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 March 31, 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 April 30, 2005,  there were  4,864,102  shares of Class A common stock,
par value $0.01 per share,  and 28,201,063  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 (Loss) Income for the Quarters Ended March 31,
          2005 and 2004 (Unaudited)                                            3

          Condensed Consolidated Balance Sheets at March 31,
          2005 (Unaudited) and December 31, 2004                               4

          Condensed Consolidated Statements of Cash Flows for the
          Quarters Ended March 31, 2005 and 2004 (Unaudited)                   5

          Notes to Condensed Consolidated Financial Statements (Unaudited)     6

Item 2. Management's Discussion and Analysis of Financial
        Condition and Results of Operations                                   11

Item 3. Quantitative and Qualitative Disclosures About Market Risk            17

Item 4. Controls and Procedures                                               17

                                     PART II
                                OTHER INFORMATION

Item 1. Legal Proceedings                                                     17

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds           19

Item 5. Other Information                                                     19

Item 6. Exhibits                                                              21


                                       2
<PAGE>

                                     PART I
                              FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                   PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                         AND COMPREHENSIVE (LOSS) INCOME
                   for the Quarters Ended March 31 (Unaudited)
                    (In thousands, except per share amounts)

                                                              2005         2004
-------------------------------------------------------------------------------
Net revenues                                              $ 83,451     $ 80,870
-------------------------------------------------------------------------------
Costs and expenses
   Cost of sales                                           (59,276)     (58,984)
   Selling and administrative expenses                     (13,267)     (14,434)
-------------------------------------------------------------------------------
      Total costs and expenses                             (72,543)     (73,418)
-------------------------------------------------------------------------------
Operating income                                            10,908        7,452
-------------------------------------------------------------------------------
Nonoperating income (expense)
   Investment income                                           187           90
   Interest expense                                         (2,648)      (4,158)
   Amortization of deferred financing fees                    (233)        (375)
   Minority interest                                          (370)        (351)
   Debt extinguishment expenses                            (19,280)          --
   Other, net                                                 (476)        (459)
-------------------------------------------------------------------------------
      Total nonoperating expense                           (22,820)      (5,253)
-------------------------------------------------------------------------------
(Loss) income before income taxes                          (11,912)       2,199
Income tax expense                                          (1,207)        (311)
-------------------------------------------------------------------------------
Net (loss) income                                          (13,119)       1,888
-------------------------------------------------------------------------------

Other comprehensive income (loss)
   Unrealized (loss) gain on marketable securities             (25)         132
   Unrealized gain (loss) on derivatives                       211          (28)
   Foreign currency translation adjustments                    276         (420)
-------------------------------------------------------------------------------
      Total other comprehensive income (loss)                  462         (316)
-------------------------------------------------------------------------------
Comprehensive (loss) income                               $(12,657)    $  1,572
===============================================================================

Net (loss) income                                         $(13,119)    $  1,888
Dividend requirements of preferred stock                        --         (335)
-------------------------------------------------------------------------------
Net (loss) income applicable to common shareholders       $(13,119)    $  1,553
===============================================================================

Weighted average number of common shares outstanding
   Basic                                                    33,354       27,478
===============================================================================
   Diluted                                                  33,354       29,323
===============================================================================

Basic and diluted (loss) earnings per common share        $  (0.39)    $   0.06
===============================================================================

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


                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                                                            (Unaudited)
                                                                               Mar. 31,        Dec. 31,
                                                                                   2005            2004
-------------------------------------------------------------------------------------------------------
<S>                                                                           <C>             <C>
Assets
Cash and cash equivalents                                                     $  22,929       $  26,668
Marketable securities and short-term investments                                 40,777          24,052
Receivables, net of allowance for doubtful accounts of
   $3,738 and $3,897, respectively                                               41,901          45,084
Receivables from related parties                                                  1,906           1,281
Inventories, net                                                                 11,818          12,437
Deferred subscription acquisition costs                                          13,570          13,104
Other current assets                                                              8,219           8,596
-------------------------------------------------------------------------------------------------------
   Total current assets                                                         141,120         131,222
-------------------------------------------------------------------------------------------------------
Property and equipment, net                                                      11,729          11,491
Long-term receivables                                                             2,429           2,755
Programming costs, net                                                           55,578          55,997
Goodwill                                                                        111,893         111,893
Trademarks                                                                       57,146          57,296
Distribution agreements, net of accumulated amortization
   of $2,145 and $1,935 respectively                                             30,995          31,206
Other noncurrent assets                                                          18,681          18,721
-------------------------------------------------------------------------------------------------------
Total assets                                                                  $ 429,571       $ 420,581
=======================================================================================================


