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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-K

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

|                                            |  |                                  
|------------------------------------------- |  | ---------------------------------
|For the Fiscal Year Ended December 31, 2002 |  | Commission File Number: 333-83448

PENTHOUSE INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)


|                         |  |                                  
|------------------------ |  | ---------------------------------
|FLORIDA                  |  | 65-1158257                       
|                         |  |                                  
|(State of incorporation) |  | (IRS Employer Identification No.)

11 Penn Plaza, New York, NY 10001

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(Address of principal executive offices)


(212) 702-6000

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(Registrants telephone number)




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



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

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

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

YES [   ] NO [X]

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

As of April 9, 2003, there were 50,000,000 shares outstanding of the
Registrants common stock.

Documents incorporated by reference: None





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TABLE OF CONTENTS



|               |                                                                                                          |  |  |  |  |  |  | 
|-------------- | -------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I        
|               | Item 1. Business                                                                                        
|               | Item 2. Properties                                                                                      
|               | Item 3. Legal Proceedings                                                                               
|               | Item 4. Submission of Matters to a Vote of Security Holders.                                            
|PART II       
|               | Item 5. Market for Registrants Common Equity and Related Stockholder Matters.                          
|               | Item 6. Selected Financial Data (a).                                                                    
|               | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.          
|               | Item 7A. Quantitative And Qualitative Disclosures About Market Risk.                                    
|               | Item 8. Financial Statements And Supplementary Data.                                                    
|               | Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure.           
|PART III      
|               | Item 10. Directors and Executive Officers of the Registrant.                                            
|               | Item 11. Executive Compensation                                                                         
|               | Item 12. Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters.
|               | Item 13. Certain Relationships And Related Transactions.                                                
|               | Item 14. Controls And Procedures.                                                                       
|PART IV       
|               | Item 15. Exhibits, Financial Statement Schedules And Reports On Form 8-K.                               
|SIGNATURES    
|CERTIFICATIONS
|EXHIBIT INDEX 
|EXHIBIT 10.20 
|EXHIBIT 10.21 
|EXHIBIT 12.1  
|EXHIBIT 21.1  
|EXHIBIT 99.1  



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PENTHOUSE INTERNATIONAL, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

TABLE OF CONTENTS

|               |                                                                                                         |  |      |    | 
|-------------- | ------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|               |                                                                                                         |  | Page
|PART I         |                                                                                                         |  | 1    |   
|               | Item 1. Business                                                                                        |  |      | 1  | 
|               | Item 2. Properties                                                                                      |  |      | 16 | 
|               | Item 3. Legal Proceedings                                                                               |  |      | 17 | 
|               | Item 4. Submission of Matters to a Vote of Security Holders                                             |  |      | 18 | 
|              
|PART II        |                                                                                                         |  | 18   |   
|               | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                           |  |      | 18 | 
|               | Item 6. Selected Financial Data (a)                                                                     |  |      | 20 | 
|               | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations           |  |      | 21 | 
|               | Item 7A. Quantitative And Qualitative Disclosures About Market Risk                                     |  |      | 40 | 
|               | Item 8. Financial Statements And Supplementary Data                                                     |  |      | 41 | 
|               | Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure            |  |      | 41 | 
|              
|PART III       |                                                                                                         |  | 41   |   
|               | Item 10. Directors and Executive Officers of the Registrant                                             |  |      | 41 | 
|               | Item 11. Executive Compensation                                                                         |  |      | 42 | 
|               | Item 12. Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters |  |      | 44 | 
|               | Item 13. Certain Relationships And Related Transactions                                                 |  |      | 46 | 
|               | Item 14. Controls And Procedures                                                                        |  |      | 48 | 
|              
|PART IV        |                                                                                                         |  | 49   |   
|               | Item 15. Exhibits, Financial Statement Schedules And Reports On Form 8-K                                |  |      | 49 | 
|              
|Signatures     |                                                                                                         |  | 52   |   
|Certifications |                                                                                                         |  | 53   |   

-i-





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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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





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PART I




Item 1. Business

General

Unless context requires otherwise, all references to we, our, us,
the Registrant or the Company are to PII and its subsidiaries.

PII, through its 99.5% owned subsidiary General Media, Inc. (General
Media), is a brand-driven global entertainment company founded in 1965 by
Robert C. Guccione. We cater to mens interests through various trademarked
publications, movies, the Internet, location-based live entertainment clubs and
consumer product licenses. Our flagship PENTHOUSE brand is widely identified
with premium entertainment for adult audiences. Our trademarks are licensed to
third parties worldwide in exchange for recurring royalty payments.

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

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

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

General Media also holds significant intellectual property and other
intangible assets. We own various trademarks developed over 37 years, which we
believe are commercially valuable, including PENTHOUSE, Forum, Variations,
PENTHOUSE Letters, the Three Key Logo, the One Key Logo, Pet of the Year,
PENTHOUSE Pet, Mind & Muscle Power, Hot Talk, PENTHOUSE Comixand PENTHOUSE
Mens Adventure Comix. Through the publication of our magazines we have also
accumulated a library of approximately one million photographic images. We seek
to protect our trademarks through registration and periodic infringement
enforcement. We regularly evaluate requests to license our brands, our video
library or





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to participate in other commercial ventures by contributing our
trademarks, including events with our PENTHOUSE Pets. Our trademarks and
copyrights are critical to the success and potential growth of all of our
businesses.

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

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

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

Competitive Strengths

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

Our Brand Recognition

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

Barriers to Entry

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

Contemporary Entertainment Trends

We believe that fashion, music, celebrity and sex have become increasingly
intertwined in contemporary adult entertainment. For example, in 2003, music
rock stars regularly market their own popular clothing lines while fashion
designers have become global celebrities. Fashion is a central feature of
celebrity awards events, such as the Grammys or MTV music awards, and sexuality
is expressed through fashion worn by music sex icons. We believe that our
flagship brand, PENTHOUSE, transcends across each of these

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entertainment segments. As a result, we believe that our brand can be
exploited in various entertainment and merchandising businesses. Because our
brand is already well known and is generally identified with a quality product
experience, we believe we have a competitive advantage over lesser-known
consumer brands in generating revenue from other entertainment categories.

Our Distribution Network

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

Our Databases

PENTHOUSE has been successfully marketing its products to consumers for
nearly 40 years. Over time, we have accumulated a significant amount of data in
respect to consumer trends, purchasing decisions, demographics and other
commercially valuable information. We have compiled a significant list of adult
magazine subscribers from decades of magazine customers. We have also compiled
an electronic list of email addresses of Internet members which includes
approximately three hundred thousand unique purchasers of our services. We
believe that this proprietary data is valuable in the future promotion and
management of our business. As a brand-oriented company, knowledge about
consumer behavior and trends is used to design new PENTHOUSE services. We
believe that this proprietary data and the associated trade secrets are
competitive advantages for our business.

Our Content Library

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

Overview of Business Groups

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

Penthouse Publishing Segment

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

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the publication of male-oriented, adult related publications. PENTHOUSE
magazine plays a key role in driving the continued popularity and recognition
of the PENTHOUSE brand.

PENTHOUSE Magazine and our Affiliate Publications

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

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

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

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

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

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

The net circulation revenues of the U.S. edition of PENTHOUSE magazine for
2001 and 2002 were $34.0 million and $30.0 million, respectively. Net
circulation revenues are gross revenues less commissions and provisions for
newsstand returns and display costs. Circulation revenue comparisons may be
materially impacted with respect to newsstand sales in any period based on
whether or not there are issues featuring major celebrities.

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

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

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

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Other Domestic Publishing

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

Foreign Edition Publishing

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

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

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

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

Production, Printing, Newsstand Distribution and Subscription Fulfillment

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

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

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

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

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

Circulation

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

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

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

The decrease in domestic average monthly circulation for PENTHOUSE
magazine and the Affiliate Publications has been partially offset, however, by
our ability to maintain consistent cover price increases and the recapture of
certain convenience store distribution channels. PENTHOUSE magazine, for
example, has

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steadily increased its cover price from 2000 levels of $6.99 to $7.99 per
issue and in 2002 from $7.99 to $10 per issue. We regularly price test our
magazines and adjust cover prices accordingly.

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

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

Advertising

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

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

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

Penthouse Online Segment

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

Our Internet Domain name, Penthouse.com, is critical to or success. We
receive a large percentage of our visitors as a result of consumers inputting
our name into commonly used Internet search engines or into their Internet
browser. In contrast, generally new visitors to competitors adult Internet
sites are obtained

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through active marketing technologies such as pop-ups, pop-unders, banners,
exit traffic links, and other electronic customer acquisition methods. These
marketing strategies require significant capital investment to coordinate,
monitor and pay for associated advertising fees. Conversely, PENTHOUSE.com
receives nearly all its current visitors as a result of the popularity and
awareness of its brand and through the cross promotion in the PENTHOUSE
magazines. This cross promotion is accomplished at minimal additional
incremental cost to our company.

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

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

We were an early adopter of the Internet as a distribution channel for our
content. We launched our first pay service, PENTHOUSEmag.com, on the Internet
in August of 1995. Today, customers are sold a membership ranging from 3 days
to one year, at prices ranging from $2.95 to $120.00. Revenues received from
the sale of memberships to our Internet Site are recognized over the term of
the membership. The membership gives the customer access to adult-oriented
photographs, video feeds and chat rooms via a personal identification number
that expires according to the membership period selected. Memberships are
billed to the customers credit card in accordance with the Federal
Communications Commissions safe harbor provision.

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

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

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

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

Penthouse Entertainment Segment

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

Revenues of the entertainment segment were $1.6 million, $2.9 million and
$3.3 million for the years ended December 31, 2002, 2001 and 2000,
respectively, representing 3%, 5% and 5% of our net revenues for

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these periods, respectively. We believe our market share in regards to
such entertainment is an insignificant portion of the total market. We have
recently undertaken measures to improve the results of this division, including
entering into a cruise ship on demand pay per view license agreement, and we believe we can
improve our results during the current fiscal period

Video and DVD Sales & Rental

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

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

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

Our Entertainment Operations

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

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

The video cassettes and DVDs are also offered for sale through the
PENTHOUSE store on our internet site and are advertised in our magazines. These
videos are generally approximately 60 minutes in

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length, have a level of explicitness greater than R and feature
PENTHOUSE centerfold models. Many of our videos are also sold internationally
through licensing arrangements.

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

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

Other Licensing Businesses

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

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

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

Company-wide marketing activities consist of various PENTHOUSE hosted
events in cities across the United States and on college campuses. In March
2003, we hosted a promotional event at the Winter Music Conference in Miami,
Florida . We also use Mr. Gucciones personal residence in New York City for
various events. The home is a 21,000 square foot historic townhome and is one
of the largest residences in Manhattan. Our intention is to make more effective
use of it in our branding efforts by establishing the Penthouse Mansion in
Manhattan with the intended promotional value akin to the Playboy Mansion in
Los Angeles. We believe we have good relations with other recognized media
companies, exemplified by our January 2003 Clear Channel Communications hosted
party at the Penthouse townhome attended by a number of celebrities. Clear
Channel is a large media company with 1,184 radio stations and 34 TV
stations.

Current television and film productions either recently produced, in
development or under consideration, to be produced and funded by outside
parties, include The Making of a PENTHOUSE Pet. We have previously produced a
variety of PENTHOUSE titles including PENTHOUSE Pet Casting Call, International
Amateurs, Swimsuit Video, Showgirls of PENTHOUSE and On Campus. We are
currently evaluating additional proposals for expanded reality-based titles
which we believe are enjoying wide market

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success as evidenced by products offerings of competitors like Girls Gone
Wild or Playboy Party at the Mansion series produced by Mandalay Entertainment.

Marketing

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

Information Technology and Customer Database Enhancement

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

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

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

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

Our Strategy

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

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

We are in negotiations to license through a third party provider database
management software used to automate our Internet operations and to derive new
sources of e-commerce revenue. The software is used to store, categorize,
manipulate and publish pictorial and film content on the Internet. We believe
that these and

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other technologies can be used to enhance our Internet members experience
and thereby retain the customer longer so as to increase revenue per customer.

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

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

Video.We believe that there continues to be significant potential in the
worldwide video and DVD market. We plan to attempt to expand the sales of
video and DVD by licensing the Penthouse name to international producers for
foreign distribution. We are negotiating non-exclusive terms presently with
prospective business partners

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

Ownership, Capitalization and Financing

PII, incorporated as American Pulp Exchange, Inc. in Florida on December
11, 2001, was originally organized to develop a website to operate an online
marketplace for the pulp and paper industry. On October 22, 2002,
approximately 73% of the outstanding shares of common stock of PII were
acquired by Vector Partners, LLC, a Los Angeles-based investment firm
(Vector), pursuant to a Stock Purchase Agreement among PII, two of its
principal shareholders, and Vector. At the time of such transaction, PII had
no significant assets or business operations. Following the transaction, PII
abandoned its original business plans in favor of pursuing favorable
acquisition and restructuring opportunities.

On November 4, 2002, PII issued 930,000 shares of its common stock to
Vector for past services valued at $9,300 and 2,225,000 shares of its common
stock to Catalyst Capital, LLC, formerly known as PH Capital Holdings, LLC
(Catalyst), for $22,250 in subscriptions receivable, pursuant to common stock purchase agreements
with each of these parties. Catalyst is a California limited liability company
of which Charles Samel is the sole manager. Mr. Samel is also the senior
advisor to the Office of the Chairman of GMI. After giving effect to

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such issuances, Vector became the holder of approximately 55% and Catalyst
became the holder of approximately 30% of the outstanding shares of common
stock of PII.

On November 4, 2002, PII entered into a Stock Exchange Agreement (the
Stock Exchange Agreement) with General Media International, Inc. (GMI).
GMI is a New York corporation of all of the capital stock of which is owned by
Robert C. Guccione and Robert C. Guccione Family Trust No. 1. Mr. Guccione is
a director and the Chairman of the Board and Chief Executive Officer of GMI and
General Media, Inc. (General Media). At the closing of the Stock Exchange
Agreement on November 8, 2002, PII acquired from GMI all 475,000 shares of the
common stock of General Media held by GMI. In exchange, PII issued 42.5
million shares of PIIs common stock and 5,000 shares of its Series A Preferred
Stock to GMI, and assumed $6.4 million of GMIs
liabilities. Subsequently, on December 31, 2002, the parties
decided to cancel the assumption of liabilities.

As of the closing of the Stock Exchange Agreement on November 8, 2002, PII
became the holder of approximately 99.5% of the outstanding shares of common
stock of General Media. In addition, GMI became the holder of 85% of the
outstanding shares of common stock, and all of the outstanding shares of
preferred stock, of PII. After giving effect to the issuance of common stock
to GMI, the PII common stock holdings of Vector and Catalyst were 8.24% and
4.45% of the outstanding shares of PII common stock, respectively. Following
the closing, Mr. Guccione and Mr. Samel were elected as directors and executive
officers of PII.

On November 9, 2002, PII entered into Warrant Agreements with Catalyst and
Vector, respectively (the PII Warrant Agreements). Under the PII Warrant
Agreements, PII issued warrants to purchase 575,000 shares of its common stock
to each of Catalyst and Vector (the PII Warrants). The PII Warrants are
exercisable in the event of a refinancing of the Series C 15% Senior Secured
Notes of General Media on the terms set forth in the PII Warrant Agreements,
and for a five year period thereafter, for an exercise price of $.01 per share.
The PII Warrants expire on the maturity date of the Series C Notes if they
have not become exercisable on or before such date.

Shares of PII common stock held by GMI, Catalyst and Vector are subject to
the terms of a Shareholders Agreement dated November 8,
2002 (the
Shareholders Agreement). Under the Shareholders Agreement, Vector and
Catalyst are jointly entitled, upon the death of Robert C. Guccione, to cause
GMI, at its option, either to purchase from Vector and Catalyst all shares of
PII common stock then held by them or to sell to Vector and Catalyst all shares
of PII common stock then held by GMI. The right is exercisable by Vector and
Catalyst by giving joint notice of exercise to GMI within six months of Mr.
Gucciones death, which notice must state the price at which Vector and
Catalyst are willing either to sell or purchase, as the case may be, at GMIs
option and other terms of sale. For a period of 30 business days following the
giving of any such notice, GMI may elect either to sell its shares of PII
common stock or purchase Vector and Catalysts shares of PII common stock on
the terms stated in the notice. If GMI fails to make an election in accordance
with the agreement, GMI is deemed to have elected to purchase the shares of PII
common stock held by Vector and Catalyst.

In addition, under the Shareholders Agreement, GMI is entitled, upon the
death of either of the principals of Vector or Catalyst, to cause Vector and
Catalyst, at their jointly exercised option, either to purchase from GMI all
shares of PII common stock then held by GMI or to sell to GMI all shares of PII
common stock then held by Vector and Catalyst. The right is exercisable by GMI
by giving notice of exercise to Vector and Catalyst within such principals
death, which notice must state the price at which GMI is willing either to sell
or purchase, as the case may be, at Vector and Catalysts joint option and
other terms of sale. For a period of 30 business days following the giving of
any such notice, Vector and Catalyst may jointly elect either to sell their
shares of PII common stock or purchase GMIs shares of PII common stock on the
terms stated in the notice. If Vector and Catalyst fail to make an election in
accordance with the agreement, they are deemed to have elected to purchase the
shares of PII common stock held by GMI.

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PII also is a party to a Registration Rights Agreement dated November 9,
2002 with GMI, Catalyst and Vector (the Registration Rights Agreement).
Under this agreement, PII has granted piggyback registration rights to GMI,
Catalyst and Vector. Accordingly, in the event PII proposes to register any of
its equity securities under the Securities Act of 1933, as amended, it will be
required to provide GMI, Catalyst and Vector with an opportunity to include
their shares of PII common stock (including any shares issued upon exercise
under the PII Warrant Agreements) in the same registration subject to terms and
conditions set forth in the agreement.

On November 8, 2002, PII entered into a Series B Preferred Stock Purchase
Agreement (the Series B Agreement) with Morgan Berkeley Partners, LLC
(MBP). Under the Series B Agreement, PII agreed to issue and MBP agreed to
purchase 5,000 shares of Series B Preferred Stock to MBP for a purchase price
of $5 million. The Series B Agreement has been amended to extend its original
date of December 31, 2002 to January 31, 2003. However, the transaction has
not closed and it is uncertain as to when, if ever, the transaction will close.
PII is in discussions with MBP regarding a further extension of the Series B
Agreement.

The shares of PII common stock and PII Warrants held by Catalyst and
Vector are subject to options to purchase in favor of GMI pursuant to Option
Agreements and Agreements for the Purchase and Sale of Capital Stock dated
November 8, 2002 between GMI and Catalyst or Vector, respectively (the Option
Agreements). The options are exercisable by GMI on the earlier of (a) the
termination of the Series B Agreement for any reason or (b) the deadline date
for the closing of the Series B Agreement. The exercise price is $50,000 for
the securities held by Vector and $22,500 for the securities held by Catalyst.

On November 18, 2002, PII filed an amendment to its First Amended and
Restated Articles of Incorporation to change its name to Penthouse
International, Inc.

PIIs principal asset is its 99.5% common stock holdings in General Media,
a Delaware corporation formed in November 1993 in connection with a private
debt offering (the Offering). As part of the Offering, General Media issued
an aggregate principal amount of $85 million of Series A 10 5/8% Senior Secured
Notes Due 2000 (the Series A Notes). The Series A Notes were issued under an
Indenture dated December 21, 1993 (the Indenture) with IBJ Whitehall Bank &
Trust Company (now HSBC as successor Trustee), as trustee. Following the
Offering, and pursuant to certain registration rights of the Series A
Noteholders, General Media exchanged the Series A Notes for Series B 10 5/8%
Senior Secured Notes Due 2000 (the Series B Notes), which General Media had
registered under the Securities Act of 1933. The Series B Notes were
substantially identical to the Series A Notes (including principal amount,
interest rate and maturity), except that the Series B Notes were freely
transferable.

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

On March 29, 2001, General Media completed the refinancing of the Series B
Notes and the GM Warrants (the Refinancing). Under the refinancing
agreement, pursuant to the exemption from registration contained in Section
3(a)(9) of the Securities Act of 1933, General Media exchanged $51.5 million of
principal amount of Series B Notes and any GM Warrants held by exchanging
holders for new notes (the Series C Notes) and preferred stock meeting
certain specified terms and conditions. The remaining $0.5 million of
principal amount of senior debt securities that were not exchanged were retired
by payments made to the

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holders on March 29, 2001. Any remaining GM Warrants were exercised or
have expired.

The Series C Notes will mature on March 29, 2004, bear interest at a rate
of 15% per annum, and require amortization payments of $6.5 million on or
before December 31, 2003. In addition, further amortization equal to 50% of
excess cash flow is required as well as any proceeds from the sale of certain
real property owned by GMI (after payment of existing debt obligations thereon)
and any proceeds to General Media from certain insurance policies on the life
of the principal shareholder. General Media has pledged substantially all of
its assets as collateral for the Series C Notes. The Indenture was amended to
reflect the above mentioned payments and to reflect the March 29, 2004 maturity
of the Series C Notes.

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

The common stock of PII is traded on the Over-the-Counter Bulletin Board
under the symbol PHSL.

Sources and Availability of Raw Materials

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

Trademarks

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

Seasonality

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

Promotional and Other Activities

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

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events. Expenses of maintaining the Townhouse, as well as any applicable
debt service requirements, are the responsibilities of GMI. See Item 13.
Certain Relationships and Related Transactions and Compensation Committee
Interlock and Insider Participation in Compensation Decisions.

Dependence on Customers

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

Competitors

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

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

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

Employees

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




Item 2. Properties

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

|                                  |  |                                                              |  |          |        |            |  |               
|--------------------------------- |  | ------------------------------------------------------------ |  | -------- | ------ | ---------- |  | --------------
|                                  |  |                                                              |  | Approx.  |        | Lease     
|                                  |  |                                                              |  | Sq. Ft.  |        | Expiration
|Location                          |  | Principal Use                                                |  | Occupied |        | Date      
|                                  |  |                                                              |  |          |        |           
|11 Penn Plaza,
New York, New York |  | Principal
Corporate,
Publishing,
Production and
Sales Office |  |          | 49,000 |            |  | March 11, 2009

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

We also use a 17,000 square foot townhouse located in New York City, owned
by GMI and Robert C. Guccione, for business related activities, including
business meetings and promotional and marketing events. Pursuant to a
Properties and Salary Allocation Agreement among General Media, GMI and a GMI
subsidiary,

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we reimbursed GMI approximately $0.6 million, $0.6 million and $0.5
million in 2002, 2001 and 2000 respectively for the use of such property.




Item 3. Legal Proceedings

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

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

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

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

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

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

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

There
are various lawsuits claiming amounts against PII. While
the outcome of these matters is currently not determinable, it is the opinion
of PIIs management that the ultimate

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liabilities, if any, in the outcome of these cases will not have a
material effect on PII'ss financial condition or results of
operations.




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

By written consent, holders of at least a majority of the then outstanding
shares of the Registrants common stock approved the following actions during
the fourth quarter of the fiscal year ended December 31, 2002:

1.     the election of Jason Galanis as sole director was approved on October
22, 2002;

2.     the Registrants First Amended and Restated Articles of Incorporation
and the Registrants acquisition of 475,000 shares of common stock of General
Media from GMI were approved on November 4, 2002;

3.     an amendment and restatement of the Registrants Bylaws, an increase in
the Registrants authorized number of directors from one to three, the election
of Robert C. Guccione and Charles Samel as directors, the use of indemnity
agreements for the Registrants newly elected directors, the Registration
Rights Agreement by and among the Registrant, GMI, Catalyst Capital, LLC
(formerly known as PH Capital Holdings, LLC) and Vector, the Shareholders
Agreement by and among GMI, Catalyst Capital, LLC and Vector, and the Warrant
Agreement between the Registrant and Catalyst Capital, LLC were approved on
November 9, 2002; and

4.     an amendment to the Registrants First Amended and Restated Articles of
Incorporation was approved on November 14, 2002.




PART II




Item 5. Market for Registrants Common Equity and Related Stockholder Matters.

Price Range

PIIs common stock (the Common Stock) has been quoted on the
Over-the-Counter Bulletin Board (OTCBB) under the symbol PHSL since November
22, 2002.

The following table sets forth the high and low bid prices for the Common
Stock during the periods indicated. The prices reported reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.

|                   |  |      |      |     |  |   |      | 
|------------------ |  | ---- | ---- | --- |  | - | ---- | 
|For the year ended |  |      |      |     |  |   |      | 
|December 31, 2002  |  | High |      | Low
|                   |  |      |      |    
|Fourth Quarter     |  | $    | 4.25 |     |  | $ | 1.00 | 

Holders

There are approximately 32 holders of the Common Stock.

Dividends

PII has never declared dividends on its Common Stock. Payment of
dividends by PII is subject to the approval of the holders of at least 60% of
shares of its Series A Preferred Stock.

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Recent Sales of Unregistered Securities

Within the past three years, the Registrant sold the following securities,
which were not registered under the Securities Act.

1.     On December 12, 2001, the Registrant issued 3,000,000 shares of Common
Stock to Al Siegel in consideration of $7,500.00 cash. This issuance was made by the Registrant in
reliance upon the exemption from registration set forth in Section 4(2) of the
Securities Act.

2.     On July 12, 2002, the Registrant issued 195,000 shares of Common Stock
to Monahan Consulting, Inc. in consideration of services to be performed under
the Monahan Consulting, Inc. Agreement. This issuance was made by the
Registrant in reliance upon the exemption from registration set forth in
Section 4(2) of the Securities Act.

3.     On November 4, 2002, the Registrant issued 2,225,000 shares of Common
Stock to Catalyst Capital, LLC in consideration of $22,250.00 of
subscriptions receivable pursuant to
the Common Stock Purchase Agreement dated as of November 1, 2002 by and between
the Registrant and Catalyst Capital, LLC. This issuance was made by the
Registrant in reliance upon the exemption from registration set forth in
Regulation D promulgated under the Securities Act.

4.     On November 4, 2002, the Registrant issued 930,000 shares of Common
Stock to Vector in consideration of past services rendered to the Registrant,
valued at $9,300.00 pursuant to the Common Stock Purchase Agreement dated as of
November 1, 2002 by and between the Registrant and Catalyst Capital, LLC. This
issuance was made by the Registrant in reliance upon the exemption from
registration set forth in Regulation D promulgated under the Securities Act.

5.     On November 8, 2002, the Registrant issued 42,500,000 shares of Common
Stock and 5,000 shares of its Series A Preferred Stock to GMI in consideration
of, among other things, GMIs assignment of 475,000 shares of General Media
common stock pursuant to the Stock Exchange Agreement dated November 4, 2002 by
and between the Registrant and GMI. This issuance was made by the Registrant
in reliance upon the exemption from registration set forth in Regulation D
promulgated under the Securities Act.

6.     On November 9, 2002, the Registrant issued to Catalyst Capital, LLC a
warrant to purchase up to an aggregate of 575,000 shares of Common Stock at an
exercise price of $0.01 per share. The warrant may be exercised on or after
the first business day following the payment in full of all indebtedness under
the Series C Notes in a Qualified Refinancing and shall expire on the earlier
of (a) the fifth anniversary of the day on which the warrant becomes
exercisable or (b) if the warrant does not become exercisable on or before
March 29, 2004, then March 29, 2004. Qualified Refinancing means any equity
or debt financing transaction completed by GMI and originated or arranged by
Catalyst Capital, LLC, the net proceeds of which are sufficient, and are used,
to pay in full all indebtedness under the Series C Notes on or before the
maturity date thereof, and Series C Notes refers to the Series C 15% Senior
Secured Notes of General Media. This issuance was made by the Registrant in
reliance upon the exemption from registration set forth in Regulation D
promulgated under the Securities Act.

7.     On November 9, 2002, the Registrant issued to Vector a warrant to
purchase up to an aggregate of 575,000 shares of Common Stock at an exercise
price of $0.01 per share. The warrant may be exercised on or after the first
business day following the payment in full of all indebtedness under the Series
C Notes in a Qualified Refinancing and shall expire on the earlier of (a) the
fifth anniversary of the day on which the warrant becomes exercisable or (b) if
the warrant does not become exercisable on or before March 29, 2004, then March
29, 2004. Qualified Refinancing means any equity or debt financing
transaction completed by

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GMI and originated or arranged by Vector, the net proceeds of which are
sufficient, and are used, to pay in full all indebtedness under the Series C
Notes on or before the maturity date thereof, and Series C Notes refers to
the Series C 15% Senior Secured Notes of General Media. This issuance was made
by the Registrant in reliance upon the exemption from registration set forth in
Regulation D promulgated under the Securities Act.




