June 30,  2004,  respectively,  and $0.7
million and $0.3 million of  compensation  expense for the six months ended June
30,  2005 and  2004,  respectively,  as it was  probable  that  the  performance
criteria would be met.

(H)   SEGMENT INFORMATION

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

<TABLE>
<CAPTION>
                                                     (Unaudited)                     (Unaudited)
                                                   Quarters Ended                 Six Months Ended
                                                      June 30,                        June 30,
                                             -------------------------       -------------------------
                                                  2005            2004            2005            2004
------------------------------------------------------------------------------------------------------
<S>                                          <C>             <C>             <C>             <C>
Net revenues
Entertainment                                $  48,882       $  43,420       $  99,358       $  89,864
Publishing                                      25,530          29,093          52,534          58,770
Licensing                                        8,459           6,204          14,430          10,953
------------------------------------------------------------------------------------------------------
Total                                        $  82,871       $  78,717       $ 166,322       $ 159,587
======================================================================================================
Income (loss) before income taxes
Entertainment                                $   9,914       $   3,101       $  21,810       $  10,654
Publishing                                      (2,356)          2,065          (2,740)          3,964
Licensing                                        3,881           2,379           7,483           4,950
Corporate Administration and Promotion          (4,144)         (4,384)         (8,350)         (8,955)
Gain on disposal                                    14               2              14               2
Investment income                                  595             133             782             223
Interest expense                                (1,412)         (3,651)         (4,060)         (7,809)
Amortization of deferred financing fees           (133)           (357)           (366)           (732)
Minority interest                                 (370)           (351)           (740)           (702)
Debt extinguishment expenses                        --          (5,908)        (19,280)         (5,908)
Other, net                                        (324)           (238)           (800)           (697)
------------------------------------------------------------------------------------------------------
Total                                        $   5,665       $  (7,209)      $  (6,247)      $  (5,010)
======================================================================================================
</TABLE>

Prior  period  segment  information  has  been  restated  as  a  result  of  the
realignment  of  our  Entertainment  and  Online  businesses,  into  a  combined
Entertainment segment, as announced during the fourth quarter of 2004.


                                       10
<PAGE>

                                                       (Unaudited)
                                                          June 30,      Dec. 31,
                                                              2005          2004
--------------------------------------------------------------------------------
Identifiable assets
Entertainment                                            $ 262,119    $  266,736
Publishing                                                  38,549        45,724
Licensing                                                    8,042         5,344
Corporate Administration and Promotion (1)                 124,315       102,777
--------------------------------------------------------------------------------
Total (1)                                                $ 433,025    $  420,581
================================================================================

(1) The increase in  identifiable  assets since  December 31, 2004 was primarily
due to our debt refinancing in March 2005. See Footnote (I), Debt Refinancing.

(I)   DEBT REFINANCING

      On March 15,  2005,  we  issued  and sold in a  private  placement  $100.0
million aggregate  principal amount of our 3.00% convertible senior subordinated
notes due 2025, or the convertible  notes. On March 28, 2005, we issued and sold
in a private placement an additional $15.0 million aggregate principal amount of
the  convertible  notes  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 estimated  offering expenses payable by us, were used,
together  with  available  cash,  (i) to  complete  a tender  offer and  consent
solicitation  for, and to purchase  and retire,  all $80.0  million  outstanding
principal  amount of the  11.00%  senior  secured  notes of 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,  (ii) 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 (iii) 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  semi-annually in arrears on March 15 and
September 15 of each year,  beginning 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%.

      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:  (1) 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; (2) 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;  (3) upon the  occurrence  of  specified  corporate
transactions,  as set forth in the indenture governing the convertible notes; or
(4) 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  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  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.


                                       11
<PAGE>

      The convertible notes are unsecured senior subordinated obligations of the
issuer,  Playboy,  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.

      On July 5, 2005, the Securities and Exchange Commission declared effective
our  registration  statement  on  Form  S-3  relating  to  the  resales  of  the
convertible notes and the underlying shares of our class B common stock issuable
upon conversion of the convertible notes.