Liabilities
Acquisition liabilities                                                       $  14,475       $  10,184
Accounts payable                                                                 19,515          21,796
Accrued salaries, wages and employee benefits                                     5,893           8,286
Deferred revenues                                                                52,157          51,421
Accrued litigation settlement                                                     1,000           1,000
Other liabilities and accrued expenses                                           14,516          18,040
-------------------------------------------------------------------------------------------------------
   Total current liabilities                                                    107,556         110,727
-------------------------------------------------------------------------------------------------------
Financing obligations                                                           115,000          80,000
Acquisition liabilities                                                          13,249          19,085
Net deferred tax liabilities                                                     15,638          15,023
Accrued litigation settlement                                                        --           1,000
Other noncurrent liabilities                                                     13,860          13,779
-------------------------------------------------------------------------------------------------------
   Total liabilities                                                            265,303         239,614
-------------------------------------------------------------------------------------------------------
Minority interest                                                                12,887          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; 28,579,935
     and 28,521,493 issued, respectively                                            286             285
Capital in excess of par value                                                  222,872         222,285
Accumulated deficit                                                             (66,068)        (52,949)
Treasury stock, at cost, 381,971 and 0 shares, respectively                      (5,000)             --
Accumulated other comprehensive loss                                               (758)         (1,220)
-------------------------------------------------------------------------------------------------------
   Total shareholders' equity                                                   151,381         168,450
-------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity                                    $ 429,571       $ 420,581
=======================================================================================================
</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 STATEMENTS OF CASH FLOWS
                   for the Quarters Ended March 31 (Unaudited)
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                        2005            2004
------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>             <C>
Cash flows from operating activities
Net (loss) income                                                                  $ (13,119)      $   1,888
Adjustments to reconcile net (loss) income to net cash provided by (used for)
  operating activities:
   Depreciation of property and equipment                                                769             776
   Amortization of intangible assets                                                     413             875
   Amortization of investments in entertainment programming                            9,253          10,327
   Amortization of deferred financing fees                                               233             375
   Debt extinguishment expenses                                                       19,280              --
   Deferred income taxes                                                                 614            (470)
   Net change in operating assets and liabilities                                     (3,481)         (7,340)
   Investments in entertainment programming                                           (8,653)        (11,477)
   Litigation settlement                                                              (1,875)         (6,500)
   Other, net                                                                            672             324
------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities                                   4,106         (11,222)
------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Additions to property and equipment                                                   (1,041)           (649)
Purchases of investments                                                             (26,750)             --
Proceeds from investments                                                             10,000              --
Other, net                                                                                --             140
------------------------------------------------------------------------------------------------------------
Net cash used for investing activities                                               (17,791)           (509)
------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from financing obligations                                                  115,000              --
Repayment of financing obligations                                                   (80,000)             --
Payment of debt extinguishment expenses                                              (15,197)             --
Payment of acquisition liabilities                                                    (1,880)         (4,519)
Purchase of treasury stock                                                            (5,000)             --
Payment of deferred financing fees                                                    (3,463)             --
Proceeds from stock plans                                                                525             316
Other                                                                                    (39)             --
------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities                                   9,946          (4,203)
------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents                                             (3,739)        (15,934)
Cash and cash equivalents at beginning of period                                      26,668          31,332
------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                                         $  22,929       $  15,398
============================================================================================================
</TABLE>

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


                                       5
<PAGE>

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

(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 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.

      Marketable securities and short-term investments include $36.8 million and
$20.0  million of auction rate  securities,  or ARS, for the periods ended March
31, 2005 and December 31, 2004,  respectively,  which were previously classified
as cash and cash  equivalents  in prior  periods.  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.  We account for ARS as trading  securities
in accordance with Statement of Financial  Accounting  Standards,  or Statement,
No. 115.