Item 6. Selected Financial Data (a).

|                    |                                                                                                     |                                                    |   |                         |     |      |   |       |       |      |   |       |      |   |   |       |      |   |   |       |      |  
|------------------- | --------------------------------------------------------------------------------------------------- | -------------------------------------------------- | - | ----------------------- | --- | ---- | - | ----- | ----- | ---- | - | ----- | ---- | - | - | ----- | ---- | - | - | ----- | ---- | -
|                    |                                                                                                     |                                                    |   | Year Ended December 31,
|                    |                                                                                                     |                                                    |   |                        
|                    |                                                                                                     |                                                    |   | (In millions)          
|                    |                                                                                                     |                                                    |   | 1998                    |     | 1999 |   | 2000  |       | 2001 |   | 2002 
|                    |                                                                                                     |                                                    |   |                         |     |      |   |       |       |      |   |      
|Operating Data:     |                                                                                                     |                                                    |   |                         |     |      |   |       |       |      |   |       |      |   |   |       |      |   |   |      
|                    | Net revenue                                                                                         |                                                    | $ | 101.0                   |     |      | $ | 75.0  |       |      | $ | 72.3  |      |   | $ | 62.6  |      |   | $ | 53.8  |     
|                    | Operating income (loss)                                                                             |                                                    |   | 5.5                     |     |      |   | (0.8  | )     |      |   | 11.8  |      |   |   | 7.3   |      |   |   | 7.4   |     
|                    | Debt restructuring expenses                                                                         |                                                    |   |                         |     |      |   |       |       |      |   |       |      |   |   | 9.6   |      |   |   |       |     
|                    | Interest expense, net                                                                               |                                                    |   | 9.4                     |     |      |   | 7.2   |       |      |   | 6.4   |      |   |   | 7.7   |      |   |   | 7.2   |     
|                    | Gain on sale of officers life insurance
policies                                                    |                                                    |   |                         |     |      |   |       |       |      |   |       |      |   |   |       |      |   |   | 0.8   |     
|                    | Gain on sale of a work of art                                                                       |                                                    |   |                         |     |      |   |       |       |      |   |       |      |   |   |       |      |   |   | 0.1   |     
|                    | Gain on sale of Automotive Magazines                                                                |                                                    |   |                         |     |      |   | 30.7  |       |      |   |       |      |   |   |       |      |   |   |       |     
|                    | Income (loss) before extraordinary item                                                             |                                                    |   | (3.9                    | )   |      |   | 19.2  |       |      |   | 3.2   |      |   |   | (9.9  | )    |   |   | 1.1   |     
|                    | Extraordinary gain from extinguishment of
debt, net of income taxes of $15 in 1999
and $465 in 2000 |                                                    |   |                         |     |      |   | 0.7   |       |      |   | 0.6   |      |   |   |       |      |   |   |       |     
|                    | Net income (loss)                                                                                   |                                                    |   | (3.9                    | )   |      |   | 19.9  |       |      |   | 3.8   |      |   |   | (9.9  | )    |   |   | 1.1   |     
|EBITDA (b):         |                                                                                                     |                                                    |   |                         |     |      |   |       |       |      |   |       |      |   |   |       |      |   |   |      
|                    | Net income (Loss)                                                                                   |                                                    |   | (3.9                    | )   |      |   | 19.9  |       |      |   | 3.8   |      |   |   | (9.9  | )    |   |   | 1.1   |     
|                    | Adjusted for:                                                                                       |                                                    |   |                         |     |      |   |       |       |      |   |       |      |   |   |       |      |   |   |       |     
|                    |                                                                                                     | Depreciation and amortization                      |   |                         | 1.8 |      |   |       | 0.9   |      |   |       | 0.7  |   |   |       | 0.6  |   |   |       | 0.5  |  
|                    |                                                                                                     | Debt restructuring expenses                        |   |                         |     |      |   |       |       |      |   |       |      |   |   |       | 9.6  |   |   |       |      |  
|                    |                                                                                                     | Interest expense, net                              |   |                         | 9.4 |      |   |       | 7.2   |      |   |       | 6.4  |   |   |       | 7.7  |   |   |       | 7.2  |  
|                    |                                                                                                     | Gain on sale of officers life insurance            |   |                         |     |      |   |       |       |      |   |       |      |   |   |       |      |   |   |       | (0.8 | )
|                    |                                                                                                     | Gain on sale of work of art                        |   |                         |     |      |   |       |       |      |   |       |      |   |   |       |      |   |   |       | (0.1 | )
|                    |                                                                                                     | Gain on sale of automotive magazines               |   |                         |     |      |   |       | (30.6 | )    |   |       |      |   |   |       |      |   |   |       |      |  
|                    |                                                                                                     | Income tax expense (benefit)                       |   |                         |     |      |   |       | 3.4   |      |   |       | 2.3  |   |   |       | (0.1 | ) |   |       |      |  
|                    |                                                                                                     | Extraordinary gain from the
extinguishment of debt |   |                         |     |      |   |       | (0.7  | )    |   |       | (0.6 | ) |   |       |      |   |   |       |      |  
|                    | EBITDA                                                                                              |                                                    |   | 7.3                     |     |      |   | 0.1   |       |      |   | 12.6  |      |   |   | 7.9   |      |   |   | 7.9   |     
|Other Data:         |                                                                                                     |                                                    |   |                         |     |      |   |       |       |      |   |       |      |   |   |       |      |   |   |      
|                    | Capital expenditures                                                                                |                                                    |   | 2.8                     |     |      |   | 0.6   |       |      |   | 0.2   |      |   |   | 0.1   |      |   |   |       |     
|                    | Ratio of earnings to fixed charges                                                                  |                                                    |   | (c                      | )   |      |   | 3.5   |       |      |   | 1.7   |      |   |   | (c    | )    |   |   | 1.1   |     
|Balance Sheet Data: |                                                                                                     |                                                    |   |                         |     |      |   |       |       |      |   |       |      |   |   |       |      |   |   |      
|                    | Total assets                                                                                        |                                                    | $ | 41.9                    |     |      | $ | 30.3  |       |      | $ | 32.8  |      |   | $ | 25.8  |      |   | $ | 15.4  |     
|                    | Current maturities of senior debt securities                                                        |                                                    |   |                         |     |      |   | 51.8  |       |      |   | 2.9   |      |   |   | 5.8   |      |   |   | 7.8   |     
|                    | Senior debt securities, less current
maturities                                                     |                                                    |   | 79.6                    |     |      |   |       |       |      |   | 49.1  |      |   |   | 43.3  |      |   |   | 35.3  |     
|                    | Manditorily redeemable convertible
preferred stock                                                  |                                                    |   |                         |     |      |   |       |       |      |   |       |      |   |   | 9.5   |      |   |   | 11.3  |     
|                    | Total stockholders deficiency                                                                      |                                                    |   | (78.1                   | )   |      |   | (56.7 | )     |      |   | (52.7 | )    |   |   | (64.0 | )    |   |   | (64.6 | )   

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---

|(a) |  | Certain amounts reported for prior periods have been reclassified to
conform to the current years presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | EBITDA represents earnings (loss) from continuing operations before
interest expense, interest income, depreciation, amortization, income
taxes and extraordinary items. We evaluate our operating results based on
several factors, including EBITDA. We consider EBITDA an important
indicator of the operational strength and performance of our ongoing
businesses, including our ability to provide cash flows to pay interest,
service debt and fund capital expenditures. EBITDA also eliminates the
impact of how we fund our businesses and the effect of changes in interest
rates, which are not necessarily indicative of our operating performance.
Finally, EBITDA is used to determine compliance with certain provisions of
the Indenture governing our Series C Notes. EBITDA should not be
considered an alternative to any measure of performance or liquidity under
accounting principles generally accepted in the United States of America.
Similarly, EBITDA should not be inferred as more meaningful than any of
those measures.
|   
|(c) |  | For the years ended December 31, 1998 and 2001, earnings were
insufficient to cover fixed charges by $4,396,000 and $10,255,000,
respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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




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

The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes, and the other financial
information included elsewhere in this annual report.

FORWARD LOOKING STATEMENTS

In addition to historical information, Managements Discussion and
Analysis of Financial Condition and Results of Operations contains
forward-looking statements as to expectations, beliefs, plans, objectives and
future financial performance, and assumptions underlying or concerning the
foregoing. These forward-looking statements involve risks and uncertainties and
are based on certain assumptions, which could cause actual results or outcomes
to differ materially from those expressed in the forward looking statements.
The following are important factors that could cause actual results or outcomes
to differ materially from those discussed in the forward-looking statements:
(a) the Companys ability to continue as a going concern; (b) the ability of
the Company to generate sufficient cash from future operations to make all the
payments required under the Series C Notes; (c) government actions or
initiatives, including (1) attempts to limit or otherwise regulate the sale of
adult-oriented materials, including print, video and online materials, (2)
regulation of the advertisement of tobacco products, or (3) significant changes
in postal regulations or rates; (d) increases in paper and printing prices; (e)
increased competition for advertisers from other publications and media or any
significant decrease in spending by advertisers generally, or with respect to
the adult male market; (f) effects of the consolidations taking place among
businesses which are part of the magazine distribution system; (g) uncertainty
with regard to the future market for entertainment, e-commerce and advertising
by way of the Internet; (h) the impact on advertising sales of a slow-down or
possible recession in the economy, an increasingly competitive environment and
competition from other content and merchandise providers; and (i) the impact of
terrorist attacks and international conflicts. Readers are cautioned not to
place undue reliance in these forward-looking statements, which reflect
managements opinions only as of the date hereof. We undertake no obligation to
revise or publicly release the results of any revision to these forward-looking
statements.

OVERVIEW

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We are currently generating revenues in three industry segments:
publishing, online and entertainment. The publishing segment is engaged in
publication of Penthousemagazine and the Affiliate Publications, the licensing
of our trademarks to publishers in foreign countries, for use on various
consumer products and, starting in 2002, for use in the operation of adult
clubs. The online segment is engaged in the sale of memberships to our Internet
Site, the sale of advertising banners posted on the Internet Site and, starting
in 2001, the sale of adult-oriented consumer products through our online store.
The entertainment segment provides a number of adult-oriented entertainment
products and services, including pay-per-call telephone lines, digital video
discs, videocassettes and pay-per-view programming.

During 2002, net revenues declined due to the weak economy and financial
uncertainty that exits in the publishing industry as a whole.

We have made various operational enhancements, including cost cutting
measures during 2002 to partially offset the decrease in revenues from our
business segments. The cumulative effect of the below listed improvements is
approximately $6.0 million in annual savings.

The following actions were taken during 2002 to improve profitability and
improve cash flow:



| |  |  | On February 28, 2002, we reduced our workforce by 38 employees (25%
of total workforce). This action reduced the amount of cash required
for salary and benefit expenses by approximately $1.6 million during
2002 and is expected to save approximately $2.1 million on an
annualized basis thereafter.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We reduced the production costs of our magazines by negotiating
reductions in the price of paper and printing costs, by changing the
paper grades on our magazines, and by changing their design to improve
production efficiencies, thereby saving approximately $1.9 million in
cash during 2002.     
|
| |  |  | We reduced the amount of cash expended to promote subscriptions and
reduced the amount of cash expended on other selling, general and
administrative expenses by approximately $1.4 million for 2002.                                                                                                   
|
| |  |  | We reduced annual aggregate payments for the benefit of Robert
Guccione by $2.8 million, from $4.5 million to $1.7 million during
2002.                                                                                                                                                                 

The Company has undertaken or is planning the following actions during
2003, which are primarily directed at improving its revenue generating
capability, to attempt to improve its cash flow:



| |  |  | The Company is expanding the licensing of its trademarks to more
adult entertainment clubs.                                                                                                                                             
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Company has entered into a new
cruise ship on demand pay-per-view license agreement to improve the revenue generated by its movies.                                                                                                 
|
| |  |  | The Company is exploring the possibility of expanding the licensing
of its trademarks to different industries and establishing partnerships
with other companies to produce a larger number of movies.                                  
|
| |  |  | The Company is also exploring the possibility of establishing
relationships with other companies to find better ways to generate
revenue from its large collection of pictorial inventory and to reach a
wider audience on the internet.

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YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

Net Revenues

Total net revenues were $62.6 million for the year ended December 31,
2001, compared to revenues of $53.8 million for the year ended December 31,
2002, a decrease of $8.8 million. This decrease was a combination of $5.0
million from our Publishing Segment; $2.5 million from our Online Segment; and
$1.3 million from our Entertainment Segment.

|                      |  |              |      |      |  |   |      | 
|--------------------- |  | ------------ | ---- | ---- |  | - | ---- | 
|                      |  | Net Revenue 
|                      |  |             
|                      |  | Year Ended  
|                      |  | December 31,
|                      |  |             
|                      |  | 2001         |      | 2002
|                      |  |              |      |     
|Publishing Segment    |  | $            | 49.9 |      |  | $ | 44.9 | 
|Online Segment        |  |              | 9.8  |      |  |   | 7.3  | 
|Entertainment Segment |  |              | 2.9  |      |  |   | 1.6  | 
|                      |  |              |      |      |  |   |      | 
|                      |  | $            | 62.6 |      |  | $ | 53.8 | 
|                      |  |              |      |      |  |   |      | 

Publishing Segment

The decrease in revenue in the publishing segment was primarily
attributable to a decrease in Newsstand revenues, as a result of a decrease in
the number of copies of Penthouse magazine and the Affiliate Publications sold.
Newsstand revenues decreased $2.9 million, from $31.0 in 2001 to $28.1 million
in 2002. Newsstand sales have been adversely affected by the continued weakness
in the economy and by the continued loss of newsstand distribution outlets due
to the change in social climate towards mens magazines, advances in electronic
technology, including the proliferation of retail video outlets and the
increased market share of cable television and the internet, as well as ongoing
acquisitions and consolidations of companies in the magazine distribution
industry which have for several years resulted in a reduction in the number of
outlets carrying our magazines. To attempt to offset this decline, we have
implemented special marketing strategies aimed at developing new outlets for
our magazines and rewarding growth in sales by distributors.

Over the last several years, the number of newsstand copies of Penthouse
magazine and the Affiliate Publications sold per issue has trended downward.
From December 31, 1998 to December 31, 2002, Penthousemagazine and the
Affiliate Publications domestic average monthly newsstand circulation decreased
by 39%. We believe that the loss of several newsstand distribution outlets due
to the change in the social climate towards mens magazines, together with
advances in electronic technology, as outlined above, as well as ongoing
acquisitions and consolidations of companies in the magazine distribution
industry have largely contributed to the overall decrease in circulation.
Newsstand sales during 2001 and 2002 have also been negatively impacted by the
economic recession that began in 2001 and the failure of the economy to make a
significant recovery in 2002. We have raised the cover prices of the magazines
and reduced production costs to partially offset the decline in newsstand
circulation. We are attempting to increase newsstand sales though the use of
special marketing strategies we have implemented aimed at developing new
outlets for its magazines and rewarding growth in sales by distributors and the
addition of extra issues of certain of our magazines. We employ a direct
newsstand sales force to call on wholesalers and retailers to promote our
magazines and to provide information back to our corporate office on the
success of our marketing efforts. However due to the negative factors listed
above and the current weakness of the economy that has resulted in an increase
in the number of bankruptcies or near bankruptcies of companies within the
magazine distribution system, the newsstand sales have fallen below that of the
prior year. We believe that newsstand sales may recover somewhat during 2003 if
the economy improves and our special marketing strategies are successful.

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Advertising revenue represented $1.0 million of the publishing segment
revenue decrease, dropping from $8.3 million in 2001 to $7.3 million in 2002.
This decrease is attributable to a decrease in the average rate per page of
advertising pages sold in Penthousemagazine and the Affiliate Publications and
a decrease in the number of advertising pages sold in Penthousemagazine,
partially offset by an increase in the number of advertising pages sold in the
Affiliate Publications.

The advertising revenues of Penthousemagazine and the Affiliate
Publications have also declined over the past several years. The primary reason
for the decrease in advertising revenue has been the decrease in the average
monthly circulation of our magazines, which has the effect of decreasing
advertising rates and making our magazines less attractive to advertisers. In
addition, many advertisers scaled back advertising in Penthousemagazine during
2002 as a result of the continuing weakness in the economy and many cigarette
companies have either suspended or scaled back advertising in magazines as a
result of increased pressure from regulatory agencies and concerns over
litigation against tobacco companies. However we were successful in increasing
sales of the lower priced advertising pages offered by the Affiliate
Publications during 2002, which became more attractive to advertisers who had
smaller advertising budgets available and could not afford advertisements in
Penthousemagazine. There has also been a steady decrease in pay-per-call
advertising over the past several years as competition in the pay-per-call
industry has caused rates per minute to decrease and as pay-per-call services
have attracted less of an audience in recent years. Partially offsetting these
negative factors has been an increase in demand for advertising for sexual
enhancement products. We are also pursuing advertisers in many other industries
in an attempt to improve our advertising revenue. We believe, however, that due
to the above mentioned negative factors, 2003 advertising revenues will fall
below 2002 revenue.

Subscription revenue accounted for $0.6 million of the decrease in our
publishing segment, decreasing from $7.3 million for the year ended December
31, 2001 to $6.7 million for the year ended December 31, 2002. The decrease is
attributable to a decrease in the number of subscription copies sold per issue
as a result of a decrease in the number of subscription acquisition direct
mailings done in the current year, partially offset by a slight increase in the
rate per copy sold.

We have experienced a steady decline in the number of sales of
subscription copies of Penthousemagazine and the Affiliate Publications over
the past several years. We believe the reasons for the decrease are similar to
the reasons for the declining newsstand sales, but has also resulted from
increases in the subscription prices of the magazines and lowered discounts
offered to subscription agents. We increased the subscription prices of the
magazines and lowered discounts to subscription agents in order to increase the
profitability of subscription sales. Subscription revenue also decreased in
2002 as a result of a decrease in the number of subscription acquisition direct
mailings done in the current year. We are not planning to increase the
subscription prices for the magazines in the near term and we plan to increase
the number of subscription acquisition direct mailings in 2003. We therefore
expect the number of subscribers to decline slightly in the first half of 2003
and then to begin to increase during the remainder of the year, as a result of
the increase in the number of subscription acquisition direct mailings.
However, the 11.6% increase in postal rates that went into effect in July 2002
is expected to reduce the profitability of subscription sales by approximately
$350,000 on an annualized basis.

Revenues from licensing of foreign editions were $2.1 million and $1.6
million for the year ended December 31, 2002 and 2001, respectively, a decrease
of $0.5 million. The decrease in revenues in 2002 resulted when some of our
licensees stopped publishing magazines in their respective markets.

Until 2002, revenue from licensing of foreign editions had remained fairly
stable for many years. While declining circulation in mens magazines around the
world had resulted in lower royalty payments per licensee each year, we had
been able to maintain our licensing revenue by adding new licensees to offset
declining royalty payments. During 2002, our foreign edition licensing revenue
declined when some of our licensees stopped publishing and we were unable to
complete a sufficient number of new licensing agreements to replace the ones
that were lost in these markets. The continuing weakness in the economy of most
foreign countries during the year and the declining circulation of mens
magazines have made it more difficult to find licensees willing to launch new
publications. Despite the results for 2002, we expect revenue from foreign

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licensing to increase moderately in 2003 as a result of two new agreements
with licensees that have been completed in 2003 and several others that are in
the process of being negotiated. However this expectation is partially
dependent on the strength of the economy in the foreign countries that we have
existing and potential licensees in during 2003, which is uncertain at this
time.

Online Segment

Decreasing revenue in the online segment is primarily attributable to a
decrease in revenue from the sale of memberships to the Internet Site of $2.0
million. The decrease in revenue resulted from a decrease in the average price
of the memberships sold, partially offset by an increase in the number of new
members. The number of members to our Internet Site has increased 4% over the
past year. In October 2002, we increased the price of memberships to the
Internet Site and eliminated some lower priced options in order to increase the
average price paid for memberships going forward. We also redesigned the site
to add more features and content to make it more appealing to members. These
changes have helped to encourage members to retain their memberships for longer
periods of time. In addition, we began accepting on-line electronic check
payments in July 2002 as an additional method of payment and plan to enter into
cross-marketing programs with other web sites to increase the amount of traffic
coming to the Internet Site.

Online advertising revenues from banners on the Internet Site decreased by
$0.5 million during the year ending December 31, 2002. The decrease in
advertising revenue is primarily attributable to the weakness in the U.S.
economy during 2001 and 2002.

Revenues from the online segment, which had declined during 2001,
primarily as a result of the use of more aggressive credit card validation
methods required to comply with Visas requirements, continued to decline in
2002 for the reasons stated above. We believe, however, that revenues from
memberships will start to increase slightly in 2003 as a result of the changes
we have made to the pricing structure, the cross-marketing programs we plan to
enter into to bring traffic to the Internet Site and the redesign of the
Internet Site that was made to retain members for longer periods of time, as
stated above. However, the results will depend partially on the strength of the
economy during 2003, which is uncertain at this time. We do not believe we will
need to improve our validation methods any further to meet Visas requirements.
However, Visa has the right to modify the maximum allowable chargeback level at
any time. Should Visa decide to reduce the maximum chargeback level, we may
need to intensify our validation methods further to meet the new requirements,
which would result in a decrease in the number of customers who would be
accepted as members of the Internet Site. MasterCard recently established its
own regulations for maximum chargeback and refund levels that went into effect
in April 2002. Our chargeback and refund levels have remained well within those
required by the new MasterCard regulations and these new regulations have had
no material effect on the sales of memberships to the Internet Site. There is
also the possibility that one or more of the credit card companies may decide
to stop processing adult on-line internet transactions altogether, which most
likely would result in a decrease in online revenues. We believe that revenue
from advertising banners in the Internet Site for the year 2003 will be
consistent with 2002. Revenues from the online store in 2003 are also expected
to remain fairly consistent with that of 2002.

Entertainment Segment

The decrease in revenue in the entertainment segment was primarily due to
our video business. Revenues of the video business were $2.1 million for the
year ended December 31, 2001 compared to $1.0 million for the year ended
December 31, 2002, a decrease of $1.1 million. Revenues for the year ended
December 31, 2002 were lower due to sales in the prior year from a series of
movies produced under a joint venture agreement, revenue in the prior year from
several foreign licensing agreements which were not renewed in the current year
and sales in the prior year of several re-released catalog titles. The amount
of video business revenues earned in each period varies with the timing of new
contracts for the production and distribution of movies.

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Revenues from the Companys pay-per-call business were $0.7 million and
$0.6 million for the years ended December 31, 2001 and
2002, respectively, a
decrease of $0.1 million. Revenues for the year ended December 31, 2002 were
lower due to lower billable minutes.

Revenues from the Entertainment Segment have been declining over the past
few years as a result of a steady decrease in demand for pay-per-call services.
Our video business revenues for the year ended December 31, 2002 have decreased
over the prior year, for the reasons stated above. We are in the process of
establishing new business relationships to increase our video business revenue
for 2003 and thereafter. However results for 2003 will depend on how quickly we
are able to reach agreements with prospective partners in producing and
distributing the movies and the timing of the movie releases.

Publishing  production, distribution and editorial

Publishing-production, distribution and editorial expenses were $24.2
million and $21.6 million for the year ended December 31, 2001 and 2002,
respectively, a decrease of $2.6 million.

Paper costs were $8.5 million and $7.4 million for the years ended
December 31, 2001 and 2002, respectively, representing $1.1 million of the
decrease. Printing costs were $8.7 million for the year ended December 31,
2001, compared to $7.8 million for the year ended December 31, 2002,
representing $0.9 million of the decrease. These decreases are primarily the
result of negotiating reductions in the price of paper and printing costs, by
changing the grades of paper used to produce the magazines and by changing
their design to improve production efficiencies, partially offset by an
increase in the number of copies printed as a result of an additional issue of
Penthousemagazine and two additional issues of Girls of Penthousemagazine
during the year ended December 31, 2002.

Distribution costs were $4.2 million and $3.7 million for the year ended
December 31, 2001 and 2002, respectively, a decrease of $0.5 million.

Editorial costs were $2.9 million and $2.8 million for the year ended
December 31, 2001 and 2002, respectively, a decrease of $0.1 million.

We have been steadily reducing our publishing-production, distribution and
editorial expenses over the past several years by reducing the number of copies
printed, reducing the number of pages per issue, negotiating reductions in
paper and printing costs, changing the grades of paper used to produce the
magazines and changing their design to improve production efficiencies. We
expect these expenses to remain about the same in 2003 as a result of the
offsetting effect of cost reductions from further reductions in the number of
copies printed and increases in printing costs as a result of increases for
inflation contained in contracts with our printers. Printing costs are expected
to increase in 2003 primarily as a result of recent increases in the cost of
petroleum that are expected to cause increases in the cost of energy,
transportation and certain petroleum based products that are used in the
printing process such as ink. Paper manufacturers are also expected to attempt
to pass on some of their increased energy and transportation costs in the form
of price increases, however they may be unsuccessful as a result of the current
weak demand for paper. Paper prices tend to be volatile and a large increase in
prices could have a material adverse affect on our cash flows and
profitability.

Online  direct costs

Direct costs for the online segment were $0.4 million and $0.1 million for
the year ended December 31, 2001 and 2002, respectively, a decrease of $0.3
million. The decrease is primarily attributable to a decrease in fees paid to
content providers of $0.2 million and a decrease in expenditures for content
purchased for the Internet Site of $0.1 million for the year ended December 31,
2002. Direct costs are expected to increase at about the same rate as inflation
in future years.

Entertainment  direct costs

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Entertainment direct costs were $0.6 million for both the year ended
December 31, 2001 and 2002. Direct costs for 2003 are expected to increase due
to increased levels of production of films and the rate of inflation.

Selling, general and administrative

Selling,
general and administrative expense was $25.5 million for the year
ended December 31, 2001, compared to $22.5 million for the
year ended December 31, 2002, a decrease of $3.0 million. The decrease is primarily due to a
decrease in salaries and benefits of $3.0 million, subscription acquisition
expenses of $0.5 million, commissions expenses of $0.2 million, rent of $0.1
million, advertising expenses of $0.1 million and bank charges of $0.1
million, offset by increased legal fees of $0.7 million, increased insurance
expenses of $0.1 million, increased professional fees of $0.1 million and
increased data processing fees of $0.1 million.

Selling, general and administrative expenses for the Publishing Segment
were $10.9 million for the year ended December 31, 2001, compared to $9.0
million for the year ended December 31, 2002, a decrease of $1.9 million. The
decrease is primarily due to a decrease in salaries and benefits of $1.2
million, subscription expense of $0.5 million, commission expense of $0.1
million and rent expense of $0.1 million during the year ended December 31,
2002.

Selling general and administrative expenses for the online segment were
$3.5 million for the year ended December 31, 2001, compared to $3.0 million for
the year ended December 31, 2002, a decrease of $0.5 million. The decrease is
primarily attributable to a decrease in salaries and benefits of $0.4 million,
advertising expense of $0.1 million and bank charges of $0.1 million, partially
offset by increased data processing fees of $0.1 million during the year ended
December 31, 2002.

Selling, general and administrative expenses for the entertainment segment
were $0.7 million and $0.3 million for the years ended December 31, 2001 and
December 31, 2002, respectively, a decrease of $0.4 million. The decrease is
primarily attributable to decreased salary and benefits expense of $0.2
million, commissions of $0.1 million and professional fees of $0.1 million
during the year ended December 31, 2002.

Included in selling, general and administrative expenses are corporate
administrative expenses which includes executive, legal, human resources,
finance and accounting, management information systems, costs related to the
operation of the corporate and executive offices and various other expenses.
Corporate administrative expenses were $10.4 million for the year ended
December 31, 2001, compared to $10.2 million for the year ended December 31,
2002, a decrease of $0.2 million. This decrease is primarily attributable to
decreased salaries and benefits of $1.2 million, partially offset by an
increase in legal expenses of $0.7 million, professional fees of $0.2 million
and insurance expenses of $0.1 million for the year ended December 31, 2002.

In future years we expect selling, general and administrative expenses to
increase at about the same rate as inflation.

Bad debts expense

Bad debt expense was $3.3 million for the year ended December 31, 2001,
compared to $0.4 million for the year ended December 31, 2002, a decrease of
$2.9 million. The decrease is primarily attributable to the recording of
reserves in the prior year of $1.1 million against an unsecured loan receivable
from an entity which is owned by GMIs principal shareholder, a reserve against
the amount due from GMI and the Other GMI subsidiaries of $0.8 million, a
reserve of $0.5 million related to receivables from subscription agents, a
reserve of $0.4 million related to receivables from KC Publishing, Inc, a
company owned by a former President and Chief Operating Officer of
the Company and a reserve
of $0.2 million related to video receivables, as well as a decrease in reserves
for advertising accounts receivable of $0.1 million in the current year. This
was partially offset by additional reserves against the amount due from GMI and
the Other GMI subsidiaries of $0.2 million during

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the year ended December 31, 2002. We established these reserves because
collectibility of these amounts was not assured.

Expense allocation from affiliated companies

Expense allocation from affiliated companies represents charges from an
affiliated company for our use of the affiliates facilities. The charge is
based upon our proportionate share of the operating expenses of such
facilities. Rent expense from affiliated companies was $0.6 million for both
the years ended December 31, 2001 and 2002.

Depreciation and amortization

Depreciation and amortization expense was $0.6 million for the year ended
December 31, 2001, compared to $0.5 million for the year ended December 31,
2002, a decrease of $0.1 million. The decrease is due to reduced spending on
capital expenditures over recent years resulting in a corresponding decrease in
depreciation expense.

Income from operations

As a result of the above discussed factors, income from operations was
$7.3 million and $7.4 million for the year ended December 31, 2001 and 2002,
respectively, an increase of $0.1 million.

Debt restructuring expenses

For the year ended December 31, 2001 we recognized $9.6 million in debt
restructuring expenses related to the refinancing of our Series C Notes on
March 29, 2001 (see Note 11 of the Notes To Consolidated Financial Statements).

Interest expense

Interest expense was $8.0 million for the year ended December 31, 2001,
compared to $7.3 million for the year ended December 31, 2002, a decrease of
$0.7 million. This decrease is due to a decrease in the total outstanding
principal amount of our Series C Notes.

Interest income

Interest income was $0.3 million for the year ended December 31, 2001,
compared to $0.1 million for the year ended December 31, 2002, a decrease of
$0.2 million. The decrease is due to a decrease in the amount of cash available
for investment during the current year.

Gain of sale of officers life insurance

For the year ended December 31, 2002 we recognized a gain of $0.8 million
on the sale of certain insurance polices on the life of our principal
shareholder.

Gain on sale of art

For the year ended December 31, 2002 we recognized a gain of $0.1 million
on the sale of a certain work of art.

Income before the provision for income taxes

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As a result of the above discussed factors, loss before income tax expense
(benefit) for the year ended December 31, 2001 was
$10.0 million, compared to income before income tax expense (benefit) of $1.2 million for the year ended
December 31, 2002.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

Net Revenues

Our net revenues were $72.3 million for the year ended December 31, 2000,
compared to revenues of $62.6 million for the year ended December 31, 2001, a
decrease of $9.7 million. This decrease was a combination of $6.3 million from
our Publishing Segment; $3.0 million from our Online Segment; and $0.4 million
from our Entertainment Segment.

|                      |  |              |      |      |  |   |      | 
|--------------------- |  | ------------ | ---- | ---- |  | - | ---- | 
|                      |  | Net Revenue 
|                      |  |             
|                      |  | Year Ended  
|                      |  | December 31,
|                      |  |             
|                      |  | 2000         |      | 2001
|                      |  |              |      |     
|Publishing Segment    |  | $            | 56.2 |      |  | $ | 49.9 | 
|Online Segment        |  |              | 12.8 |      |  |   | 9.8  | 
|Entertainment Segment |  |              | 3.3  |      |  |   | 2.9  | 
|                      |  |              |      |      |  |   |      | 
|                      |  | $            | 72.3 |      |  | $ | 62.6 | 
|                      |  |              |      |      |  |   |      | 

Publishing Segment

The decrease in revenue in the publishing segment was primarily
attributable to a decrease in Newsstand revenue, as a result of a decrease in
the number of copies of Penthousemagazine and the Affiliate Publications sold,
partially offset by an increase in the cover price of Penthouse, Penthouse
Lettersand Variationsmagazines. Newsstand revenues decreased $5.5 million,
from $36.5 in 2000 to $31.0 million in 2001. Of this decrease, $0.4 million is
due to the suspension of publication of Power Magazine. Newsstand sales have
been adversely affected by the weakness in the economy in 2001 and by the
ongoing consolidations of companies within the magazine distribution industry
which have for several years resulted in a reduction in the number of outlets
carrying our magazines.

Advertising revenues from Mens Magazines were $8.8 million and $8.3
million for the year ended December 31, 2000 and 2001, respectively, a decrease
of $0.5 million. The decrease in advertising revenue is primarily attributable
to a decrease in the average rate per page of advertising pages sold in
Penthousemagazine, partially offset by an increase in the number of
advertising pages sold in this publication.

Advertising revenues for Power Magazine were $0.7 million for the year
ended December 31, 2000. Publication of Power Magazine was suspended after the
November 2000 issue.