(J)   EQUITY OFFERING

      On April 26, 2004, we completed a public  offering of 6,021,340  shares of
our Class B stock at $12.69 per share, before underwriting  discounts.  Included
in this offering were 4,385,392 shares sold by Playboy, 1,485,948 shares sold by
Mr. Hefner and 150,000  shares sold by Ms.  Hefner.  Playboy's  shares  included
3,600,000  initial  shares,  plus  an  additional  785,392  shares  due  to  the
underwriters'  exercise  of the  over-allotment  option.  The shares sold by Mr.
Hefner  consisted  of all of the  shares  of  Class B  stock  he  received  upon
conversion of all of the  outstanding  shares of Playboy's  Series A convertible
preferred stock,  which we refer to as the Playboy  Preferred Stock, at the time
of the offering.

      Net  proceeds to us from the sale of our shares were  approximately  $51.9
million.  On June 11,  2004,  we used $39.8  million of the net proceeds of this
sale to redeem $35.0 million in aggregate  principal  amount of our  outstanding
11.00%  senior  secured  notes due 2010,  which  included  a $3.9  million  bond
redemption  premium  and accrued and unpaid  interest of $0.9  million.  We used
approximately  $0.7 million of net proceeds to pay accrued and unpaid  dividends
on the Playboy Preferred Stock up to the time of conversion.


                                       12
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                                          Quarters Ended                Six Months Ended
                                                                             June 30,                        June 30,
                                                                    -------------------------       -------------------------
                                                                         2005         2004(1)            2005         2004(1)
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>             <C>             <C>             <C>
Net revenues
Entertainment
   Domestic TV networks                                             $    24.9       $    22.5       $    50.1       $    46.9
   International                                                         11.9            10.4            25.3            20.9
   Online subscriptions                                                   5.7             4.9            11.5            10.1
   E-commerce                                                             5.1             3.8            10.3             8.6
   Other                                                                  1.3             1.8             2.2             3.4
-----------------------------------------------------------------------------------------------------------------------------
   Total Entertainment                                                   48.9            43.4            99.4            89.9
-----------------------------------------------------------------------------------------------------------------------------
Publishing
   Playboy magazine                                                      22.1            24.8            45.0            50.2
   Other domestic publishing                                              1.9             2.8             4.2             5.5
   International publishing                                               1.5             1.5             3.3             3.1
-----------------------------------------------------------------------------------------------------------------------------
   Total Publishing                                                      25.5            29.1            52.5            58.8
-----------------------------------------------------------------------------------------------------------------------------
Licensing
   International licensing                                                4.7             2.6             9.1             5.8
   Domestic licensing                                                     0.8             0.7             1.6             1.5
   Entertainment licensing                                                0.4             0.5             1.0             1.0
   Marketing events                                                       2.4             2.3             2.6             2.5
   Other                                                                  0.1             0.1             0.1             0.1
-----------------------------------------------------------------------------------------------------------------------------
   Total Licensing                                                        8.4             6.2            14.4            10.9
-----------------------------------------------------------------------------------------------------------------------------
Total net revenues                                                  $    82.8       $    78.7       $   166.3       $   159.6
=============================================================================================================================
Net income (loss)
Entertainment
   Before programming amortization and online content expenses      $    20.1       $    14.9       $    41.8       $    33.4
   Programming amortization and online content expenses                 (10.2)          (11.9)          (20.0)          (22.8)
-----------------------------------------------------------------------------------------------------------------------------
   Total Entertainment                                                    9.9             3.0            21.8            10.6
-----------------------------------------------------------------------------------------------------------------------------
Publishing                                                               (2.3)            2.1            (2.7)            4.0
-----------------------------------------------------------------------------------------------------------------------------
Licensing                                                                 3.9             2.4             7.5             5.0
-----------------------------------------------------------------------------------------------------------------------------
Corporate Administration and Promotion                                   (4.2)           (4.4)           (8.4)           (9.0)
-----------------------------------------------------------------------------------------------------------------------------
Operating income                                                          7.3             3.1            18.2            10.6
-----------------------------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
   Investment income                                                      0.6             0.1             0.8             0.2
   Interest expense                                                      (1.5)           (3.6)           (4.1)           (7.8)
   Amortization of deferred financing fees                               (0.2)           (0.3)           (0.4)           (0.7)
   Minority interest                                                     (0.3)           (0.3)           (0.7)           (0.7)
   Debt extinguishment expenses                                            --            (5.9)          (19.3)           (5.9)
   Other, net                                                            (0.2)           (0.3)           (0.7)           (0.7)
-----------------------------------------------------------------------------------------------------------------------------
Total nonoperating expense                                               (1.6)          (10.3)          (24.4)          (15.6)
-----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes                                         5.7            (7.2)           (6.2)           (5.0)
Income tax expense                                                       (1.1)           (1.1)           (2.3)           (1.4)
-----------------------------------------------------------------------------------------------------------------------------
Net income (loss)                                                   $     4.6       $    (8.3)      $    (8.5)      $    (6.4)
=============================================================================================================================
Basic and Diluted EPS                                               $    0.14       $   (0.26)      $   (0.26)      $   (0.23)
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  Prior  period  segment  information  has been  restated  as a result of the
realignment  of  our  Entertainment  and  Online  businesses,  into  a  combined
Entertainment segment, as announced during the fourth quarter of 2004.