(B)   RESTRUCTURING EXPENSES

      During the quarter  ended March 31,  2005,  we made cash  payments of $0.4
million related to our various  restructuring plans.  Approximately $9.4 million
of the total restructuring  charges was paid by March 31, 2005, with most of the
remainder 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 our 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 quarter  ended March 31,
2005 (in thousands):

<TABLE>
<CAPTION>
                                                         Consolidation
                                         Workforce   of Facilities and
                                         Reduction          Operations           Total
--------------------------------------------------------------------------------------
<S>                                      <C>                 <C>             <C>
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                                 (169)               (227)           (396)
--------------------------------------------------------------------------------------
Balance at March 31, 2005                $      10           $   1,600       $   1,610
======================================================================================
</TABLE>


                                       6
<PAGE>

(C)   EARNINGS (LOSS) PER COMMON SHARE

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

<TABLE>
<CAPTION>
                                                                    (Unaudited)
                                                                  Quarters Ended
                                                                     March 31,
                                                             -----------------------
                                                                  2005          2004
------------------------------------------------------------------------------------
<S>                                                          <C>          <C>
Numerator:
For basic EPS - net (loss) income                            $ (13,119)   $    1,553
   Preferred stock dividends                                        --           335
------------------------------------------------------------------------------------
For diluted EPS - net (loss) income                          $ (13,119)   $    1,888
====================================================================================

Denominator:
For basic EPS - weighted-average shares                         33,354        27,478
  Effect of dilutive potential common shares:
   Employee stock options and other                                 --           359
   Preferred stock                                                  --         1,486
------------------------------------------------------------------------------------
      Dilutive potential common shares                              --         1,845
------------------------------------------------------------------------------------
For diluted EPS - weighted-average shares                       33,354        29,323
====================================================================================

Basic and diluted (loss) earnings per common share           $   (0.39)   $     0.06
====================================================================================
</TABLE>

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>
                                                                     (Unaudited)
                                                                   Quarters Ended
                                                                      March 31,
                                                                 -------------------
                                                                  2005          2004
------------------------------------------------------------------------------------
<S>                                                              <C>           <C>
Stock options                                                    3,746         1,322
------------------------------------------------------------------------------------
Total                                                            3,746         1,322
====================================================================================
</TABLE>

      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
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,  plus 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.

(D)   INVENTORIES, NET

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

<TABLE>
<CAPTION>
                                                           (Unaudited)
                                                              Mar. 31,      Dec. 31,
                                                                  2005          2004
------------------------------------------------------------------------------------
<S>                                                          <C>           <C>
Paper                                                        $   2,887     $   2,573
Editorial and other prepublication costs                         7,141         7,814
Merchandise finished goods                                       1,790         2,050
------------------------------------------------------------------------------------
Total inventories, net                                       $  11,818     $  12,437
====================================================================================
</TABLE>


                                       7
<PAGE>

(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 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.

      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.  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.

(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 expect to adopt  Statement
123(R)  on  January  1, 2006  using  the  modified  prospective  method  and are
currently conducting an analysis of the impact on our financial statements.

      Pro forma net  (loss)  income and net  (loss)  income  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 for each of the
quarters ended March 31, 2005 and 2004.

                                                               (Unaudited)
                                                             Quarters Ended
                                                                March 31,
                                                        -----------------------
                                                             2005          2004
-------------------------------------------------------------------------------
Net (loss) income
   As reported                                          $ (13,119)   $    1,888
   Pro forma                                              (13,823)        1,139

Basic EPS
   As reported                                          $   (0.39)   $     0.06
   Pro forma                                                (0.41)         0.03

Diluted EPS
   As reported                                          $   (0.39)   $     0.06
   Pro forma                                                (0.41)         0.03
-------------------------------------------------------------------------------

      We recorded $0.3 million and $0.2 million of compensation  expense for the
quarters  ended March 31,  2005 and 2004,  respectively,  related to  restricted
stock units, as it was probable that the performance criteria would be met.


                                       8
<PAGE>


(H)   SEGMENT INFORMATION

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

                                                               (Unaudited)
                                                             Quarters Ended
                                                                March 31,
                                                      -------------------------
                                                          2005             2004
-------------------------------------------------------------------------------
Net revenues
Entertainment                                         $ 50,476         $ 46,444
Publishing                                              27,004           29,677
Licensing                                                5,971            4,749
-------------------------------------------------------------------------------
Total                                                 $ 83,451         $ 80,870
===============================================================================
(Loss) income before income taxes
Entertainment                                         $ 11,896         $  7,553
Publishing                                                (384)           1,899
Licensing                                                3,602            2,571
Corporate Administration and Promotion                  (4,206)          (4,571)
Investment income                                          187               90
Interest expense                                        (2,648)          (4,158)
Amortization of deferred financing fees                   (233)            (375)
Minority interest                                         (370)            (351)
Debt extinguishment expenses                           (19,280)              --
Other, net                                                (476)            (459)
-------------------------------------------------------------------------------
Total                                                 $(11,912)        $  2,199
===============================================================================

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.