Subscription revenues were $6.9 million and $7.3 million for the year
ended December 31, 2000 and 2001, respectively, an increase of $0.4 million.
The increase is due to an increase in the net revenue per copy sold of the
Penthousemagazine,partially offset by a decrease in the number of
subscription copies sold of Penthousemagazine and the Affiliate Publications.
In the third quarter of 1999, the Company increased the subscription price for
Penthousemagazine and reduced discounts offered to its subscription agents to
improve the profitability of subscriptions sold. This change has had the effect
of increasing the net revenue per copy for subscriptions as old subscriptions
expire and they are replaced by new subscriptions sold at the increased rate.
This increase has been partially offset by a decrease in the number of
subscription copies sold during the year ended December 31, 2001 as compared to
the year ended December 31, 2000.

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Revenues from licensing of foreign editions were $2.1 million for both the
years ended December 31, 2000 and 2001, respectively.

Online Segment

Revenues for the online segment were $12.8 million and $9.8 million for
the year ended December 31, 2000 and 2001, respectively, a decrease of $3.0
million. Decreasing revenue in the online segment is primarily attributable to
a decrease in revenue from the sale of memberships to the Internet Site of $3.4
million, partially offset by an increase in advertising revenues from banners
in the Internet Site of $0.1 million and online store revenue of $0.3 million
during the year ending December 31, 2001. We experienced a decline in new
members due to weakness in the U.S. economy during the year ended December 31,
2001 and due to our use of more aggressive credit card validation methods in
order to comply with Visas more stringent requirements regarding chargeback
levels.

Entertainment Segment

Revenues for the Entertainment Segment were $3.3 million and $2.9 million
for the year ended December 31, 2000 and 2001, respectively, a decrease of
$0.4 million.

The
decrease in revenue in the entertainment segment was primarily due to our
pay-per-call business. Revenues from our pay-per-call business were $1.0
million and $0.7 million for the year ended December 31, 2000 and 2001,
respectively, a decrease of $0.3 million. Revenues for the year ended
December 31, 2001 were lower due to lower billable minutes

Revenues from our video business were $2.2 million and $2.1 million for
the year ended December 31, 2000 and 2001, respectively, a decrease of $0.1
million. Revenues for the year ended December 31, 2001 were lower because the
company re-released many of its older movies on DVD format during the prior
year causing sales to be higher during the prior period.

Publishing  production, distribution and editorial

Publishing-production, distribution and editorial expenses were $29.6
million and $24.2 million for the year ended December 31, 2000 and 2001,
respectively, a decrease of $5.4 million. $1.3 million of this decrease is
attributable to the suspension of publication of Power Magazine.

For the remaining magazines, paper costs were $11.3 million and $8.4
million for the year ended December 31, 2000 and 2001, respectively, a decrease
of $2.9 million. Print costs were $9.5 million for the year ended December 31,
2000, compared to $8.7 million for the year ended December 31, 2001, a decrease
of $0.8 million. The decreases are due primarily to a decrease in the number of
copies printed, a decrease in the price of paper, and a decrease in the number
of pages per issue, partially offset by paper and printing costs for two
additional issues of Girls of Penthousein 2001 and increased printing costs
due to price increases for inflation contained in our contracts with printers.

Distribution costs were $4.2 million for both the years ended December 31,
2000 and 2001.

Editorial costs were $3.3 million and $2.9 million for the year ended
December 31, 2000 and 2001, respectively, a decrease of $0.4 million.

Online  direct costs

Direct costs for the online segment were $0.6 million and $0.4 million for
the year ended December 31, 2000 and 2001, respectively, a decrease of $0.2
million. The decrease is primarily attributable to a decrease in fees paid to
content providers for the year ended December 31, 2001.

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Entertainment  direct costs

Entertainment  direct costs were $0.6 million for both the year ended
December 31, 2000 and 2001.

Selling, general and administrative

Selling, general and administrative expense was $27.8 million for the year
ended December 31, 2000, compared to $25.5 million for the year ended December
31, 2001, a decrease of $2.3 million. $0.6 million of this decrease is
attributable to Power magazine, which suspended publication after the November
2000 issue. The remaining decrease of $1.7 million is primarily due to a
decrease in salaries and benefits of $1.6 million, bank charges of $0.8
million, legal fees of $0.6 million, consulting expenses of $0.1 million,
travel expenses of $0.1 million, promotional expenses of $0.1 million and rent
expenses of $0.1 million, partially offset by increased subscription
acquisition costs of $1.1 million, insurance expenses of $0.3 million,
fulfillment expenses of $0.1 million, commercial rent taxes of $0.1 million and
promotions expense of $0.1 million during the year ended December 31, 2001.

Selling, general and administrative expenses for the Publishing Segment
were $11.0 million for the year ended December 31, 2000, compared to $10.9
million for the year ended December 31, 2001, a decrease of $0.1 million. $1.0
million of this decrease was due to a reduction in salaries and benefits
expenses and $0.6 million of the decrease was attributable to Power Magazine,
which suspended publication with the November 2000 issue. These decreases were
partially offset by increased subscription acquisition costs of $1.1 million,
consulting expense of $0.1 million, fulfillment expense of $0.1 million,
commercial rent taxes of $0.1 million and promotions expense of $0.1 million
during the year ended December 31, 2001.

Selling general and administrative expenses for the online segment were
$4.0 million for the year ended December 31, 2000, compared to $3.4 million for
the year ended December 31, 2001, a decrease of $0.6 million. The decrease is
primarily attributable to a decrease in bank charges of $0.8 million and
consulting fees of $0.2 million, partially offset by increased salaries and
benefits of $0.4 million during the year ended December 31, 2001.

Selling, general and administrative expenses for the entertainment segment
were $0.8 million and $0.7 million for the year ended December 31, 2000 and
December 31, 2001, respectively, a decrease of $0.1 million. The decrease is
primarily attributable to decreased salary and benefits expense during the year
ended December 31, 2001.

Included in selling, general and administrative expenses are corporate
administrative expenses which includes executive, legal, human resources,
finance and accounting, management information systems, costs related to the
operation of the corporate and executive offices and various other expenses.
Corporate administrative expenses were $11.9 million for the year ended
December 31, 2000, compared to $10.4 million for the year ended December 31,
2001, a decrease of $1.5 million. This decrease is primarily attributable to
decreased salaries and benefits of $0.9 million, legal fees of $0.6 million,
travel expenses of $0.1 million, rent of $0.1 million and promotional expenses
of $0.1 million, partially offset by increased insurance expense of $0.3
million.

Bad debts expense

Bad debt expense was $0.6 million for the year ended December 31, 2000,
compared to $3.3 million for the year ended December 31, 2001, an increase of
$2.7 million. The increase is primarily attributable to the recording of a
reserves of $1.1 million against an unsecured loan receivable from an entity
which is owned by GMIs principal shareholder, a reserve against the amount due
from GMI and the Other GMI subsidiaries of $0.8 million, increased reserves of
$0.3 million related to receivables from subscription agents, a reserve of $0.4
million related to receivables from KC Publishing, Inc, a company
owned by a

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former President and Chief Operating
Officer of the Company and reserves of $0.2
million related to video receivables, partially offset by a decrease in
reserves for advertising accounts receivable of $0.1 million during the year
ended December 31, 2001. We established these reserves because collectibility
of these amounts was not assured.

Expense allocated from affiliated companies

Expense allocated from affiliated companies represents charges from an
affiliated company for our use of the affiliates facilities. The charge is
based upon the Companys proportionate share of the operating expenses of such
facilities. Rent expense from affiliated companies was
$0.5 million and $0.6
million for the years ended December 31, 2000 and 2001, respectively.

Depreciation and amortization

Depreciation and amortization expense was $0.7 million for the year ended
December 31, 2000, compared to $0.6 million for the year ended December 31,
2001, a decrease of $0.1 million. The decrease is due to reduced spending on
capital expenditures over recent years resulting in a corresponding decrease in
depreciation expense

Income from operations

As a result of the above discussed factors, income from operations was
$11.8 million and $7.3 million for the year ended December 31, 2000 and 2001,
respectively, a decrease of $4.5 million.

Debt restructuring expenses

For the year ended December 31, 2001 we recognized $9.6 million in debt
restructuring expenses related to the refinancing of our Series C Notes on
March 29, 2001 (see Note 11 of the Notes To Condensed Consolidated Financial
Statements).

Interest expense

Interest expense was $6.9 million for the year ended December 31, 2000,
compared to $8.0 million for the year ended December 31, 2001, an increase of
$1.1 million. The increase is primarily due to an increase in the interest
rate paid on our Series C Notes as a result of the refinancing of the Notes.
The interest rate on the Series C Notes issued on March 29, 2001 is 15%
compared to an interest rate of 10-5/8% on the Notes which were retired on that
date. The new rate went into effect on January 1, 2001. Included in interest
expense for the year ended December 31, 2000 are amortized debt issuance costs
and discounts of $0.9 million.

Interest income

Interest income was $0.5 million for the year ended December 31, 2000,
compared to $0.3 million for the year ended December 31, 2001, a decrease of
$0.2 million. The decrease is due to a decrease in the amount of cash available
for investment during the current year.

Income before the provision for income taxes

As a result of the above discussed factors, income before income tax
expense (benefit) for the year ended December 31, 2000 was $5.5 million,
compared to a loss before income tax expense (benefit) of $10.0 million for the
year ended December 31, 2001.

LIQUIDITY AND CAPITAL RESOURCES

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At December 31, 2001, we had $2.4 million in cash and cash equivalents, as
compared to $0.2 million at December 31, 2002, a decrease of $2.2 million
during the year ended December 31, 2002. The decrease was due to the use of
$1.4 million in operating activities and mandatory principal payments for our
Series C Notes of $5.9 million. This was offset in part by a net decrease in
advances from affiliated companies of $2.5 million, the collection of $1.0
million of loans receivable from the principal shareholder that arose in prior
periods, the receipt of $0.9 million from the sale of life insurance policies
(the Policies) on the life of the principal shareholder and the receipt of
$0.6 million from the sale of a work of art. In January 2003, we received $1.0
million from GMI as a partial repayment of the balance due from affiliated
companies. At December 31, 2002, our current liabilities exceeded current
assets by $58.6 million.

In addition to the principal and interest payments made in January 2003,
General Medias Series C Notes require interest payments of approximately $5.9
million and principal payments of $6.5 million during the year ended December
31, 2003. We do not believe we can generate sufficient funds from operations to
make all of these required payments. In the event we are unable to make these
payments, the trustee under the indenture governing the Series C Notes (the
Indenture), in addition to other actions, could assume control over General
Media and substantially all of our assets including our registered trademarks.
We are seeking other sources of financing to replace our current debt
arrangements. There can be no assurance that we will be successful in obtaining
other sources of financing

We took the following actions in 2002 to attempt to improve our
profitability and cash flow:



| |  |  | On February 28, 2002, the Company reduced its workforce
by 38 employees (25% of total workforce). This action reduced the
amount of cash required for salary and benefit expenses by
approximately $1.6 million during 2002 and is expected to save
$2.1 million on an annualized basis thereafter.                 
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We reduced the production and distribution costs of our
magazines by negotiating reductions in the price of paper and
printing costs, by changing the paper grades on our magazines,
and by changing their design to improve production efficiencies,
thereby saving approximately $1.9 million in cash during 2002.
|
| |  |  | We reduced the amount of cash expended to promote
subscriptions and reduced the amount of cash expended on other
selling, general and administrative expenses by approximately
$1.4 million for 2002.                                                                                                               
|
| |  |  | We delayed employee salary increases for five months
during 2002. This action saved us approximately $70,000 in 2002.                                                                                                                                                                                               
|

The Company has undertaken or is planning the following actions during
2003, which are primarily directed at improving its revenue generating
capability, to attempt to improve its cash flow:



| |  | The Company is expanding the licensing of its trademarks to more adult entertainment clubs.                                                                                                           
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | The Company has entered into a new
cruise ship on demand pay-per-view license agreement to improve the revenue generated by its movies.                                                               
| 
| |  | The Company is exploring the possibility of expanding the licensing of its trademarks to different industries and
establishing partnerships with other companies to produce a larger number of movies.

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| |  | The Company is also exploring the possibility of establishing relationships with other companies to find better ways to
generate revenue from its large collection of pictorial inventory and to reach a wider audience on the internet.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Since the above actions will not generate sufficient improvements to cash
flow to meet current debt service requirements, we are contemplating additional
actions, including seeking other sources of financing, to provide cash.
However, there can be no assurances that we will be able to achieve such a
result.

Cash flows from operating activities

Net cash
provided by operating activities was $4.1 million for the year ended
December 31, 2001, compared to net cash used in operating activities of
$1.4 million for the year ended December 31, 2002. The primary reason for the
change in cash flow from operating activities for the year ended December 31,
2002 was the net income for the year adjusted by a gain on the sale of life
insurance policies, a gain on the sale of a work of art and depreciation, as
well as a significant decrease in accounts payable due to the timing of
payments to vendors and decreases in deferred revenues during the year ended
December 31, 2002. This was partially offset by decreases in inventories,
receivables, spending on subscription acquisition drives and a reduction in
receivables from affiliated companies. The net cash provided by operating
activities for the year ended December 31, 2001, was derived by adjusting the
net loss for the period by the effect of restructuring expenses, bad debts and
depreciation, as well as a decrease in inventories and accounts receivable from
our newsstand distributor. This was partially offset by increased spending on
subscription acquisition drives and increased payments of interest on the
Senior Secured Notes during the year ended December 31, 2001.

Cash flows from investing activities

Cash
flows used in investing activities were $0.1 million for the year
ended December 31, 2001, compared to cash flows provided by investing activities of
$1.5 million for the year ended December 31, 2002. The cash provided by
investing activities for the year ended December 31, 2002 was the result of the
sale of insurance policies on the life of the principal shareholder for $0.9
million and the sale of a work of art for $0.6 million. The cash used in
investing activities for the year ended December 31, 2001 was the result of
capital expenditures made during that period.

Cash flows from financing activities

Cash flows used in financing activities were $8.0 million for the year
ended December 31, 2001, compared to cash flows used in financing activities of
$2.4 million for the year ended December 31, 2002. Cash used in financing
activities for the year ended December 31, 2002 was primarily the result of
payments of $5.9 million in mandatory principal payments for its Series C
Notes, partially offset by repayments of $2.5 million from GMI and $1.0 million
in cash received against a loan from the principal shareholder. Cash used in
financing activities for the year ended December 31, 2001 was primarily the
result of the payment of debt issuance costs of $2.0 million related to the
refinancing our Series C Notes (See Notes 5 and 6 of the Notes To Consolidated
Financial Statements), advances of $3.2 million to GMI and the repayment of
$2.9 million of principal amount of the Notes, during the year ended December
31, 2001.

Affiliated company advances at December 31, 2002 decreased $2.5 million
from December 31, 2001. These balances regularly result from the effect of
certain cost sharing and expense allocation agreements with GMI and its
subsidiaries, whereby certain costs, such as shared corporate salaries and
overhead, are paid by us and a portion is charged to GMI and its subsidiaries
as incurred. These charges generally result in amounts due to General Media,
and are to be repaid sixty days after the end of each quarter in accordance
with the terms of an expense sharing agreement. The expense sharing agreement
will need to be modified as a result of changes in provisions of the Indenture
specified in the Third Supplemental Indentures which established limits for the

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amounts of payments on behalf of Robert C Guccione and his Affiliates, but
did not specify dates for repayment. These changes have the effect of
permitting an increase in amounts that may be due from affiliates. General
Media intends to amend the expense sharing agreement in the near future to
match those specified in the new provisions of the Indenture. The ability of
General Media to realize repayment of its advance is dependent upon the success
of GMI in refinancing its existing debt obligations, most of which are
currently in default. At December 31, 2001, we had a loan receivable from the
principal shareholder of GMI of $1.0 million. The principal shareholder repaid
$529,000 and $471,000 of this loan in April and May 2002, respectively.

DEBT

The Companys debt includes Series C Senior Secured Notes, which are
collateralized by substantially all of our assets. The Series C Notes, which
bear interest at a rate of 15% per annum, have a maturity date of March 29,
2004. As of December 31, 2002, General Medias unpaid principal balance on the
Series C Notes was approximately $43.1 million.

The Series C Notes require amortization payments of $6.5 million during
the calendar year 2003, with the balance of $35.3 million due in 2004. In
addition, further amortization equal to 50% of excess cash flow in each year is
required, as well as any proceeds from the sale of certain real property owned
by GMI (after payment of existing debt obligations thereon) and any proceeds to
us from certain insurance policies on the life of the principal shareholder. We
made amortization payments of $5.9 million during the year ended December 31,
2002, which included $0.9 million of proceeds from the sale of the Policies
(See Note 9 of the Notes to Consolidated Financial Statements) and $0.6 million
of proceeds from the sale of a work of art (See Note 10 of the Notes to
Consolidated Financial Statements).

The Indenture has been extended to the March 29, 2004 maturity of the
Series C Notes. The original Indenture contained covenants, that continue to
the new maturity date, which, among other things, (i) restrict our ability to
dispose of assets, incur indebtedness, create liens and make certain
investments, (ii) require us to maintain a consolidated tangible net worth
deficiency of no greater than $81.6 million, and (iii) restrict our ability to
pay dividends unless certain financial performance tests are met. Our
subsidiaries, which are guarantors of the Series C Notes under the Indenture,
however, were and continue to be permitted to pay intercompany dividends on
their shares of common stock. The ability of General Media and its subsidiaries
to incur additional debt is severely limited by such covenants.

The Indenture was amended in conjunction with the issuance of the Series C
Notes to reflect the above mentioned payments, to reflect the March 29, 2004
maturity of the Series C Notes, to provide additional Change of Control
events (requiring the commencement of an offer to purchase Notes), to provide
additional flexibility as to the nature of, but also to set a fixed dollar
limit for, Owner Payments, and to require Noteholder consent to entering into
new lines of business or for sales or other conveyances of the Penthouse
trademark (other than ordinary course licensing) or other assets for net
proceeds in excess of $0.5 million. In addition, the related Security Agreement
was amended to grant additional security interests in inventory and accounts
receivable as well as a security interest in the proceeds of the sale of
certain real property owned by GMI (after payment of existing debt obligations
thereon) and on any proceeds to us from certain insurance policies on the life
of our principal beneficial owner.

As of December 31, 2002, we were in compliance with all Indenture
covenants. However, as of December 31, 2002 we had not made a required
principal payment of $1.3 million and a required interest payment
of $1.6 million, both due by that date. During January 2002, we
received $1.0 million from GMI as a repayment of amounts due us by affiliated
companies. These funds, along with $1.9 million of other
available cash from operations, were used by us in January 2003 to make the
required principal and interest payments within the applicable grace periods
allowed for by the Indenture. The Company was required to make a
principal payment of $2.0 million and an interest payment of
$1.6 million on March 31, 2003. The principal and
interest payments were not made by March 31, 2003. On April 14, 2003
a notice of event of default was issued by the Indenture Trustee. On
April 15 and 16, 2003, the Company transferred additional funds
(including $0.2 million made available through the repayment of
an intercompany balance from GMI) and has fully paid the
$2.0 million principal amount. The Company had until
April 30, 2003 (30 day grace period) to make the interest
payment, but was unable to do so. Accordingly, the underlying debt
has been classified in the accompanying balance sheet as a current
liability.

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On August 1, 2002, General Media and the Holders entered into a Third
Supplemental Indenture to amend the Change of Control events in the Indenture
to add further restrictions on the amount of Owner Payments; to substitute
John Orlando for John Prebich in the Change of Control provision; and to
require that new financial covenants (the Financial Covenants) be added that
require us to achieve not less than 80% of the projected revenues and EBITDA
to be set forth in a business plan in a form and substance reasonably
satisfactory to the holders of the Series C Notes (the Holders). In addition
we agreed to allow the Holders to audit the books and records of General Media
and the payroll records of General Media and GMI and to pay all the legal fees,
cost and expenses, and audit fees (collectively the Amendment Expenses)
related to the agreement. We recorded $0.1 million of Amendment Expenses during
the year ended December 31, 2002. In July 2002, we also paid $0.1 million to
the Holders as a deposit against Amendment Expenses expected to be incurred by
the Holders in completing the further amendments to the Indenture required to
incorporate the accepted business plan into the financial covenants. In
exchange for these amendments the Holders agreed to waive their prior
contention that a Change of Control event had occurred with respect to the
termination of John Prebich, one of our former President and Chief Operating
Officers.

The Indenture requires that General Media hire a replacement President and
Chief Operating Officer reasonably satisfactory to a majority of the Holders
within ninety days of the date of either the resignation or termination of John
Orlando, our last President and Chief Operating Officer, to avoid a deemed
Change of Control which in turn requires that an offer to purchase be made by
the Company to all Holders. On January 14, 2003, John Orlando was terminated.
On March 28, 2003 a replacement President and Chief Operating Officer was
proposed to the majority of the Holders for approval within the ninety day
period and we are waiting for their response.

On September 13, 2002, we submitted a business plan to the Holders for
approval in accordance with the requirements of the Third Supplemental
Indenture. The Holders notified us that they had accepted the business plan
effective October 4, 2002. On November 12, 2002 , General Media and the Holders
entered into the Fourth Supplemental Indenture to incorporate the Financial
Covenants into the Indenture. As of December 31, 2002, we were in compliance
with all the Financial Covenants. There can be no assurance that General Media
will be successful in negotiating further amendments of or extensions to the
Indenture on favorable terms, or at all.

FINANCING FROM OR TO RELATED PARTY.

GMI owns (together with Robert C. Guccione, who owns a 1% interest and
utilizes such facilities as his residence and his executive offices) a
Townhouse. The Townhouse is used for various activities related to General
Media, including business meetings, client entertainment, charitable functions,
magazine photography sessions and promotional and marketing events. Expenses
of maintaining the Townhouse, as well as any applicable debt service
requirements, are the responsibility of GMI. Pursuant to the Properties and
Salary Allocation Agreement among General Media, GMI and a GMI subsidiary, we
reimbursed GMI in the amounts of approximately $0.5 million in 2000, and $0.6
million in both 2001 and 2002, for the use of the Townhouse for our purposes.
See Compensation Committee Interlock and Insider Participation in Compensation
Decisions.

The Properties and Salary Allocation Agreement also provides that the
salary of Mr. Guccione is determined and paid by GMI. Pursuant to this
agreement, we reimburse GMI for a portion of such salary based upon an
allocation of the relative business time spent by Mr. Guccione on GMI related
business and on General Media related business. In 2000, 2001 and 2002, we
reimbursed GMI in the amounts of approximately $1.9 million, $1.3 million and
$0.4 million, respectively, for the allocable amount of Mr. Gucciones salary.

General Media, GMI and the Other GMI Subsidiaries also have entered into
an Expense Allocation Agreement, which sets forth the methodology for
allocating common expenses among the parties to the Expense Allocation
Agreement including expenses related to the use of and occupancy costs for our
principal corporate offices in New York City. Pursuant to the Expense
Allocation Agreement, items of common

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expense are allocated primarily on the basis of estimates of time spent
and space occupied by relevant personnel, including executive personnel (other
than Mr. Guccione), data processing, accounting, production and sales support
and administrative personnel. We pay such combined expenses and allocate to
GMI and the Other GMI Subsidiaries the portions due by such companies. Costs
incurred directly by subsidiaries of General Media solely for their benefit are
paid directly by such companies, as are direct costs incurred by the Other GMI
Subsidiaries solely for their benefit. The amount receivable under the Property
and Salary Allocation Agreement and the Expense Allocation Agreement at
December 31, 2001 and 2002 was $3.8 million and $1.3 million, respectively. We
advanced $2.9 million and $3.2 million to GMI and the Other GMI Subsidiaries in
2000 and 2001, respectively and was repaid $2.3 million in 2002. In 2001 and
2002, we established a reserves of $0.8 and $0.2 million respectively against
the amount due from GMI and the Other GMI Subsidiaries as collectability is not
fully assured. On March 27, 2000, we received a payment of approximately
$0.8 million toward this balance through the transfer of the outstanding stock
of a subsidiary of GMI.

In October 1997, Mr. Guccione was granted a loan in the amount of $1.2
million from NTS, a company that had simultaneously entered into an agreement
with us to provide services for our pay-per-call business. The loan was in
consideration of Mr. Guccione personally guaranteeing all our material
obligations under the agreement. Mr. Guccione defaulted on this loan when it
became due upon the refinancing of our Senior B Notes in March 2001. As
provided in the agreement, NTS began to apply payments due us on its
pay-per-call services to the loan. At December 31, 2002, the remaining
principal balance of the loan and unpaid interest thereon amounted to $434,000.
Pursuant to a modification and extension agreement entered into in October
2002, NTS agreed to limit the amount of payments applied to the loan to $50,000
and to settle all disputes and issues between General Media and NTS in exchange
for an extension of the agreement to March 31, 2006.

At December 31, 2001, the Company had a $1.0 million loan receivable from
Mr. Guccione, pursuant to a promissory note which was repaid in 2002.

At December 31, 2002, the Company had a $1.1 million loan receivable from
a foreign company which is principally owned by Mr. Guccione, which has been
fully reserved as collectability is not assured.

At December 31, 2002, the Company had $0.4 million of receivables from KC
Publishing, Inc., a company owned by a former President and Chief Operating
Officer of the Company. The Company has established a full reserve against
these receivables as collectibility is not assured.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Securities and Exchange Commission Financial Reporting Release No. 60
requires all companies to include a discussion of critical accounting policies
or methods used in the preparation of the consolidated financial statements. In
addition, Financial Reporting Release No. 61 requires all companies to include
a discussion to address, among other things, liquidity, off-balance sheet
arrangements, contractual obligations and commercial commitments. The following
discussion is intended to supplement the summary of significant accounting
policies included in Note 1 of the Notes To Consolidated Financial Statements.

These policies were selected because they represent the more significant
accounting policies and methods that are broadly applied in the preparation of
the consolidated financial statements. Revenues, expenses, accrued liabilities
and allowances related to certain of these policies are initially based on our
best estimates at the time of original entry in our accounting records.
Adjustments are recorded when our actual experience differs from the expected
experience underlying the estimates. These adjustments could be material if our
experience were to change significantly in a short period of time. We make
frequent comparisons of actual experience and expected experience in order to
mitigate the likelihood of material adjustments.

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| | a. |  | Revenue Recognition- Sales of magazines for retail distribution
are recorded on the on-sale date of each issue based on an estimate of
the revenue for each issue of the magazine, net of estimated returns.
These estimates are based upon several factors, including but not
limited to historical trends, days on sale and special editorial or
pictorial content. Estimated revenues are adjusted to actual revenues
as actual sales information becomes available. Actual sales
information generally becomes available ninety days after the on-sale
date for U.S. and Canadian sales and final settlement occurs one
hundred and eighty days after the off-sale date for U.S., Canadian and
international sales.                                                                                                                                                                                                                                                                                                                                                                            
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | Advances in the amounts of $1.0 million and $3.0 million relating to two
distribution agreements for our magazines are being recognized as revenue
on a straight-line basis over the ten year terms of each of the related
contracts. An advance in the amount of $0.9 million relating to a
licensing agreement for domestic sales of our digital video disc versions
of our video products is being recognized as revenue on a straight line
basis over the seven year term of the agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | b. |  | Retail Display Allowances Retail display allowances are
payments made to convenience stores, bookstores and newsstands as an
incentive to handle and sell magazines. The formula used to calculate
the allowance is negotiated on an individual basis with each outlet
owner and varies accordingly. However each formula is based on a
combination of a percentage of sales dollars and an amount per copy
sold. Accruals for retail display allowances are recorded as a
reduction of newsstand revenues on the on-sale date based upon past
experience using the estimated sales of each issue, net of estimated
returns. As new information becomes available the accruals are adjusted
accordingly.                                                                                                                                                                                                                                                                                                                                                                                          
|
| | c. |  | Income Taxes In preparing our financial statements we make
estimates of our current tax exposure and temporary differences
resulting from timing differences for reporting items for book and tax
purposes. We recognize deferred taxes by the asset and liability method
of accounting for income taxes. Under the asset and liability method,
deferred taxes are recognized for differences between the financial
statement and tax bases of assets and liabilities at enacted statutory
tax rates in effect for the years in which the differences are expected
to reverse. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
In addition, valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized. In
consideration of our taxable loss in the current year and lack of
historical ability to generate taxable income to utilize our deferred
tax assets, we have recorded a full valuation allowance.                                           
|
| |    |  | GMI, General Media and the Other GMI Subsidiaries are parties to the Tax
Sharing Agreement pursuant to which such parties file consolidated
federal, state and local income tax returns so long as permitted by the
relevant tax authorities. The Tax Sharing Agreement sets forth the
methodology for allocating income taxes and the use of net operating
losses (NOLs) between General Media, GMI and the Other GMI
Subsidiaries. We, however, are not required to pay income or franchise
taxes (except certain alternative taxes) to the extent that we can
utilize a portion of the NOLs of GMI and the Other GMI Subsidiaries
pursuant to the terms of the Tax Sharing Agreement. Prior to 2000, we
were not required to reimburse GMI and the Other GMI Subsidiaries for the
use of the NOLs generated by these entities. In addition, the Tax Sharing
Agreement provides that GMI and the other GMI Subsidiaries indemnify us
from any income or franchise tax liabilities of the consolidated group in
excess of the $26 million arising during years ending through December
31, 1993.
|
| | d. |  | Other Loss Reserves We have other loss exposures, such as
accounts receivable reserves and reserves for refunds that would be
required if we do not attain circulation levels stipulated in contracts
with advertisers. Establishing allowances for doubtful accounts and
loss reserves for these matters requires the use of estimates and
judgment in regards to risk exposure and the ultimate                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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| |  |  | liability. We estimate losses using consistent and appropriate methods;
however, changes to our assumptions could materially affect our estimate
of allowances and losses. Where available we utilize published credit
ratings for our debtors to assist us in determining the amount of
required reserves.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Impact Of Recently Issued Accounting Pronouncements

Certain provisions of The Emerging Issues Task Force pronouncement EITF
01-9, Accounting for Consideration Given by a Vendor to a Customer (Including
a Reseller of the Vendors Products), are effective for fiscal periods
beginning after December 15, 2001. The Task Force reached a consensus that
consideration from a vendor to a reseller of the vendors products is presumed
to be a reduction of the selling prices of the vendors products and,
therefore, should be characterized as a reduction of revenue when recognized in
the vendors income statement. Beginning January 2002 we adopted this policy as
it relates to retail display allowances. Retail display allowances had been
included in selling, general and administrative expenses prior to the adoption
of this policy. The effect on General Media of the adoption of the policy is a
reduction of newsstand revenue and an equivalent reduction in selling, general
and administrative expenses of approximately $3.0 million for the year ended
December 31, 2002. The net
revenue and the selling, general and administrative expenses of the publishing
segment for the years ended December 31, 2000 and 2001 have been reduced by
approximately $2.8 million and $3.7 million, respectively, to conform to the
December 31, 2002 presentation.

In April 2002, the FASB issued SFAS 145, which rescinded certain prior
FASB statements, amended a FASB statement and made technical corrections to a
number of prior pronouncements. This statement is effective for fiscal years
beginning after May 15, 2002. The Company does not believe that this statement
will have a material effect on the Companys financial statements.