                                       13
<PAGE>

      Our revenues increased $4.1 million,  or 5%, and $6.7 million,  or 4%, for
the  quarter  and  six-month  period,  respectively,  and our  operating  income
increased $4.2 million,  or 131%, and $7.6 million,  or 72%, for the quarter and
six-month  period,  respectively,  primarily  due to  strong  results  from  our
Entertainment and Licensing  Groups,  partially offset by expected lower results
from our Publishing Group.

      Net income of $4.6  million for the quarter  represented  a $12.9  million
increase over the prior year quarter due to the  above-mentioned  improvement in
operating  results  combined with a decrease in interest  expense related to our
debt   refinancing   completed  during  the  first  quarter  of  2005  and  debt
extinguishment  expenses  recorded in the prior year  quarter.  Net loss for the
current  six-month  period  of  $8.5  million  includes  $19.3  million  of debt
extinguishment expenses compared to $5.9 million in the prior year period.

      Several  of  our  businesses   can  experience   variations  in  quarterly
performance.  As a result,  our  performance  in any quarter is not  necessarily
reflective  of full-year  or  longer-term  trends.  Playboy  magazine  newsstand
revenues vary from issue to issue,  with revenues  generally  higher for holiday
issues and any issues  including  editorial or pictorial  features that generate
additional  public  interest.  Advertising  revenues  also vary from  quarter to
quarter  depending  on  economic  conditions,  holiday  issues  and  changes  in
advertising buying patterns.  Online subscription revenues and operating results
are  impacted  by  decreased  Internet  traffic  during the summer  months,  and
e-commerce  revenues and operating results are typically strongest in the fourth
quarter due to the holiday buying season.

ENTERTAINMENT GROUP

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

      Revenues from our domestic TV networks business increased $2.4 million, or
11%,  and  $3.2  million,   or  7%,  for  the  quarter  and  six-month   period,
respectively.  Direct-to-home,  or DTH, revenues increased $1.1 million and $1.9
million for the quarter and six-month  period,  respectively,  due to subscriber
growth and an increase in average pay-per-view,  or PPV, buys.  Video-on-demand,
or VOD, revenues increased $0.9 million,  or 113%, and $1.6 million, or 95%, for
the quarter and six-month period, respectively, due to the continued roll out of
VOD service in additional  cable systems as well as a growing number of consumer
buys in existing cable systems.  The discontinuation of a service agreement with
a distributor of our high-definition  service, which resulted in the accelerated
recognition of the remaining $1.4 million of deferred  revenue  associated  with
the agreement,  also favorably impacted the quarter and six-month period.  These
revenue  increases  were  partially  offset by a $0.6  million and $1.8  million
decrease in cable revenues for the quarter and six-month  period,  respectively,
primarily  due to a decrease in cable PPV buys for both periods as certain cable
companies  migrate  consumers from linear channels to VOD.  Profit  contribution
from domestic TV networks increased $3.1 million,  or 22%, and $4.6 million,  or
15%, for the quarter and six-month  period,  respectively,  primarily due to the
revenue activity described above combined with a decrease in cable marketing and
overhead expenses.