                                                   (Unaudited)
                                                      Mar. 31,         Dec. 31,
                                                          2005             2004
-------------------------------------------------------------------------------
Identifiable assets
Entertainment                                         $266,383         $266,736
Publishing                                              41,103           45,724
Licensing                                                5,839            5,344
Corporate Administration and Promotion(1)              116,246          102,777
-------------------------------------------------------------------------------
Total(1)                                              $429,571         $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 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.


                                       9
<PAGE>

      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.

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

(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  $51.8
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.


                                       10
<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
                                                                                                    March 31,
                                                                                            -----------------------
                                                                                                 2005          2004(1)
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>          <C>
Net revenues
Entertainment
   Domestic TV networks                                                                     $    25.2    $     24.4
   International                                                                                 13.4          10.5
   Online subscriptions                                                                           5.8           5.2
   E-commerce                                                                                     5.2           4.8
   Other                                                                                          0.9           1.6
-------------------------------------------------------------------------------------------------------------------
   Total Entertainment                                                                           50.5          46.5
-------------------------------------------------------------------------------------------------------------------
Publishing
   Playboy magazine                                                                              22.9          25.4
   Other domestic publishing                                                                      2.3           2.7
   International publishing                                                                       1.8           1.6
-------------------------------------------------------------------------------------------------------------------
   Total Publishing                                                                              27.0          29.7
-------------------------------------------------------------------------------------------------------------------
Licensing
   International licensing                                                                        4.4           3.2
   Domestic licensing                                                                             0.8           0.8
   Entertainment licensing                                                                        0.6           0.5
   Marketing events                                                                               0.2           0.2
-------------------------------------------------------------------------------------------------------------------
   Total Licensing                                                                                6.0           4.7
-------------------------------------------------------------------------------------------------------------------
Total net revenues                                                                          $    83.5    $     80.9
===================================================================================================================
Net (loss) income
Entertainment
   Before programming amortization and online content expenses                              $    21.7    $     18.5
   Programming amortization and online content expenses                                          (9.8)        (10.9)
-------------------------------------------------------------------------------------------------------------------
   Total Entertainment                                                                           11.9           7.6
-------------------------------------------------------------------------------------------------------------------
Publishing                                                                                       (0.4)          1.9
-------------------------------------------------------------------------------------------------------------------
Licensing                                                                                         3.6           2.6
-------------------------------------------------------------------------------------------------------------------
Corporate Administration and Promotion                                                           (4.2)         (4.6)
-------------------------------------------------------------------------------------------------------------------
Operating income                                                                                 10.9           7.5
-------------------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
   Investment income                                                                              0.2           0.1
   Interest expense                                                                              (2.6)         (4.2)
   Amortization of deferred financing fees                                                       (0.2)         (0.4)
   Minority interest                                                                             (0.4)         (0.4)
   Debt extinguishment expenses                                                                 (19.3)            -
   Other, net                                                                                    (0.5)         (0.4)
-------------------------------------------------------------------------------------------------------------------
Total nonoperating expense                                                                      (22.8)         (5.3)
-------------------------------------------------------------------------------------------------------------------
(Loss) income before income taxes                                                               (11.9)          2.2
Income tax expense                                                                               (1.2)         (0.3)
-------------------------------------------------------------------------------------------------------------------
Net (loss) income                                                                           $   (13.1)   $      1.9
===================================================================================================================
Basic and diluted (loss) earnings per common share                                          $   (0.39)   $     0.06
===================================================================================================================
</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.


                                       11
<PAGE>

      Our revenues and  operating  income  increased  approximately  3% and 46%,
respectively,  for  the  quarter  primarily  due  to  strong  results  from  our
Entertainment  and  Licensing  Groups,  partially  offset by  anticipated  lower
results from our Publishing Group.