In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated
with Exit or Disposal Activities. This statement is effective for exit or
disposal activities initiated after December 31, 2002. The Company does not
believe that this statement will have a material effect on the Companys
financial statements.

In October 2002, the FASB issued SFAS 147, Acquisitions of Certain
Financial Institutions. This statement is effective for acquisitions for which
the date of acquisition is on or after October 1, 2002. The Company does not
believe that this statement will have a material effect on the Companys
financial statements.

In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. The statement amends SFAS 123,
Accounting for Stock-Based Compensation, and is effective for fiscal years
ending after December 15, 2002. The Company does not believe that this
statement will have a material effect on the Companys financial statements.

Selected Quarterly Data

The following table sets forth our selected quarterly for the years ending
December 31, 2002 and 2001.

39



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|                                                                   |  |                |        |               |  |                             |        |                   |  |   |        |   |  |   |        |  
|------------------------------------------------------------------ |  | -------------- | ------ | ------------- |  | --------------------------- | ------ | ----------------- |  | - | ------ | - |  | - | ------ | -
|                                                                   |  |                |        |               |  | Quarter
Ended(in thousands) |        |                   |  |  
|                                                                   |  |               
|                                                                   |  | March 31, 2002 |        | June 30, 2002 |  | September 30, 2002          |        | December 31, 2002
|                                                                   |  |                |        |               |  |                             |        |                  
|                                                                   |  |                |        |               |  | (unaudited)                 |        |                   |  |  
|Revenues                                                           |  | $              | 14,208 |               |  | $                           | 16,074 |                   |  | $ | 11,838 |   |  | $ | 11,718 |  
|Income from
operations                                             |  |                | 1,591  |               |  |                             | 3,524  |                   |  |   | 304    |   |  |   | 1,987  |  
|Net
income (loss)
applicable to
common stock                       |  |                | (757   | )             |  |                             | 2,062  |                   |  |   | (1,940 | ) |  |   | (28    | )
|Net
income (loss) per
weighted average number of
common shares (1) |  |                | (.02   | )             |  |                             | .05    |                   |  |   | (.05   | ) |  |   |       |  

|                                                               |  |                |        |               |  |                              |        |                   |  |   |        |   |  |   |        |  
|-------------------------------------------------------------- |  | -------------- | ------ | ------------- |  | ---------------------------- | ------ | ----------------- |  | - | ------ | - |  | - | ------ | -
|                                                               |  |                |        |               |  | Quarter
Ended
(in thousands) |        |                   |  |  
|                                                               |  |               
|                                                               |  | March 31, 2001 |        | June 30, 2001 |  | September 30, 2001           |        | December 31, 2001
|                                                               |  |                |        |               |  |                              |        |                  
|                                                               |  |                |        |               |  | (unaudited)                  |        |                   |  |  
|Revenues                                                       |  | $              | 17,023 |               |  | $                            | 16,175 |                   |  | $ | 13,863 |   |  | $ | 15,543 |  
|Income from
operations                                         |  |                | 3,241  |               |  |                              | 2,970  |                   |  |   | 859    |   |  |   | 257    |  
|Net
income (loss)
applicable to
common stock                   |  |                | (8,703 | )             |  |                              | 1,780  |                   |  |   | (1,173 | ) |  |   | (3,005 | )
|Net
income (loss) per
weighted average number of
common shares |  |                | (.20   | )             |  |                              | .04    |                   |  |   | (.03   | ) |  |   | (.07   | )



---

|(1) |  | The sum of the quarterly net gain (loss) per weighted average of shares
does not equal the year-to-date net gain (loss) per weighted average of
shares calculation due to differences in quarterly weighted average shares
outstanding versus year-to-date weighted average shares outstanding.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Item 7A. Quantitative And Qualitative Disclosures About Market Risk.

We are exposed to market risk from changes in interest rates. Management
does not believe that it has any foreign currency rate risk.

Interest Rates  As of December 31, 2000, we had debt of $52.0 million
with a fixed rate of 10 5/8%. On March 29, 2001 we exchanged $51.5 million of
this debt for new debt with a fixed rate of 15% and retired $0.5 million of the
debt. In July, October and December 2001, we retired $0.7 million, $1.1 million
and $0.7 million of the new debt, respectively in accordance with the
requirements of the Series C Notes. In April, May, July, October and December
2002, we retired new debt of $1.3 million, $ 0.9 million, $1.3 million, $1.9
million and $0.5 million of the new debt in accordance with the requirements of
the Series C Notes. We are subject to market risk based on potential
fluctuations in current interest rates.

40



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##### Table of Contents



Foreign-Exchange Rate Risk-We do not believe we have exposure to foreign
exchange rate risk because all of our financial instruments are denominated in
U.S. dollars.




Item 8. Financial Statements And Supplementary Data.

See page F-1 for an index to the Consolidated Financial Statements.




Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure.

On February 28, 2003, PII dismissed Baum & Company, P.A. (Baum) as its
independent auditors and engaged Eisner LLP (Eisner) to serve as its
independent auditors. PIIs Board of Directors approved the change in PIIs
independent auditors on February 28, 2003. PII made this change so that the
same independent auditor will provide auditing services to PII and its
subsidiary, General Media. General Media engaged Eisner as its independent
auditor on January 28, 2003.

The reports of Baum on PIIs financials statements since its inception on
December 11, 2001 to its latest report on Form 10-KSB for the fiscal year ended
October 31, 2002 did not contain an adverse opinion or a disclaimer of opinion,
and were not modified as to uncertainty, audit scope or accounting principles;
however, Baums report for the fiscal year ended October 31, 2002 contained
explanatory language regarding PIIs difficulty in generating sufficient cash
flow to meet its present capital requirements and sustain its operations and
continue as a going concern as described in Note 3 to PIIs financial
statements for such fiscal year.

During PIIs fiscal year ended October 31, 2002 and through the date of
this Form 10-K there were no disagreements with Baum on any matter of
accounting principles, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Baum,
would have caused them to make reference thereto in their report on PIIs
financial statements.

In connection with Eisners retention as auditors for General Media on
January 28, 2003, Eisner communicated in the ordinary course of its engagement
with General Media, but did not render any accounting or auditing advice to PII
during PIIs fiscal year ended October 31, 2002 and through the date of this
Form 10-K.




PART III




Item 10. Directors and Executive Officers of the Registrant.

Our directors serve until the next annual meeting of stockholders or until
their successors are elected and qualified. The executive officers serve at the
discretion of the Board of Directors in the absence of employment agreements.
The following information is submitted with respect to each of our directors
and executive officers at March 28, 2003.

|                     |  |     |    |            |          |                                            |                 |                 |      |  |  |  |      | 
|-------------------- |  | --- | -- | ---------- | -------- | ------------------------------------------ | --------------- | --------------- | ---- |  |  |  | ---- | 
|                     |  |     |    |            |          | Positions Presently                        |                 |                 |      |  |  |  |      | 
|                     |  |     |    |            |          | Held with the                              | Date Elected as | Date Elected to
|Name                 |  | Age |    | Registrant | Director | Present Office                            
|                     |  |     |    |            |          |                                           
|Robert C. Guccione   |  |     | 72 |            |          | Director, Chairman
of the Board,
President |                 |                 | 2002 |  |  |  | 2002 | 
|Charles Samel        |  |     | 53 |            |          | Director, Executive Vice President         |                 |                 | 2002 |  |  |  | 2002 | 
|Tonina Biggs Andrews |  |     | 53 |            |          | Secretary                                  |                 |                 | -    |  |  |  | 2002 | 

41



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The business experience for the last 5 years of our current directors and
executive officers and those individuals who were directors or executive
officers during the year ended December 31, 2002 is presented below.

Robert C. Guccionehas been a Director, Chairman of the Board, President and
Chief Executive Officer of PII since 2002. Mr. Guccione founded Penthouse
Publications in London in 1965 after having served as managing director and
editor-in-chief of London American, a weekly newspaper. Mr. Guccione is a
Director, Chairman of the Board, Publisher and Chief Executive Officer of both
GMI and General Media.

Charles Samelhas been a Director and Executive Vice President of PII since
2002. Mr. Samel is the principal financial advisor and senior advisor to the
Office of the Chairman of GMI. He was formerly President of Bankers Capital,
which was the lead U.S. advisor to several Japanese multi-national real estate
investors. Mr. Samel has developed in excess of $500 million of residential
construction and has structured the acquisition of dozens of large projects for
Japanese investors. He is a Reinsurance Intermediary Broker and is active in
developing risk management strategies and reinsurance agreements for structured
financing transactions.

Tonina Biggs Andrewshas been Secretary of PII 2002. Ms. Andrews is a Director,
Secretary and Treasurer of GMI and a Director and Assistant Secretary of
General Media. Ms. Andrews is a regular contributing editor with a monthly
column in Penthouse Magazine and has served in various management capacities
within General Media for the past thirty years, primarily in the position of
West Coast Editor. Ms. Andrews is also the owner and President of Tonina Music,
Inc., a music publishing company. Ms. Andrews is the daughter of Robert C.
Guccione.




Item 11. Executive Compensation

The following table summarizes the compensation for services rendered to
PII during fiscal years 2000, 2001 and 2002 by (i) our Chief Executive Officer,
Robert C. Guccione, and (ii) each of our other most highly compensated
executive officers whose total annual salary and bonus exceeded $100,000 and
whose compensation is required to be disclosed under S.E.C. rules. The
compensation for all such officers represents the amounts paid by PII in
respect thereof pursuant to the Properties and Salary Allocation Agreement (for
Mr. Guccione) and the Expense Allocation Agreement (for all other such
officers). See Certain Relationships and Related Transactions.

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|                            |                          |                     |      |      |      |  |            |           |      |   |           |         |                |  |   |         |  |  | 
|--------------------------- | ------------------------ | ------------------- | ---- | ---- | ---- |  | ---------- | --------- | ---- | - | --------- | ------- | -------------- |  | - | ------- |  |  | 
|Name and Principal Position |                          | Annual Compensation |      |      |      | 
|                            |                          |                     |      |      |      | 
|                            |                          |                     |      |      |      |  |            |           |      |   |           |         | Consulting (2) |  |   |         | 
|                            |                          |                     |      |      | Year |  | Salary (1) |           | Fees |   | Other (3)
|                            |                          |                     |      |      |      |  |            |           |      |   |          
|Robert C. Guccione (4)      |                          |                     |      |      |      |  |            |           |      |   |           |         |                |  |   |        
|                            | Chairman, Chief          |                     |      | 2002 |      |  | $          | 415,385   |      |   |           |         |                |  |   |         | 
|                            | Executive Officer and    |                     |      | 2001 |      |  | $          | 1,295,462 |      |   |           |         |                |  | $ | 356,972 | 
|                            | Publisher                |                     |      | 2000 |      |  | $          | 1,850,444 |      |   |           |         |                |  | $ | 277,139 | 
|                           
|Charles Samel (2)           |                          |                     | 2002 |      |      |  |            |           |      | $ | 118,750   |         |                |  |   |        
|                            | Executive Vice President |                     |      | 2001 |      |  |            |           |      |   | $         | 190,000 |                |  |   |         | 
|                            |                          |                     |      | 2000 |      |  |            |           |      |   | $         | 90,250  |                |  |   |         | 



---

|(1) |  | Executive officer compensation is determined pursuant to the allocation
provisions of the Properties and Salary Allocation Agreement and the
Expense Allocation Agreement referred to above. Up until July 2002 the
allocations were approved by the nonemployee members of the Board of
Directors of the Company. See Compensation Committee Interlock and
Insider Participation and Certain Relationships and Related Party
Transactions.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Consulting fees are fees paid to
Charles Samel or Risktx Ltd, a company
owned by Mr. Samel.                                                                                                                                                                                                                                                                                                                                                    
|   
|(3) |  | Other compensation represents life insurance premiums paid on behalf of
Mr. Guccione, under split dollar policy arrangements.                                                                                                                                                                                                                                                                                                                  
|   
|(4) |  | See Certain Relationships and Related Party Transactions for a
description of amounts advanced by us to GMI and the Other GMI
Subsidiaries, indirectly wholly owned by Mr. Guccione and a trust for the
benefit of his children, in 2000, 2001 and 2002.                                                                                                                                                                                     

Compensation of Directors

Directors who are also employees of PII or any of its subsidiaries do not
currently receive any additional compensation for serving as a director or
committee member or for attending Board or committee meetings. All other
directors receive an annual retainer of $5,000 plus $1,500 for each Board
meeting and committee meeting attended.

Compensation Committee Interlock and Insider Participation

Up until their resignations during 2002, two non-employee directors, Ms.
Schwebel and Mr. Siano (the Non-employee Members), who had never served as
officers or been employees of General Media, acted as our Compensation
Committee. Ms. Schwebel acted in this capacity until she resigned from her
position as a director in April 2002 and Mr. Siano acted in this capacity until
he resigned from his position as a director in July 2002. Since July 2002 we
have not had any members on the compensation committee.

Compensation Committee Report

Executive compensation of General Media, PII and GMI is determined by
Robert C. Guccione and during the periods that they served, was reviewed and
approved by the Non-employee Members. The salary of Mr. Guccione is paid by
GMI. During the periods that they served, the Non-employee Members reviewed
and

43



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##### Table of Contents



approved the reimbursement of GMI by us in an amount equal to the portion
of the salary of Mr. Guccione allocated to us pursuant to the Properties and
Salaries Allocation Agreement (the Allocation Agreement). In addition, during
the periods that they served, the Non-employee Members reviewed and approved
the expenses allocated to us for our use of the Townhouse pursuant to the
Allocation Agreement. Since July 2002 we have continued to reimburse GMI in an
amount equal to the portion of the salary allocated to us pursuant to the
Allocation Agreement and have continued to allocate the expenses of the
Townhouse pursuant to such agreement. See Certain Relationships and Related
Transactions.

| |                                 
| | --------------------------------
| | Robert C. Guccione
Charles Samel

Retirement Savings Plan

The General Media International, Inc. Employees Retirement Savings Plan
and Trust (the Plan) is a tax-exempt defined contribution
(401(k) plan
covering all employees of GMI and its affiliates (including General Media) who
have completed 1,000 hours of service in one plan year and are twenty-one years
of age or older. GMI may make discretionary contributions to the Plan from its
current profits, before profit-sharing costs and income taxes, in each plan
year, in such amounts as authorized by the Board of Directors of GMI, provided
that the amount of the contribution for each plan year does not exceed 3% of
the qualified earnings of each participant. Participants may contribute up to
15% of their annual wages before bonuses and overtime up to a maximum pre-tax
contribution of $10,500 in 2002. Participants accounts are credited with the
participants contribution and an allocation of (a) GMIs contribution, if any,
(b) Plan earnings, and (c) forfeitures of terminated participants nonvested
accounts, if any. Allocations are based on participant earnings on account
balances. The benefit to which a participant is entitled is the benefit that
can be provided from the participants account. Participants are immediately
vested in their pre-tax contributions plus actual earnings thereon. Vesting in
the remainder of their accounts begins after completing two years of service
and vests in equal amounts until the participant has completed five years of
service, at which time the participant becomes 100% vested. Under the Plan,
participating employees can allocate funds in their account among several
investment options. Upon termination of service, a participant may elect to
receive an amount equal to the vested value of his or her account, in either a
lump-sum or in monthly, quarterly, or semiannual payments from the Plan over a
period not extending beyond the life expectancy of the participant and his or
her spouse. As of December 31, 2002, Robert Guccione, Laurence Sutter and
Tonina Biggs Andrews were 100% vested in profit sharing contributions made by
GMI. Amounts contributed by GMI, if any, on behalf of employees who performed
services for the Company are reimbursed to GMI by the Company pursuant to the
Expense Allocation Agreement. See Certain Relationships and Related
Transactions. There were no contributions to the Plan by PII, General Media
or GMI in the years 2000, 2001 and 2002.




Item 12. Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters.

Voting Equity Securities and Principal Holders Thereof.

The following table sets forth certain information regarding PIIs voting
securities held as of March 28, 2003.

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|               |  |                                   |  |              |            |       |  |            |       |  
|-------------- |  | --------------------------------- |  | ------------ | ---------- | ----- |  | ---------- | ----- | -
|               |  |                                   |  |              |            |       |  | Percent of
|Title of Class |  | Name and Address                  |  | Amount Owned |            | Class
|               |  |                                   |  |              |            |      
|Common Stock   |  | General Media International, Inc. |  |              | 42,500,000 |       |  |            | 85.00 | %
|               |  | 11 Penn Plaza                     |  |              |            |       |  |            |       |  
|               |  | New York, New York 10001          |  |              |            |       |  |            |       |  
|Common Stock   |  | PH Capital Holdings, LLC (1)      |  |              | 2,225,000  |       |  |            | 4.45  | %
|               |  | 16 East 67th Street               |  |              |            |       |  |            |       |  
|               |  | New York, New York 10021          |  |              |            |       |  |            |       |  



---

|(1) |  | Charles Samel, a director and the Executive Vice President of PII,
is the owner and sole manager of Catalyst Capital, LLC.
|--- |  | --------------------------------------------------------------------------------------------------------------------------

b. Non-Voting Securities and Principal Holders Thereof.

The following table sets forth certain information regarding the
beneficial ownership of PIIs non-voting securities held as of March 28, 2003.

|                |  |                                   |  |        |  |           
|--------------- |  | --------------------------------- |  | ------ |  | ----------
|                |  |                                   |  | Amount |  | Percent of
|Title of Class  |  | Name and Address                  |  | Owned  |  | Class     
|                |  |                                   |  |        |  |           
|Series A        |  | General Media International, Inc. |  |        |  |           
|Preferred Stock |  | 11 Penn Plaza                     |  |        |  |           
|                |  | New York, New York 10001          |  | 5,000  |  | 100%      

c. Options, Warrants and Rights.

|                          |  |                             |         |          |  |                 |  |  |    |  
|------------------------- |  | --------------------------- | ------- | -------- |  | --------------- |  |  | -- | -
|                          |  | Amount of Securities Called |         | Exercise |  | Date of        
|Name of Holder            |  | FOR BY WARRANTS             |         | Price    |  | Exercise       
|                          |  |                             |         |          |  |                
|Catalyst Capital,
LOC (1) |  |                             | 575,000 |          |  | $0.01 per
share |  |  | (2 | )



---

|(1) |  | Charles Samel, a director and the Executive Vice President of
PII, is the sole manager of Catalyst Capital, LLC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The warrant may be exercised on or after the first business
day following the payment in full of all indebtedness under the
Series C Notes in a Qualified Refinancing and shall expire on the
earlier of (a) the fifth anniversary of the day on which the warrant
becomes exercisable or (b) if the warrant does not become
exercisable on or before March 29, 2004, then March 29, 2004.
Qualified Refinancing means any equity or debt financing
transaction completed by GMI and originated or arranged by Catalyst
Capital, LLC, the net proceeds of which are sufficient, and are
used, to pay in full all indebtedness under the Series C Notes on or
before the maturity date thereof, and Series C Notes refers to the
Series C 15% Senior Secured Notes of General Media.

The following table sets forth certain information regarding the
beneficial ownership of GMIs common stock as of March 28, 2003.

45



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|                               |  |                 |  |                    |      |          |  |  |       |   |  | 
|------------------------------ |  | --------------- |  | ------------------ | ---- | -------- |  |  | ----- | - |  | 
|                               |  | GMI             |  | Shares             |      | Percent 
|Name and Address               |  | Common Stock(1) |  | Beneficially Owned |      | of Class
|                               |  |                 |  |                    |      |         
|Robert C. Guccione             |  | Class A         |  |                    | 6.67 |          |  |  | 66.7  | %
|16 East 67th Street            |  | Class B         |  |                    | 0.00 |          |  |  | 0.0   |  
|New York, New York 10022       | 
|                              
|Robert C. Guccione Family      |  | Class A         |  |                    | 3.33 |          |  |  | 33.3  |  
|Trust No. 1                    |  | Class B         |  |                    | 1.62 |          |  |  | 100.0 |  
|C/O ACT Trustees (Cayman) Ltd. |  |                 |  |                    |      |          |  |  |       |   |  | 
|Cayside, 2nd Floor             |  |                 |  |                    |      |          |  |  |       |   |  | 
|Harbor Drive                   |  |                 |  |                    |      |          |  |  |       |   |  | 
|George Town, Cayman Islands,   | 
|BOWIE                          | 



---

|(1) |  | Holders of Class A and Class B common stock have equal voting rights and
are entitled to one vote per share.
|--- |  | ------------------------------------------------------------------------------------------------------------

Securities authorized for issuance under equity compensation plans

There were 3,000,000 shares of Common Stock authorized for issuance under
the Registrants 2002 Consultant Compensation Plan as of December 31, 2002, and
no shares have been issued under such plan.

Changes in Control

A change of control in PII may be effected by operation of a Shareholders
Agreement dated November 8, 2002 among GMI, Catalyst and Vector. Under this
agreement, if, upon the death of Robert C. Guccione, each of GMI, Vector and
Catalyst is the holder of at least one share of Common Stock, then Vector and
Catalyst jointly have the right to cause GMI, at its option, either to purchase
from Vector and Catalyst all shares of Common Stock then held by Vector and
Catalyst or to sell to Vector and Catalyst all shares then held by GMI. In
addition, if, upon the death of the principal of Vector or Catalyst, each of
Vector, Catalyst and GMI is the holder of at least one share of Common Stock,
then GMI has the right to cause Vector and Catalyst, at their jointly exercised
option, either to purchase from GMI all shares of Common Stock then held by GMI
or to sell to GMI all shares then held by Vector and Catalyst. See Item 1
Business.

The Indenture also contains change of control provisions. See Item 7.
Managements Discussion and Analysis of Financial Condition and Results of
Operations.




Item 13. Certain Relationships And Related Transactions.

GMI owns (together with Robert C. Guccione, who owns a 1% interest and
utilizes such facilities as his residence and his executive offices) a
Townhouse. The Townhouse is used for various activities related to General
Media, including business meetings, client entertainment, charitable functions,
magazine photography sessions and promotional and marketing events. Expenses
of maintaining the Townhouse, as well as any applicable debt service
requirements, are the responsibility of GMI. Pursuant to the Properties and
Salary Allocation Agreement among General Media, GMI and a GMI subsidiary, we
reimbursed GMI in the amounts of approximately $0.5 million in 2000, and $0.6
million in both 2001 and 2002, for the use of the Townhouse for our purposes.
See Compensation Committee Interlock and Insider Participation in Compensation
Decisions.

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The Properties and Salary Allocation Agreement also provides that the
salary of Mr. Guccione is determined and paid by GMI. Pursuant to this
agreement, we reimburse GMI for a portion of such salary based upon an
allocation of the relative business time spent by Mr. Guccione on GMI related
business and on General Media related business. In 2000, 2001 and 2002, we
reimbursed GMI in the amounts of approximately $1.9 million, $1.3 million and
$0.4 million, respectively, for the allocable amount of Mr. Gucciones salary.

GMI, General Media and the Other GMI Subsidiaries are parties to the Tax
Sharing Agreement pursuant to which such parties file consolidated federal,
state and local income tax returns so long as permitted by the relevant tax
authorities. The Tax Sharing Agreement sets forth the methodology for
allocating income taxes and the use of net operating losses (NOLs) between
General Media, GMI and the Other GMI Subsidiaries. We, however, are not
required to pay income or franchise taxes (except certain alternative taxes) to
the extent that we can utilize a portion of the NOLs of GMI and the Other GMI
Subsidiaries pursuant to the terms of the Tax Sharing Agreement. Prior to
2000, we were not required to reimburse GMI and the Other GMI Subsidiaries for
the use of the NOLs generated by these entities. In addition, the Tax Sharing
Agreement provides that GMI and the other GMI Subsidiaries indemnify us from
any income or franchise tax liabilities of the consolidated group in excess of
the $26 million arising during years ending through December 31, 1993.

General Media, GMI and the Other GMI Subsidiaries also have entered into
an Expense Allocation Agreement, which sets forth the methodology for
allocating common expenses as among the parties to the Expense Allocation
Agreement including expenses related to the use of and occupancy costs for our
principal corporate offices in New York City. Pursuant to the Expense
Allocation Agreement, items of common expense are allocated primarily on the
basis of estimates of time spent and space occupied by relevant personnel,
including executive personnel (other than Mr. Guccione), data processing,
accounting, production and sales support and administrative personnel. We pay
such combined expenses and allocate to GMI and the Other GMI Subsidiaries the
portions due by such companies. Costs incurred directly by subsidiaries of
General Media solely for their benefit are paid directly by such companies, as
are direct costs incurred by the Other GMI Subsidiaries solely for their
benefit. The amount receivable under the Property and Salary Allocation
Agreement and the Expense Allocation Agreement at December 31, 2001 and 2002
was $3.8 million and $1.2 million, respectively. We advanced $2.9 million and
$3.2 million to GMI and the other GMI subsidiaries in 2000 and 2001,
respectively and we received $2.3 million of repayments in 2002. In 2001 and
2002, we established a reserve of $0.8 and $0.2 million respectively against
the amount due from GMI and the Other GMI Subsidiaries as collectability is not
fully assured. On March 27, 2000, we received a payment of approximately $0.8
million toward this balance through the transfer of the outstanding stock of a
subsidiary of GMI.

In October 1997, Mr. Guccione was granted a loan in the amount of $1.2
million from NTS, a company that had simultaneously entered into an agreement
with us to provide services for our pay-per-call business. The loan was in
consideration of Mr. Guccione personally guaranteeing all our material
obligations under the agreement. Mr. Guccione defaulted on this loan when it
became due upon the refinancing of our Senior B Notes in March 2001. As
provided in the agreement, NTS began to apply payments due us on its
pay-per-call services to the loan. At December 31, 2002, the remaining
principal balance of the loan and unpaid interest thereon amounted to $434,000.
Pursuant to a modification and extension agreement entered into in October
2002, NTS agreed to limit the amount of payments applied to the loan to $50,000
and to settle all disputes and issues between General Media and NTS in exchange
for an extension of the agreement to March 31, 2006.

At December 31, 2001, the Company had a $1.0 million loan receivable from
Mr. Guccione, pursuant to a promissory note which was repaid in 2002.

On November 4, 2002, the Registrant issued 2,225,000 shares of Common
Stock to Catalyst in consideration of 22,250 in subscriptions
receivable pursuant to a Common
Stock Purchase Agreement dated as of November 1, 2002. In addition, on
November 9, 2002, the Registrant issued to Catalyst a warrant to purchase up to
an aggregate of 575,000 shares of Common Stock. See Item 5. Market For
Registrants Common Equity and

47



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##### Table of Contents



Related Stockholder Matters. Charles Samel, a director and the Executive
Vice President of the Registrant, is the sole manager of Catalyst.

Charles Samel or Risktx Ltd., a company owned by Mr. Samel, received
consulting fees from the Company in an aggregate amount of $118,750 during
fiscal year 2002.

On November 8, 2002, the Registrant issued 42,500,000 shares of Common
Stock and 5,000 shares of its Series A Preferred Stock to GMI in consideration
of, among other things, GMIs assignment of 475,000 shares of General Medias
common stock pursuant to the Stock Exchange Agreement dated November 4, 2002.
Robert C. Guccione is the Chairman of the Board and President of GMI and,
together with the Robert C. Guccione Family Trust No. 1, owns all of the
outstanding shares of GMIs capital stock. See Item 5 Market For Registrants
Common Equity and Related Stockholder Matters.

At December 31, 2002, the Company had a $1.1 million loan receivable from
a foreign company which is principally owned by Mr. Guccione, which has been
fully reserved as collectability is not assured.

At December 31, 2002, the Company had $0.4 million of receivables from KC
Publishing, Inc., a company owned by a former President and Chief Operating
Officer of the Company. The Company has established a full reserve against
these receivables as collectibility is not assured.




Item 14. Controls And Procedures.

Within the 90 days prior to the date of this Annual Report on Form 10-K,
we evaluated the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Rules 13a-14(c) and 15d-14(c) of the
Securities Exchange Act of 1934, as amended (the Exchange Act) (Disclosure
Controls) and our internal controls and procedures for financial reporting
(Internal Controls). This evaluation (the Controls Evaluation) was done
under the supervision and with the participation of management.

Disclosure Controls are procedures that are designed with the objective of
ensuring that information required to be disclosed in our reports filed under
the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms. Disclosure Controls are
also designed with the objective of ensuring that such information is
accumulated and communicated to our management, including the Chief Executive
Officer (CEO) to allow timely decisions regarding required disclosure.
Internal Controls are procedures which are designed with the objective of
providing reasonable assurance that (1) our transactions are properly
authorized; (2) our assets are safeguarded against unauthorized or improper
use; and (3) our transactions are properly recorded and reported, all to permit
the preparation of our financial statements in conformity with accounting
principles generally accepted in the United States of America.

Among other matters, we sought in our Controls Evaluation to determine
whether there were any significant deficiencies or material weaknesses in
our Internal Controls, or whether we had identified any acts of fraud involving
personnel who have a significant role in our Internal Controls. In professional
auditing literature, significant deficiencies are referred to as reportable
conditions; these are control issues that could have a significant adverse
effect on the ability to record, process, summarize and report financial data
in the financial statements. A material weakness is defined in the auditing
literature as a particularly serious reportable condition where the internal
control does not reduce to a relatively low level the risk that misstatements
caused by error or fraud may occur in the amounts that would be material in
relation to the financial statements and not be detected within a timely period
by employees in the normal course of performing their assigned functions. We
also sought to deal with other controls matters in the Controls Evaluation, and
in each case if a problem was identified, we considered what revision,
improvement and/or correction to make in accord with our on-going procedures.

The CEO notes that, since the date of the Controls Evaluation to the date
of this Annual Report, there have been no significant changes in Internal
Controls or in other factors that could significantly affect Internal

48



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##### Table of Contents



Controls, and no corrective actions were required or taken with regard to
significant deficiencies and material weaknesses.

Based upon the Controls Evaluation, our CEO has concluded that our
Disclosure Controls were effective to ensure that material information relating
to General Media is made known to management, including the CEO.




PART IV




Item 15. Exhibits, Financial Statement Schedules And Reports On Form 8-K.

(a)  The following documents are being filed as part of this Report:

(1)  See page F-1 for an index of consolidated financial statements.

(2)  See page F-1 for an index of financial statement schedules.