      International  revenues increased $1.5 million,  or 14%, and $4.4 million,
or 21%, for the quarter and six-month  period,  respectively.  DTH revenues from
our networks in the U.K.,  several of which  launched in the prior year quarter,
contributed  favorably  to revenues  in both  periods.  Additionally,  increased
revenues from new networks  launched in Australia and Germany  during the second
half of 2004 and increased  royalties from wireless  agreements,  principally in
Europe,  contributed favorably to revenues in both periods.  Profit contribution
from our  international  businesses  increased  $1.0  million,  or 30%, and $2.6
million, or 34%, for the quarter and six-month period, respectively,  due to the
higher international  revenues mentioned above, partially offset by higher costs
related to the new channels in the U.K.

      Online  subscription  revenues  increased  $0.8 million,  or 15%, and $1.4
million,  or 14%, for the quarter and  six-month  period,  respectively,  due to
growth in the number of subscribers  for our online clubs.  Profit  contribution
for the online  subscription  business  increased $0.4 million,  or 13%, for the
quarter and $1.1 million,  or 16%, for the six-month period,  due to the revenue
increase described above, partially offset by higher technology costs.


                                       14
<PAGE>

      E-commerce  revenues increased $1.3 million,  or 35%, and $1.7 million, or
20%, for the quarter and six-month period,  respectively. A $1.2 million payment
due to the  termination  of a  marketing  alliance is  reflected  in the current
quarter's  revenues.  Excluding this termination fee,  e-commerce  revenues were
flat for the quarter and increased $0.5 million for the six-month  period as the
prior year periods  experienced higher traffic to the online catalog in response
to our 50th  Anniversary.  Profit  contribution  from e-commerce  increased $0.2
million for the quarter and decreased  $0.3 million for the six-month  period as
the  favorable  termination  fee was offset by higher  anticipated  paper  costs
combined with increased circulation costs and marketing expenses associated with
the production of a test catalog.

      Profit  contribution  from other  businesses  was flat for the quarter and
decreased  $0.3 million for the six-month  period  primarily due to the expected
decline in worldwide DVD sales.

      The group's  administrative  expenses  decreased  for both the quarter and
six-month period due in part to lower legal costs and a contractually  obligated
severance charge recorded in the prior year quarter.

      Segment income for the group  increased  $6.9 million,  or 220%, and $11.2
million, or 105%, for the quarter and six-month period, respectively,  primarily
due to  the  previously  mentioned  higher  revenues  and  lower  administrative
expenses.  Segment  income  was also  favorably  impacted  by lower  programming
amortization  and online  content  expenses  of $1.7  million,  or 14%,  for the
quarter and $2.8 million,  or 12%, for the six-month period. This is due to both
the mix of  programming  and the number of program  premieres.  We  continue  to
expect that our cash programming investments will be approximately $38.0 million
for the year, down  nearly  10% from last year, and cash  investments  in online
content will be approximately $2.0 million.  We expect programming  amortization
to decline to about $38.0 million for the year, down from $41.7 million in 2004,
and online content amortization to be approximately $2.0 million, down from $2.3
million in 2004.