      The net loss for the  current  quarter  of $13.1  million  includes  $19.3
million of debt  extinguishment  expenses related to our redemption of all $80.0
million of our 11.00% senior secured notes due 2010,  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.  There were no
such expenses in the prior year quarter.  See the Debt Financing  section within
Liquidity and Capital  Resources for more  information  regarding the redemption
and the economic benefits associated with the transaction.

      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  higher 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 $0.8 million, or
3%, for the quarter. Direct-to-home, or DTH, revenues increased $0.8 million due
to subscriber  growth and an increase in average monthly  pay-per-view,  or PPV,
buys  compared  to the prior  year  period.  Video-on-demand,  or VOD,  revenues
increased  $0.7 million due to the roll out of VOD service in  additional  cable
systems as well as growing  customer  demand.  Higher  revenues  associated with
renting our studio  facility and  providing  various  related  services to third
parties also  contributed.  These revenue  increases were partially  offset by a
decrease  in cable PPV buys as cable  companies  migrate  consumers  from linear
channels to VOD.

      Profit  contribution from our domestic TV networks increased $1.4 million,
or 9%,  for the  quarter,  as a result of the  revenue  growth  described  above
combined with a decrease in marketing  expenses due to the timing of promotional
campaigns.  This increase was partially  offset by higher overhead costs related
to the  operation  of our  production  facility  as a  result  of  renting  more
production space to third parties compared to the prior year quarter.

      International  revenues  increased $2.9 million,  or 28%, for the quarter.
Higher DTH  revenues  from our networks in the U.K.,  revenues  from several new
third  party  network  licensees  and  royalties  related  to  wireless  license
agreements contributed to the increase in revenues. Profit contribution from our
international  business  increased  $1.6  million,  or 36%,  from the prior year
quarter,   in  spite  of  higher   network  costs  in  the  U.K.,   due  to  the
above-mentioned revenue increases.

      Online  subscription  revenues  increased  $0.6  million,  or 13%, for the
quarter due to an increase in revenues for all Playboy.com  clubs.  Contributing
to the revenue  growth was a higher number of  subscriptions  and an increase in
average  revenue  per  subscription  for our two largest  clubs,  Cyber Club and
PlayboyNet.  Profit contribution from the online subscription business increased
$0.6 million,  or 18%, due to the revenue increase  described  above,  partially
offset by higher  technology  and  promotional  costs related to Playboy  Daily,
which launched in September 2004.

      E-commerce  revenues increased $0.4 million, or 8%, for the quarter due to
an  increase  in  online  store   visitors  and  catalog   circulation.   Profit
contribution  from  e-commerce  decreased  $0.4  million,  or 62%, due to higher
production costs related to an anticipated increase in paper costs combined with
higher circulation costs.

      Profit  contribution  from other  businesses  decreased  $0.2 million on a
revenue decrease of $0.7 million,  or 43%, primarily due to the expected decline
in worldwide DVD sales.


                                       12
<PAGE>

      Segment income for the group increased $4.3 million, or 58%, primarily due
to the previously  mentioned higher revenues.  Segment income was also favorably
impacted by lower  programming  amortization and online content expenses of $1.1
million,  or  11%,  compared  to the  prior  year  quarter  due  to  the  mix of
programming  and fewer program  premieres.  We believe our cash  programming and
online content  investments  will be  approximately  $40.0 million for the year,
down nearly 10% from last year, and programming  amortization and online content
expenses will decline to about $41.0 million for the year.

PUBLISHING GROUP

      Playboy magazine revenues decreased $2.5 million, or 10%, for the quarter.
Newsstand  revenues  were  $0.9  million  lower  largely  due to a $0.3  million
unfavorable  adjustment  related to prior  year  issues in the  current  quarter
compared to a $0.3 million favorable  adjustment related to prior year issues in
the prior year  quarter.  Also  contributing  to the decrease  were higher cover
prices related to celebrity  pictorials in the prior year quarter.  Subscription
revenues  decreased $0.9 million primarily due to a higher favorable  adjustment
in the  prior  year  quarter  for paid  subscriptions  that  will not be  served
combined  with lower  average  net revenue per copy.  As  previously  announced,
advertising  revenues  decreased  $0.7  million  principally  due to the  mix of
advertisements which resulted in a decrease in net revenue per page. Advertising
sales for the 2005 second quarter  magazine issues are closed,  and we expect to
report 20% lower  advertising  revenues and 14% lower advertising pages compared
to the 2004 second quarter.