(3)  Exhibits:

|        |                           |                                                                                                                                                                                                       |  |      |  |           |  |          |  |         |     |          |  | 
|------- | ------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- |  | --------- |  | -------- |  | ------- | --- | -------- |  | 
|        | INCORPORATED BY REFERENCE
|EXHIBIT |                           |                                                                                                                                                                                                       |  |      |  |           |  | FILING   |  | EXHIBIT |     | FILED   
|NO.     |                           | EXHIBIT                                                                                                                                                                                               |  | FORM |  | FILE NO.  |  | DATE     |  | NO.     |     | HEREWITH
|        |                           |                                                                                                                                                                                                       |  |      |  |           |  |          |  |         |     |         
|3.1     |                           | First Amended and Restated Articles of
Incorporation of the Registrant as amended as
of November 4, 2002                                                                                              |  | 8-K  |  | 333-83448 |  | 11-14-02 |  |         | 3.1 |          |  | 
|       
|       
|       
|       
|3.2     |                           | Article of Amendment to First Amended and
Restated Articles of Incorporation of the
Registrant, as effective on November 18, 2002                                                                     |  | 8-K  |  | 333-83448 |  | 11-27-02 |  |         | 3.1 |          |  | 
|       
|       
|       
|       
|3.3     |                           | Amended and Restated Bylaws of the Registrant,
as amended as of November 9, 2002                                                                                                                      |  | 8-K  |  | 333-83448 |  | 11-14-02 |  |         | 3.2 |          |  | 
|       
|       
|       
|       
|4.1     |                           | Indenture, dated as of December 21, 1993,
between General Media and IBJ Schroder Bank &
Trust Company, as trustee (Trustee),
containing as exhibits, specimens of Series A
Notes and Series B Notes |  | S-4  |  | 33-76716  |  | 3-22-94  |  |         | 4.2 |          |  | 
|       
|       
|       
|       
|4.2     |                           | Security Agreement, dated December 21, 1993,
between General Media and Trustee                                                                                                                        |  | S-4  |  | 33-76716  |  | 3-22-94  |  |         | 4.4 |          |  | 
|       
|       
|       
|       
|4.3     |                           | Pledge Agreement, dated December 21, 1993,
between General Media and Trustee                                                                                                                          |  | S-4  |  | 33-76716  |  | 3-22-94  |  |         | 4.5 |          |  | 
|       
|       
|       
|       
|4.4     |                           | Copyright Security Agreement, dated December
21, 1993, between General Media and Trustee                                                                                                              |  | S-4  |  | 33-76716  |  | 3-22-94  |  |         | 4.6 |          |  | 
|       
|       
|       
|       
|4.5     |                           | Trademark Security Agreement, dated December
21, 1993, between General Media and Trustee                                                                                                              |  | S-4  |  | 33-76716  |  | 3-22-94  |  |         | 4.7 |          |  | 

49



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|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                           |  |           |  |          |  |         |       |          |  | 
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | --------- |  | -------- |  | ------- | ----- | -------- |  | 
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | INCORPORATED BY REFERENCE
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                          
|EXHIBIT |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                           |  |           |  | FILING   |  | EXHIBIT |       | FILED   
|NO.     |  | EXHIBIT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | FORM                      |  | FILE NO.  |  | DATE     |  | NO.     |       | HEREWITH
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                           |  |           |  |          |  |         |       |         
|       
|       
|       
|       
|4.6     |  | First Supplemental Indenture, dated May 19,
1999, among General Media, each of the
Subsidiary Guarantors and IBJ Whitehall Bank & Trust as trustee                                                                                                                                                                                                                                                                                                                                                                        |  | 10-K                      |  | 33-76716  |  | 4-02-01  |  |         | 4.7   |          |  | 
|       
|       
|       
|       
|4.7     |  | Second Supplemental Indenture, dated March,
29, 2001, among General Media, each of the
Subsidiary Guarantors and The Bank of New
York, as trustee, containing as exhibits,
specimens of Series C Notes                                                                                                                                                                                                                                                                                                                    |  | 10-K                      |  | 33-76716  |  | 4-02-01  |  |         | 4.8   |          |  | 
|       
|       
|       
|       
|4.8     |  | Registration Rights Agreement, dated as of
March 29, 2001, between General Media and the
holders of General Medias Class A Preferred
Stock                                                                                                                                                                                                                                                                                                                                                                               |  | 10-K                      |  | 33-76716  |  | 4-02-01  |  |         | 4.9   |          |  | 
|       
|       
|       
|       
|4.9     |  | Amendment To Security Agreement, dated as of
March 29, 2001, among General Media, each of
the Subsidiary Grantors and The Bank of New
York, as collateral agent                                                                                                                                                                                                                                                                                                                                                           |  | 10-K                      |  | 33-76716  |  | 4-02-01  |  |         | 4.10  |          |  | 
|       
|       
|       
|       
|4.10    |  | Third Supplemental Indenture, dated August 1,
2002, among General Media, each of the
Subsidiary Guarantors and The Bank of New
York, as trustee,                                                                                                                                                                                                                                                                                                                                                                          |  | 10-Q                      |  | 33-76716  |  | 8-14-02  |  |         | 10.18 |          |  | 
|       
|       
|       
|       
|4.11    |  | Fourth Supplemental Indenture, dated November
12, 2002, among General Media, each of the
Subsidiary                                                                                                                                                                                                                                                                                                                                                                                                                       |  | 10-KSB                    |  | 333-83448 |  | 2-13-03  |  |         | 6.11  |          |  | 
|        |  | Guarantors and The Bank of New
York, as trustee                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                           |  |           |  |          |  |         |       |          |  | 
|       
|       
|       
|       
|4.12    |  | Instrument of Resignation, Appointment and
Acceptance among General Media, the Subsidiary
Guarantors, the Subsidiary Grantors, the
Subsidiary Pledgors, The Bank of New York and
HSBC Bank USA                                                                                                                                                                                                                                                                                                                            |  | 10-KSB                    |  | 333-83448 |  | 2-13-03  |  |         | 6.12  |          |  | 
|       
|       
|       
|       
|+10.1   |  | Distribution Agreement, dated September 19,
1977, among Curtis Circulation Company,
Penthouse International, Ltd., Forum
International, Ltd., Viva International, Ltd.,
Penthouse Photo World, Ltd. and Penthouse
Poster Press, Ltd.; Amendment No. 1, undated;
Amendment No. 2, dated September 8, 1982;
Amendment No. 3, dated March 18, 1985; and
Amendment No. 4, dated February 1, 1986                                                                                                                              |  | S-4                       |  | 33-76716  |  | 3-22-94  |  |         | 10.1  |          |  | 
|       
|       
|       
|       
|10.2    |  | Properties and Salary Allocation Agreement,
dated December 21, 1993, among General Media,
GMI and Locusts on the Hudson River Corp.                                                                                                                                                                                                                                                                                                                                                                                       |  | S-4                       |  | 33-76716  |  | 3-22-94  |  |         | 10.8  |          |  | 
|       
|       
|       
|       
|10.3    |  | Expense Allocation Agreement, dated December
21, 1993, among General Media, GMI and the
Other GMI Subsidiaries                                                                                                                                                                                                                                                                                                                                                                                                            |  | S-4                       |  | 33-76716  |  | 3-22-94  |  |         | 10.9  |          |  | 
|       
|       
|       
|       
|10.4    |  | Tax Sharing and Indemnification Agreement,
dated December 21, 1993, among General Media,
GMI and the Other GMI Subsidiaries                                                                                                                                                                                                                                                                                                                                                                                               |  | S-4                       |  | 33-76716  |  | 3-22-94  |  |         | 10.10 |          |  | 
|       
|       
|       
|       
|10.5    |  | Amendment to Distribution Agreement, dated
November 8, 1995, among Curtis Circulation
Company, Penthouse International, Ltd., Forum
International, Ltd., Four Wheeler Publishing,
Ltd., Penthouse Letters, Ltd., Omni
Publications International, Ltd., Variations
International, Ltd., Girls of Penthouse
Publications, Inc., Longevity International,
Ltd., Hot Talk Publications, Ltd., Stock Car
Racing Publications, Ltd., Super Stock and
Drag Racing Illustrated Publishing, Ltd., and
Open Wheel Publishing, Ltd. |  | 10-K                      |  | 33-76716  |  | 3-28-02  |  |         | 10.15 |          |  | 
|       
|       
|       
|       
|10.6    |  | Agreement of Lease Between M393 Associates LLC
and General Media                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  | 10-Q                      |  | 33-76716  |  | 11-13-98 |  |         | 10.2  |          |  | 
|       
|       
|       
|       
|+10.7   |  | Printing Contract, dated October 12, 2001,
between Quebecor World, Inc. and General Media
Communications, Inc. (to print Penthouse,
Girls of Penthouse and Penthouse Letters)                                                                                                                                                                                                                                                                                                                                             |  | 10-K                      |  | 33-76716  |  | 3-28-02  |  |         | 10.16 |          |  | 
|       
|       
|       
|       
|++10.8  |  | Printing Contract, effective as of January 1,
2001, between Transcontinental Printing and
General Media Communications, Inc. (to print
Penthouse  Canadian Version, Forum,
Variations, Forum and Variations Specials)                                                                                                                                                                                                                                                                                                    |  | 10-K                      |  | 33-76716  |  | 3-28-02  |  |         | 10.17 |          |  | 
|       
|       
|       
|       
|++10.9  |  | Circulation Subscription Fulfillment Services
Agreement, dated October 1, 2002, between Palm
Coast Data, LLC and General Media
Communications, Inc.                                                                                                                                                                                                                                                                                                                                                                       |  | 10-KSB                    |  | 333-83448 |  | 2-13-03  |  |         | 6.21  |          |  | 
|       
|       
|       
|       
|10.10   |  | Stock Exchange Agreement dated November 4,
2002 between the Registrant and GMI                                                                                                                                                                                                                                                                                                                                                                                                                                            |  | 8-K                       |  | 333-83448 |  | 11-14-02 |  |         | 2.1   |          |  | 
|       
|       
|       
|       
|10.11   |  | Common Stock Purchase Agreement dated November
1, 2002 between the Registrant and Vector
Partners, LLC                                                                                                                                                                                                                                                                                                                                                                                                                    |  | 8-K                       |  | 333-83448 |  | 11-14-02 |  |         | 10.1  |          |  | 
|       
|       
|       
|       
|10.12   |  | Common Stock Purchase Agreement dated November
1, 2002 between the Registrant and PH Capital
Holding, LLC                                                                                                                                                                                                                                                                                                                                                                                                                 |  | 8-K                       |  | 333-83448 |  | 11-14-02 |  |         | 10.2  |          |  | 
|       
|       
|       
|       
|10.13   |  | Warrant Agreement, dated November 9, 2002
between the Registrant and Vector Partners, LLC                                                                                                                                                                                                                                                                                                                                                                                                                                 |  | 8-K                       |  | 333-83448 |  | 11-14-02 |  |         | 10.3  |          |  | 
|       
|       
|       
|       
|10.14   |  | Warrant Agreement, dated November 9, 2002
between the Registrant and PH Capital
Holdings, LLC                                                                                                                                                                                                                                                                                                                                                                                                                             |  | 8-K                       |  | 333-83448 |  | 11-14-02 |  |         | 10.4  |          |  | 

50



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##### Table of Contents



|        |  |                                                                                                                              |  |                           |  |           |  |          |  |         |      |          |  |    
|------- |  | ---------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | --------- |  | -------- |  | ------- | ---- | -------- |  | ---
|        |  |                                                                                                                              |  | INCORPORATED BY REFERENCE
|        |  |                                                                                                                              |  |                          
|EXHIBIT |  |                                                                                                                              |  |                           |  |           |  | FILING   |  | EXHIBIT |      | FILED   
|NO.     |  | EXHIBIT                                                                                                                      |  | FORM                      |  | FILE NO.  |  | DATE     |  | NO.     |      | HEREWITH
|        |  |                                                                                                                              |  |                           |  |           |  |          |  |         |      |         
|10.15   |  | Registration Rights Agreement dated November
9, 2002 among the Registrant, Vector Partners,
LLC and PH Capital Holdings, LLC |  | 8-K                       |  | 333-83448 |  | 11-14-02 |  |         | 10.5 |          |  |    
|       
|10.16   |  | 2002 Consultant Compensation Plan of the
Registrant dated November 9, 2002                                                   |  | 8-K                       |  | 333-83448 |  | 11-14-02 |  |         | 10.6 |          |  |    
|       
|10.17   |  | Indemnity Agreement dated October 23, 2002
between the Registrant and Jason Galanis                                          |  | 8-K                       |  | 333-83448 |  | 11-14-02 |  |         | 10.7 |          |  |    
|       
|10.18   |  | Indemnity Agreement dated November 9, 2002
between the Registrant and Charles Samel                                          |  | 8-K                       |  | 333-83448 |  | 11-14-02 |  |         | 10.8 |          |  |    
|       
|10.19   |  | Indemnity Agreement dated November 9, 2002
between the Registrant and Robert C. Guccione                                     |  | 8-K                       |  | 333-83448 |  | 11-14-02 |  |         | 10.9 |          |  |    
|       
|10.20   |  | Amendment No. 1 to Stock Exchange Agreement
dated December 31, 2002 between Registrant and
General Media International, Inc. |  |                           |  |           |  |          |  |         |      |          |  | (X)
|       
|12.1    |  | Computation of ratio of earnings to fixed
charges                                                                            |  |                           |  |           |  |          |  |         |      |          |  | (X)
|       
|16.1    |  | Letter from Baum & Company, P.A. to the
Securities and Exchange Commission dated
February 28, 2003                           |  | 8-K                       |  | 333-83448 |  | 3-07-03  |  |         | 16   |          |  |    
|       
|21.1    |  | Subsidiaries of the Registrant                                                                                               |  |                           |  |           |  |          |  |         |      |          |  | (X)
|       
|99.1    |  | Certifications Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002      |  |                           |  |           |  |          |  |         |      |          |  | (X)



---

|+  |  | Confidential treatment has been granted with respect to certain information
contained in this exhibit.  
|-- |  | --------------------------------------------------------------------------------------------------------
|   |  |                                                                                                         
|++ |  | Confidential treatment has been requested with respect to certain information
contained in this exhibit.

(d) Financial Statement Schedules:



| |  | See page F-1 for an index of financial statement schedules filed as
part of this Form 10-K.
| |  | -------------------------------------------------------------------------------------------

(b) Reports on Form 8-K:

During the quarter ended December 31, 2002, the Registrant filed Reports
on Form 8-K as follows:

1.     On November 1, 2002, the Registrant filed a Report on Form 8-K to
report a change of control under Item 1. On October 22, 2002, Vector acquired
approximately 73% of the Registrants then outstanding shares of common stock
from two of the Registrants shareholders.

2.     On November 14, 2002, the Registrant filed a Report on Form 8-K to
report (a) under Item 2 that it had acquired 99.5% of the outstanding shares of
the common stock of General Media. from General Media International, Inc., (b)
under Item 5 that it had issued an aggregate of 3,155,000 shares of its common
stock in private offer, and (c) under Item 8 that it had determined to change
its fiscal year.

3.     On November 27, 2002, the Registrant filed a Report on Form 8-K to
report its name change under Item 5.

(c) Exhibits:



| |  | See paragraph (a)(3) above for a listing of items filed as exhibits
to this Form 10-K as required by Item 601 of Regulation S-K.
| |  | --------------------------------------------------------------------------------------------------------------------------------

51



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##### Table of Contents






SIGNATURES

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

|                              |  |                                                         |  |               
|----------------------------- |  | ------------------------------------------------------- |  | --------------
|PENTHOUSE INTERNATIONAL, INC. |  |                                                        
|                              |  |                                                         |  |               
|By:                           |  | /s/ R. Guccione                                         |  | April 30, 2003
|                              |  |                                                         |  |               
|                              |  | Robert C. Guccione,
Chairman of the Board and President |  |               

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

|                                                                       |  |                                                |  |               
|---------------------------------------------------------------------- |  | ---------------------------------------------- |  | --------------
|Signature                                                              |  | Title                                          |  | Date          
|                                                                       |  |                                                |  |               
|                                                                      
|Principal Executive Officer,
Financial Officer and Accounting Officer:
|                                                                      
|/s/ R. GuccioneRobert C. Guccione                                      |  | Chairman of the Board, President,
and Director |  | April 30, 2003
|                                                                      
|Additional Director:                                                   |  |                                                |  |               
|                                                                      
|/s/ Charles SamelCharles Samel                                         |  | Executive Vice President and Director          |  | April 30, 2003

52



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##### Table of Contents






CERTIFICATIONS

I, Robert C. Guccione, certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of Penthouse
International, Inc.;                                                                                                                                                                                                                                       
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operation and cash flows of the registrant as of, and for, the
periods presented in this annual report;                    
|
| | 4. |  | I am responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and I have;                                                                                                                                                
|

| | a. |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the
Evaluation Date); and                                                                                                  
|
| | c. |  | presented in this annual report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;                                                                                                                        
|

| | 5. |  | I have disclosed, based on our most recent evaluation, to
the registrants auditors and the registrants board of
directors;
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------
|

| | a. |  | all significant deficiencies in the design or
operation of internal controls which could adversely affect
the registrants ability to record, process, summarize and
report financial data and have identified for the
registrants auditors any material weaknesses in internal
controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrants internal controls; and                                                                                                                                        
|

| | 6. |  | I have indicated in this annual report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | /s/ R. Guccione
Chief Executive Officer
(Principal Executive Officer and
Principal Financial Officer)
April 30, 2003
| | --------------------------------------------------------------------------------------------------------------------

53



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SUPPLEMENTAL INFORMATION TO BE
FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY
REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT

We
have not provided any annual report covering our last fiscal year or
any proxy statements, form of proxy or other proxy soliciting
materials to our security holders.



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Penthouse International, Inc. and Subsidiaries

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS AND SCHEDULES

|                                |                                                                                                |  |           |             | 
|------------------------------- | ---------------------------------------------------------------------------------------------- |  | --------- | ----------- | 
|                                |                                                                                                |  | Page     
|                                |                                                                                                |  |          
|Reports of Independent Auditors |                                                                                                |  | F-2  F-3 |            
|Financial Statements            |                                                                                                |  |           |            
|                                | Consolidated Balance Sheets, December 31, 2001 and 2002                                        |  |           | F-4 - F-5   | 
|                                | Consolidated Statements of Operations for the Years
Ended December 31, 2000, 2001 and 2002     |  |           | F-6         | 
|                                | Consolidated
Statement of Capital Deficit for the Years
Ended December 31, 2000, 2001 and 2002 |  |           | F-7         | 
|                                | Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 2001 and 2002     |  |           | F-8 - F-9   | 
|                                | Notes to Consolidated Financial Statements                                                     |  |           | F-10 - F-30 | 
|                                | Reports of Independent Auditors on Schedule                                                    |  |           | S-1  S-2   | 
|                                | Schedule II  Valuation and Qualifying Accounts                                                |  |           | S-3         | 

All other schedules are omitted because they are not applicable or the required
information is contained in the financial statements or notes thereto.

F-1



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REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
     Penthouse International, Inc.

We have audited the accompanying consolidated balance sheet of Penthouse
International, Inc. (a majority owned subsidiary
of General Media International, Inc.) and subsidiaries (the Company) as of
December 31, 2002, and the related consolidated statements of operations,
capital deficit and cash flows for the year ended December 31, 2002. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Penthouse
International, Inc. and subsidiaries as of December 31, 2002, and the
consolidated results of their operations and their consolidated cash flows for
the year ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
at December 31, 2002, the Company had a working capital deficit in excess of
$59 million and during 2002 sustained a cash outflow from operating activities in
excess of $1 million. In addition, the Company will be required to make
substantial payments to service its Series C Note obligations during 2003.
These factors, among others, as discussed in Note 2 to the accompanying
financial statements, raise substantial doubt about the Companys ability to
continue as a going concern. Managements plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

As discussed in Note 5, the
Company is obligated to make a substantial interest payment on
April 30, 2003. The failure to make such payment results in the
underlying debt being callable.

EISNER LLP

New York, New York
March 21, 2003
April 30, 2003 with respect to Note 5

F-2



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##### Table of Contents



REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors     General
Media, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheet of General Media,
Inc. (a Delaware corporation and wholly-owned subsidiary of General Media
International, Inc.) and Subsidiaries as of December 31, 2001, and the related
consolidated statements of operations, capital deficit and cash flows for
each of the two years in the period ended December 31, 2001. These financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of General Media,
Inc. and Subsidiaries as of December 31, 2001, and the consolidated
results of their operations and their consolidated cash flows for each of the
two years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
at December 31, 2001, the Companys current liabilities exceeded current assets
by $22,331,000. In addition, it is unlikely that the Company can generate
sufficient funds from operations to make all the mandatory payments required by
its Series C Notes during 2002. These factors, among others, as discussed in
Note 2 to the financial statements, raise substantial doubt about the Companys
ability to continue as a going concern. Managements plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

GRANT THORNTON LLP

New York, New York
March 8, 2002

F-3



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##### Table of Contents



Penthouse International, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

December 31,
(amounts in thousands)

|                                                                                   |                                                                                                  |                      |        |       |        |   |        |       |       | 
|---------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | -------------------- | ------ | ----- | ------ | - | ------ | ----- | ----- | 
|ASSETS                                                                             |                                                                                                  | 2001                 |        | 2002 
|                                                                                   |                                                                                                  |                      |        |      
|CURRENT ASSETS                                                                     |                                                                                                  |                      |        |       |        |   |        |      
|                                                                                   | Cash and cash equivalents                                                                        |                      | $      | 2,431 |        |   | $      | 206   |      
|                                                                                   | Accounts receivable, net of allowance for
doubtful accounts of $1,852 in 2001
and $1,785 in 2002 |                      |        | 3,340 |        |   |        | 2,862 |      
|                                                                                   | Inventories                                                                                      |                      |        | 4,447 |        |   |        | 3,355 |      
|                                                                                   | Prepaid expenses and other current assets                                                        |                      |        | 1,855 |        |   |        | 1,716 |      
|                                                                                   |                                                                                                  |                      |        |       |        |   |        |      
|                                                                                   |                                                                                                  | Total current assets |        |       | 12,073 |   |        |       | 8,139 | 
|WORKS OF ART AND OTHER COLLECTIBLES                                                |                                                                                                  |                      | 2,270  |       |        |   | 1,820  |      
|PROPERTY AND EQUIPMENT  at cost,
net of accumulated depreciation and amortization |                                                                                                  |                      | 2,420  |       |        |   | 1,905  |      
|OTHER ASSETS                                                                       |                                                                                                  |                      |        |       |        |   |        |      
|                                                                                   | Due from affiliated companies                                                                    |                      |        | 3,805 |        |   |        | 1,153 |      
|                                                                                   | Rent security deposits                                                                           |                      |        | 1,496 |        |   |        | 1,071 |      
|                                                                                   | Deferred subscription acquisition costs, net                                                     |                      |        | 1,282 |        |   |        | 248   |      
|                                                                                   | Loan to stockholder of parent                                                                    |                      |        | 1,000 |        |   |        |       |      
|                                                                                   | Other                                                                                            |                      |        | 1,440 |        |   |        | 1,036 |      
|                                                                                   |                                                                                                  |                      |        |       |        |   |        |      
|                                                                                   |                                                                                                  |                      | 9,023  |       |        |   | 3,508  |      
|                                                                                   |                                                                                                  |                      |        |       |        |   |        |      
|                                                                                   |                                                                                                  | $                    | 25,786 |       |        | $ | 15,372 |      
|                                                                                   |                                                                                                  |                      |        |       |        |   |        |      

The accompanying notes are an integral part of these statements.

F-4



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##### Table of Contents



Penthouse International, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS (continued)

December 31,
(amounts in thousands, except par value and share amounts)

|                                                   |                                                                                                                                                                           |                           |         |         |        |   |         |         |        | 
|-------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ------- | ------- | ------ | - | ------- | ------- | ------ | 
|LIABILITIES AND CAPITAL DEFICIT                    |                                                                                                                                                                           | 2001                      |         | 2002   
|                                                   |                                                                                                                                                                           |                           |         |        
|CURRENT LIABILITIES                                |                                                                                                                                                                           |                           |         |         |        |   |         |        
|                                                   | Current
maturities of notes payable                                                                                                                                       |                           | $       | 5,800   |        |   | $       | 43,147  |       
|                                                   | Accounts payable                                                                                                                                                          |                           |         | 12,439  |        |   |         | 7,894   |       
|                                                   | Accrued retail display allowances                                                                                                                                         |                           |         | 1,407   |        |   |         | 1,653   |       
|                                                   | Deferred revenue                                                                                                                                                          |                           |         | 9,551   |        |   |         | 7,602   |       
|                                                   | Accrued expenses and other current liabilities                                                                                                                            |                           |         | 2,442   |        |   |         | 3,863   |       
|                                                   | Accrued
interest  notes payable                                                                                                                                          |                           |         | 1,840   |        |   |         | 1,617   |       
|                                                   | Income taxes payable                                                                                                                                                      |                           |         | 925     |        |   |         | 935     |       
|                                                   |                                                                                                                                                                           |                           |         |         |        |   |         |        
|                                                   |                                                                                                                                                                           | Total current liabilities |         |         | 34,404 |   |         |         | 66,711 | 
|                                                   |                                                                                                                                                                           |                           |         |         |        |   |         |        
|NOTES
PAYABLE, less current maturities             |                                                                                                                                                                           |                           | 43,257  |         |        |   |         |        
|                                                   |                                                                                                                                                                           |                           |         |         |        |   |         |        
|DEFERRED REVENUE                                   |                                                                                                                                                                           |                           | 1,433   |         |        |   | 1,013   |        
|                                                   |                                                                                                                                                                           |                           |         |         |        |   |         |        
|OTHER LONG-TERM LIABILITIES                        |                                                                                                                                                                           |                           | 1,130   |         |        |   | 867     |        
|                                                   |                                                                                                                                                                           |                           |         |         |        |   |         |        
|COMMITMENTS AND CONTINGENCIES                      |                                                                                                                                                                           |                           |         |         |        |   |         |        
|MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK |                                                                                                                                                                           |                           | 9,450   |         |        |   | 11,256  |        
|                                                   |                                                                                                                                                                           |                           |         |         |        |   |         |        
|MINORITY INTEREST                                  |                                                                                                                                                                           |                           | 117     |         |        |   | 116     |        
|                                                   |                                                                                                                                                                           |                           |         |         |        |   |         |        
|CAPITAL DEFICIT                                    |                                                                                                                                                                           |                           |         |         |        |   |         |        
|                                                   | Series A Preferred Stock, $.0025 par value; authorized,
20,000,000 shares, issued and outstanding, 5,000 shares                                                           |                           |         |         |        |   |         |         |       
|                                                   | Series B Preferred Stock $.0025 par value; authorized
20,000,000 shares, issued and outstanding, none                                                                     |                           |         |         |        |   |         |         |       
|                                                   | Common stock, $.0025 par value; authorized, 250,000,000
shares; issued and outstanding, 42,500,000 shares
at December 31, 2001 and 50,000,000 shares at
December 31, 2002 |                           |         | 106     |        |   |         | 125     |       
|                                                   | Capital in excess of par value                                                                                                                                            |                           |         | 1,554   |        |   |         | 6,237   |       
|                                                   | Subscriptions receivable                                                                                                                                                  |                           |         |         |        |   |         | (22     | )     
|                                                   | Accumulated deficit                                                                                                                                                       |                           |         | (65,665 | )      |   |         | (70,931 | )     
|                                                   |                                                                                                                                                                           |                           |         |         |        |   |         |        
|                                                   |                                                                                                                                                                           |                           | (64,005 | )       |        |   | (64,591 | )      
|                                                   |                                                                                                                                                                           |                           |         |         |        |   |         |        
|                                                   |                                                                                                                                                                           | $                         | 25,786  |         |        | $ | 15,372  |        
|                                                   |                                                                                                                                                                           |                           |         |         |        |   |         |        

The accompanying notes are an integral part of these statements.

F-5



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##### Table of Contents



Penthouse International, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

Year ended December 31,
(amounts in thousands, except per share and share amounts)

|                                                                                                            |                                                     |                                              |                                                           |        |       |        |            |        |         |         |            |        |      |        |  
|----------------------------------------------------------------------------------------------------------- | --------------------------------------------------- | -------------------------------------------- | --------------------------------------------------------- | ------ | ----- | ------ | ---------- | ------ | ------- | ------- | ---------- | ------ | ---- | ------ | -
|                                                                                                            |                                                     |                                              |                                                           |        | 2000  |        | 2001       |        | 2002   
|                                                                                                            |                                                     |                                              |                                                           |        |       |        |            |        |        
|Net revenue                                                                                                 |                                                     | $                                            | 72,344                                                    |        |       | $      | 62,604     |        |         | $       | 53,838     |       
|                                                                                                            |                                                     |                                              |                                                           |        |       |        |            |        |         |         |            |       
|Costs and expenses                                                                                          |                                                     |                                              |                                                           |        |       |        |            |        |         |         |            |       
|                                                                                                            | Publishing  production, distribution and
editorial |                                              |                                                           | 29,624 |       |        |            | 24,240 |         |         |            | 21,646 |     
|                                                                                                            | Entertainment and online                            |                                              |                                                           | 1,244  |       |        |            | 1,050  |         |         |            | 749    |     
|                                                                                                            | Selling, general and administrative                 |                                              |                                                           | 27,822 |       |        |            | 25,504 |         |         |            | 22,527 |     
|                                                                                                            | Bad debt expense                                    |                                              |                                                           | 563    |       |        |            | 3,312  |         |         |            | 437    |     
|                                                                                                            | Rent expense from affiliated companies              |                                              |                                                           | 540    |       |        |            | 571    |         |         |            | 550    |     
|                                                                                                            | Depreciation and amortization                       |                                              |                                                           | 714    |       |        |            | 600    |         |         |            | 523    |     
|                                                                                                            |                                                     |                                              |                                                           |        |       |        |            |        |         |         |            |       
|                                                                                                            |                                                     |                                              | Total costs and expenses                                  |        |       | 60,507 |            |        |         | 55,277  |            |        |      | 46,432 |  
|                                                                                                            |                                                     |                                              |                                                           |        |       |        |            |        |         |         |            |       
|                                                                                                            |                                                     |                                              | Income from operations                                    |        |       | 11,837 |            |        |         | 7,327   |            |        |      | 7,406  |  
|Other income (expense)                                                                                      |                                                     |                                              |                                                           |        |       |        |            |        |         |         |            |       
|                                                                                                            | Debt restructuring expenses                         |                                              |                                                           |        |       |        |            | (9,579 | )       |         |            |        |     
|                                                                                                            | Interest expense                                    |                                              |                                                           | (6,865 | )     |        |            | (8,003 | )       |         |            | (7,258 | )   
|                                                                                                            | Interest income                                     |                                              |                                                           | 495    |       |        |            | 289    |         |         |            | 67     |     
|                                                                                                            | Gain on sale of officers life insurance             |                                              |                                                           |        |       |        |            |        |         |         |            | 811    |     
|                                                                                                            | Gain on sale of work of art                         |                                              |                                                           |        |       |        |            |        |         |         |            | 144    |     
|                                                                                                            |                                                     |                                              |                                                           |        |       |        |            |        |         |         |            |       
|                                                                                                            |                                                     |                                              | Total other income (expense), net                         |        |       | (6,370 | )          |        |         | (17,293 | )          |        |      | (6,236 | )
|                                                                                                            |                                                     |                                              |                                                           |        |       |        |            |        |         |         |            |       
|                                                                                                            |                                                     |                                              | Income
(loss) before provision (benefit) for income
taxes |        |       | 5,467  |            |        |         | (9,966  | )          |        |      | 1,170  |  
|Income tax expense (benefit)                                                                                |                                                     |                                              | 2,239                                                     |        |       |        | (58        | )      |         |         | 28         |       
|                                                                                                            |                                                     |                                              |                                                           |        |       |        |            |        |         |         |            |       
|                                                                                                            |                                                     |                                              | Income (loss) before minority interest                    |        |       | 3,228  |            |        |         | (9,908  | )          |        |      | 1,142  |  
|Minority interest                                                                                           |                                                     |                                              |                                                           |        |       |        | (50        | )      |         |         | 8          |       
|                                                                                                            |                                                     |                                              |                                                           |        |       |        |            |        |         |         |            |       
|                                                                                                            |                                                     |                                              | Income (loss) before extraordinary item                   |        |       | 3,228  |            |        |         | (9,858  | )          |        |      | 1,134  |  
|Extraordinary gain from extinguishment of
debt, net of income taxes of $465 in 2000                         |                                                     |                                              | 571                                                       |        |       |        |            |        |         |         |            |       
|                                                                                                            |                                                     |                                              |                                                           |        |       |        |            |        |         |         |            |       
|                                                                                                            |                                                     |                                              | NET INCOME (LOSS)                                         |        |       | 3,799  |            |        |         | (9,858  | )          |        |      | 1,134  |  
|                                                                                                            |                                                     |                                              |                                                           |        |       |        |            |        |         |         |            |       
|Paid in kind dividends on mandatorily redeemable
preferred stock, net of minority interest                |                                                     |                                              |                                                           |        |       |        | (995       | )      |         |         | (1,457     | )     
|Accretion of mandatorily redeemable preferred stock
to its liquidation preference, net of minority interest |                                                     |                                              |                                                           |        |       |        | (248       | )      |         |         | (340       | )     
|                                                                                                            |                                                     |                                              |                                                           |        |       |        |            |        |         |         |            |       
|                                                                                                            |                                                     | NET INCOME (LOSS) APPLICABLE TO
COMMON STOCK |                                                           | $      | 3,799 |        |            | $      | (11,101 | )       |            | $      | (663 | )     
|                                                                                                            |                                                     |                                              |                                                           |        |       |        |            |        |         |         |            |       
|Net
income (loss) per common share                                                                          |                                                     | $                                            | .09                                                       |        |       | $      | (.26       | )      |         | $       | (.01       | )     
|                                                                                                            |                                                     |                                              |                                                           |        |       |        |            |        |         |         |            |       
|Weighted
average number of common shares                                                                    |                                                     |                                              | 42,500,000                                                |        |       |        | 42.500,000 |        |         |         | 47,150,314 |       
|                                                                                                            |                                                     |                                              |                                                           |        |       |        |            |        |         |         |            |       

The accompanying notes are an integral part of these statements.