PUBLISHING GROUP

      Playboy  magazine  revenues  decreased  $2.7  million,  or 11%,  and  $5.2
million, or 10%, for the quarter and six-month period,  respectively.  Newsstand
revenues  declined  $0.6  million  for the  quarter  and  $1.5  million  for the
six-month period primarily due to fewer copies sold.  Additionally,  the current
year six-month period included an unfavorable adjustment of $0.3 million related
to prior year issues  compared to a $0.3  million  favorable  adjustment  in the
prior year period. Subscription revenues decreased $0.2 million and $1.1 million
for the quarter  and  six-month  period,  respectively,  primarily  due to lower
average  net  revenue per copy in the current  year  periods,  higher  favorable
adjustments  recorded in the prior year periods to  recognize  revenues for paid
subscriptions  that will not be served and lower  list  rental  revenues  in the
current  year  periods,  partially  offset  by an  increase  in  the  number  of
subscription copies in the current year periods.  Advertising revenues decreased
$1.9   million  and  $2.6  million  for  the  quarter  and   six-month   period,
respectively,  due to  fewer  advertising  pages,  as a  result  of a  shift  in
advertising  media,  and lower  average net revenue per page,  due to the mix in
advertisements. Advertising sales for the 2005 third quarter magazine issues are
closed, and we expect to report approximately 20% lower advertising revenues and
29% fewer advertising pages compared to the 2004 third quarter.

      Revenues from our other  domestic  publishing  businesses  decreased  $0.9
million, or 32%, and $1.3 million, or 23%, for the quarter and six-month period,
respectively,  primarily  due to  fewer  special  editions  copies  sold  on the
newsstand  in  the  current  year  periods  combined  with  higher   unfavorable
adjustments to prior period issues in the current periods.  An expected decrease
in royalties  from books  published in prior  periods  also  contributed  to the
revenue decrease.

      International  publishing revenues were flat for the quarter and increased
$0.2 million,  or 8%, for the six-month period primarily due to higher royalties
from the German edition.

      The group's segment income decreased $4.4 million and $6.7 million for the
quarter and six-month  period,  respectively,  as a result of the lower revenues
discussed above combined with higher  subscription  acquisition  expense of $0.5
million  for the quarter and $1.0  million for the  six-month  period and higher
paper costs of $0.4 million for the quarter and $0.8  million for the  six-month
period,  partially offset by a $0.9 million  decrease in editorial  expenses for
the six-month period.


                                       15
<PAGE>

LICENSING GROUP

      Licensing Group revenues increased $2.2 million, or 36%, and $3.5 million,
or 32%, for the quarter and the six-month period, respectively, primarily due to
higher royalties from existing  licensees and new licensee  agreements in Europe
and Asia. The group's  segment income  increased $1.5 million,  or 63%, and $2.5
million, or 51%, for the quarter and six-month period, respectively,  due to the
revenue increase, partially offset by higher revenue-related expenses, including
agency fees.

CORPORATE ADMINISTRATION AND PROMOTION

      Corporate Administration and Promotion expenses decreased $0.2 million, or
5%, for the quarter and $0.6 million, or 7%, for the six-month period related to
lower variable  compensation  expense, the reclassification of a senior position
from Corporate to a division and lower marketing  expenses,  partially offset by
an increase in internal audit expenses.

NONOPERATING INCOME (EXPENSES)

      The  six-month  period  included  debt  extinguishment  expenses  of $19.3
million  related to our  redemption  of all $80.0  million of the 11.00%  senior
secured notes due 2010, or the senior secured notes,  issued by our  subsidiary,
PEI Holdings,  Inc., or Holdings. These expenses were comprised of $14.9 million
of bond redemption  premium  combined with $0.3 million of related  expenses and
$4.1 million for the non-cash write-off of the related deferred financing costs.
The senior secured notes were repurchased  using the proceeds of the issuance of
$115.0 million of 3.00% convertible  senior  subordinated notes due 2025, or the
convertible  notes. The prior quarter and six-month period included $5.9 million
of debt  extinguishment  expenses  related to our  redemption  of $35.0  million
aggregate  principal amount of the senior secured notes. A reduction of interest
expenses of $2.1 million and $3.7 million for the quarter and six-month  period,
respectively,  related to the lower  interest rate on the new 3.00%  convertible
notes, partially offset the redemption expenses.