      Revenues from our other  domestic  publishing  businesses  decreased  $0.4
million, or 13%, primarily due to an unfavorable  adjustment to special editions
newsstand  revenues  related to prior year  issues in the current  year  quarter
combined  with an expected  decrease in royalties  from Playboy:  50 Years:  The
Photographs.

      International   publishing   revenues  increased  $0.2  million,  or  10%,
primarily due to higher royalties from the German edition.

      The  group's  segment  profitability  decreased  $2.3  million,  which was
attributable  to the  lower  revenues  discussed  above  as well as  anticipated
increases in subscription  acquisition  amortization  expense and paper costs of
$0.5 million and $0.3 million, respectively, partially offset by lower editorial
costs related to celebrity pictorials in the current year quarter.

LICENSING GROUP

      Licensing Group revenues  increased $1.3 million,  or 26%, for the quarter
principally due to higher royalties from existing  licensees in Japan and Europe
as well as several new international licensee agreements. Segment income for our
Licensing Group increased $1.0 million, or 40%, due to the revenue increase.

CORPORATE ADMINISTRATION AND PROMOTION

      Corporate Administration and Promotion expenses decreased $0.4 million, or
8%, for the quarter due to a decrease in benefit-related 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.


                                       13
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

      At March 31,  2005,  we had  $22.9  million  in cash and cash  equivalents
compared to $26.7 million in cash and cash  equivalents at December 31, 2004. At
March 31,  2005,  we had $36.8  million  of  auction  rate  securities,  or ARS,
included in  short-term  investments  compared to $20.0  million at December 31,
2004.  During the first quarter of 2005, we determined  that  investments in ARS
should be classified as short-term investments. Previously, such investments had
been  classified  as cash and cash  equivalents.  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 March 31, 2005 and December 31, 2004, respectively.

      At March 31, 2005, our liquidity  requirements were being provided by cash
generated from our operating  activities,  our existing cash, cash  equivalents,
short-term  investments  and net proceeds  from the issuance of the  convertible
senior  subordinated notes described under "Debt Financings" below. At March 31,
2005,  we had a $30.0  million  credit  facility,  which was used for  revolving
borrowings,  issuing  letters of credit or a  combination  of both. At March 31,
2005,  there  were  no  borrowings  and  $10.8  million  in  letters  of  credit
outstanding   under  this  facility,   permitting  $19.2  million  of  available
borrowings under this facility. Effective April 1, 2005, we amended and restated
the facility to increase  the size of the  facility to $50.0  million and extend
the term to April 1, 2008. See "Credit Facility" for additional information.

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, or 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 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.


                                       14
<PAGE>

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

CREDIT FACILITY

      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 Enterprises,  Inc. 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.

CALIFA ACQUISITION

      The  Califa  acquisition  agreement  gives us the  option of paying  $21.0
million of the remaining $27.8 million  purchase price  consideration in cash or
in shares of Class B stock.  Under the terms of the  agreement,  a total of $8.0
million is payable in 2005,  all of which will be paid in cash.  On May 2, 2005,
we made the first payment in the amount of $3.5 million. We also have the option
of accelerating remaining acquisition payments.

CASH FLOWS FROM OPERATING ACTIVITIES

      Net  cash  provided  by  operating  activities  was  $4.1  million,  which
represents  an  increase  of $15.3  million  from the prior year  quarter.  This
increase reflects a decrease of $4.6 million in litigation  settlement  payments
and a decrease in investments in entertainment programming of approximately $2.8
million  compared to the prior year  quarter.  Better  overall  operations  also
contributed to the increase.

CASH FLOWS FROM INVESTING ACTIVITIES

      Net cash used for  investing  activities  increased  $17.3  million due to
investments  made in auction rate  securities  during the current year  quarter.
There was no such investment activity in the prior year quarter.

CASH FLOWS FROM FINANCING ACTIVITIES

      Net cash provided by financing activities was $9.9 million for the quarter
principally  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 $3.5
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.


                                       15
<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 margin splits with operators of these systems;

(15)  Risks that we may not realize the expected increased sales and profits and
      other   benefits  from   acquisitions   and  the   restructuring   of  our
      international TV joint ventures;

(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 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.