F-6



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##### Table of Contents



Penthouse International, Inc. and Subsidiaries

CONSOLIDATED STATEMENT OF CAPITAL DEFICIT

Years ended December 31, 2000, 2001 and 2002
(amounts in thousands)

|                                                                   |  |        |     |           |  |             |        |               |  |       |         |   |  |   |     |   |  |   |         |  
|------------------------------------------------------------------ |  | ------ | --- | --------- |  | ----------- | ------ | ------------- |  | ----- | ------- | - |  | - | --- | - |  | - | ------- | -
|                                                                   |  |        |     |           |  | Capital in  |        |               |  |       |         |   |  |   |     |   |  |  
|                                                                   |  | Common |     | excess of |  | Accumulated |        | Subscriptions |  |       |         |  
|                                                                   |  | stock  |     | par value |  | deficit     |        | receivable    |  | Total
|                                                                   |  |        |     |           |  |             |        |               |  |      
|Balance  December 31, 1999                                        |  | $      | 106 |           |  | $           | 2,797  |               |  | $     | (59,606 | ) |  | $ |     |   |  | $ | (56,703 | )
|Net income for the year                                            |  |        |     |           |  |             |        |               |  |       | 3,799   |   |  |   |     |   |  |   | 3,799   |  
|                                                                   |  |        |     |           |  |             |        |               |  |       |         |   |  |   |     |   |  |   |         |  
|Balance  December 31, 2000                                        |  |        | 106 |           |  |             | 2,797  |               |  |       | (55,807 | ) |  |   |     |   |  |   | (52,904 | )
|Net loss for the year                                              |  |        |     |           |  |             |        |               |  |       | (9,858  | ) |  |   |     |   |  |   | (9,858  | )
|Paid in kind dividends on mandatorily
redeemable preferred stock |  |        |     |           |  |             | (995   | )             |  |       |         |   |  |   |     |   |  |   | (995    | )
|                                                                   |  |        |     |           |  |             |        |               |  |       |         |   |  |   |     |   |  |   |         |  
|Accretion of mandatorily redeemable
preferred stock                |  |        |     |           |  |             | (248   | )             |  |       |         |   |  |   |     |   |  |   | (248    | )
|                                                                   |  |        |     |           |  |             |        |               |  |       |         |   |  |   |     |   |  |   |         |  
|Balance  December 31, 2001                                        |  |        | 106 |           |  |             | 1,554  |               |  |       | (65,665 | ) |  |   |     |   |  |   | (64,005 | )
|Net income for the year                                            |  |        |     |           |  |             |        |               |  |       | 1,134   |   |  |   |     |   |  |   | 1,134   |  
|Paid in kind dividends on mandatorily
redeemable preferred stock |  |        |     |           |  |             | (1,457 | )             |  |       |         |   |  |   |     |   |  |   | (1,457  | )
|Accretion of mandatorily redeemable
preferred stock                |  |        |     |           |  |             | (340   | )             |  |       |         |   |  |   |     |   |  |   | (340    | )
|Issuances of common stock for cash                                |  |        | 10  |           |  |             | 56     |               |  |       |         |   |  |   |     |   |  |   | 66      |  
|Issuances of common stock for
services rendered                   |  |        | 3   |           |  |             | 8      |               |  |       |         |   |  |   |     |   |  |   | 11      |  
|Subscription to shares of common stock                             |  |        | 6   |           |  |             | 16     |               |  |       |         |   |  |   | (22 | ) |  |   |         |  
|Deemed
distribution  assumption of liabilities                    |  |        |     |           |  |             |        |               |  |       | (6,400  | ) |  |   |     |   |  |   | (6,400  | )
|Cancellation of assumption of liabilities                          |  |        |     |           |  |             | 6,400  |               |  |       |         |   |  |   |     |   |  |   | 6,400   |  
|                                                                   |  |        |     |           |  |             |        |               |  |       |         |   |  |   |     |   |  |   |         |  
|Balance  December 31, 2002                                        |  | $      | 125 |           |  | $           | 6,237  |               |  | $     | (70,931 | ) |  | $ | (22 | ) |  | $ | (64,591 | )
|                                                                   |  |        |     |           |  |             |        |               |  |       |         |   |  |   |     |   |  |   |         |  

The accompanying notes are an integral part of this statement.

F-7



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##### Table of Contents



Penthouse International, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year ended December 31,
(amounts in thousands)

|                                                       |                                                                                                   |                                                   |                                                     |                                                                  |        |       |        |      |       |       |        |     |      |        |        |  
|------------------------------------------------------ | ------------------------------------------------------------------------------------------------- | ------------------------------------------------- | --------------------------------------------------- | ---------------------------------------------------------------- | ------ | ----- | ------ | ---- | ----- | ----- | ------ | --- | ---- | ------ | ------ | -
|                                                       |                                                                                                   |                                                   |                                                     |                                                                  |        | 2000  |        | 2001 |       | 2002 
|                                                       |                                                                                                   |                                                   |                                                     |                                                                  |        |       |        |      |       |      
|Cash flows from operating activities
Net income (loss) |                                                                                                   | $                                                 | 3,799                                               |                                                                  |        | $     | (9,858 | )    |       | $     | 1,134  |    
|                                                       |                                                                                                   |                                                   |                                                     |                                                                  |        |       |        |      |       |       |        |    
|                                                       | Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities |                                                   |                                                     |                                                                  |        |       |        |      |       |       |        |     |     
|                                                       |                                                                                                   | Depreciation and amortization                     |                                                     |                                                                  | 714    |       |        |      | 600   |       |        |     | 523  |       
|                                                       |                                                                                                   | Debt restructuring costs                          |                                                     |                                                                  |        |       |        |      | 9,579 |       |        |     |      |       
|                                                       |                                                                                                   | Bad debts expense                                 |                                                     |                                                                  | 563    |       |        |      | 3,312 |       |        |     | 437  |       
|                                                       |                                                                                                   | Amortization of deferred revenue                  |                                                     |                                                                  | (364   | )     |        |      | (268  | )     |        |     | (420 | )     
|                                                       |                                                                                                   | Gain on sale of officers life insurance policies  |                                                     |                                                                  |        |       |        |      |       |       |        |     | (811 | )     
|                                                       |                                                                                                   | Gain on sale of work of art                       |                                                     |                                                                  |        |       |        |      |       |       |        |     | (144 | )     
|                                                       |                                                                                                   | Interest on loan to shareholder                   |                                                     |                                                                  | (95    | )     |        |      | (110  | )     |        |     |      |       
|                                                       |                                                                                                   | Amortization of bond costs                        |                                                     |                                                                  | 873    |       |        |      |       |       |        |     |      |       
|                                                       |                                                                                                   | Income taxes reimbursable to affiliated
companies |                                                     |                                                                  | 2,718  |       |        |      |       |       |        |     |      |       
|                                                       |                                                                                                   | Extraordinary gain from extinguishment
of debt    |                                                     |                                                                  | (1,036 | )     |        |      |       |       |        |     |      |       
|                                                       |                                                                                                   | Changes in operating assets and liabilities       |                                                     |                                                                  |        |       |        |      |       |       |        |     |      |       
|                                                       |                                                                                                   |                                                   |                                                     | Accounts receivable                                              |        |       | 18     |      |       |       | 1,454  |     |      |        | 241    |  
|                                                       |                                                                                                   |                                                   |                                                     | Inventories                                                      |        |       | (1,800 | )    |       |       | 1,876  |     |      |        | 1,092  |  
|                                                       |                                                                                                   |                                                   |                                                     | Other current assets                                             |        |       | (422   | )    |       |       | 41     |     |      |        | 139    |  
|                                                       |                                                                                                   |                                                   |                                                     | Other assets                                                     |        |       | (807   | )    |       |       | (905   | )   |      |        | 1,739  |  
|                                                       |                                                                                                   |                                                   |                                                     | Accounts payable, accrued expenses and
other current liabilities |        |       | (3,061 | )    |       |       | 130    |     |      |        | (2,878 | )
|                                                       |                                                                                                   |                                                   |                                                     | Accrued
interest on notes payable                                |        |       | 2,763  |      |       |       | (923   | )   |      |        | (223   | )
|                                                       |                                                                                                   |                                                   |                                                     | Income taxes payable                                             |        |       | (55    | )    |       |       | (39    | )   |      |        | 10     |  
|                                                       |                                                                                                   |                                                   |                                                     | Deferred revenue                                                 |        |       | 236    |      |       |       | (600   | )   |      |        | (1,949 | )
|                                                       |                                                                                                   |                                                   |                                                     | Other long-term liabilities                                      |        |       | 73     |      |       |       | (93    | )   |      |        | (263   | )
|                                                       |                                                                                                   |                                                   |                                                     | Minority interest                                                |        |       |        |      |       |       | (50    | )   |      |        | 8      |  
|                                                       |                                                                                                   |                                                   |                                                     |                                                                  |        |       |        |      |       |       |        |    
|                                                       |                                                                                                   |                                                   | 318                                                 |                                                                  |        |       | 14,004 |      |       |       | (2,499 | )  
|                                                       |                                                                                                   |                                                   |                                                     |                                                                  |        |       |        |      |       |       |        |    
|                                                       |                                                                                                   |                                                   | Net cash provided by (used in) operating
activities |                                                                  |        | 4,117 |        |      |       | 4,146 |        |     |      | (1,365 | )     
|                                                       |                                                                                                   |                                                   |                                                     |                                                                  |        |       |        |      |       |       |        |    
|Cash flows from investing activities                   |                                                                                                   |                                                   |                                                     |                                                                  |        |       |        |      |       |       |        |    
|                                                       | Proceeds from sale of life insurance policies                                                     |                                                   |                                                     |                                                                  |        |       |        |      |       |       |        | 935 |     
|                                                       | Proceeds from sale of work of art                                                                 |                                                   |                                                     |                                                                  |        |       |        |      |       |       |        | 594 |     
|                                                       | Capital expenditures                                                                              |                                                   |                                                     | (232                                                             | )      |       |        | (130 | )     |       |        | (8  | )   
|                                                       |                                                                                                   |                                                   |                                                     |                                                                  |        |       |        |      |       |       |        |    
|                                                       |                                                                                                   |                                                   | Net cash (used in) provided by investing
activities |                                                                  |        | (232  | )      |      |       | (130  | )      |     |      | 1,521  |       
|                                                       |                                                                                                   |                                                   |                                                     |                                                                  |        |       |        |      |       |       |        |    

F-8



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##### Table of Contents



Penthouse International, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

Year ended December 31,
(amounts in thousands)

|                                                           |                                                                                                         |              |                                                      |        |       |        |       |        |       |        |       |        |       |        |  
|---------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ------------ | ---------------------------------------------------- | ------ | ----- | ------ | ----- | ------ | ----- | ------ | ----- | ------ | ----- | ------ | -
|                                                           |                                                                                                         |              |                                                      |        | 2000  |        | 2001  |        | 2002 
|                                                           |                                                                                                         |              |                                                      |        |       |        |       |        |      
|Cash flows from financing activities                       |                                                                                                         |              |                                                      |        |       |        |       |        |       |        |       |       
|                                                           | Principal
payments on notes payable                                                                     |              | $                                                    |        |       |        | $     | (2,943 | )     |        | $     | (5,910 | )    
|                                                           | Collections from affiliated companies                                                                   |              |                                                      |        |       |        |       |        |       |        |       | 2,452  |      
|                                                           | Loan to shareholder                                                                                     |              |                                                      | (54    | )     |        |       |        |       |        |       |        |      
|                                                           | Collections from shareholder of parent                                                                  |              |                                                      | 11     |       |        |       | 110    |       |        |       | 1,000  |      
|                                                           | Issuances of common stock for cash                                                                     |              |                                                      |        |       |        |       |        |       |        |       | 66     |      
|                                                           | Issuances of common stock for
services rendered                                                        |              |                                                      |        |       |        |       |        |       |        |       | 11     |      
|                                                           | Advance to affiliated companies                                                                         |              |                                                      | (2,911 | )     |        |       | (3,216 | )     |        |       |        |      
|                                                           | Debt issuance costs                                                                                     |              |                                                      | (165   | )     |        |       | (1,961 | )     |        |       |        |      
|                                                           |                                                                                                         |              |                                                      |        |       |        |       |        |       |        |       |        |      
|                                                           |                                                                                                         |              | Net cash used in financing activities                |        |       | (3,119 | )     |        |       | (8,010 | )     |        |       | (2,381 | )
|                                                           |                                                                                                         |              |                                                      |        |       |        |       |        |       |        |       |        |      
|                                                           |                                                                                                         |              | Net increase (decrease) in cash
and cash equivalents |        |       | 766    |       |        |       | (3,994 | )     |        |       | (2,225 | )
|Cash and cash equivalents at beginning of year             |                                                                                                         |              | 5,659                                                |        |       |        | 6,425 |        |       |        | 2,431 |       
|                                                           |                                                                                                         |              |                                                      |        |       |        |       |        |       |        |       |        |      
|Cash and cash equivalents at end of year                   |                                                                                                         | $            | 6,425                                                |        |       | $      | 2,431 |        |       | $      | 206   |       
|                                                           |                                                                                                         |              |                                                      |        |       |        |       |        |       |        |       |        |      
|Supplemental disclosures of cash flow information:         |                                                                                                         |              |                                                      |        |       |        |       |        |       |        |       |       
|                                                           | Cash paid during the year for                                                                           |              |                                                      |        |       |        |       |        |       |        |       |        |      
|                                                           |                                                                                                         | Interest     |                                                      | $      | 3,200 |        |       | $      | 8,911 |        |       | $      | 7,490 |       
|                                                           |                                                                                                         | Income taxes |                                                      | $      | 236   |        |       | $      | 17    |        |       | $      | 14    |       
|Supplemental disclosures of non-cash financing
activities: |                                                                                                         |              |                                                      |        |       |        |       |        |       |        |       |       
|                                                           | Paid in kind dividends on mandatorily
redeemable preferred stock, net of minority
interest            |              |                                                      |        |       |        | $     | 995    |       |        | $     | 1,457  |      
|                                                           | Accretion of mandatorily redeemable
preferred stock to liquidation preference,
net of minority interest |              |                                                      |        |       |        | $     | 248    |       |        | $     | 340    |      
|                                                           | Issuance of mandatorily redeemable
convertible preferred stock                                          |              |                                                      |        |       |        | $     | 8,200  |       |        |       |        |      
|                                                           | Expiration of redeemable common stock warrants                                                          |              |                                                      |        |       |        | $     | 582    |       |        |       |        |      
|                                                           | Repayment by affiliated companies                                                                       |              | $                                                    | 1,800  |       |        |       |        |       |        |       |        |      

The accompanying notes are an integral part of these statements.

F-9



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##### Table of Contents



Penthouse International, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2000, 2001 and 2002

NOTE 1  ORGANIZATION AND SUMMARY OF ACCOUNTING POLICIES



| |  | Penthouse International, Inc. (the Company) is majority owned by General
Media International, Inc. (GMI). The Company was incorporated as
American Pulp Exchange, Inc. (APE) on December 11, 2001, to develop a
website to operate an online marketplace for the pulp and paper
industry. On February 27, 2002, the Company filed a registration
statement on Form SB-2 with the Securities and Exchange Commission
(SEC) for the registration of 1,150,000 shares of its common stock
under the Securities Act of 1933, as amended.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On November 8, 2002, pursuant to the Stock Exchange Agreement, the
Company acquired 99.5% of the outstanding shares of General Media, Inc.
(General Media) from General Media International, Inc. (GMI) in exchange
for 42,500,000 shares of APEs common stock comprising 85% of such class, the
assumption of $6,400,000 of GMIs liabilities and 5,000 shares of APEs Series A
Preferred Stock, as part of a corporate restructuring plan designed to give
the Company greater flexibility in seeking new sources of financing. The
Company also obtained, a $5.0 million equity capital commitment from Morgan
Berkeley Partners LLC (Morgan), for the purchase by Morgan of 5,000 shares
of the Companys Series B Preferred Stock. This Series B Stock commitment has not yet been
satisfied. Subsequently, on December 31, 2002, the parties decided to cancel
the assumption of liabilities. In connection with this transaction, GMI
elected Robert C. Guccione, a principal of GMI, and, at the nomination of
Vector Partners, Charles Samel to APEs board of directors. On
November 9, 2002 APE changed its fiscal year to
December 31 from October 31, and on November 18,
2002 APE filed an amendment to its First Amended and Restated Articles of
Incorporation to change its name to Penthouse International, Inc.
|
| |  | The acquisition of General Media by APE has been accounted for as a reverse
merger (recapitalization) with General Media deemed to be the
accounting acquirer.
Accordingly, the historical financial statements presented herein are
those of General Media, as retroactively
restated to reflect the number of APEs shares received in the
merger and as adjusted to give effect to any difference in the par
value of the issuers and the accounting acquirers stock
with an offset to capital in excess of par value. The accumulated deficit of the
accounting acquirer has been carried forward after the acquisition.
Also, General Medias basis for its assets and liabilities were
carried over in the recapitalization. Operations prior to the merger are those of the accounting acquirer. Earnings
(loss) per share for periods prior to the merger have been restated to
reflect the equivalent number of shares issued in the merger.                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | The Company is a publishing, online and entertainment company engaged in
the publication and sale of mens magazines, the sale of various
adult-oriented online products and services, the sale of various
adult-oriented entertainment products and services and the licensing of its
trademarks to publishers in foreign countries and for use on various consumer
products and services. Penthouse is the Companys most significant trademark
and is used extensively by its publishing, online, entertainment and foreign
edition licensing operations. In December 1999, the Company launched a new
magazine called Mind & Muscle Power (Power) which targeted the mens health
magazine market. The publication was suspended after the November 2000
issue. The Companys operations are located primarily in New York City, and
the Company has a broad customer base.                                                                                                                                                                                                                                                                                                                                                                                                                                                         

F-10



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##### Table of Contents



Penthouse International, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

December 31, 2000, 2001 and 2002

NOTE 1 (continued)



| |  | A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements
follows:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | Principles of Consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.                                                                                                                                                                                                                                                                                                                        
|
| | b. |  | Revenue Recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |    |  | Sales of magazines for retail distribution are recorded on the on-sale
date of each issue based on an estimate of the revenue for each issue of
the magazine, net of estimated returns. Estimated revenue are adjusted
to actual revenue as actual sales information becomes available.                                                                                                                                                                                                                                           
|
| |    |  | Revenue from advertising are recognized on the on-sale date of each issue
in which the advertising was included.                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |    |  | Revenue from the sale of magazine subscriptions are recognized over the
term of the subscriptions.                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |    |  | Revenue from the sales of films and videocassettes are recognized in the
period in which the product is shipped.                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |    |  | Revenue from product and trademark licensing are recorded in the period
in which earned.                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |    |  | Revenue from the sale of memberships to the Companys internet site are
recognized over the term of the membership.                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |    |  | Revenue from pay-per-call programs and product sales are recorded in the
period in which the calls are made and the products are shipped.                                                                                                                                                                                                                                                                                                                                                                                         
|
| | c. |  | Retail Display Allowances                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |    |  | Retail display allowances are payments made to retail outlets as an
incentive to carry and sell magazines. The formula used to calculate the
allowance is based on a percentage of sales dollars and an amount per copy
sold. Retail display allowances are recorded as a reduction of newsstand
revenues on the on-sale date based upon past experience using the
estimated sales of each issue, net of estimated returns. As new
information becomes available, the retail display allowances recorded are
adjusted accordingly.

F-11



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##### Table of Contents



Penthouse International, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

December 31, 2000, 2001 and 2002

NOTE 1 (continued)



| | d. |  | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | Paper and printing costs are valued at the lower of cost (first-in,
first-out method) or market. Editorials and pictorials are valued at
cost. Film and programming costs are the direct cost of production, which
are amortized over the expected period of revenue, generally twelve to
eighteen months from the film release date.                                                                                                                                            
|
| | e. |  | Works of Art and Other Collectibles                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |    |  | Works of art and other collectibles are carried at lower of cost or
estimated fair value                                                                                                                                                                                                                                                                                                                                                                                         
|
| | f. |  | Deferred Subscription Acquisition Costs                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |    |  | The costs of acquiring subscriptions related to direct response marketing
are deferred and amortized over the life of the subscriptions.
Amortization of these costs is done on a cost-pool-by-cost-pool basis over
generally twelve months.                                                                                                                                                                                                                                     
|
| | g. |  | Property and Equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |    |  | Property and equipment are stated at cost. Depreciation is provided by the
straight-line method based upon the estimated useful lives of the assets.
Furniture and equipment and computer hardware and software are depreciated
over five years and leasehold improvements are depreciated over the
shorter of the life of the lease or the improvement.                                                                                                                         
|
| | h. |  | Cash Equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |    |  | The Company considers its investments with an original maturity of three
months or less to be cash equivalents.                                                                                                                                                                                                                                                                                                                                                                  
|
| | i. |  | Management Charges                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |    |  | The Company incurs shared common indirect expenses for the benefit of GMI
and affiliated companies, including accounting, personnel, data
processing, employee relations and other administrative services. In
addition, the Company is charged by GMI and its subsidiaries for other
corporate overhead costs, executive compensation and costs which
principally relate to office space. These allocations are based on
agreements between the parties as described in Note 13.

F-12



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##### Table of Contents



Penthouse International, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

December 31, 2000, 2001 and 2002

NOTE 1 (continued)



| |    |  | In the opinion of management, the results of operations of the Company
reflect all of the Companys costs, including salaries, rent,
depreciation, legal and accounting services and other general and
administrative costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | j. |  | Concentration of Credit Risk and Fair Value of Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |    |  | The Companys financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents and trade
accounts receivable. The Company places its cash and temporary cash
investments with high credit quality institutions. In general, such
balances generally exceed the FDIC insurance limit. Management of the
Company provides credit, in the normal course of business, to a
significant number of advertisers in the tobacco, alcohol and adult
entertainment industries. The Company routinely assesses the financial
strength of its customers and newsstand distributors and, as a
consequence, believes that its trade accounts receivable exposure is
limited. The carrying value of financial instruments (principally
consisting of cash and cash equivalents and receivables) approximates fair
market value due to its short-term nature. There is no established public
trading market for the Companys Senior Secured Notes and it would be
impractical to estimate fair value at December 31, 2002 in the
circumstances.
|
| |    |  | No customer of the Company accounted for more than ten percent of the
Companys net revenues in 2000, 2001 or 2002, and no part of the business
is dependent upon a single customer or a few customers, the loss of any
one or more of which would have a material adverse effect on the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | k. |  | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |    |  | The Company makes estimates of its tax obligations exposure and temporary
differences resulting from timing differences for reporting items for book
and tax purposes. The Company recognizes deferred taxes by the assets and
liability method of accounting for income taxes. Under the assets and
liability method, deferred taxes are recognized for differences between
the financial statement and tax bases of assets and liabilities at enacted
statutory tax rates in effect for the years in which the differences are
expected to reverse. The effect on deferred taxes of a change in tax rates
is recognized in income in the period that includes the enactment date. A
valuation allowance is recorded if it is more likely than not that some
portion or all of the deferred tax assets will not be realized based on a
review of available evidence.                                                                                                                                                                                                                 

F-13



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##### Table of Contents



Penthouse International, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

December 31, 2000, 2001 and 2002



| | l. |  | Use of Estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | In preparing financial statements in conformity with accounting
principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period.
The most sensitive estimates made by management are those related to
estimated sales of magazines and retail display allowances. Actual
results could differ from those estimates.
|
| | m. |  | Net Income (Loss) Per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |    |  | Net income (loss) per share is computed by dividing the net income (loss)
after reductions for paid in kind dividends and accretion by the
weighted average number of shares of common stock and common stock
equivalents outstanding during each period.                                                                                                                                                                                                                                                                                                                                                

NOTE 2  BASIS OF PRESENTATION
AND FINANCIAL STATUS



| |  | The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America,
which contemplate continuation of the Company as a going concern. The
Companys cash balance was $206,000 at December 31, 2002, compared to
$2,431,000 at December 31, 2001. During the year ended December 31, 2002,
the Company used $1,365,000 in cash flows from operating activities and
absorbed $2,225,000 in total cash outflows. At December 31, 2002, the
Companys current liabilities exceeded current assets by $23,225,000.                                                                                                                                                                                                                                  
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | General Medias Series C Notes require interest payments of $5,884,000 and
principal payments of $6,500,000 during 2003 (excluding the $1,300,000
principal payment due December 31, 2002 which was paid in January 2003). The
management of the Company does not believe it can generate sufficient funds
from operations to make all of the required payments. In the event that the
Company is unable to make these payments, the trustee under the Indenture
could assume control over General Media, which represents substantially all
of the Companys assets including its registered trademarks. The Company is
currently seeking to restructure its debt in order to modify its debt
service payments. There can be no assurance that the Company will
successfully negotiate a reduction in the debt service payments.
|
| |  | The Company took the following actions in 2002 to attempt to improve its cash
flow:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              



| |  |  | On February 28, 2002, the Company reduced its workforce by 38
employees (25% of total workforce). This action will reduce the amount
of cash required for salary and benefit expenses.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-14



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##### Table of Contents



Penthouse International, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

December 31, 2000, 2001 and 2002

NOTE 2  (Continued)



| |  |  | The Company reduced the production and distribution costs of its
magazines by negotiating reductions in the price of paper and printing
costs, by changing the paper grades on its magazines and by changing
their design to improve production efficiencies.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Began licensing its trademarks and providing marketing expertise to
adult entertainment clubs in exchange for licensing fees.                                                                                                                                
|
| |  |  | The Company reduced the amount of cash expended to promote
subscriptions and reduce the amount of cash expended on other selling,
general and administrative expenses.                                                                                       
|
| |  |  | The Company delayed employee salary increases for five months during
2002.                                                                                                                                                                                   



| |  | In addition, the principal shareholder of GMI and affiliated companies repaid
a total of $3,452,000 of loans and advances.                                                                    
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company has undertaken or is planning the following actions during 2003,
which are primarily directed at improving its revenue generating capability,
to attempt to improve its cash flow:



| |  |  | The Company is expanding the licensing of its trademarks to more
adult entertainment clubs.                                                                                                                                             
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Company has entered into a new
cruise ship on demand pay-per-view license
agreement to improve the revenue generated by its movies.                                                                                                 
|
| |  |  | The Company is exploring the possibility of expanding the licensing
of its trademarks to different industries and establishing partnerships
with other companies to produce a larger number of movies.                                  
|
| |  |  | The Company is also exploring the possibility of establishing
relationships with other companies to find better ways to generate
revenue from its large collection of pictorial inventory and to reach a
wider audience on the internet.



| |  | In addition, in January 2003 affiliated companies repaid an additional
$1,000,000 of intercompany loans.                                                                                                                                                                                                                            
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Since the above actions will not generate sufficient improvements to cash
flow to meet current debt service requirements, the Company is contemplating
additional actions, including seeking other sources of financing, to provide
cash. However, there can be no assurances that management will be able to
achieve such a result.