INCOME TAX EXPENSE

      Our  effective  income tax rate differs  from U.S.  statutory  rates.  The
income tax provision consists of foreign income tax related to our international
networks and withholding  tax on licensing  income for which we do not receive a
current U.S.  income tax  benefit.  The tax  provision  also  includes  deferred
federal and state income tax related to the  amortization  of goodwill and other
indefinite-lived intangibles, which cannot be offset against deferred tax assets
due to the indefinite reversal period of the deferred tax liabilities.

LIQUIDITY AND CAPITAL RESOURCES

      At June 30,  2005,  we had  $31.5  million  in cash  and cash  equivalents
compared to $26.7 million in cash and cash  equivalents at December 31, 2004. At
June 30, 2005, we had $34.8 million of auction rate securities, or ARS, included
in short-term  investments  compared to $20.0 million at December 31, 2004.  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 and $80.0 million at June 30, 2005 and
December 31, 2004, respectively.

      At June 30, 2005, our liquidity  requirements  were being provided by cash
generated from our operating activities,  our existing cash and cash equivalents
and  short-term  investments.  At June 30, 2005, we had a $50.0  million  credit
facility, which can be used for revolving borrowings,  issuing letters of credit
or a combination  of both. At June 30, 2005,  there were no borrowings and $10.8
million in letters of credit  outstanding under this facility,  permitting $39.2
million of available  borrowings under this facility.  See "Credit Facility" for
additional information.


                                       16
<PAGE>

DEBT FINANCINGS

      On March 15,  2005,  we  issued  and sold in a  private  placement  $100.0
million aggregate  principal amount of our 3.00% convertible senior subordinated
notes due 2025. On March 28, 2005, we issued and sold in a private  placement an
additional $15.0 million aggregate principal amount of the convertible notes 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
estimated  offering  expenses payable by us, were used,  together with available
cash,  (i) to  complete a tender  offer and  consent  solicitation  for,  and to
purchase  and retire,  all $80.0  million  outstanding  principal  amount of the
11.00%  senior  secured  notes,  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,  (ii) to purchase 381,971 shares of our Class B common
stock,  or Class B  stock,  for an  aggregate  purchase  price  of $5.0  million
concurrently  with the sale of the  convertible  notes  and  (iii)  for  working
capital and general corporate  purposes.  Also, on March 15, 2005,  concurrently
with  the  convertible   note  offering,   Hugh  M.  Hefner,   our  Founder  and
Editor-In-Chief,  purchased 381,971 shares of our Class B stock for an aggregate
purchase price of $5.0 million.

      The  convertible  notes bear  interest at a rate of 3.00% per annum on the
principal amount of the notes, payable  semi-annually in arrears on March 15 and
September  15 of each year,  beginning  on  September  15,  2005.  In  addition,
beginning in March 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%. The notes are convertible under specified circumstances into cash and, if
applicable,  shares of our Class B stock based on an initial  conversion rate 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).  In
general,  upon  conversion  of a convertible  note,  the holder of the note will
receive cash in an amount equal to the principal  amount of the note and Class B
stock for the note's  conversion  value in excess of the principal  amount.  See
Footnote (I), Debt Refinancing, for additional information.

      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  notes,  plus any  accrued  and  unpaid
interest 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 the
issuer,  Playboy  Enterprises,  Inc., or Playboy,  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.

      On July 5, 2005, the Securities and Exchange Commission declared effective
our  registration  statement on Form S-3 relating to resales of the  convertible
notes  and the  underlying  shares  of our class B common  stock  issuable  upon
conversion of the convertible notes.