                                       16
<PAGE>

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      At March 31, 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 notes will be influenced by changes in market  interest
rates, the share price of our Class B stock and our credit quality.  As of March
31, 2005, the convertible senior subordinated notes had an implied fair value of
$113.7 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.


                                       17
<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.


                                       18
<PAGE>

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

      On March 9,  2005,  in  connection  with our  issuance  and sale of $100.0
million aggregate principal amount of convertible notes, we and Mr. Hefner each,
separately,  contingent  on  the  closing  of  the  convertible  note  offering,
purchased  381,971  shares  of our  Class  B stock  from  third  parties  for an
aggregate  purchase price in each case of $5.0 million.  These purchases,  which
were settled  concurrently  with the closing of the convertible note offering on
March 15, 2005,  were effected in negotiated  transactions by us and Mr. Hefner,
acting  through an agent.  The table set forth below provides  information  with
respect to purchases by us or any "affiliated purchaser" (as defined in Rule 10b
18(a)(3) under the Exchange Act) of our Class B stock during the quarter covered
by this  Quarterly  Report  on Form  10-Q.  We have  included  in the  table Mr.
Hefner's  purchase  described  above because Mr. Hefner could be deemed to be an
affiliated  purchaser  with  respect to that  transaction,  but we disclaim  any
implication or inference that Mr. Hefner is in fact such an affiliated purchaser
or that he purchased the shares of Class B stock on our behalf.

                      ISSUER PURCHASES OF EQUITY SECURITIES

<TABLE>
<CAPTION>
                                                                           Total Number of                  Maximum
                                              Total                    Shares Purchased as         Number of Shares
                                          Number of        Average        Part of Publicly         That May Yet Be
                                             Shares     Price Paid      Announced Plans or      Purchased under the
Period                                    Purchased      Per Share                Programs        Plans or Programs
-------------------------------------------------------------------------------------------------------------------
<S>                                         <C>        <C>                              <C>                      <C>
January 1 -
January 31, 2005                                 --    $        --                      --                       --
February 1 -
February 28, 2005                                --             --                      --                       --
March 1 -
March 31, 2005
   Purchases by Playboy Enterprises,        381,971    $     13.09                      --                       --
     Inc.
   Purchases by Mr. Hefner                  381,971    $     13.09                      --                       --
-------------------------------------------------------------------------------------------------------------------
      Total                                 763,942    $     13.09                      --                       --
===================================================================================================================
</TABLE>

ITEM 5. OTHER INFORMATION

CREDIT FACILITY

      Effective  April 1, 2005,  Holdings  entered  into an amended and restated
credit  agreement  with  Bank  of  America,   N.A.  and  LaSalle  Bank  National
Association  which  amended and restated the terms of our credit  facility.  The
following  description  of the credit  facility is  qualified in its entirety by
reference to the complete  text of the amended and  restated  credit  agreement,
which is included as Exhibit 10.1 to this Quarterly  Report on Form 10-Q for the
quarterly period ended March 31, 2005.

      The  amended  and  restated  credit  agreement,  subject  to the terms and
conditions set forth therein,  provides Holdings with a secured revolving credit
facility for  borrowing  up to $50.0  million for working  capital  advances and
general corporate purposes,  including up to $30.0 million of which is available
for the issuance of letters of credit.  As of the effective  date of the amended
and restated credit agreement,  there were no loans and $10.8 million in letters
of credit outstanding under the credit facility.

Term

      All  outstanding  borrowings  under the credit  facility are  scheduled to
mature on April 1, 2008.

Interest

      For purposes of  calculating  interest,  revolving  loans under the credit
facility  are  designated  as  Eurodollar  rate  committed  loans or, in certain
circumstances, base rate committed loans.


                                       19
<PAGE>

      Eurodollar  rate  committed  loans bear  interest at the London  interbank
eurodollar rate, adjusted for reserves, plus a borrowing margin that varies from
1.00% to 2.75% depending on our Transactions  Adjusted EBITDA (as defined in the
amended and restated  credit  agreement).  Interest on Eurodollar rate committed
loans is payable  at the end of the  applicable  interest  period in the case of
interest  periods of one, two or three months and every three months in the case
of interest periods which exceed three months.