F-15



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##### Table of Contents



Penthouse International, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

December 31, 2000, 2001 and 2002

NOTE 2  (Continued)



| |  | In view of the matters described in the preceding paragraphs, substantial
doubt exists about the Companys ability to continue as a going concern. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 3  INVENTORIES

Inventories include the following at December 31:

|                           |  |                |       |      |  |   |       | 
|-------------------------- |  | -------------- | ----- | ---- |  | - | ----- | 
|                           |  | 2001           |       | 2002
|                           |  |                |       |     
|                           |  | (in thousands)
|Paper and printing         |  | $              | 1,411 |      |  | $ | 1,599 | 
|Editorials and pictorials  |  |                | 2,239 |      |  |   | 1,456 | 
|Film and programming costs |  |                | 797   |      |  |   | 300   | 
|                           |  |                |       |      |  |   |       | 
|                           |  | $              | 4,447 |      |  | $ | 3,355 | 
|                           |  |                |       |      |  |   |       | 

NOTE 4  PROPERTY AND EQUIPMENT

Property and equipment as of December 31, consist of:

|                                          |  |                |        |      |  |   |        |  
|----------------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | -
|                                          |  | 2001           |        | 2002
|                                          |  |                |        |     
|                                          |  | (in thousands)
|Furniture and equipment                   |  | $              | 6,253  |      |  | $ | 6,253  |  
|Leasehold improvements                    |  |                | 1,871  |      |  |   | 1,879  |  
|Computer hardware and software            |  |                | 2,902  |      |  |   | 2,902  |  
|Other                                     |  |                | 66     |      |  |   | 66     |  
|                                          |  |                |        |      |  |   |        |  
|                                          |  |                | 11,092 |      |  |   | 11,100 |  
|Accumulated depreciation and amortization |  |                | (8,672 | )    |  |   | (9,195 | )
|                                          |  |                |        |      |  |   |        |  
|                                          |  | $              | 2,420  |      |  | $ | 1,905  |  
|                                          |  |                |        |      |  |   |        |  

F-16



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##### Table of Contents



Penthouse International, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

December 31, 2000, 2001 and 2002

NOTE 5  NOTES PAYABLE



| |  | On December 21, 1993, General Media issued $85,000,000 of Senior Secured
Notes (the Notes) at an issue price equal to 99.387% of the principal
amount of the Notes. As part of the issuance of the Notes, General Media
issued 85,000 common stock purchase warrants to the purchasers of the Notes
and sold to the underwriter at a discount 102,506 warrants (the Warrants).
The Warrants, having an expiration date of December 22, 2000, entitled the
holders to purchase in the aggregate 25,000 shares of General Medias common
stock at the exercise price of $0.01 per share. The Warrants also gave the
holders the right to require General Media to purchase for cash all of the
Warrants at their fair value. At the time of issuance, the Company recorded
the Warrants at their fair value.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Notes were collateralized by a first priority security interest in all
intellectual property rights (including copyrights and trademarks) and
substantially all other intangible and tangible assets of the General Media,
other than accounts receivable, inventory and cash equivalents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | In July 1995, General Media repurchased $5,000,000 face amount of its
outstanding Notes, including 5,000 warrants, for cash of $4,050,000. In May
1999, General Media repurchased $28,000,000 face amount of its outstanding
Notes for cash of $26,600,000. The remaining Notes matured on December 31,
2000 and bore interest at 10-5/8% per annum, which was payable semiannually.                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | On December 22, 2000, 18,009 of the Warrants were exercised to purchase 2,401
shares of General Medias Common Stock and 104,076 Warrants expired without
being timely exercised in accordance with the Warrant agreement. The due
date of the remaining 60,421 Warrants held by holders of the Notes was
extended as part of the negotiations for refinancing the Notes. The exercise
of the 18,009 Warrants was recorded in December 2000 as a reduction in
redeemable warrants and a contribution to capital of $173,000. The expiration
of the 104,076 Warrants was recorded in the financial statements in December
2000 as an extraordinary gain from extinguishment of debt of $571,000, net of
income tax of $465,000.                                                                                
|
| |  | On March 29, 2001 (the Closing Date), General Media refinanced the Notes.
Under the refinancing agreement, General Media exchanged the $51,507,000 of
principal amount of Notes and any Warrants held by Noteholders (the
Consenting Holders) for Series C Notes and mandatorily redeemable
convertible preferred stock (the Preferred Stock) with a liquidation
preference of $10,000,000 (See
Note 6) meeting certain specified terms and conditions. The remaining
$493,000 principal amount of Notes that were not exchanged were retired by
payments made to the holders on March 29, 2001.                                                                                                                                                                                                        
|
| |  | The Series C Notes mature on March 29, 2004, bear interest at a rate of 15%
per annum effective January 1, 2001 and require principal payments of
$6,500,000 during 2003, with the balance due in 2004. In addition, further
principal payments equal to 50% of excess cash flow, as defined, in each year
is required, as well as any proceeds from the sale of certain real property
owned by GMI (after payment of                                                                                                                                                                                                                                                                                                                                                                                         

F-17



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##### Table of Contents



Penthouse International, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

December 31, 2000, 2001 and 2002

NOTE 5 (continued)



| |  | existing debt obligations thereon) and any proceeds to General Media from
certain insurance policies (the Policies) on the life of the principal
stockholder. General Media made principal payments of $2,943,000 and
$5,910,000 during the years ended December 31, 2001 and 2002, respectively.
The principal payments during the year ended December 31, 2002 included
$935,000 of proceeds from the sale of certain of the Policies (See Note 9)
and approximately $475,000 of proceeds from the sale of a work of art (See
Note 10).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Indenture has been extended to the March 29, 2004 maturity of the Series
C Notes. The original Indenture contained covenants, that will continue to
the new maturity date, which, among other things, (i) restrict the ability of
General Media to dispose of assets, incur indebtedness, create liens and make
certain investments, (ii) require General Media to maintain a consolidated
tangible net worth deficiency of no greater than $81,600,000, and (iii)
restrict General Medias ability to pay dividends unless certain financial
performance tests are met. General Medias subsidiaries, which are guarantors
of the Senior Secured Notes under the Indenture, however, were and continue
to be permitted to pay intercompany dividends on their shares of common
stock. The ability of General Media and its subsidiaries to incur additional
debt is severely limited by such covenants. The Indenture was amended in
conjunction with the issuance of the Series C Notes to reflect the above
mentioned payments, to reflect the March 29, 2004 maturity of the Series C
Notes, to provide additional Change of Control events (requiring the
commencement of an offer to purchase Notes), to provide additional
flexibility as to the nature of, but also to set a fixed dollar limit for,
Owner Payments, and to require Noteholder consent to entering into new
lines of business or for sales or other conveyances of the Penthouse
trademark (other than ordinary course licensing) or other assets for net
proceeds in excess of $500,000. In addition, the related Security Agreement
was amended to grant additional security interests in inventory and accounts
receivable as well as a security interest in proceeds of the sale of certain
real property owned by GMI (after payment of existing debt obligations
thereon) and on any proceeds to General Media from certain Policies on the
life of General Medias principal beneficial owner. As of December 31, 2002
General Media had not made a required a principal payment of $1,300,000 and
a required interest payment of $1,634,000, both due by that date. In January
2003, General Media received $1,000,000 in repayments from GMI on amounts due
General Media by affiliated companies. General Media used these funds, along
with another $1,934,000 of available cash, in January 2003 to make the
required principal and interest payments within the grace periods provided
for by the Indenture. The Company was required to make a principal payment of
$1,950,000 and an interest payment of $1,568,000 on March 31, 2003. The
principal and interest payments were not made by March 31, 2003.
On April 14, 2003 a notice of event of default was issued by the
Indenture Trustee. On April 15 and 16, 2003, the Company
transferred additional funds (including $185,000 made available
through the repayment of an intercompany balance from GMI) and has
fully paid the $1,950,000 principal amount. The Company had until
April 30, 2003 (30 day grace period) to make the interest
payment, but was unable to do so. Accordingly, the underlying debt
has been classified in the accompanying balance sheet as a current
liability.
|
| |  | On August 1, 2002, General Media and the holders of a majority in principal
amount of the Series C Notes (the Holders) entered into a Third
Supplemental Indenture to amend the Change of Control events in the
Indenture to add further restrictions on the amount of Owner Payments; to
substitute John Orlando for John Prebich in the Change of Control
provision; and to require that new financial                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

F-18



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##### Table of Contents



Penthouse International, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

December 31, 2000, 2001 and 2002

NOTE 5 (continued)



| |  | covenants (the Financial Covenants) be added that require General Media to
achieve not less than 80% of the projected revenues and EBITDA to be set
forth in a business plan in a form and substance reasonably satisfactory to
the Holders. In addition General Media agreed to allow the Holders to audit
its books and records and the payroll records of GMI and to pay all the
legal fees, costs and expenses, and audit fees of the Holders (collectively
the Amendment Expenses) related to the agreement. General Media recorded
$214,000 of Amendment Expenses during the year ended December 31, 2002. In
exchange for these amendments the Holders agreed to waive their prior
contention that a Change of Control event had occurred with respect to the
termination of John Prebich, General Medias former President and Chief
Operating Officer.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On September 13, 2002, General Media submitted a business plan to the Holders
for approval in accordance with the requirements of the Third Supplemental
Indenture. The Holders notified the Company that they had accepted the
business plan effective October 4, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | On November 12, 2002, General Media and the Holders entered into a Fourth
Supplemental Indenture to incorporate the Financial Covenants into the
Indenture.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | John Orlando, General Medias President and Chief Operating Officer was
terminated on January 14, 2003. The Indenture requires that General Media
hire a replacement President and Chief Operating Officer reasonably
satisfactory to a majority of the Holders within ninety days of the date of
either the resignation or termination of John Orlando, to avoid a deemed
Change of Control which in turn requires that an offer to purchase be made
by General Media to all Holders. On March 28, 2003, General Media hired
Stephen Gross to replace John Orlando as General Medias President and Chief
Operating Officer. A proposal was submitted to the Holders on that date
requesting confirmation that Mr. Gross is reasonably satisfactory to them.
The Company is currently waiting for the Holders reply.                                              

NOTE 6  MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK



| |  | On March 29, 2001, the General Media issued 9,905 shares of Preferred Stock
to the Consenting Holders at a fair value of $8,200,000. The Preferred Stock
carries a liquidation preference of $10,000,000, provides for paid-in-kind
dividends at a 13% per annum rate and is convertible at the option of the
holders, after two years following the Closing Date, into 10% of General
Medias common stock on a fully diluted basis in the third year, 12.5% of
General Medias common stock on a fully diluted basis in the fourth year, and
15% of such common stock on a fully diluted basis during the fifth year. The
Preferred Stock is mandatorily redeemable by General Media (subject to the
aforementioned conversion rights) at its liquidation preference including the
paid-in-kind dividends at the end of the fifth year.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



Penthouse International, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

December 31, 2000, 2001 and 2002

NOTE 6 (continued)



| |  | The Preferred Stock may be optionally redeemed by General Media during the
second year following the Closing Date at a redemption price of $10,000,000
and at increasing premiums of 110%, 115% and 120% during the third, fourth
and fifth years, respectively, provided that the Series C Notes are paid in
full at or before the time of any redemption.                                                                                                                                                                                                                                                                                                                 
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The recorded value net of issuance costs is being accreted up to the
redemption value using the effective interest method through the March 29,
2006 mandatory redemption date of the Preferred Stock. For the year ended
December 31, 2002, the Company recorded $342,000 of such accretion. For the
year ended December 31, 2002, the Company also recorded paid-in-kind
dividends of approximately $1,464,000. Both the accretion of the Preferred
Stock and the paid-in-kind dividends are reflected in the accompanying
financial statements as an increase in Mandatorily Redeemable Convertible
Preferred Stock and a decrease in Capital In Excess Of Par Value.

NOTE 7  PREFERRED STOCK



| |  | In November 2002, the Company issued 5,000 shares of its Series A Preferred
Stock. The Series A Preferred Stock is not convertible into common stock. The
Series A Preferred Stock is redeemable at an aggregate amount equal to
$5,000,000, subject to the payment of preferential amounts due under any
Series B Preferred Stock that is issued.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 8  WARRANTS



| |  | On November 7, 2002, the Company issued to PH Capital Holdings LLC (PH
Capital) and Vector Partners LLC (Vector), warrants to purchase up to an
aggregate of 575,000 shares each of the Companys common stock at an exercise
price of $.01 per share as an equity incentive for their assistance in
securing replacement financing for General Medias Series B Notes. The
warrants are exercisable on the first business day following the payment in
full of all indebtedness under the Series C Notes in a qualified refinancing,
as defined. The warrants expire on the earlier of five years after the day on which the
warrants first become exercisable or if the warrant does not become
exercisable, on the maturity date of the Series C
Notes.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 9  GAIN ON SALE OF OFFICERS LIFE INSURANCE POLICIES



| |  | In April 2002, certain officers life insurance policies were sold to an
unrelated third party, resulting in proceeds to the Company of approximately
$935,000 and a net gain of approximately $811,000, after deducting the cash
surrender value of the policies of approximately $124,000. The proceeds from
the sale of the policies was applied against the Senior Secured Notes as an
additional principal payment in accordance with the requirements of the
Indenture (See Note 5).
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



Penthouse International, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

December 31, 2000, 2001 and 2002

NOTE 10  GAIN ON SALE OF WORK OF ART



| |  | In November 2002, a work of art was sold resulting in proceeds to the Company
of approximately $594,000, and a net gain of approximately $144,000. The
proceeds from the sale of the work of art was applied against the Senior
Secured Notes as an additional principal payment in accordance with the
requirements of the Indenture (See Note 5).
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 11  DEBT RESTRUCTURING EXPENSES



| |  | In connection with the refinancing of General Medias debt, as more fully
described in Note 5, the Company recorded debt restructuring expenses of
$9,579,000 consisting of a fee of approximately $1,030,000 to Consenting
Holders as well as their legal fees and related expenses of approximately
$177,000, legal fees and expenses for General Medias own lawyers and
representatives of approximately $754,000 and the fair value of 9,905 shares
of Preferred Stock of $8,200,000 issued to the Consenting Holders, as more
fully described in Note 6 above, less the remaining $582,000 of liability
associated with 60,421 Warrants surrendered in connection with the
refinancing.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 12  INCOME TAXES



| |  | The income tax provision for the year ended December 31 consists of:
| |  | --------------------------------------------------------------------

|                |         |   |                |     |      |   |      |     |   |   |    |    | 
|--------------- | ------- | - | -------------- | --- | ---- | - | ---- | --- | - | - | -- | -- | 
|                |         |   | 2000           |     | 2001 |   | 2002
|                |         |   |                |     |      |   |     
|                |         |   | (in thousands)
|Current
Federal |         | $ | 1,580          |     |      | $ |      |     |   | $ |    |   
|                | State   |   |                | 673 |      |   |      | 25  |   |   |    | 28 | 
|                | Foreign |   |                | (14 | )    |   |      | (83 | ) |   |    |    | 
|                |         |   |                |     |      |   |      |     |   |   |    |   
|                |         | $ | 2,239          |     |      | $ | (58  | )   |   | $ | 28 |   
|                |         |   |                |     |      |   |      |     |   |   |    |   



| |  | The Company incurred a taxable loss of approximately $1,053,000 for the
year ended December 31, 2002. In addition, the Company has a net operating
loss (NOL) carryover available from the prior year of approximately
$1,475,000, which can be used to reduce future taxable income. This NOL will
expire in 2021. The state income tax provision for the year ended December
31, 2002 is comprised of minimum taxes. The benefit in the foreign tax
provision for the year ended December 31, 2001 is the result of a favorable
settlement of a foreign jurisdiction tax audit.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



Penthouse International, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

December 31, 2000, 2001 and 2002

NOTE 12 (continued)



| |  | The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory rate to earnings (loss)
before income tax expense (benefit), as a result of the following:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                             |  |      |      |   |  |  |  |      |  |      |       |   |  |  |       |  
|-------------------------------------------------------------------------------------------- |  | ---- | ---- | - |  |  |  | ---- |  | ---- | ----- | - |  |  | ----- | -
|                                                                                             |  | 2000 |      |   |  |  |  | 2001 |  | 2002
|                                                                                             |  |      |      |   |  |  |  |      |  |     
|Statutory Federal income tax rate                                                            |  |      | 34.0 | % |  |  |  |      |  |      | 34.0  | % |  |  | 34.0  | %
|Net operating loss and other tax benefits for
which no current tax benefit is being
realized |  |      |      |   |  |  |  |      |  |      | (34.0 | ) |  |  | (34.0 | )
|State taxes, net of Federal income tax                                                       |  |      | 7.4  |   |  |  |  |      |  |      |       |   |  |  |       |  
|Net change in valuation allowance for
deferred taxes                                         |  |      | 2.2  |   |  |  |  |      |  |      |       |   |  |  |       |  
|Utilization of Federal AMT credit carryforward                                               |  |      | (2.3 | ) |  |  |  |      |  |      |       |   |  |  |       |  
|Foreign tax refund                                                                           |  |      | (.3  | ) |  |  |  |      |  |      |       |   |  |  |       |  
|                                                                                             |  |      |      |   |  |  |  |      |  |      |       |   |  |  |       |  
|Effective tax rate                                                                           |  |      | 41.0 | % |  |  |  |      |  |      |      | % |  |  |      | %
|                                                                                             |  |      |      |   |  |  |  |      |  |      |       |   |  |  |       |  



| |  | Deferred income taxes reflect the impact of temporary differences
between the amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant
components of the deferred income tax assets and liabilities at December 31
were as follows:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                         |                                  |                                         |        |                |       |      |        |       |       | 
|---------------------------------------- | -------------------------------- | --------------------------------------- | ------ | -------------- | ----- | ---- | ------ | ----- | ----- | 
|                                         |                                  |                                         |        | 2001           |       | 2002
|                                         |                                  |                                         |        |                |       |     
|                                         |                                  |                                         |        | (in thousands)
|Deferred tax assets
Debt financing costs |                                  | $                                       | 2,874  |                |       | $    | 1,597  |      
|                                         | Net operating loss carryforwards |                                         |        | 590            |       |      |        | 1,011 |      
|                                         | Allowance for doubtful accounts  |                                         |        | 740            |       |      |        | 816   |      
|                                         | Accrued severence                |                                         |        |                |       |      |        | 233   |      
|                                         | Deferred rent  11 Penn Plaza    |                                         |        | 151            |       |      |        | 138   |      
|                                         | Depreciation                     |                                         |        |                |       |      |        | 9     |      
|                                         | Accrued bonuses                  |                                         |        | 100            |       |      |        |      |      
|                                         |                                  |                                         |        |                |       |      |        |      
|                                         |                                  | Gross deferred tax asset                |        |                | 4,455 |      |        |       | 3,804 | 
|Deferred tax liabilities
Depreciation    |                                  |                                         | (46    | )              |       |      |       |      
|                                         |                                  |                                         |        |                |       |      |        |      
|                                         |                                  | Net deferred tax asset before valuation |        |                | 4,409 |      |        |       | 3,804 | 
|                                         |                                  |                                         |        |                |       |      |        |      
|Valuation allowance                      |                                  |                                         | (4,409 | )              |       |      | (3,804 | )    
|                                         |                                  |                                         |        |                |       |      |        |      
|                                         |                                  | Net deferred tax asset                  |        | $              |      |      |        | $     |      | 
|                                         |                                  |                                         |        |                |       |      |        |      

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##### Table of Contents



Penthouse International, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

December 31, 2000, 2001 and 2002

NOTE 12 (continued)



| |  | The Company has established a full valuation allowance with respect to
the future realization of net deferred tax assets due to the uncertainty of
the Companys ability to generate sufficient future taxable income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company and its subsidiaries are included in the consolidated
Federal and Combined New York State and New York City income tax return of
GMI. The provision for income taxes (benefit) in the accompanying statements
of operations is allocated to the Company from GMI as if the Company filed
separate income tax returns. Since each member of a consolidated tax group is
jointly and severally liable for Federal income taxes of the entire group,
the Company may be liable for taxes of GMI or other members of the
consolidated group. Under the terms of a Tax Sharing and Indemnification
Agreement (the Agreement), the Company can utilize the net operating losses
GMI (GMI NOLs) to reduce its income taxes as long as the Company is member
of GMIs consolidated group. To the extent that the Company utilizes such GMI
NOLs to reduce its income taxes, it is required to pay GMI, within thirty
days after the Company pays the group consolidated tax liability, an amount
that would have been paid in taxes had the net operating losses of GMI not
been available. At January 1, 2002, GMI had available for Federal income
tax purposes GMI NOLs aggregating approximately $84,751,000 which can be
used by the Company to reduce future income taxes, as long as the Company is
a member of GMIs consolidated group. These GMI NOLs expire in tax years
ending 2007 to 2021. The Companys ability to utilize net operating losses
may be limited in the future due to the additional issuance of GMIs common
stock or other changes in control, as defined in the Internal Revenue Code
and related regulations.
|
| |  | The New York State Department of Taxation and Finance has completed an
audit of GMIs Combined New York State Franchise Tax Returns for the years
ended 1993 to 1996. The audit resulted in no change to the returns as filed.
During 2002, the New York City Department of Finance audited General Medias
Commercial Rent Tax Returns for the period June 1997 to May 1998. The audit
resulted in a tax deficiency of approximately $49,000, including interest and
penalties, approximately $13,000 of which was paid during 2002. GMIs
Federal, New York State and other tax returns filed by GMI and the Company
are subject to audit by governmental authorities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

NOTE 13  COMMITMENTS AND CONTINGENCIES



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

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##### Table of Contents



Penthouse International, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

December 31, 2000, 2001 and 2002

NOTE 13 (continued)



| |  |  | On May 8, 2002, An action was filed in United States District Court
for the Central District of California (the California Court), alleging,
among other things, that General Media published photographs (the
Photographs) of a woman topless in the June 2002 issue of Penthouse
Magazine (the Magazine), falsely representing them to be pictures of the
plaintiff when they were in reality photographs of someone else. The Action
also alleges that General Media advertised its intention to make the
Photographs and a video of the woman available on its internet site on May
10, 2002. On May 7, 2002, General Media issued a press release stating that
it had made an unintentional error when it said the Photographs were of the
plaintiff and it apologized to the plaintiff and the actual woman in the
Photographs for the error. General Media also published the apology on its
internet site.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The plaintiff seeks a permanent injunction barring General Media from
any similar acts concerning her, barring it from any further distribution of
the Photographs and the June 2002 edition of the Magazine, barring it from
any references to the plaintiff on its internet site, barring it from
representing that any pictures or photographs on the internet site are
depictions of the plaintiff, ordering it to deliver or destroy all materials
that have the alleged false representations, ordering the
disgorgement and paying over of all profits it earned and any other
unjust enrichment that it received from the alleged false depiction of the
plaintiff, awarding damages in an unspecified amount not less than
$10,000,000, trebling of these unspecified damages, awarding punitive
damages in an unspecified amount and reimbursement for the plaintiffs costs
and attorneys fees in prosecuting the action. General Media has filed a
motion to dismiss portions of the complaint and the plaintiff has filed a
cross-motion to freeze $15,000,000 of General Medias assets for purposes of
insuring the payment of a possible judgment. The California Court denied
both of these motions in August 2002. The plaintiff filed an
appeal to the Ninth US Court of Appeals, which ruled against the
plaintiff in November 2002. General Media and the plaintiff
have exchanged discovery requests and are in the process of exchanging
information. General Media intends to vigorously defend itself in this
action. It is still too early to determine the possible outcome of the
proceedings. Therefore management cannot give an opinion as to the effect
this action will have on PIIs financial condition or results of operations.
There can be no assurance, however, that the ultimate liability from these
proceedings will not have a material adverse effect on its financial
condition and results of operations.
|
| |  |  | On August 26, 2002, two individuals on behalf of themselves and all
others similarly situated (the Class Action Plaintiffs) filed in the
Circuit Court of Cook County, Illinois, an action alleging that General
Media committed a breach of contract, a breach of express warranty and
consumer fraud when it published the Photographs, falsely representing them
to be pictures of the aforementioned plaintiff when they were in reality
photographs of someone else. The Class Action Plaintiffs have filed a
request that the action be certified as a class action with the two
plaintiffs as class representatives and their lawyer as class counsel.
General Media has filed a motion to dismiss the action. General Media
intends to vigorously defend itself in this action. It is still too early
to determine the possible outcome of the
proceedings. Therefore management cannot give an opinion as to the
effect this action will have on PIIs financial condition or results of
operations. There can be no assurance, however, that the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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##### Table of Contents



Penthouse International, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

December 31, 2000, 2001 and 2002

NOTE 13 (continued)



| |  |  | ultimate liability from these proceedings will not have a material
adverse effect on its financial condition and results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | On July 13, 2001, an employee
filed a charge of discrimination (the Charge) against
General Media with the U.S. Equal Employment Opportunity Commission
(EEOC). On April 11, 2003, the District Director of the
EEOC ruled that there was reasonable cause to find that the employee
had been subjected to discrimination on the basis of disability and
age, and that she had been constructively discharged. General Media
is waiting for the EEOC to schedule a conciliation meeting with the
employee to determine what actions need to be taken to resolve the
Charge. General Media intends to vigorously defend itself in this
action. It is still too early to determine the possible outcome of
the proceedings. Therefore management cannot give an opinion as to
the effect this action will have on PIIs financial condition or
results of operations. There can be no assurance, however, that the
ultimate liability from these proceedings will not have a material
adverse effect on its financial condition or results of operations.
|
| |  |  | On March 28, 2003, a former
employee of  General Media who was terminated for what General Media
believes to be reasonable cause, filed a claim in the Supreme Court
of The State of New York seeking damages of $75,000 plus an
accounting of their incentive compensation. PII believes it has no
liability to this individual and is vigorously defending itself
against this claim.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  |  | In December 2002, General
Media received correspondence from a third party informing General
Media that transmission of video content on the Internet is a
violation of patents that the third party claims to own. The third
party has demanded that General Media execute a royalty agreement in
favor of the third party with respect to revenue from any videos that
it has displayed on its Internet Site. To General Media's knowledge
no action has been instituted against it by the third party. PII
believes that it does not owe any royalties to this third party and
intends to vigorously defend itself in any action brought against it
by the third party.                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  |  | There are various lawsuits claiming amounts against PII. While the
outcome of these matters is currently not determinable, it is the opinion of
PIIs management that the ultimate liabilities, if any, in the outcome of
these cases will not have a material effect on PIIs financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  |  | Leases                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  |  | The Company leases office space under operating leases expiring at
various dates through March 2009. Rent expense under operating leases was
$1,821,000, $1,856,000 and $1,873,000 during the years ended December 31,
2000, 2001 and 2002, respectively. Minimum lease commitments are set forth
below:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|                         |  |                |            |  |  |       |        | 
|------------------------ |  | -------------- | ---------- |  |  | ----- | ------ | 
|Year ending December 31, |  | (in thousands)
|                         |  |               
|                         |  |                | 2003       |  |  | $     | 1,863  | 
|                         |  |                | 2004       |  |  |       | 1,864  | 
|                         |  |                | 2005       |  |  |       | 1,895  | 
|                         |  |                | 2006       |  |  |       | 1,896  | 
|                         |  |                | 2007       |  |  |       | 1,898  | 
|                         |  |                | Thereafter |  |  | 2,374 |       
|                         |  |                |            |  |  |       |        | 
|                         |  |                |            |  |  | $     | 11,790 | 
|                         |  |                |            |  |  |       |        | 



| |  |  | Employee Benefit Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Companys employees may participate in a GMI-sponsored employee
profit-sharing and deferred compensation 401(k) benefit plan. The plan
covers substantially all employees and permits employees to defer up to 15%
of their salary up to statutory maximums. The plan also provides for GMI and
the Company to make contributions to a profit-sharing fund solely at GMIs or
the Companys discretion. There were no Company contributions to the plan
for the years ended December 31, 2000, 2001 and 2002.
|
| |  |  | Other Contingency                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  |  | The Company is determining what changes, if any, need to be made to its
existing Property and Salary Allocation and Expense Allocation Agreements
with GMI and an affiliate to comply with the Prohibition on Personal Loans
Section of the Sarbanes-Oxley Act. Such determination is currently being
undertaken with advice of Company counsel (See Note 15).                                                                                                                                                   

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##### Table of Contents



Penthouse International, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

December 31, 2000, 2001 and 2002

NOTE 14  DEFERRED REVENUE



| |  |  | During 1994 and 1995, the Company received advances aggregating
$1,000,000 and $3,000,000, respectively, relating to two ten-year
distribution agreements for the Companys magazines. These advances are
being recognized as revenue on a straight-line basis over the term of the
related contracts.                                                                                                                                                           
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | During 1999, the Company received a non-recoupable advance of $900,000,
relating to a seven-year licensing agreements for domestic sales of the
Companys digital video disc (DVD) versions of its video products.                                                                                                                                                                                                                                             
|
| |  |  | During 2000, the Company received a recoupable advance in the amount of
$500,000 as an incentive to sign a seven-year licensing agreement with a
distributor covering foreign distribution of the DVD versions of the
Companys video products and worldwide distribution of the videocassette
versions of the Companys video products. This advance was recognized as
revenue as the Companys products were sold through the distributor during
2000 and 2001.

NOTE 15  RELATED PARTIES



| |  |  | General Media has a Property and Salary Allocation Agreement (the
Agreement) with GMI and an affiliate of GMI, pursuant to which General
Media is charged for the cost of utilizing facilities owned by GMI and an
affiliate of GMI. The charges are based upon an estimate of the portion of
such facilities used by General Media, as defined.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Agreement also provides that General Media is charged for a portion of
the compensation of the Chairman of the Board of the Company, which is paid
by GMI. The amount of salary charged to the Company is based upon an
estimate of the time devoted to Company matters.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  |  | General Media also has an Expense
Allocation Agreement (the Expense Agreement) with GMI and its subsidiaries,
which requires General Media to pay certain shared common indirect expenses.
Under the Expense Agreement, GMI and its subsidiaries are required to
reimburse General Media, within 60 days after each quarter-end, for any
payments made by General Media on their behalf. In light of the changes to the
Indenture made in connection with the refinancing, which had the effect of
permitting an increase in amounts which may be due from affiliates, the
Company intends to amend the Agreement in the near future. The amount of
shared common indirect expenses charged to GMI and its subsidiaries is based
upon factors determined by management of the Company to be appropriate for
the particular item, including relative time commitments, relative number of
employees and square footage of space occupied. The amount receivable under
the Property and Salary Allocation Agreement and the Expense Allocation
Agreement, which is non-interest bearing, at December 31, 2001 and 2002 was
$3,805,000 and $1,153,000 (net), respectively. In 2001 and 2002, the Company
established a reserve of $800,000 and $1,000,000, respectively, against an
amount due from GMI and its subsidiaries as collectibility is not fully
assured.