CREDIT FACILITY

      Effective April 1, 2005, Holdings and its lenders amended and restated the
credit agreement  governing our credit facility,  primarily to increase the size
of our credit facility from $30.0 million to $50.0 million.  The credit facility
provides for  revolving  borrowings  by Holdings of up to $50.0  million and the
issuance  of up to $30.0  million in letters of credit,  subject to a maximum of
$50.0 million in combined  borrowings  and letters of credit  outstanding at any
time.  Borrowings  under the credit  facility bear interest at a variable  rate,
equal to a specified  Eurodollar,  LIBOR or base rate plus a specified borrowing
margin  based on our  Transactions  Adjusted  EBITDA,  as  defined in the credit
agreement.  We pay fees on the outstanding amount of letters of credit under the
credit  facility based on the borrowing  margin that applies to borrowings  that
bear interest at a rate based on LIBOR. All amounts outstanding under the credit
facility will mature on April 1, 2008.  Holdings'  obligations as borrower under
the  credit  facility  are  guaranteed  by  Playboy  and each of our other  U.S.
subsidiaries,  except for Playboy.com and its  subsidiaries.  The obligations of
the borrower and each 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.


                                       17
<PAGE>

CALIFA ACQUISITION

      The  Califa  acquisition  agreement  gives us the  option of paying  $17.5
million of the remaining $23.8 million purchase price consideration  obligation,
as of June 30, 2005, in cash or in shares of Class B stock. We have notified the
sellers that the $7.0 million of base  consideration due in 2005 will be paid in
cash.  Under the terms of the agreement,  the base  consideration  is due in two
installments of $3.5 million, one of which was paid on May 2, 2005 and the other
of which will be paid on November 1, 2005.

CASH FLOWS FROM OPERATING ACTIVITIES

      Net cash  provided  by  operating  activities  was $15.4  million  for the
six-month  period,  which represents an increase of $19.9 million from the prior
year period.  This increase is primarily due to better overall operating results
combined with a decrease in  investments  in  entertainment  programming of $7.1
million  and a decrease  in legal  settlement  payments  of  approximately  $4.6
million compared to the prior period.

CASH FLOWS FROM INVESTING ACTIVITIES

      Net cash used for  investing  activities  increased  $16.5  million due to
investments made in auction rate securities during the six-month  period.  There
was no such investment activity in the prior year period.

CASH FLOWS FROM FINANCING ACTIVITIES

      Net  cash  provided  by  financing  activities  was $7.0  million  for the
six-month  period  primarily due to the proceeds from our sale of $115.0 million
aggregate  principal amount of convertible notes partially offset by the payment
of $94.9  million in  connection  with the purchase and  retirement of all $80.0
million  outstanding  principal  amount of Holdings' 11.00% senior secured notes
and the payment of $0.3 million in associated debt  extinguishment  expenses and
$4.0 million of related  financing  fees.  Proceeds  from the  convertible  note
offering were also used to purchase  381,971  shares of our Class B stock for an
aggregate  purchase price of $5.0 million.  See Footnote (I), Debt  Refinancing,
for additional information.


                                       18
<PAGE>

FORWARD-LOOKING STATEMENTS

      This Quarterly Report on Form 10-Q contains "forward-looking  statements,"
including  statements  in  "Management's  Discussion  and  Analysis of Financial
Condition  and  Results  of  Operations"  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. 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  regulation,  actions  or
      initiatives, including:

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

(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 or  convertible  preferred
      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  and  product
      licensing markets;

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

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

(13)  Risks  associated with losing access to  transponders  and competition for
      transponders and channel space;

(14)  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,  cancellation of fee arrangements or pressure
      on splits with operators of these systems;

(15)  Risks that we may not realize the expected increased sales and profits and
      other  benefits  from   acquisitions,   joint  ventures  and/or  licensing
      arrangements;

(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, postage or printing costs;

(19)  Effects  of  the  national   consolidation  of  the  single-copy  magazine
      distribution system; and

(20)  Risks  associated  with the viability of our primarily  subscription-  and
      e-commerce-based Internet model.


                                       19
<PAGE>

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      At June 30, 2005, we did not have any floating interest rate exposure. All
of our  outstanding  debt as of that date  consisted of the  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.  As of June 30, 2005, the convertible senior  subordinated notes had an
implied fair value of $112.6 million.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

      Our management,  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(e) under the Securities Exchange Act of 1934, as amended, or the Exchange
Act) as of the end of the period covered by this quarterly report. Based on such
evaluation,  our Chief  Executive  Officer  and  Chief  Financial  Officer  have
concluded  that,  as of the end of such  period,  our  disclosure  controls  and
procedures are effective in recording, processing, summarizing and reporting, on
a timely basis,  information  required to be disclosed by us in the reports that
we file or submit under the Exchange Act.