      Base rate committed loans bear interest at (a) the greater of (i) the rate
most recently announced by Bank of America, N.A. as its "prime rate" or (ii) the
federal  funds rate plus 1/2 of 1% per annum plus (b) a  borrowing  margin  that
varies from 0.00% to 1.25%  depending on our  Transactions  Adjusted  EBITDA (as
defined in the amended and  restated  credit  agreement).  Interest on base rate
committed loans is payable quarterly in arrears.

      Letters of credit  issued  under the credit  facility  accrue  fees at the
applicable Eurodollar rate borrowing margin.

Security and Guarantees

      The credit  facility  provides that any loans made thereunder and any swap
or other  hedging  arrangements  entered  into with any of the  lenders  will be
obligations  of  Holdings  and  guaranteed  by  Playboy  Enterprises,  Inc.  and
substantially  all of its other present and future domestic  subsidiaries  other
than  Playboy.com  and its  subsidiaries.  The  credit  facility  provides  that
obligations  thereunder  will be  secured  by a first  priority  lien or  pledge
(subject  to  permitted  liens)  on 100% of the  stock of  substantially  all of
Playboy  Enterprises,  Inc.'s  present and future  direct and indirect  domestic
subsidiaries  other than  Playboy.com's  subsidiaries  and on 65% of the capital
stock of certain of Playboy  Enterprises,  Inc.'s  indirect  first-tier  foreign
subsidiaries  other than  subsidiaries of Playboy.com.  The credit facility also
provides that obligations thereunder will be secured by a first priority lien or
pledge (subject to permitted  liens) on (i) the Playboy Mansion and the personal
property  assets of  Playboy  Enterprises,  Inc.  and  substantially  all of its
present  and  future  direct  and  indirect  domestic  subsidiaries,  other than
Playboy.com  and  its   subsidiaries   and  (ii)  trademarks  owned  by  Playboy
Enterprises,  Inc. and substantially all of Playboy Enterprises,  Inc.'s present
and future direct and indirect domestic subsidiaries, other than Playboy.com and
its subsidiaries.  Under the terms of the amended and restated credit agreement,
Playboy.com and its subsidiaries must provide  guarantees of and pledge or grant
security  interests  in their assets to secure the  obligations  of the Borrower
under the credit facility on  substantially  the same terms as applicable to the
existing  loan  parties if  Playboy.com  becomes a  wholly-owned  subsidiary  of
Playboy Enterprises, Inc.

Covenants

The credit facility contains  representations,  affirmative covenants,  negative
covenants  and  financial  covenants  that  restrict  our and our  subsidiaries'
ability to do specified things, including but not limited to:

      o     incur or guarantee additional indebtedness;

      o     pay dividends or make other distributions on capital stock;

      o     repurchase capital stock;

      o     make loans and investments;

      o     enter into agreements restricting the ability of the subsidiaries of
            Playboy Enterprises, Inc. to pay dividends;

      o     create liens;

      o     sell or otherwise dispose of assets;

      o     enter new lines of business;

      o     merge or consolidate with other entities; and

      o     engage in transactions with affiliates.


                                       20
<PAGE>

The following financial covenants are included:

      o     minimum net worth;

      o     minimum interest coverage ratio; and

      o     limitation on capital expenditures.

Mandatory Prepayment and Commitment Reduction

In the  event of a sale or  other  disposition  of the  Playboy  Mansion  or the
Playboy  or Rabbit  Head  trademark  designs,  Holdings  must apply the net cash
proceeds of such  disposition up to the amount necessary to repay its borrowings
under the credit facility,  and the banks'  commitment under the credit facility
will be reduced permanently by an amount equal to such net cash proceeds, unless
at the time of such  disposition no event of default  exists,  in which case the
commitments shall not be reduced to less than $25.0 million.

Events of Default

      The loan  documentation for the credit facility contains  customary events
of default,  including,  but not limited to,  specified change of control events
and cross defaults to other  indebtedness  of Playboy  Enterprises,  Inc. or any
subsidiary that is a restricted  subsidiary for purposes of the credit facility.
As of the date of this report, all of Playboy  Enterprises,  Inc.'s subsidiaries
are restricted subsidiaries for the purposes of the credit facility.

ITEM 6. EXHIBITS

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

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

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

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

   10.1     Credit Agreement, effective April 1, 2005, or the Credit Agreement,
            among PEI Holdings, Inc., as borrower, Bank of America, N.A., as
            Agent, and the Other Lenders Party Hereto.

   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


                                       21
<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: May 10, 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)


                                       22