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##### Table of Contents



Penthouse International, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

December 31, 2000, 2001 and 2002

NOTE 15 (continued)



| |  |  | Included in the accompanying statements of operations are allocated expenses
for use by the Company of facilities of $540,000, $571,000 and $550,000 for
the years ended December 31, 2000, 2001 and 2002, respectively.                                                                                                                                                                                                                                                                                                                                             
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Included in selling, general and administrative expenses are $1,666,000,
$1,101,000 and $271,000 of allocated expenses for the years ended December
31, 2000, 2001 and 2002, respectively. These amounts represent compensation
charges from GMI, net of charges to GMI for shared expenses by the Company.                                                                                                                                                                                                                                                          
|
| |  |  | The Company has an unsecured loan receivable in the amount of $1,086,000 from
an entity which is owned by GMIs principal shareholder, which amount has
been fully reserved at December 31, 2001 and 2002 as collectibility is not
assured.                                                                                                                                                                                                                                                                                                                          
|
| |  |  | In October 1997, GMIs principal shareholder was granted a loan in the amount
of $1,200,000 from NTS, a company that had simultaneously entered into an
agreement with the Company to provide services for the Companys pay-per-call
business. Upon the refinancing of General Medias notes payable in
March 2001, the principal shareholder defaulted on the repayment which
resulted in NTS applying monies due the Company from its pay-per-call
business towards the repayment of this loan. At December 31, 2002, the loan
balance was approximately $435,000.
|
| |  |  | At December 31, 2001, the Company had a $1,000,000 loan receivable from GMIs
principal shareholder, pursuant to a promissory note, which was repaid in
2002.                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  |  | At December 31, 2002, the Company had $418,000 of receivables from KC
Publishing, Inc., a company owned by a former President and Chief Operating
Officer of the Company. The Company has established a full reserve against
these receivables as collectibility is not assured.                                                                                                                                                                                                                                                                                     

NOTE 16  SEGMENT INFORMATION



| |  |  | The Company is currently engaged in activities in three industry segments:
publishing, online and entertainment. The publishing segment of the Company
is engaged in the publication of Penthouse magazine and four affiliate
magazines (the Affiliate Publications and, together with Penthouse
magazine, the Mens Magazines) and the licensing of the Companys
trademarks to publishers in foreign countries and for use on various consumer
products and services, and, starting in 2002 for use in the operation of
adult entertainment clubs. From December 1999 to October 2000, the Company
also published Mind and Muscle Power Magazine. The online segment is engaged
in the sale of memberships to the Companys Internet site (the Internet
Site), the sale of advertising banners posted on the Internet Site and,
starting in 2001, the sale of adult-oriented consumer products through the
Companys online store. The entertainment segment of the Company provides a
number of adult-oriented entertainment products and services, including
pay-per-call telephone lines, digital video discs (DVDs), videocassettes
and pay-per-view programming.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



Penthouse International, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

December 31, 2000, 2001 and 2002

NOTE 16 (continued)

|     |                                           |               |   |                 |        |        |   |               |       |       |   |              |       |  |  |             |   |  |   |        |        | 
|---- | ----------------------------------------- | ------------- | - | --------------- | ------ | ------ | - | ------------- | ----- | ----- | - | ------------ | ----- |  |  | ----------- | - |  | - | ------ | ------ | 
|     |                                           |               |   |                 |        |        |   |               |       |       |   |              |       |  |  | Corporate   |   |  |   |       
|     |                                           |               |   |                 |        |        |   |               |       |       |   |              |       |  |  | and         |   |  |   |       
|     |                                           |               |   |                 |        |        |   |               |       |       |   |              |       |  |  | reconciling |   |  |   |       
|     |                                           |               |   | Publishing      |        | Online |   | Entertainment |       | items |   | Consolidated
|     |                                           |               |   |                 |        |        |   |               |       |       |   |             
|     |                                           |               |   | ( in thousands)
|2002 |                                           |               |   |                 |        |        |   |               |       |       |   |              |       |  |  |             |   |  |   |       
|     | Revenues from customers:                  |               |   |                 |        |        |   |               |       |       |   |              |       |  |  |             |   |  |   |        |       
|     |                                           | Circulation   |   | $               | 36,548 |        |   |               |       |       |   |              |       |  |  |             |   |  |   | $      | 36,548 | 
|     |                                           | Advertising   |   |                 | 7,289  |        |   |               |       |       |   |              |       |  |  |             |   |  |   |        | 7,289  | 
|     |                                           | Online        |   |                 |        |        |   | $             | 7,252 |       |   |              |       |  |  |             |   |  |   |        | 7,252  | 
|     |                                           | Entertainment |   |                 |        |        |   |               |       |       |   | $            | 1,634 |  |  |             |   |  |   |        | 1,634  | 
|     |                                           | Other         |   |                 | 1,115  |        |   |               |      |       |   |              |      |  |  |             |   |  |   |        | 1,115  | 
|     |                                           |               |   |                 |        |        |   |               |       |       |   |              |       |  |  |             |   |  |   |       
|     | Total Revenues from customers             |               |   | 44,952          |        |        |   | 7,252         |       |       |   | 1,634        |       |  |  |             |   |  |   | 53,838 |       
|     | Depreciation and amortization             |               |   | 448             |        |        |   | 70            |       |       |   | 5            |       |  |  |             |   |  |   | 523    |       
|     | Income (loss) from operations             |               |   | 13,308          |        |        |   | 4,094         |       |       |   | 718          |       |  |  | (10,714     | ) |  |   | 7,406  |       
|     | Interest expense                          |               |   | 215             |        |        |   |               |       |       |   |              |       |  |  | 7,043       |   |  |   | 7,258  |       
|     | Interest income                           |               |   | 5               |        |        |   |               |       |       |   |              |       |  |  | 62          |   |  |   | 67     |       
|     | Gain on sale of life insurance policies   |               |   |                 |        |        |   |               |       |       |   |              |       |  |  | 811         |   |  |   | 811    |       
|     | Gain on sale of work of art               |               |   |                 |        |        |   |               |       |       |   |              |       |  |  | 144         |   |  |   | 144    |       
|     | Segment profit (loss) before income taxes |               |   | 13,098          |        |        |   | 4,094         |       |       |   | 718          |       |  |  | (16,740     | ) |  |   | 1,170  |       
|     | Minority interest                         |               |   |                 |        |        |   |               |       |       |   |              |       |  |  | 8           |   |  |   | 8      |       
|     | Segment assets                            |               |   | 9,509           |        |        |   | 116           |       |       |   | 460          |       |  |  | 5,287       |   |  |   | 15,372 |       
|     | Capital expenditures                      |               |   | 8               |        |        |   |               |       |       |   |              |       |  |  |             |   |  |   | 8      |       
|2001 |                                           |               |   |                 |        |        |   |               |       |       |   |              |       |  |  |             |   |  |   |       
|     | Total Revenues from customers             |               | $ | 49,884          |        |        | $ | 9,827         |       |       | $ | 2,893        |       |  |  |             |   |  | $ | 62,604 |       
|     | Depreciation and amortization             |               |   | 502             |        |        |   | 82            |       |       |   | 16           |       |  |  |             |   |  |   | 600    |       
|     | Income (loss) from operations             |               |   | 13,529          |        |        |   | 5,870         |       |       |   | 1,212        |       |  |  | (13,284     | ) |  |   | 7,327  |       
|     | Debt restructuring expenses               |               |   |                 |        |        |   |               |       |       |   |              |       |  |  | 9,579       |   |  |   | 9,579  |       
|     | Interest expense                          |               |   | 356             |        |        |   |               |       |       |   |              |       |  |  | 7,647       |   |  |   | 8,003  |       
|     | Interest income                           |               |   |                 |        |        |   |               |       |       |   |              |       |  |  | 289         |   |  |   | 289    |       
|     | Segment profit (loss) before income taxes |               |   | 13,173          |        |        |   | 5,870         |       |       |   | 1,212        |       |  |  | (30,221     | ) |  |   | (9,966 | )     
|     | Minority interest                         |               |   |                 |        |        |   |               |       |       |   |              |       |  |  | (50         | ) |  |   | (50    | )     
|     | Segment assets                            |               |   | 12,341          |        |        |   | 237           |       |       |   | 1,056        |       |  |  | 12,152      |   |  |   | 25,786 |       
|     | Capital expenditures                      |               |   | 74              |        |        |   | 56            |       |       |   |              |       |  |  |             |   |  |   | 130    |       

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##### Table of Contents



Penthouse International, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

December 31, 2000, 2001 and 2002

NOTE 16 (continued)

|     |                                           |  |   |                 |  |        |   |               |  |       |   |              |  |  |  |             |   |  |   |        |  | 
|---- | ----------------------------------------- |  | - | --------------- |  | ------ | - | ------------- |  | ----- | - | ------------ |  |  |  | ----------- | - |  | - | ------ |  | 
|     |                                           |  |   |                 |  |        |   |               |  |       |   |              |  |  |  | Corporate   |   |  |   |       
|     |                                           |  |   |                 |  |        |   |               |  |       |   |              |  |  |  | and         |   |  |   |       
|     |                                           |  |   |                 |  |        |   |               |  |       |   |              |  |  |  | reconciling |   |  |   |       
|     |                                           |  |   | Publishing      |  | Online |   | Entertainment |  | items |   | Consolidated
|     |                                           |  |   |                 |  |        |   |               |  |       |   |             
|     |                                           |  |   | ( in thousands)
|2000 |                                           |  |   |                 |  |        |   |               |  |       |   |              |  |  |  |             |   |  |   |       
|     | Revenues from customers                   |  |   |                 |  |        |   |               |  |       |   |              |  |  |  |             |   |  |   |        | 
|     | Total Revenues from customers             |  | $ | 56,217          |  |        | $ | 12,840        |  |       | $ | 3,287        |  |  |  |             |   |  | $ | 72,344 | 
|     | Depreciation
and amortization             |  |   | 602             |  |        |   | 76            |  |       |   | 36           |  |  |  |             |   |  |   | 714    | 
|     | Income (loss) from operations             |  |   | 14,424          |  |        |   | 8,082         |  |       |   | 1,806        |  |  |  | (12,475     | ) |  |   | 11,837 | 
|     | Interest expense                          |  |   | 461             |  |        |   |               |  |       |   |              |  |  |  | 6,404       |   |  |   | 6,865  | 
|     | Interest income                           |  |   |                 |  |        |   |               |  |       |   |              |  |  |  | 495         |   |  |   | 495    | 
|     | Segment profit (loss) before income taxes |  |   | 13,963          |  |        |   | 8,082         |  |       |   | 1,806        |  |  |  | (18,384     | ) |  |   | 5,467  | 
|     | Extraordinary gain, net of income taxes   |  |   |                 |  |        |   |               |  |       |   |              |  |  |  | 571         |   |  |   | 571    | 
|     | Segment assets                            |  |   | 17,537          |  |        |   | 216           |  |       |   | 1,112        |  |  |  | 13,947      |   |  |   | 32,812 | 
|     | Capital expenditures                      |  |   | 153             |  |        |   | 79            |  |       |   |              |  |  |  |             |   |  |   | 232    | 

The Corporate and reconciling items column represents corporate administrative
expenses such as executive, human resources, finance and accounting, management
information systems, costs related to the operation of the corporate and
executive offices, interest expense, interest income, gain on sale of officers
life insurance policies (in 2002), gain on sale of works of art (in 2002),
minority interest (in 2002), debt restructuring expenses (in 2001) and
extraordinary gains, net of income taxes (in 2000), resulting in the segment
profit (loss) shown. Corporate and reconciling items included in segment
assets include all cash, deferred debt issuance costs, loan to shareholder and
loan to affiliated company.

The market for the Companys products is worldwide; however 82% of the
Companys revenue is derived from U.S.-based sources.

NOTE 17  IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS



| |  |  | Certain provisions of The Emerging Issues Task Force pronouncement EITF 01-9,
 Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendors Products), are effective for fiscal periods
beginning after December 15, 2001. The Task Force reached a consensus that
consideration from a vendor to a reseller of the vendors products is
presumed to be a reduction of the selling prices of the vendors products
and, therefore, should be characterized as a reduction of revenue when
recognized in the vendors income statement. Beginning January 2002 the
Company adopted this policy as it relates to retail display allowances.
Retail display allowances had been included in selling, general and
administrative expenses prior to the adoption of this policy. The effect on
the
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-29



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##### Table of Contents



Penthouse International, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)

December 31, 2000, 2001 and 2002

NOTE 17 (continued)



| |  |  | Company of the adoption of the policy is a reduction of newsstand revenue and
an equivalent reduction in selling, general and administrative expenses of
$3,002,000 and $2,829,000 for the year ended December 31, 2002 and 2001,
respectively. As a result of this adjustment, the net revenue and the
selling, general and administrative expenses of the publishing segment for
the year ended December 31, 2001 have each been reduced by approximately
$2,829,000 to conform to the December 31, 2002 presentation.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | In April 2002, the FASB issued SFAS 145, which rescinded certain prior FASB
statements, amended a FASB statement and made technical corrections to a
number of prior pronouncements. This statement is effective for fiscal years
beginning after May 15, 2002. The Company does not believe that this
statement will have a material effect on the Companys financial statements.                                                                                                                                     
|
| |  |  | In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities. This statement is effective for exit or
disposal activities initiated after December 31, 2002. The Company does not
believe that this statement will have a material effect on the Companys
financial statements.                                                                                                                                                                                          
|
| |  |  | In October 2002, the FASB issued SFAS 147, Acquisitions of Certain Financial
Institutions. This statement is effective for acquisitions for which the
date of acquisition is on or after October 1, 2002. The Company does not
believe that this statement will have a material effect on the Companys
financial statements.                                                                                                                                                                                         
|
| |  |  | In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. The statement amends SFAS 123,
Accounting for Stock-Based Compensation, and is effective for fiscal years
ending after December 15, 2002. The Company does not believe that this
statement will have a material effect on the Companys financial statements.                                                                                                                                          

F-30



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##### Table of Contents



REPORT OF AUDITORS ON SCHEDULE

Board of Directors and StockholdersPenthouse International, Inc.

In connection with our audits of the consolidated financial statements of
Penthouse International, Inc. and subsidiaries, referred to in our report dated
March 21, 2003, April 7, 2003 with respect to Note 5, we have also audited
Schedule II as of and for the year ended December 31, 2002. In our opinion,
this schedule presents fairly, in all material respects, the information set
forth therein.

EISNER LLP

New York, New York
March 21, 2003

S-1



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##### Table of Contents



REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS ON SCHEDULE

Board of DirectorsGeneral Media, Inc. and Subsidiaries

In connection with our audit of the consolidated financial statements of
General Media, Inc. and Subsidiaries, referred to in our report dated March 8,
2002, we have also audited Schedule II as of December 31, 2000 and 2001, and
for each of the two years in the period ended December 31, 2001. In our
opinion, this schedule presents fairly, in all material respects, the
information set forth therein.

GRANT THORNTON LLP

New York, New York
March 8, 2002

S-2



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##### Table of Contents



Penthouse International, Inc. and Subsidiaries

SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2002, 2001 and 2000
(amounts in thousands)

|                             |                                                    |          |            |          |            |          |            |          |              |      |            |  |            |  |   |     |     |  |   |        | 
|---------------------------- | -------------------------------------------------- | -------- | ---------- | -------- | ---------- | -------- | ---------- | -------- | ------------ | ---- | ---------- |  | ---------- |  | - | --- | --- |  | - | ------ | 
|Column A                     |                                                    | Column B |            | Column C |            | Column D |            | Column E
|                             |                                                    |          |            |          |            |          |            |         
|                             |                                                    |          |            |          |            |          | Additions  |          |              |      |            |  |            |  |  
|                             |                                                    |          |            |          |            |          |            |          |              |      |            |  |            |  |  
|                             |                                                    |          |            |          |            |          |            |          |              |      | Charged to |  |            |  |   |     |     |  |  
|                             |                                                    |          | Balance at |          | Charged to |          | other      |          |              |      |            |  | Balance at
|                             |                                                    |          | Beginning  |          | costs and  |          | accounts - |          | Deductions - |      | End of    
|Description                  |                                                    | Of year  |            | expenses |            | describe |            | describe |              | Year
|                             |                                                    |          |            |          |            |          |            |          |              |     
|Year ended December 31, 2002 |                                                    |          |            |          |            |          |            |          |              |      |            |  |            |  |   |     |     |  |   |       
|                             | Allowance for doubtful accounts                    |          | $          | 1,852    |            |          | $          | 288      |              |      |            |  |            |  | $ | 355 | (a) |  | $ | ,1,785 | 
|                             |                                                    |          |            |          |            |          |            |          |              |      |            |  |            |  |   |     |     |  |   |       
|                             | Allowance for intercompany and
related party notes |          | $          | 1,886    |            |          | $          | 200      |              |      |            |  |            |  | $ |    |     |  | $ | 2,086  | 
|                             |                                                    |          |            |          |            |          |            |          |              |      |            |  |            |  |   |     |     |  |   |       
|Year ended December 31, 2001 |                                                    |          |            |          |            |          |            |          |              |      |            |  |            |  |   |     |     |  |   |       
|                             | Allowance for doubtful accounts                    |          | $          | 1,301    |            |          | $          | 943      |              |      |            |  |            |  | $ | 392 | (a) |  | $ | 1,852  | 
|                             |                                                    |          |            |          |            |          |            |          |              |      |            |  |            |  |   |     |     |  |   |       
|                             | Allowance for intercompany and
related party notes |          | $          |         |            |          | $          | 1,886    |              |      |            |  |            |  | $ |    |     |  | $ | 1,886  | 
|                             |                                                    |          |            |          |            |          |            |          |              |      |            |  |            |  |   |     |     |  |   |       
|Year ended December 31, 2000 |                                                    |          |            |          |            |          |            |          |              |      |            |  |            |  |   |     |     |  |   |       
|                             | Allowance for doubtful accounts                    |          | $          | 1,122    |            |          | $          | 427      |              |      |            |  |            |  | $ | 248 | (a) |  | $ | 1,301  | 
|                             |                                                    |          |            |          |            |          |            |          |              |      |            |  |            |  |   |     |     |  |   |       



|(a) |  | Accounts written off, net of recoveries.
|--- |  | ----------------------------------------

S-3



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##### Table of Contents






EXHIBIT INDEX

|        |                           |                                                                                                                                                                                                       |  |      |  |           |  |          |  |         |     |          |  | 
|------- | ------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- |  | --------- |  | -------- |  | ------- | --- | -------- |  | 
|        | INCORPORATED BY REFERENCE
|EXHIBIT |                           |                                                                                                                                                                                                       |  |      |  |           |  | FILING   |  | EXHIBIT |     | FILED   
|NO.     |                           | EXHIBIT                                                                                                                                                                                               |  | FORM |  | FILE NO.  |  | DATE     |  | NO.     |     | HEREWITH
|        |                           |                                                                                                                                                                                                       |  |      |  |           |  |          |  |         |     |         
|3.1     |                           | First Amended and Restated Articles of
Incorporation of the Registrant as amended as
of November 4, 2002                                                                                              |  | 8-K  |  | 333-83448 |  | 11-14-02 |  |         | 3.1 |          |  | 
|       
|3.2     |                           | Article of Amendment to First Amended and
Restated Articles of Incorporation of the
Registrant, as effective on November 18, 2002                                                                     |  | 8-K  |  | 333-83448 |  | 11-27-02 |  |         | 3.1 |          |  | 
|       
|3.3     |                           | Amended and Restated Bylaws of the Registrant,
as amended as of November 9, 2002                                                                                                                      |  | 8-K  |  | 333-83448 |  | 11-14-02 |  |         | 3.2 |          |  | 
|       
|4.1     |                           | Indenture, dated as of December 21, 1993,
between General Media and IBJ Schroder Bank &
Trust Company, as trustee (Trustee),
containing as exhibits, specimens of Series A
Notes and Series B Notes |  | S-4  |  | 33-76716  |  | 3-22-94  |  |         | 4.2 |          |  | 
|       
|4.2     |                           | Security Agreement, dated December 21, 1993,
between General Media and Trustee                                                                                                                        |  | S-4  |  | 33-76716  |  | 3-22-94  |  |         | 4.4 |          |  | 
|       
|4.3     |                           | Pledge Agreement, dated December 21, 1993,
between General Media and Trustee                                                                                                                          |  | S-4  |  | 33-76716  |  | 3-22-94  |  |         | 4.5 |          |  | 
|       
|4.4     |                           | Copyright Security Agreement, dated December
21, 1993, between General Media and Trustee                                                                                                              |  | S-4  |  | 33-76716  |  | 3-22-94  |  |         | 4.6 |          |  | 
|       
|4.5     |                           | Trademark Security Agreement, dated December
21, 1993, between General Media and Trustee                                                                                                              |  | S-4  |  | 33-76716  |  | 3-22-94  |  |         | 4.7 |          |  | 





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##### Table of Contents



|        |  |                                                                                                                                                                                                        |  |                           |  |           |  |         |  |         |       |          |  | 
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------- |  | --------- |  | ------- |  | ------- | ----- | -------- |  | 
|        |  |                                                                                                                                                                                                        |  | INCORPORATED BY REFERENCE
|        |  |                                                                                                                                                                                                        |  |                          
|EXHIBIT |  |                                                                                                                                                                                                        |  |                           |  |           |  | FILING  |  | EXHIBIT |       | FILED   
|NO.     |  | EXHIBIT                                                                                                                                                                                                |  | FORM                      |  | FILE NO.  |  | DATE    |  | NO.     |       | HEREWITH
|        |  |                                                                                                                                                                                                        |  |                           |  |           |  |         |  |         |       |         
|4.6     |  | First Supplemental Indenture, dated May 19,
1999, among General Media, each of the
Subsidiary Guarantors and IBJ Whitehall Bank & Trust as trustee                                                     |  | 10-K                      |  | 33-76716  |  | 4-02-01 |  |         | 4.7   |          |  | 
|        |  |                                                                                                                                                                                                        |  |                           |  |           |  |         |  |         |      
|       
|4.7     |  | Second Supplemental Indenture, dated March,
29, 2001, among General Media, each of the
Subsidiary Guarantors and The Bank of New
York, as trustee, containing as exhibits,
specimens of Series C Notes |  | 10-K                      |  | 33-76716  |  | 4-02-01 |  |         | 4.8   |          |  | 
|       
|4.8     |  | Registration Rights Agreement, dated as of
March 29, 2001, between General Media and the
holders of General Medias Class A Preferred
Stock                                                            |  | 10-K                      |  | 33-76716  |  | 4-02-01 |  |         | 4.9   |          |  | 
|       
|4.9     |  | Amendment To Security Agreement, dated as of
March 29, 2001, among General Media, each of
the Subsidiary Grantors and The Bank of New
York, as collateral agent                                        |  | 10-K                      |  | 33-76716  |  | 4-02-01 |  |         | 4.10  |          |  | 
|       
|4.10    |  | Third Supplemental Indenture, dated August 1,
2002, among General Media, each of the
Subsidiary Guarantors and The Bank of New
York, as trustee,                                                       |  | 10-Q                      |  | 33-76716  |  | 8-14-02 |  |         | 10.18 |          |  | 
|       
|4.11    |  | Fourth Supplemental Indenture, dated November
12, 2002, among General Media, each of the
Subsidiary                                                                                                    |  | 10-KSB                    |  | 333-83448 |  | 2-13-03 |  |         | 6.11  |          |  | 





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##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                           |  |           |  |          |  |         |       |          |  | 
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | --------- |  | -------- |  | ------- | ----- | -------- |  | 
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | INCORPORATED BY REFERENCE
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                          
|EXHIBIT |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                           |  |           |  | FILING   |  | EXHIBIT |       | FILED   
|NO.     |  | EXHIBIT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | FORM                      |  | FILE NO.  |  | DATE     |  | NO.     |       | HEREWITH
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                           |  |           |  |          |  |         |       |         
|        |  | Guarantors and The Bank of New
York, as trustee                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                           |  |           |  |          |  |         |       |          |  | 
|4.12    |  | Instrument of Resignation, Appointment and
Acceptance among General Media, the Subsidiary
Guarantors, the Subsidiary Grantors, the
Subsidiary Pledgors, The Bank of New York and
HSBC Bank USA                                                                                                                                                                                                                                                                                                                            |  | 10-KSB                    |  | 333-83448 |  | 2-13-03  |  |         | 6.12  |          |  | 
|       
|+10.1   |  | Distribution Agreement, dated September 19,
1977, among Curtis Circulation Company,
Penthouse International, Ltd., Forum
International, Ltd., Viva International, Ltd.,
Penthouse Photo World, Ltd. and Penthouse
Poster Press, Ltd.; Amendment No. 1, undated;
Amendment No. 2, dated September 8, 1982;
Amendment No. 3, dated March 18, 1985; and
Amendment No. 4, dated February 1, 1986                                                                                                                              |  | S-4                       |  | 33-76716  |  | 3-22-94  |  |         | 10.1  |          |  | 
|       
|10.2    |  | Properties and Salary Allocation Agreement,
dated December 21, 1993, among General Media,
GMI and Locusts on the Hudson River Corp.                                                                                                                                                                                                                                                                                                                                                                                       |  | S-4                       |  | 33-76716  |  | 3-22-94  |  |         | 10.8  |          |  | 
|       
|10.3    |  | Expense Allocation Agreement, dated December
21, 1993, among General Media, GMI and the
Other GMI Subsidiaries                                                                                                                                                                                                                                                                                                                                                                                                            |  | S-4                       |  | 33-76716  |  | 3-22-94  |  |         | 10.9  |          |  | 
|       
|10.4    |  | Tax Sharing and Indemnification Agreement,
dated December 21, 1993, among General Media,
GMI and the Other GMI Subsidiaries                                                                                                                                                                                                                                                                                                                                                                                               |  | S-4                       |  | 33-76716  |  | 3-22-94  |  |         | 10.10 |          |  | 
|       
|10.5    |  | Amendment to Distribution Agreement, dated
November 8, 1995, among Curtis Circulation
Company, Penthouse International, Ltd., Forum
International, Ltd., Four Wheeler Publishing,
Ltd., Penthouse Letters, Ltd., Omni
Publications International, Ltd., Variations
International, Ltd., Girls of Penthouse
Publications, Inc., Longevity International,
Ltd., Hot Talk Publications, Ltd., Stock Car
Racing Publications, Ltd., Super Stock and
Drag Racing Illustrated Publishing, Ltd., and
Open Wheel Publishing, Ltd. |  | 10-K                      |  | 33-76716  |  | 3-28-02  |  |         | 10.15 |          |  | 
|       
|10.6    |  | Agreement of Lease Between M393 Associates LLC
and General Media                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  | 10-Q                      |  | 33-76716  |  | 11-13-98 |  |         | 10.2  |          |  | 
|       
|+10.7   |  | Printing Contract, dated October 12, 2001,
between Quebecor World, Inc. and General Media
Communications, Inc. (to print Penthouse,
Girls of Penthouse and Penthouse Letters)                                                                                                                                                                                                                                                                                                                                             |  | 10-K                      |  | 33-76716  |  | 3-28-02  |  |         | 10.16 |          |  | 
|       
|++10.8  |  | Printing Contract, effective as of January 1,
2001, between Transcontinental Printing and
General Media Communications, Inc. (to print
Penthouse  Canadian Version, Forum,
Variations, Forum and Variations Specials)                                                                                                                                                                                                                                                                                                    |  | 10-K                      |  | 33-76716  |  | 3-28-02  |  |         | 10.17 |          |  | 
|       
|++10.9  |  | Circulation Subscription Fulfillment Services
Agreement, dated October 1, 2002, between Palm
Coast Data, LLC and General Media
Communications, Inc.                                                                                                                                                                                                                                                                                                                                                                       |  | 10-KSB                    |  | 333-83448 |  | 2-13-03  |  |         | 6.21  |          |  | 
|       
|10.10   |  | Stock Exchange Agreement dated November 4,
2002 between the Registrant and GMI                                                                                                                                                                                                                                                                                                                                                                                                                                            |  | 8-K                       |  | 333-83448 |  | 11-14-02 |  |         | 2.1   |          |  | 
|       
|10.11   |  | Common Stock Purchase Agreement dated November
1, 2002 between the Registrant and Vector
Partners, LLC                                                                                                                                                                                                                                                                                                                                                                                                                    |  | 8-K                       |  | 333-83448 |  | 11-14-02 |  |         | 10.1  |          |  | 
|       
|10.12   |  | Common Stock Purchase Agreement dated November
1, 2002 between the Registrant and PH Capital
Holding, LLC                                                                                                                                                                                                                                                                                                                                                                                                                 |  | 8-K                       |  | 333-83448 |  | 11-14-02 |  |         | 10.2  |          |  | 
|       
|10.13   |  | Warrant Agreement, dated November 9, 2002
between the Registrant and Vector Partners, LLC                                                                                                                                                                                                                                                                                                                                                                                                                                 |  | 8-K                       |  | 333-83448 |  | 11-14-02 |  |         | 10.3  |          |  | 
|       
|10.14   |  | Warrant Agreement, dated November 9, 2002
between the Registrant and PH Capital
Holdings, LLC                                                                                                                                                                                                                                                                                                                                                                                                                             |  | 8-K                       |  | 333-83448 |  | 11-14-02 |  |         | 10.4  |          |  | 





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##### Table of Contents



|        |  |                                                                                                                                                |  |                           |  |           |  |          |  |         |      |          |  |    
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | --------- |  | -------- |  | ------- | ---- | -------- |  | ---
|        |  |                                                                                                                                                |  | INCORPORATED BY REFERENCE
|        |  |                                                                                                                                                |  |                          
|EXHIBIT |  |                                                                                                                                                |  |                           |  |           |  | FILING   |  | EXHIBIT |      | FILED   
|NO.     |  | EXHIBIT                                                                                                                                        |  | FORM                      |  | FILE NO.  |  | DATE     |  | NO.     |      | HEREWITH
|        |  |                                                                                                                                                |  |                           |  |           |  |          |  |         |      |         
|10.15   |  | Registration Rights Agreement dated November
9, 2002 among the Registrant, Vector Partners,
LLC and PH Capital Holdings, LLC                   |  | 8-K                       |  | 333-83448 |  | 11-14-02 |  |         | 10.5 |          |  |    
|       
|10.16   |  | 2002 Consultant Compensation Plan of the
Registrant dated November 9, 2002                                                                     |  | 8-K                       |  | 333-83448 |  | 11-14-02 |  |         | 10.6 |          |  |    
|       
|10.17   |  | Indemnity Agreement dated October 23, 2002
between the Registrant and Jason Galanis                                                            |  | 8-K                       |  | 333-83448 |  | 11-14-02 |  |         | 10.7 |          |  |    
|       
|10.18   |  | Indemnity Agreement dated November 9, 2002
between the Registrant and Charles Samel                                                            |  | 8-K                       |  | 333-83448 |  | 11-14-02 |  |         | 10.8 |          |  |    
|       
|10.19   |  | Indemnity Agreement dated November 9, 2002
between the Registrant and Robert C. Guccione                                                       |  | 8-K                       |  | 333-83448 |  | 11-14-02 |  |         | 10.9 |          |  |    
|       
|10.20   |  | Amendment No. 1 to Stock Exchange Agreement
dated December 31, 2002 between Registrant and
General Media International, Inc.                   |  |                           |  |           |  |          |  |         |      |          |  | (X)
|       
|10.21   |  | Amendment No. 1 to Series B Preferred Stock
Purchase Agreement dated December 7, 2002 between the Registrant and
Morgan Berkeley Partners, LLC |  |                           |  |           |  |          |  |         |      |          |  | (X)
|       
|12.1    |  | Computation of ratio of earnings to fixed
charges                                                                                              |  |                           |  |           |  |          |  |         |      |          |  | (X)
|       
|16.1    |  | Letter from Baum & Company, P.A. to the
Securities and Exchange Commission dated
February 28, 2003                                             |  | 8-K                       |  | 333-83448 |  | 3-07-03  |  |         | 16   |          |  |    
|       
|21.1    |  | Subsidiaries of the Registrant                                                                                                                 |  |                           |  |           |  |          |  |         |      |          |  | (X)
|       
|99.1    |  | Certifications Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002                        |  |                           |  |           |  |          |  |         |      |          |  | (X)



---

|+  |  | Confidential treatment has been granted with respect to certain information
contained in this exhibit.  
|-- |  | --------------------------------------------------------------------------------------------------------
|   |  |                                                                                                         
|++ |  | Confidential treatment has been requested with respect to certain information
contained in this exhibit.