Internal Control Over Financial Reporting

      There have not been any changes in our  internal  control  over  financial
reporting (as such term is defined in Rules  13a-15(f)  and 15d-15(f)  under the
Exchange Act) during the fiscal  quarter to which this report  relates that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.

                                     PART II
                                OTHER INFORMATION

ITEM 1. 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, respectively,  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 are vigorously  pursuing an appeal with the
State Appellate Court sitting in Corpus Christi challenging the verdict. We have
posted a bond in the amount of approximately  $8.5 million (which represents the
amount of the judgment,  costs and estimated pre- and post-judgment interest) in
connection with the appeal.  We, on advice of legal counsel,  believe that it is
not  probable  that a  material  judgment  against  us  will  be  sustained.  In
accordance with Statement of Financial Accounting  Standards,  or Statement,  5,
Accounting for Contingencies, no liability has been accrued.


                                       20
<PAGE>

      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 the fourth  quarter of 2003,  $6.5  million of which was
paid in 2004 and $1.0 million in 2005.  The remaining  $1.0 million will be paid
in 2006.

      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
(together,  the "Howington  defendants") 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. In consideration of
this  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.  On January 14,  2005,  Logix and the  Howington
defendants filed a motion to dismiss the Faherty action for, among other things,
lack  of  personal   jurisdiction.   On  February  15,  2005,  Faherty  filed  a
cross-motion  to stay the action  pending the outcome of his appeal.  The motion
and  cross-motions  are  pending.  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,  Accounting  for
Contingencies, 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,  California
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 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  are engaged in  discovery.  We believe  that we have good
defenses  against  Directrix's  claims.  We  believe it is not  probable  that a
material  judgment  against us will  result.  In  accordance  with  Statement 5,
Accounting for Contingencies, no liability has been accrued.

      In the  fourth  quarter of 2004,  we  received  a $5.6  million  insurance
recovery partially related to the prior year litigation settlement with Logix.


                                       21
<PAGE>

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      Our  annual  meeting  of  shareholders  was held on May 11,  2005.  At the
meeting,  the  following  director  nominees  were elected by the holders of our
Class A common stock, who were the only holders entitled to vote on the matter:

                                                             Votes         Votes
Nominee                                                        For      Withheld
--------------------------------------------------------------------------------
Dennis S. Bookshester                                    4,690,283         8,766
David I. Chemerow                                        4,667,433        31,616
Donald G. Drapkin                                        4,690,183         8,866
Christie A. Hefner                                       4,364,194       334,855
Jerome H. Kern                                           4,690,183         8,866
Russell I. Pillar                                        4,690,158         8,891
Sol Rosenthal                                            4,364,159       334,890
Richard S. Rosenzweig                                    4,364,166       334,883
--------------------------------------------------------------------------------

Also at the  meeting,  the  holders  of our Class A common  stock  approved  the
ratification  of Ernst & Young LLP as independent  auditors,  with voting as set
forth below:

                                  Class A Common Stock
                  ------------------------------------------------------
                       Votes        Votes         Votes
                        For        Against      Withheld      Non-Vote
                  ------------------------------------------------------
                    4,691,315       5,993         1,741           N/A
                  ------------------------------------------------------

ITEM 6. EXHIBITS

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

   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


                                       22
<PAGE>

                                   SIGNATURES

Pursuant to the requirements 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.
                                              --------------------------------
                                                       (Registrant)


Date: August 5, 2005                          By  /s/ Linda Havard
      --------------                              ----------------------------
                                                  Linda G. Havard
                                                  Executive Vice President,
                                                  Finance and Operations,
                                                  and Chief Financial Officer
                                                  (Authorized Officer and
                                                  Principal Financial and
                                                  Accounting Officer)


                                       23